Sierra Bancorp Reports Record Quarterly Earnings

Sierra Bancorp (Nasdaq: BSRR), parent of Bank of the Sierra, today announced its unaudited financial results for the quarter ended March 31, 2021. Sierra Bancorp reported consolidated net income of $11.1 million, or $0.72 per diluted share, for the first quarter of 2021 compared to $7.8 million, or $0.58 per diluted share, in the first quarter of 2020. The favorable variance in net income came largely from a $4.8 million increase in net interest income and a $1.6 million decrease in the provision for loan and lease losses in the first quarter of 2021 as compared to the first quarter of 2020. The Company's return on average assets and return on average equity were 1.40% and 12.94%, respectively, in the first quarter of 2021 as compared to 1.23% and 9.97%, respectively, in the first quarter of 2020.

"Following unprecedented core loan growth in 2020, we are happy to announce record earnings for the first quarter of 2021!" stated Kevin McPhaill, President and CEO. "This could only have been accomplished thanks to the combined efforts from our frontline banking teams, lenders, and corporate staff. They are the keys to our continued success. While there is still uncertainty, it is good to see the economy start to improve. We look forward to the remainder of this year and the opportunities that lie ahead," McPhaill concluded.

Financial Highlights

Quarterly Changes (comparisons to the first quarter of 2020)

• The $4.8 million, or 20%, increase in net interest income is due mostly to a $3.4 million increase in interest income resulting primarily from higher loan volumes partially offset by lower rates. In addition, there was a $1.4 million favorable decline in interest expense due to a higher mix of noninterest bearing deposits and lower rates on the remaining deposits and borrowed funds.
• The provision for loan & lease losses is $1.6 million lower as a result of higher economic uncertainty being the primary driver for provision in the first quarter of 2020. The lower first quarter of 2021 provision for loan & lease losses was due to net loan recoveries and lower historical loan loss rates used in the calculation for the Allowance for Loan and Lease Losses.
• The $0.7 million, or 12%, favorable increase in noninterest income is due to a $0.4 million favorable change in the annual fair market value adjustment of restricted equity investments, and fluctuations in income on BOLI associated with deferred compensation plans. Customer service charges on deposit accounts were lower in the quarterly comparison, but were partially offset by increases in debit card interchange income.
• The efficiency ratio improved to 56.43% from 58.88% despite a 14% increase in noninterest expense, or $2.5 million, given our 20% improvement in net interest income described above. The largest expense item with an increase was salaries and benefits, with a $1.0 million increase due to lower deferred loan costs and higher bonus expense in the first quarter of 2021 as compared to the same period in 2020. Further detail on remaining expense increases is described below.

Linked Quarter Changes (comparisons to the three months ended December 31, 2020)

• Net income increased by $2.1 million, or 23%, driven mostly by a $2.0 million decline in the provision for loan and lease losses.
• Noninterest income increased by $0.8 million, or 13%, due mostly to a $0.9 million increase in the fair value of restricted equity investments (this adjustment is typically recorded in the first quarter each year).
• Noninterest expense decreased $0.5 million, or 2%, mostly due to a decrease in professional fees.

Balance Sheet Changes (comparisons to December 31, 2020)

• Total assets increased by $105.3 million, or 3%, to $3.3 billion primarily due to higher cash balances resulting from deposit increases, and lower loan balances.
• Loan balances declined $175.2 million, or 7%, due primarily to seasonal declines in mortgage warehouse lines of $119.7 million as well as a $33.3 million decline in SBA Paycheck Protection Program (PPP) loans. The remainder of the decline was primarily in construction loans as the Bank continues to supplement its core commercial real estate lending franchise with an increased strategic focus of building our commercial & industrial loans, including owner-occupied CRE loans and small business lending.
• Deposits increased by $229.3 million, or 9%. The growth in deposits came primarily from noninterest bearing or low-cost transaction, and savings accounts, while higher-cost time deposits decreased slightly.
• Other interest bearing liabilities, comprised primarily of overnight FHLB borrowings and fed funds purchased, decreased $125.5 million due to the significant increase in deposit balances.

Other financial highlights are reflected in the following table.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income was $28.6 million for the first quarter of 2021, a decrease of $0.3 million, or 1%, as compared to the fourth quarter of 2020 and an increase of $4.8 million, or 20%, as compared to the first quarter of 2020. As compared to the fourth quarter of 2020, overall loan interest income declined by $0.2 million, or 1%, due primarily to a $36.1 million decline in average loan balances, which was partially offset by a 12 basis point increase in loan yield. There was no change in the cost of interest bearing liabilities for the first three months of 2021 as compared to the prior linked quarter.

