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  • Net income of $10.4 million in the third quarter of 2020, an increase of $2.1 million, or 25% as compared to the second quarter of 2020 and 16% higher than the same quarter in 2019
  • Loans & Leases, Net of Fees grew $167.7 million in the third quarter of 2020, or 8% on a linked-quarter basis
  • Deposits increased by $85.0 million in the third quarter of 2020, or 3% on a linked-quarter basis
  • A stable loan yield and lower cost of deposits led to an improvement of net interest margin to 3.98% in the third quarter of 2020 as compared to 3.81% in the second quarter of 2020

PORTERVILLE, Calif.–(BUSINESS WIRE)–Sierra Bancorp (Nasdaq: BSRR), parent of Bank of the Sierra, today announced third quarter of 2020 net income of $10.4 million, or $0.67 per diluted share, compared to net income of $9.0 million, or $0.58 per diluted share, in the third quarter of 2019. The Company’s return on average assets decreased slightly to 1.34% in the third quarter of 2020, as compared to 1.36% in the third quarter of 2019, however return on average equity increased to 12.34% from 11.78%, for the same comparative periods. The increase in net income is driven primarily by higher net interest income on higher loan balances and higher noninterest income, partially offset by a higher provision for loan and lease losses and noninterest expense.

For the first nine months of 2020, the Company recognized net income of $26.5 million, or $1.72 per diluted share, as compared to $26.7 million, or $1.73 per diluted share, for the same period in 2019.

“Our potential is one thing. What we do with it is quite another.” – Dr. Angela Duckworth

“As we continue to navigate these challenging times, we are very proud to serve our communities as demonstrated by our continued strong loan growth,” stated Kevin McPhaill, President and CEO. “This robust loan growth coupled with a continued focus on efficiency resulted in record high earnings. During these unique times, our foundation as a community bank drives our bankers to find new ways to continue to meet our customers’ needs. The coming months will bring further challenges, but we are determined to use them as opportunities to help our communities, customers, and employees succeed.” McPhaill concluded.

Financial Highlights

Quarterly Changes (comparisons to the third quarter of 2019)

  • The $3.7 million increase in net interest income is due to a $1.1 million increase in interest income due mostly to higher loan volumes partially offset by lower rates and lower interest expense, as well as a $2.6 million decrease in interest expense due to an increase in noninterest bearing deposits and lower rates on the remaining deposits.
  • The provision for loan & lease losses was $1.0 million higher due to the increase in core loan volume and relative uncertainty in the economy.
  • The $1.2 million favorable increase in noninterest income is due to a $0.8 million gain from the disposal of a low-income housing tax credit fund investment, and a $0.7 million increase in bank-owned life insurance (BOLI) income. These increases were partially offset by a $0.3 million decline in customer service charges.
  • Noninterest expense increased by $2.2 million, due mostly to a $1.1 million increase in salaries, a $0.4 million increase in foreclosed asset expenses, and a $0.5 million increase in director’s deferred compensation.

Year to-Date Changes (comparisons to the first nine-months of 2019)

  • Net income was relatively flat with a $0.2 million net decline, or less than 1%. The most significant line item changes were a $4.3 million increase in the provision for loan and lease losses, partially offset by a $3.5 million increase in net interest income due to higher loan balances and a favorable deposit mix.
  • Noninterest income increased by $2.5 million, or 14%, due in part to the third quarter changes described above in the quarterly comparison, but also because of a second quarter $0.7 million gain from the disposal of a tax credit fund investment and a second quarter $0.4 million gain from the sale of debt securities.
  • Noninterest expense increased $2.6 million, or 5% due mostly to the increases previously discussed in noninterest expense for the quarterly comparison.

