Sierra Bancorp Reports Strategic Securities Transaction As Well As Fourth Quarter And Year End 2023 Results

January 29, 2024

Porterville, Calif – (Business Wire) – Sierra Bancorp (Nasdaq: BSRR), parent of Bank of the Sierra, today announced a strategic securities transaction (“securities strategy”) and unaudited financial results for the three-and twelve-month periods ended December 31, 2023. Sierra Bancorp reported consolidated net income in the fourth quarter of 2023 of $6.3 million, or $0.43 per diluted share, compared to net income of $7.1 million, or $0.47 per diluted share, in the fourth quarter of 2022.

For the year ended 2023, the Company recognized net income of $34.8 million, or $2.36 per diluted share, as compared to $33.7 million, or $2.24 per diluted share, for the same period in 2022. The Company’s return on average assets and return on average equity for the year ended 2023 was 0.94% and 11.30%, respectively, as compared to 0.97% and 10.66%, respectively, for the same comparative period in 2022.

Highlights for the fourth quarter of 2023 (unless otherwise stated):

Strategic Branch Sale/Leaseback followed by a Securities Strategy to Improve Future Earnings

Entered into contract to sell 13 branches in two tranches on December 21, 2023.

First tranche closed in December 2023 at a gain of $15.3 million.
Second tranche expected to close in the first quarter of 2024.

In early January 2024, sold $196.7 million of bonds in a securities strategy at a $14.5 million loss.

Bonds sold had a weighted average book yield of 2.61%.
The $14.5 million securities loss was recognized in 2023 due to management’s intention at
year end to sell such bonds in January 2024.

Proceeds from bond sale were used to pay down short-term borrowings at an average rate of 5.52%.

Steady Earnings

2023 Net Income of $34.8 million, up 4% from 2022.
2023 Diluted EPS of $2.36 as compared to $2.24 in 2022, an increase of 6%.
2023 ROAE of 11.30% as compared to 10.66% in 2022.

Solid Asset Quality

Total Nonperforming Loans at $8.0 million, or 0.38% of total gross loans.
Past due loans declined to $0.3 million, the lowest level for the past two years.
No foreclosed assets at December 31, 2023.

Stable Deposits & Liquidity

Overall primary and secondary liquidity sources increased to $2.6 billion at December 31, 2023.
Noninterest-bearing deposits stable at 37% of total deposits.

Strong Capital and Solid Asset Growth

Maintained a diversified investment portfolio designed for interest rate risk management and liquidity.
Tangible Book Value per share increased 10% during the quarter to $20.91 per share at year end.
Strong regulatory Community Bank Leverage Ratio of 11.29% for our subsidiary Bank.
Tangible Common Equity Ratio, a non-GAAP financial measure, of 8.4% on a consolidated basis and 10.3% for our subsidiary bank.
Dividend declared of $0.23 per share, payable on February 12, 2024, our 100th consecutive quarterly dividend.

“You have to participate relentlessly in the manifestation of your own blessings.” – Elizabeth Gilbert

“We are proud to share our fourth quarter results as we wrap up 2023,” stated Kevin McPhaill, CEO and President. “Although last year presented a number of challenges, we also uncovered several positive opportunities. As a result, our banking team maintained a high percentage of noninterest bearing deposits, enhanced our lending capabilities, and expanded our treasury efforts. In addition to those ongoing projects, we completed a sale-leaseback agreement covering several of our branch properties. The $15.3 million gain on this sale-leaseback offset the cost of a $196.7 million securities strategy. Together, these strategies enhanced capital, and we expect to improve our financial metrics, including margin, liquidity, and return on average assets and equity. Accordingly, I believe that our Bank is stronger and better positioned to take advantage of expansion possibilities, whether organic or otherwise. We have many reasons to be excited about our prospects and look forward to the new year and beyond!” concluded Mr. McPhaill.