For the first quarter of 2021 as compared to the same quarter in 2020, average loan balances increased $658.5 million, primarily in real estate loans, mortgage warehouse lines and SBA PPP loans contributing to the $4.3 million increase in loan interest income; however the volume increase was offset by lower yields. Overall there was a decline of 68 bps in loan yield for the quarter ending March 31, 2021 as compared to the same period in 2020. There was a 40 bps decrease in the cost of interest bearing liabilities for the same period which mitigated a portion of the impact of the decrease in loan yield.

Our 2021 net interest income has been primarily impacted by the following:

• A lower initial rate environment precipitated by two interest rate cuts by the Federal Open Market Committee totaling 150 bps in March 2020, negatively impacting our yield on existing adjustable and variable rate portfolio loans and creating a lower initial interest rate for new loan volumes. Given this lower rate environment, the average yield on mortgage warehouse lines declined to 3.22% from 3.52% for the first quarter of 2021, as compared to the same quarter in 2020, and from 3.31% for the fourth quarter of 2020.
• The Bank continues to support our local small businesses impacted by the COVID-19 pandemic by participating in the latest round of SBA PPP loan originations. SBA PPP loans contributed $1.7 million to loan interest income for the first quarter of 2021, including loan fee recognition, compared to $1.3 million for fourth quarter of 2020. The increase in income related to SBA PPP loans was primarily due to accelerated fee income resulting from loan forgiveness in the first quarter of 2021.
• Discount accretion on loans from whole-bank acquisitions enhanced our net interest margin by one basis point in the first quarter of 2021 as compared to two basis points in the fourth quarter 2020, and three basis points for first quarter of 2020. On March 31, 2021, the remaining balance of loan discount available to be accreted was $3.0 million.

Provision for Loan and Lease Losses

The Company recorded a loan and lease loss provision of $0.3 million in the first quarter of 2021, as compared to $2.2 million in the fourth quarter of 2020, and $1.8 million in the first quarter of 2020. The higher provision for loan losses in the first quarter of 2020 was primarily due to an increase in the qualitative risk factors given the economic uncertainty related to the beginning of the COVID-19 pandemic. The higher provision for loan losses in the fourth quarter of 2020 was due mostly to higher loan balances in that quarter. The decrease in provision for loan and lease losses in the first quarter of 2021 is due to lower loan balances and the receipt of net loan recoveries for the first three months of 2021. Management also evaluated its qualitative risk factors under our current incurred loss model and adjusted for changes as deemed appropriate in the current environment.

The Company was subject to the adoption of the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, the Company elected under Section 4014 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. The Consolidated Appropriations Act, 2021 extended the deferral of implementation of CECL to the earlier of the first day of the fiscal year, beginning after the national emergency terminates or January 1, 2022. The Company elected in the first quarter of 2020 to postpone implementation in order to provide additional time to assess better the impact of the COVID-19 pandemic on the expected lifetime credit losses. At the time the decision was made, there was a significant change in economic uncertainty on the local, regional, and national levels as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state, and local level. Further, the Company has taken actions to serve our communities during the pandemic, including permitting short-term payment deferrals to current customers, as well as originating bridge loans and SBA PPP loans. It was determined that more time was needed to assess the impact of the uncertainty and related actions on the Company's allowance for loan and lease losses under the CECL methodology.

Noninterest Income

Noninterest income increased by $0.8 million, or 13%, to $6.8 million in the first quarter of 2021 as compared to $6.0 million in the fourth quarter of 2020. Noninterest income increased by $0.7 million, or 12%, in the first quarter of 2021 as compared to the same quarter in 2020. The first quarter 2021 increase of $0.8 million, compared to the fourth quarter of 2020, is primarily due to valuation increases related to restricted equity investments for $0.9 million and BOLI fluctuations associated with deferred compensation plans for $0.2 million.

In comparing the first quarter of 2021 to the same period in 2020, the reasons for the variances include a $0.4 million increase in the change in the annual valuation change of restricted equity investments, as well as BOLI fluctuations.

Service charges on customer deposit account income declined by $0.2 million, or 8%, to $2.8 million in the first quarter of 2021 as compared to the fourth quarter of 2020. This same income was $0.4 million lower in the first quarter of 2021 as compared to the first quarter of 2020. These changes are primarily a result of changes in overdraft income. Overdraft income is typically down in the first quarter of each year, although it has trended downward since the onset of the COVID-19 pandemic. Waived overdraft fees were similar to prior quarters.

Noninterest Expense

Total noninterest expense was down by $0.5 million, or 2%, in the first quarter of 2021 as compared to the fourth quarter of 2020, and increased $2.5 million or 14%, compared to the first quarter of 2020.