Balance Sheet Changes (comparisons to December 31, 2019)

  • Total assets increased by $605.8 million, or 23%, to $3.2 billion, during the first nine months of the year.
  • Year-to-date 2020 loan growth of $611.8 million, or 35%, was highlighted by a $437.8 million increase in non-agricultural real estate loans, as well as a $98.4 million increase in mortgage warehouse lines, and $123.6 million of Paycheck Protection Program (PPP) loans.
  • Deposits increased by $423.3 million, or 20% during 2020. The growth in deposits came primarily from noninterest bearing or low-cost transaction and savings accounts, while higher-cost time deposits decreased. Other interest bearing liabilities increased $149.1 million as we utilized overnight FHLB borrowings to partially fund loan growth in 2020, including PPP loans and increased utilization of mortgage warehouse lines.

Other financial highlights are reflected in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL HIGHLIGHTS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or For the

 

 

At or For the

 

 

At or For the

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

9/30/2020

 

 

6/30/2020

 

 

9/30/2019

 

 

9/30/2020

 

 

9/30/2019

Net Income

 

$

10,356

 

$

8,303

 

$

8,952

 

$

26,465

 

$

26,676

Diluted Earnings per share

 

$

0.67

 

$

0.54

 

$

0.58

 

$

1.72

 

$

1.73

Return on Average Assets

 

 

1.34%

 

 

1.19%

 

 

1.36%

 

 

1.26%

 

 

1.40%

Return on Average Equity

 

 

12.34%

 

 

10.30%

 

 

11.78%

 

 

10.90%

 

 

12.33%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin (Tax-Equivalent)

 

 

3.98%

 

 

3.81%

 

 

4.09%

 

 

3.97%

 

 

4.20%

Yield on Average Loans and Leases

 

 

4.56%

 

 

4.56%

 

 

5.39%

 

 

4.75%

 

 

5.51%

Cost of Average Total Deposits

 

 

0.10%

 

 

0.15%

 

 

0.54%

 

 

0.19%

 

 

0.54%

Efficiency Ratio (Tax-Equivalent)¹

 

 

53.74%

 

 

57.78%

 

 

55.64%

 

 

56.64%

 

 

57.51%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

3,199,618

 

$

3,110,044

 

$

2,635,960

 

$

3,199,618

 

$

2,635,960

Loans & Leases Net of Deferred Fees

 

$

2,377,222

 

$

2,209,480

 

$

1,800,606

 

$

2,377,222

 

$

1,800,606

Noninterest Demand Deposits

 

$

975,750

 

$

949,662

 

$

685,528

 

$

975,750

 

$

685,528

Total Deposits

 

$

2,591,713

 

$

2,506,754

 

$

2,196,207

 

$

2,591,713

 

$

2,196,207

Noninterest-bearing Deposits over Total Deposits

 

 

37.6%

 

 

37.9%

 

 

31.2%

 

 

37.6%

 

 

31.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders Equity / Total Assets

 

 

10.5%

 

 

10.5%

 

 

11.5%

 

 

10.5%

 

 

11.5%

Tangible Common Equity Ratio

 

 

9.6%

 

 

9.6%

 

 

10.4%

 

 

9.6%

 

 

10.4%

Book Value per Share

 

$

21.92

 

$

21.55

 

$

19.85

 

$

21.92

 

$

19.85

Tangible Book Value per Share

 

$

19.84

 

$

19.43

 

$

17.69

 

$

19.84

 

$

17.69

(1) Noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from securities and bank owned life insurance income.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased $3.7 million to $28.1 million, for the third quarter of 2020 over the third quarter of 2019, and increased $3.5 million to $76.0 million for the first nine months of 2020 relative to the same period in 2019. For the third quarter of 2020, growth in average interest-earning assets totaled $452.8 million, or 19%, as compared to the third quarter of 2019. Although the yield on these balances was 56 basis points lower for the same period, the decrease in our cost of interest-bearing liabilities for the same period was 66 basis points resulting in an overall decline in margin of 11 basis points. Net interest income for the comparative year-to-date periods increased $3.5 million as the increase in volume of interest earning assets and favorable change in our deposit mix more than made up for the decrease in margin.

