Sierra Bancorp Announces Record Quarterly and Year to Date Earnings

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, 2021. Sierra Bancorp reported consolidated net income of $11.7 million, or $0.76 per diluted share, for the second quarter of 2021, compared to $8.3 million, or $0.54 per diluted share, in the second quarter of 2020.

For the first six months of 2021, the Company recognized net income of $22.8 million as compared to $16.1 million for the same period in 2020. The Company's financial performance metrics for the first half of 2021 include an annualized return on average equity of 13.11%, a return on average assets of 1.41%, and diluted earnings per share of $1.48.

“We are pleased to report another quarter of record earnings!” stated Kevin McPhaill, President and CEO. “Our strong results in the second quarter of 2021 are thanks to the continued hard work and persistence of our banking team. While we anticipate headwinds during the second half of this year due to historically low interest rates and competitive pressures, our core earnings engine remains strong, and our team is committed to meeting these challenges. We will continue to look for additional opportunities and we are excited about the future of Bank of the Sierra!” McPhaill concluded.

Financial Highlights

Quarterly Changes (comparisons to the second quarter of 2020)

• The change in quarterly net income was primarily due to a $2.1 million negative provision for loan and lease losses. This significant decrease is attributable to the impact of continued improvements in the overall economy, lower historical loss rates, net recoveries during the past two quarters, and a $272.7 million decrease in average balances of net loans and leases.
• Net interest income increased $3.0 million, or 13%, due primarily to increases in average loan balances and a lower cost of funds.

Year to-Date Changes (comparisons to the first six-months of 2020)

• Net income increased by $6.7 million due mostly to a $1.9 million negative provision for loan and lease losses, attributed to the same reasons as noted above in the quarterly comparison.
• Net interest income increased by $7.8 million, or 16%, as declines in loan yields were offset by higher balances and lower interest expense.
• The above year-to-date increases were partially offset by an increase in noninterest expense of $4.7 million, or 13%, due mostly to a $2.1 million increase in salaries and benefits, $1.4 million in professional services, and $0.8 million in data processing expenses.

Balance Sheet Changes (comparisons to December 31, 2020)

• Total assets increased to $3.3 billion, representing an increase of $51.3 million, or 2%, during the first half of the year.
• Cash and due from banks increased 424% to $373.9 million during the first six months of the year due mostly to higher deposit balances coupled with lower loan balances.
• Gross loans declined $318.3 million due predominantly to a $157.3 million decline in mortgage warehouse line utilization, a $100 million decline in real estate loans mostly due to lower commercial real estate balances, and a $58.4 million decrease in commercial and industrial loans, which was mostly PPP loan forgiveness.
• Deposits totaled $2.8 billion at June 30, 2021, representing a year-to-date increase of $151.3 million, or 6%. The growth in deposits came primarily from core transaction and savings accounts, while higher-cost time deposits decreased.

Other financial highlights are reflected in the following table.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income was $27.2 million for the second quarter of 2021, a $3.0 million increase, or 13% over the second quarter of 2020, and increased $7.8 million, or 16% to $55.7 million for the first six months of 2021 relative to the same period in 2020.

For the second quarter of 2021, growth in average interest-earning assets totaled $491.8 million, or 19%, as compared to the second quarter of 2020. The yield on these balances was 29 basis points lower for the same period due mostly to a shift in the mix of earning assets to lower yielding assets and a decline in investment yields. This decrease in yield was partially offset by an 11 basis point drop in the cost of our interest-bearing liabilities for the same period.

Net interest income for the comparative year-to-date periods increased due to a $565.0 million, or 23%, growth in average interest-earning assets. The yield on these average balances was 37 basis points lower for the same period, but was partially offset by a 25 basis point drop in interest paid on liabilities. The net impact of this lower rate was a 21 basis point decrease in our net interest margin for the six-months ending June 30, 2021 as compared to the same period in 2020.

Loan income during the second quarter of 2021 included $1.0 million related to fee income, net of origination costs, recognized on Small Business Administration Paycheck Protection Program (“SBA PPP”) loans. Similarly, SBA PPP loan fees, net of origination costs of $2.4 million were recognized for the six months ended June 30, 2021. At June 30, 2021, approximately $2.4 million of unearned fees, net of origination costs related to SBA PPP loans remains on the balance sheet.

Interest expense was $0.9 million for the second quarter of 2021, a decline of $0.3 million, or 27%, relative to the second quarter of 2020. For the first six months of 2021, compared to the first six months of 2020, interest expense declined $1.7 million, or 49%, to $1.8 million. The significant decline in interest expense is attributable to a favorable shift in deposit mix as higher cost time deposits declined by $62.7 million, or 14%, in the second quarter of 2021 as compared to the second quarter of 2020, and fell by $132.1 million, or 26%, compared to the fourth quarter of 2020, while lower or no cost transaction and savings accounts increased $323.3 million, or 17%, for the second quarter of 2021 compared to the same period in 2020 and increased by $280.6 million, or 14%, over the fourth quarter of 2020.