Salaries and benefits were $0.1 million higher in the first quarter of 2021 as compared to the fourth quarter of 2020 and $1.0 million higher than the first quarter of 2020. The increase in the year-over-year quarterly comparison is due to several factors, including merit increases for employees due to annual performance evaluations during the first quarter of 2021 and the addition of and a focus on hiring higher-level staff and management. Salary expense deferrals related to loan originations were relatively unchanged for the linked quarters but were $0.4 million lower for the year-over-year quarterly comparisons. There have not been any permanent or temporary reductions in employees as a direct result of COVID-19, although we have made business decisions as a result of the pandemic which will affect staffing in the future. See the discussion of branch closures below.

Occupancy expense was relatively flat for the linked quarters but was $0.2 million higher for the first quarter of 2021 as compared to the same quarter last year. We experienced higher janitorial costs due to intermittent COVID-19 sanitization of facilities.

Other noninterest expense decreased $0.6 million, or 9%, in the first quarter of 2021 as compared to the fourth quarter of 2020 and was $1.3 million, or 25% higher than the first quarter of 2020. The primary reason for the decrease in the linked quarters was lower professional services expense. For the year-over-year quarterly comparison, we experienced increases in every expense category except advertising and marketing; due to the COVID-19 pandemic, much of our in-person marketing efforts were temporarily suspended. The principal increases were in data processing for $0.3 million due to increased network security and additional software required for the efficient processing of SBA PPP loans, a $0.3 million increase in debit card processing costs, $0.1 million increase in foreclosed asset expenses, an increase in FDIC assessments for $0.2 million, as the first quarter of 2020 included Small Bank Assessment credits applied against the FDIC deposit insurance assessment, a $0.3 million increase in directors deferred compensation expense, which is linked to changes in BOLI income, a $0.1 million increase in debit card losses and other costs associated with five branch closures scheduled for June 2021 as discussed in the paragraph below.

The Company's effective tax rate was 25.47% in the first quarter of 2021 relative to 24.63% in the fourth quarter of 2020 and 24.02% for the first quarter of 2020. The increase in the effective tax rate for the first quarter of 2021 is due to tax credits and tax-exempt income representing a smaller percentage of total taxable income.

As a result of an ongoing COVID-19 pandemic, several of our branch lobbies were closed throughout the pandemic. Many of these lobbies have reopened, but a few remain closed. As a result of a change in customer behaviors brought about by the COVID-19 pandemic along with an efficiency review, the Company has decided to permanently close five branch locations effective June 18, 2021, which are located outside of the Bank’s primary market area. Customers affected by these branch closures have been notified. Many of our customers have found an added convenience and ease of transacting business through online and mobile banking services which precipitated our decision to close locations where in-person transaction volumes no longer warranted a traditional brick-and-mortar branch. The acceleration of amortization of leasehold improvements for these locations increased depreciation expense by $0.1 million in the first quarter of 2021 and is expected to increase depreciation expense by an additional $0.4 million in the second quarter of 2021. Further, it is estimated that there will be an additional expense of $0.2 million related to the right of use asset due to lease cancellations. It is projected that closing these five branch locations will result in annual noninterest expense savings of between $0.8 and $1.0 million.

Balance Sheet Summary

The $105.3 million, or 3% increase in total assets during the first quarter of 2021, is primarily a result of a $274.8 million increase in cash and due from banks, net of a $175.8 million decrease in net loans.

The decrease in loan balances as compared to December 31, 2020 was primarily a result of a $119.7 million decline in mortgage warehouse outstanding balances due mostly to first quarter seasonality and lower levels of refinancing, a net decrease of $29.7 million in real estate secured loans, and a $19.6 million of decrease in SBA PPP loans. The decline in real estate secured loans resulted from a strategic decision to slow the growth of commercial real estate lending and focus primarily on commercial lending, including owner-occupied commercial real estate and small business lending. The Company’s regulatory commercial real estate concentration ratio decreased to 352% at March 31, 2021 as compared to 378% at December 31, 2020.

Regarding line utilization, unused commitments, excluding mortgage warehouse and consumer overdraft lines, were $238.6 million at March 31, 2021, compared to $259.6 million at December 31, 2020. Total utilization excluding mortgage warehouse and consumer overdraft lines was 56% at March 31, 2021, compared to 57% at December 31, 2020. Commercial line utilization was 58% at both March 31, 2021, and December 31, 2020. Mortgage warehouse utilization was 51% at March 31, 2021, as compared to 71% at December 31, 2020.