Our 2020 net interest margin has been impacted primarily by the following:

  • Market conditions, including five interest rate cuts by the Federal Open Market Committee totaling 225 bps over the past 12 months, negatively impacted our yield on existing adjustable and variable rate portfolio loans and created a lower initial interest rate for new loan volumes. In addition, given the low rate environment loan demand for our mortgage warehouse lines increased, resulting in a $92.8 million, or 55%, increase in average balances during the third quarter 2020. The average yield on mortgage warehouse lines declined to 3.16% from 3.85% for the comparative quarters.
  • Origination of SBA PPP loans, issuing 1,334 loans for $123.6 million to assist our customers impacted by the COVID 19 Pandemic. We have collected $5.0 million in loan fees related to PPP loans from the SBA which are accreted over the stated life of the loan.

On September 30, 2020, our outstanding fixed-rate loans represented 28% of our loan portfolio. Adjustable-rate loans represent 61% of our loan portfolio and range in adjustment periods from 30 days to 10 years with most of these subject to repricing after 3-years. There are $68.8 million of these adjustable-rate loans scheduled to adjust in the next quarter. Approximately 77% or $1.1 billion of these loans will not begin repricing until after three years, with $701.8 million repricing after five years. About 12% of our total portfolio, or $273.7 million, consists of variable rate loans. Of these variable rate loans, approximately $93.9 million have floors, with $85.5 million at their floors, which limited the overall reduction in rates.

Discount accretion on loans from whole-bank acquisitions enhanced our net interest margin by two basis points in the third quarter of 2020 as compared to three basis points in the third quarter 2019, and two basis points for the first nine months of 2020 relative to four basis points in the first nine months of 2019. On September 30, 2020 the remaining balance of loan discount available to be accreted was $3.3 million.

Interest expense was $1.0 million for the third quarter of 2020, a favorable decline of $2.6 million, or 73%, relative to the third quarter of 2019. For the first nine months of 2020, compared to the first nine months of 2019, interest expense declined $6.1 million, or 58%, to $4.5 million due to lower rates, higher low or no cost deposits, and lower time deposits. The average balance of higher-cost time deposits declined by $86.7 million, or 16%, in the third quarter of 2020 as compared to the third quarter of 2019. The average 2020 year-to-date balance of such time-deposits declined by $60.9 million, or 11.4%, compared to the same period in 2019. The average balance of lower or no cost transaction and savings accounts increased $158.7 million, or 7.5%, for the third quarter of 2020 compared to the same period in 2019 and increased by $91.6 million, or 10.9%, on a year-to-date basis in 2020 compared to the same period in 2019.

Provision for Loan and Lease Losses

The Company recorded a loan and lease loss provision of $2.4 million in the third quarter of 2020 relative to a provision of $1.4 million in the third quarter of 2019, and a year-to-date loan loss provision of $6.4 million in 2020 as compared to $2.1 million for the same period in 2019. The Company is 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) in 2020. 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. Although this deferral will still require CECL to be implemented as of January 1, 2020, 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.

The Company’s $1.0 million, or 74%, increase in provision for loan and lease losses in the third quarter of 2020 as compared to the third quarter of 2019, and the $4.3 million, or 210% increase in the first nine months of 2020 compared to the same period in 2019 is due to growth in organic non-owner occupied commercial real estate loans, downgrades of certain loans deferred under section 4016 of the Cares Act and the continued uncertainty surrounding the estimated impact that COVID-19 will have on the economy and our loan customers. Management adjusted its qualitative risk factors under our current incurred loss model for economic conditions, changes in the mix of the portfolio due to loans subject to a payment deferral, potential changes in collateral values due to reduced cash flows, and external factors such as government actions. In particular, the uncertainty regarding our customers’ ability to repay loans could be adversely impacted by COVID-19 given higher unemployment rates, requests for payment deferrals, temporary business shut-downs, and reduced consumer and business spending.