Our net interest margin was primarily impacted by the additional liquidity from significant deposit growth in 2021 coupled with lower loan balances. This additional liquidity was mostly deployed in overnight funding at an average rate of 11 basis points for the second quarter and six-months ending June 30, 2021. Discount accretion on loans from whole-bank acquisitions enhanced our net interest margin by two basis points in the second quarter of 2021 compared to one basis point in the second quarter of 2020, and by two basis points for the first half of 2021 and for the same period in 2020. On June 30, 2021, the remaining balance of loan discount available to be accreted was $2.8 million. In addition, investment yields have continued to decline given the overall rate environment in 2021. The overall impact of a lower net interest margin was more than offset by higher earning assets in 2021 as compared to 2020.

Provision for Loan and Lease Losses

The Company recorded a net benefit related to loan and lease loss provision of $2.1 million in the second quarter of 2021 relative to a loan and lease loss provision expense of $2.2 million in the second quarter of 2020, and a year-to-date net benefit for loan and lease loss provision of $1.9 million in 2021 as compared to $4.0 million loan and lease loss provision expense for the same period in 2020. The Company's $4.3 million, or 195%, favorable decline in provision for loan and lease losses in the second quarter of 2021 as compared to the second quarter of 2020, and the $5.9 million favorable decrease, or 146%, in the first six months of 2021 compared to the same period in 2020 is due mostly to lower historical loan loss rates, lower average balances on loans, net recoveries of previously charged-off loan balances, and changes to qualitative factors. Management adjusted its qualitative risk factors under our current incurred loss model for improved economic conditions, improvements in the severity and volume of past due loans, enhancements in the quality of the Company’s loan review system, and a reduction in the level of concentrations of credit in non-owner occupied real estate loans.

The Company was subject to the adoption in the first quarter of 2020 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). Prior to the close of the first quarter of 2020, 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. Later in 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’s decision to defer the adoption of CECL was done primarily 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.

Noninterest Income

Total noninterest income decreased by $0.3 million, or 4%, for the quarter ended June 30, 2021 as compared to the same quarter in 2020 and increased $0.4 million, or 3%, for the comparable year-to-date periods. The quarterly and year-to-date comparison includes a $0.7 million non-recurring gain resulting from the wrap-up of a low-income housing tax credit fund investment and a $0.4 million gain from the sale of debt securities which occurred in the second quarter of 2020. The year-to-date comparison also reflects a $0.7 million favorable swing in bank-owned life insurance (BOLI) income, resulting from fluctuations in income on BOLI associated with deferred compensation plans and a $0.4 million favorable increase in the valuation of equity securities.

Service charges on customer deposit account income increased by $0.1 million, or 4%, to $2.7 million in the second quarter of 2021 as compared to the second quarter of 2020. This service charge income was $0.3 million lower, or 5%, in the first six months of 2021, as compared to the same period in 2020. These declines in the year-to-date comparison are primarily a result of a net decline in overdraft income partially offset by higher interchange income on debit cards.

Noninterest Expense

Total noninterest expense increased by $2.2 million, or 12%, in the second quarter of 2021 relative to the second quarter of 2020, and by $4.7 million, or 13%, in the first six months of 2021 as compared to the first six months of 2020.

Salaries and Benefits were $1.2 million, or 13%, higher in the second quarter of 2021 as compared to the second quarter of 2020 and $2.1 million, or 11% higher for the first six months of 2021 compared to the same period in 2020. The reason for this increase is primarily due to lower salary expense deferrals related to the decrease in loan originations for both the quarterly and year-to-date comparisons.

Occupancy expenses were $0.1 million higher for the second quarter of 2021 as compared to the same quarter in 2020 and $0.3 million higher for the first half of 2021 as compared to the first half of 2020. The primary reason for this increase was an acceleration of leasehold improvement amortization for two leased branch facilities that were closed during the second quarter. See the discussion of branch closures below.

Other noninterest expense increased $0.9 million, or 15%, for the second quarter 2021 as compared to the second quarter in 2020, and increased $2.2 million, or 19%, for the first half of 2021 as compared to the same period in 2020. The variance for second quarter of 2021 compared to the same period in 2020 was driven an increase of $0.5 million or 45% in data processing costs, due mostly to increases in core processor costs, price increases in loan processing software and additional software to compliment the Company’s digital strategy. We also experienced a $0.2 million increase in data communication costs, a $0.3 million increase in legal costs and a $0.3 million increase in other professional services costs. Other professional services variances include a $0.1 million increase in FDIC assessments, and a $0.1 million increase in deferred compensation expense for directors, which is linked to the changes in BOLI income. For the year-over-year comparison the categories of increase were the same as with the quarterly comparison, along with a $0.4 million increase in check-card processing costs.

The Company's provision for income taxes was 25.3% of pre-tax income in the second quarter of 2021 relative to 23.2% in the second quarter of 2020, and 25.4% of pre-tax income for the first half of 2021 relative to 23.6% for the same period in 2020. The increase in effective tax rate in the second quarter of 2021 is due to tax credits and tax-exempt income representing a smaller percentage of total taxable income.