The Company participates in the Small Business Administration's Paycheck Protection Program (PPP) as authorized by the CARES Act. We began accepting and funding loans under this program in April 2020. There were 1,070 loans for $97.3 million outstanding at March 31, 2021, compared to 1,274 loans for $117.2 million at December 31, 2020. During the first quarter of 2021, the Bank originated, and the SBA approved, funding for $33.2 million in PPP loans while the SBA forgave $52.8 million of PPP loans.

Deposit balances grew by $229.3 million, or 9%, during the first quarter of 2021 to $2.9 billion at March 31, 2021. Core non-maturity deposits increased $230.8 million, or 11%, for the first three months of 2021, while customer time deposits declined by $1.6 million. There was no change in brokered deposits during the quarter. Overall noninterest-bearing deposits as a percent of total deposits decreased to 35.8% at March 31, 2021, compared to 36.0% at December 31, 2020, and increased from 32.3% at March 31, 2020. Other interest-bearing liabilities of $91.7 million at March 31, 2021, include $51.5 million of customer repurchase agreements, $5.0 million of FHLB short-term borrowings, and $35.2 million in trust preferred securities.

The Company continues to have substantial liquidity. At March 31, 2021, and December 31, 2020, the Company had the following sources of primary and secondary liquidity ($ in thousands):

In addition to the primary and secondary sources of liquidity listed above, the Company has also been approved to borrow $97.3 million from the Federal Reserve's Paycheck Protection Program Liquidity Facility (PPPLF). Should the Company wish to draw on the PPPLF, it would be required to pledge individual SBA PPP loans as collateral. The loans are taken as collateral at their face value. Due to the Company's liquidity at March 31, 2021, and expectations in the next quarter, it has elected not to utilize the PPPLF at this time.

Total capital of $348.0 million at March 31, 2021, reflects an increase of $4.1 million, or 1%, compared to December 31, 2020. The increase in equity during the first quarter of 2021 is due to net income of $11.1 million, offset by a $3.2 million dividend paid to shareholders, and a $4.1 million decrease in other comprehensive income/loss due principally to changes in investment securities' fair value. The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter. The Company executed no share repurchases during the first quarter of 2021.

Asset Quality

Total nonperforming assets, comprised of non-accrual loans and foreclosed assets, increased by $1.0 million, or 11%, during the first quarter of 2021. The increase resulted from an increase in non-accrual loans, from two loans to one borrower. The Company's ratio of nonperforming assets to loans plus foreclosed assets increased to 0.42% at March 31, 2021, from 0.35% at December 31, 2020. All of the Company's impaired assets are periodically reviewed and are either well-reserved based on current loss expectations or are carried at the fair value of the underlying collateral net of expected disposition costs.

The Company's allowance for loan and lease losses was $18.3 million at March 31, 2021, as compared to $17.7 million at December 31, 2020, and $11.5 million at March 31, 2020. The $0.6 million increase in the allowance for loan and lease losses during the first quarter of 2021 is due to the following items: a $0.3 million provision for loan and lease losses; a $0.2 million increase in specific reserves associated with impaired loans, a $0.9 million net increase in qualitative factors, net loan recoveries of $0.3 million, and an improvement in historical loss rates of $0.5 million. For further information regarding the Company's decision to defer CECL under Section 4014 of the CARES Act, as well as further detail on the provision during the first quarter of 2021, please see the discussion above under Provision for Loan and Lease Losses.

The allowance was 0.80% of total loans at March 31, 2021, 0.72% of total loans at December 31, 2020, and 0.64% of total loans at March 31, 2020. Management's detailed analysis indicates that the Company's allowance for loan and lease losses should be sufficient to cover credit losses inherent in loan and lease balances outstanding as of March 31, 2021, 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.

The Company provided loan modification deferrals to customers under Section 4013 of the CARES Act, which are not treated as troubled debt restructured loans. As of March 31, 2021, we had eight loans for five customer relationships totaling $22.4 million. All of these loans are fully secured by real estate collateral, except for one small consumer relationship. We expect all customers to show an ability and willingness to pay full principal and interest payments upon maturity of their deferment periods.

About Sierra Bancorp

Sierra Bancorp is the holding Company for Bank of the Sierra (www.bankofthesierra.com), which is in its 44th 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, Los Angeles, Ventura, San Luis Obispo, and Santa Barbara. The Bank also maintains an online branch and provides specialized lending services through an agricultural credit center, an SBA center, and a dedicated loan production office in Rocklin, California. In 2021, 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 development 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 our borrowers' actual payment performance as loan deferrals related to the COVID-19 pandemic expire, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance, the health of the national and local economies, the Company's ability to attract and retain skilled employees, customers' service expectations, the Company's ability to successfully deploy new technology, the success of acquisitions and branch expansion, closure or consolidation, changes in interest rates, loan portfolio performance, 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.

Category: Financial

Source: Sierra Bancorp

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