Noninterest Income

Total noninterest income reflects increases of $1.2 million, or 21%, for the quarter ended September 30, 2020 as compared to the same period in 2019, and $2.5 million, or 14% for the year-to-date period ended September 30, 2020 as compared to the same period in 2019. The third quarter 2020 comparison to the third quarter 2019 includes a $0.8 million non-recurring gain resulting from the wrap-up of a low-income housing tax credit fund investment, as well as a $0.7 million favorable fluctuation in income on Bank-Owned Life Insurance (BOLI) associated with deferred compensation plans. Those increases were partially offset by lower service charges on deposits. In comparing the 2020 year-to-date period to the same period in 2019, the variances in noninterest income came from a $0.4 million increase in BOLI income, a $1.4 million gain from the wrap up of low-income housing tax credit fund investments, a decrease of $0.6 million in low-income housing tax credit fund expenses, an increase of $0.2 million in the valuation gain of restricted equity investments owned by the Company and a $0.4 million gain on the sale of debt securities from the restructuring of the portfolio in the second quarter.

Service charges on customer deposit account income declined by $0.3 million, or 10%, to $3.0 million in the third quarter of 2020 as compared to the third quarter of 2019. This service charge income was $0.6 million lower, or 7%, in the first nine months of 2020, as compared to the same period in 2019. These declines are primarily a result of decreases in overdraft income offset by increases in interchange income and other deposit fees including analysis.

Noninterest Expense

Total noninterest expense increased by $2.2 million, or 13%, in the third quarter of 2020 relative to the third quarter of 2019, and by $2.6 million, or 5%, in the first nine months of 2020 as compared to the same period in 2019.

Salaries and Benefits were $0.9 million, or 10%, higher in the third quarter of 2020 as compared to the third quarter of 2019 and $2.1 million, or 8%, higher for the first nine months of 2020 compared to the same period in 2019. The reason for this increase is due to several factors, including merit increases for employees due to annual performance evaluations for 2019, new loan production teams for the northern and southern California markets, and a focus on hiring higher-level staff and management. Salary expense deferrals related to loan originations were $0.1 million lower in the third quarter of 2020 relative to the third quarter of 2019, and $0.4 million higher for the first nine months of 2020 compared to the same period in 2019. There have not been any permanent or temporary reductions in employees as a result of COVID-19 although total full-time equivalent employees have declined from 512 at September 30, 2019 to 491 at September 30, 2020.

Occupancy expenses remained relatively flat for the respective comparative periods. Other noninterest expense increased $1.2 million, or 21%, for the third quarter 2020 as compared to the third quarter in 2019, but was only $0.4 million, or 2%, higher for the first nine months of 2020 as compared to the same period in 2019. The variance for the third quarter of 2020 compared to the same period in 2019 was primarily driven by a $0.6 million increase in loan servicing expense, due mostly to write-downs of other real estate owned assets; a $0.5 million increase in professional services; partially offset by a $0.3 million decrease in advertising costs. The $0.5 million change in professional services includes a $0.2 million increase in FDIC assessments due to the Small Bank Assessment credits applied against FDIC deposit insurance costs in the comparative quarter for 2019, a $0.5 million increase in deferred compensation expense for directors, which is linked to the changes in BOLI income, and a $0.2 million reduction in consulting costs. The Company continues to actively consider a variety of operational efficiency opportunities. For the first nine months of 2020, the $0.4 million increase in other noninterest expense was driven by a $0.6 million increase in loan services costs (mostly in foreclosed assets), a $0.3 million increase in deposit services costs, a $0.2 million increase in sundry losses, partially offset by a $0.5 million decrease in advertising costs and a $0.2 million decrease in professional services expense.