As a result of the COVID-19 pandemic, several of our branch lobbies were fully or partially closed throughout the pandemic. All of these branch lobbies have reopened, except for five locations that the Company decided to permanently close in June 2021. This decision to close these branches was made as a result of a change in customer behaviors brought about by the COVID-19 pandemic along with an efficiency review. All of the five closed locations were located outside of the Bank’s primary market area. Customers affected by these branch closures were 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 $0.4 million in the second quarter of 2021 and by $0.5 million year-to-date 2021. Most of the staff at these five locations were re-located to existing branches with position vacancies, however four individuals elected to leave the Company. 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

Balance sheet changes during the first half of 2021 include an increase in total assets of $51.3 million, or 2%, primarily a result of a $302.5 million increase in cash and due from banks, and an increase of $63.5 million, or 12%, in investment securities, net of a $317.7 million decrease in net loan balances.

The decrease in gross loan balances as compared to December 31, 2020 was primarily a result of a $157.3 million decline in mortgage warehouse line utilization. In addition, there was a net decrease of $100.0 million in real estate secured loans, primarily from construction and other commercial real estate loans as the Company strategically lowered its regulatory commercial real estate concentration ratio from 378% at December 31, 2020 to 335% at June 30, 2021. Further, SBA PPP loan forgiveness resulted in a $49.0 million decline in loan balances. The loan pipeline at June 30, 2021 continues to improve as compared to the past two quarters.

Unused commitments, excluding mortgage warehouse and consumer overdraft lines, were $224.8 million at June 30, 2021, compared to $260.0 million at December 31, 2020. Total line utilization, excluding mortgage warehouse and consumer overdraft lines, was 56% at June 30, 2021 and 57% at December 31, 2020. Mortgage warehouse utilization declined significantly to 43% at June 30, 2021, as compared to 71% at December 31, 2020.

The Company participated in the SBA PPP as authorized by the CARES Act. We began accepting and funding loans under this program in April 2020. There were 943 loans for $68.0 million outstanding at June 30, 2021, compared to 1,274 loans for $117.2 million at December 31, 2020. During the second quarter of 2021, the Bank originated, and the SBA approved, funding for $16.1 million in SBA PPP loans while the SBA forgave $45.5 million of SBA PPP loans.

Deposit balances reflect growth of $151.3 million, or 6%, during the first six months of 2021. Core non-maturity deposits increased by $283.4 million, or 13%, while customer time deposits decreased by $117.1 million, or 28%. Wholesale brokered deposits decreased by $15.0 million to $85.0 million. Overall noninterest-bearing deposits as a percent of total deposits at June 30, 2021, increased to 38.7%, as compared to 36.0% at December 31, 2020. Other interest-bearing liabilities of $70.5 million on June 30, 2021 consists exclusively of customer repurchase agreements. Other interest-bearing liabilities at December 31, 2020 of $182.0 million consisted of $100.0 million of fed funds purchased, $39.1 million of customer repurchase agreements, $37.9 million of FHLB overnight borrowings and $5.0 million of FHLB short term borrowings.

The Company continues to have substantial liquidity. At June 30, 2021, and December 31, 2020, the Company had the following sources of primary and secondary liquidity (Dollars in Thousands):

Total capital of $357.7 million at June 30, 2021 reflects an increase of $13.8 million, or 4%, relative to year-end 2020. The increase in equity during the first half of 2021 was due to the addition of $22.8 million in net income, offset by a $3.0 million unfavorable swing in accumulated other comprehensive income/loss, and net of $6.5 million in dividends paid. The remaining difference is related to stock options exercised during the quarter. The Company executed no share repurchases during the first half of 2021.

Asset Quality

Total nonperforming assets, comprised of nonaccrual loans and foreclosed assets, decreased by $0.5 million to $8.1 million for the first half of 2021. The Company's ratio of nonperforming loans to gross loans increased to 0.34% at June 30, 2021 from 0.31% at December 31, 2020; this was due to a decrease in the gross loan and lease portfolio, since nonperforming loans decreased $0.3 million during the same period. 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 $16.4 million at June 30, 2021, as compared to a balance of $17.7 million at December 31, 2020 and $13.6 million at June 30, 2020. The allowance was 0.77% of total loans at June 30, 2021, and 0.72% at December 31, 2020 and 0.61% at June 30, 2020.

The $1.3 million decrease in the allowance for loan and lease losses during the first half of the year resulted from the $1.9 million benefit associated with loan and lease loss provision combined with net loan recoveries of previously charged off loan balances for $0.5 million. For further information regarding the Company's decision to defer the implementation of CECL under Section 4014 of the CARES Act, as well as further detail on the decrease in loan and lease loss provision during the second quarter and first half of 2021, please see the discussion above under Provision for Loan and Lease Losses.

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 June 30, 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 June 30, 2021, we had three remaining loans for two customer relationships totaling $10.4 million. All of these loans are fully secured by real estate collateral. 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, 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 Roseville, 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 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, 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, 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.