Financial Highlights

Quarterly Changes (comparisons to the fourth quarter of 2022)

Net income for the fourth quarter of 2023 decreased $0.8 million or 12%, to $6.3 million. Net interest income was negatively impacted by compression in the net interest margin. There was a favorable change in the credit loss expense on loans and improvements made in noninterest income, primarily offset by a realized loss on a securities strategy which identified available-for-sale securities for sale in January 2024, and higher noninterest expenses.
The $1.5 million decrease to net interest income for the fourth quarter of 2023 was driven by a 32 basis point decrease in net interest margin. There was a $130.0 million increase in average interest earning assets with an increased yield of 62 basis points; however, this was more than offset by a $198.8 million increase in interest bearing liabilities at 133 bps higher cost.
Noninterest income for the fourth quarter of 2023 increased $0.4 million or 5%. This is primarily due to a $15.3 million gain on the sale of Bank owned branch buildings (subsequently leased back) partially offset by a $14.5 million realized loss on a securities strategy which identified bonds for sale in January 2024.
Noninterest expense for the fourth quarter of 2023 increased by $2.6 million, or 12%. There was a $1.4 million increase in salaries and benefits from the hiring of new lending teams and one new executive officer; additionally, we had severance payments of $0.9 million due a strategic reduction in force on 14 positions eliminated through efficiencies gained from operational reorganization and the deployment of new technologies partially offset by a $0.5 million reduction in bonuses accrued. There was a $0.4 million increase in occupancy expense for normal contractual rent increases and one-time stipends paid to employees for home office expenses, and a $0.8 million increase in other noninterest expense most notably in FDIC assessments, compliance and legal costs, and higher fraud losses primarily due to our debit card conversion from Mastercard to VISA earlier in the year.

Year to-Date Changes (comparisons to the year ended 2022)

Net income for 2023 increased by $1.2 million, or 4%. There was an increase of $2.8 million or 3% in net interest income, due mostly to an overall increase in interest rates. We experienced higher yields and balances on loans and investment securities, which were partly offset by higher overall funding costs.
We experienced a $6.8 million decrease in credit loss expense on loans, net of taxes due to lower net loan charge-offs in 2023 as compared to 2022.
Noninterest income for 2023 decreased by $0.4 million, or 1%. The same large variances discussed in the quarterly comparison apply to the year-to-date comparisons along with a $2.8 million favorable variance in bank-owned life insurance income, $0.4 million positive variance in life insurance proceeds, offset by a $3.2 million negative variance mostly from the sale of VISA stock in 2022 with no like sales in 2023.
Noninterest expense increased $7.9 million, or 9%, due mostly to a $3.9 million increase in salary and benefits expense for new lending teams and management staff along with reduction in force severance payments as discussed in the quarterly comparison, an unfavorable variance in director’s deferred compensation expense which is linked to the favorable changes in bank-owned life insurance income, mentioned above in the discussion of noninterest income, a $0.8 million increase in FDIC assessment costs and $0.5 million increase in fraud losses primarily due to our debit card conversion from Mastercard to VISA earlier in the year.

Balance Sheet Changes (comparisons to December 31, 2022)

Total assets increased by $121.2 million, or 3%, to $3.7 billion, during 2023, due mostly to a $68.2 million increase in investment securities, a $37.1 million increase in gross loans, and a $19.0 million increase in operating lease right-of-use assets from the sale and leaseback of 11 bank-owned branch buildings.
Investment securities increased $67.5 million, or 5%, to $1.3 billion primarily due to strategic purchases of high-quality AAA, collateralized loan obligations and government agency securities during 2023.
Gross loans increased $37.1 million due to a $50.6 million increase in mortgage warehouse line utilization, along with a $51.6 million increase in other commercial loans, and an $18.8 million increase in commercial real estate loans. Organic loan production for the year ending 2023 was $185.3 million, as compared to $292.2 million for the comparative period in 2022. Loan production was negatively impacted by $161.4 million in loan maturities, charge-offs and payoffs, and a decline in credit line utilization of $37.3 million. Counterbalancing these negative variances, we had a $50.6 million increase in mortgage warehouse line utilization as our customers ramped up utilization towards year-end.
Deposits totaled $2.8 billion at December 31, 2023, representing a year-to-date decrease of $84.9 million, or 3%. The decline in deposits came primarily from a $175.1 million decrease in transaction accounts, an $80.4 million decrease in savings and money market accounts offset by an increase in customer time deposit balances of $155.5 million as customers moved their funds to higher interest-bearing type accounts and a $15.0 million increase in wholesale brokered deposits.
Short-term debt increased by $59.5 million during 2023 to $387.6 million at December 31, 2023. Overnight fed funds increased by $5.0 million, and short term FHLB advances increased $125.0 million while repurchase agreements decreased $2.0 million and FHLB overnight borrowings decreased by $68.5 million.
Long term debt in the form of term FHLB advances increased $80.0 million while subordinated debentures were relatively unchanged.

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