The Company’s provision for income taxes was 23.4% of pre-tax income in the third quarter of 2020 relative to 24.2% in the third quarter of 2019, and 23.5% of pre-tax income for the first nine months of 2020 relative to 24.9% for the same period in 2019. The decline in tax rate in the third quarter of 2020 is due mostly to a higher percent of the income being tax-exempt income.

Balance Sheet Summary

Balance sheet changes during the first nine months of 2020 include an increase in total assets of $605.8 million, or 23%, due mostly to a $617.7 million increase, or 35%, in the loan portfolio. This significant increase in loan balances in 2020 is due to a $437.8 million increase in non-agricultural real estate loans, a $123.6 million increase in PPP loans, and a $98.4 million change in mortgage warehouse line utilization. Non-agricultural real estate loan balances increased due to deliberate and concentrated efforts of our Northern and Southern market loan production teams. These teams were added in the first quarter 2020 as part of a strategic initiative that began in 2019 to expand our geographic footprint. Our loan pipeline at September 30, 2020 remains robust but has softened from the previous quarter due to a strategic shift to focus on further diversifying our loan mix. Based on this pipeline, we expect continued loan growth in the fourth quarter but not at the same pace as the prior two quarters. Mortgage warehouse loan balances increased due to market factors favorably impacting line utilization due to both mortgage originations and refinancing activity, as well as normal seasonal mortgage activity.

With regards to line utilization, excluding mortgage warehouse and consumer overdraft lines, unused commitments were $304.8 million on September 30, 2020, as compared to $303.4 million on December 31, 2019. Total utilization, excluding mortgage warehouse and consumer overdraft lines was 55% at September 30, 2020, as compared to 59% at December 31, 2019. Commercial line utilization was 57% on September 30, 2020, as compared to 61% on December 31, 2019. Mortgage warehouse utilization was 61% at September 30, 2020, as compared to 59% on December 31, 2019.

The Company’s core deposit intangible assets decreased $0.8 million to $4.6 million at September 30, 2020 from $5.4 million at December 31, 2019. Goodwill remained at $27.4 million during the first nine months of 2020 and was approximately 8% of total capital at September 30, 2020. The Company performed a qualitative test for impairment and determined that no goodwill impairment was probable at September 30, 2020. The Company will continue to evaluate qualitative factors to determine if a quantitative test for goodwill impairment is necessary.

As of September 30, 2020, deposit balances reflected growth of $423.3 million, or 20%, during the first nine months of 2020. Core non-maturity deposits increased by $467.4 million, or 28%, during this period while customer time deposits decreased by $44.1 million, or 9%. Wholesale brokered deposits of $50.0 million were unchanged at September 30, 2020 as compared to December 31, 2019. Overall noninterest-bearing deposits as a percent of total deposits at September 30, 2020, increased to 37.7%, as compared to 31.9% at December 31, 2019. Other interest-bearing liabilities of $229.7 million on September 30, 2020 is comprised of $36.7 million of customer repurchase agreements, $148.0 million in overnight FHLB borrowings, $5.0 million in short term borrowings, $5.0 million in long term borrowings, and $35.1 million in subordinated debentures. The increase in overnight FHLB borrowings was due mostly to support organic growth in non-owner occupied commercial real estate loans, PPP loans and changes in mortgage warehouse line utilization. It is anticipated that normal seasonal volatility will reduce utilization on mortgage warehouse lines and PPP loans will start to be forgiven in 2021.

The Company continues to have substantial liquidity. At September 30, 2020, and December 31, 2019, the Company had the following sources of primary and secondary liquidity ($ in thousands):

 

 

 

 

 

 

 

Primary and Secondary Liquidity Sources

 

 

September 30, 2020

 

 

December 31, 2019

Cash and Due From Banks

 

$

88,933

 

$

80,077

Unpledged Investment Securities

 

 

339,125

 

 

366,012

Excess Pledged Securities

 

 

61,655

 

 

70,955

FHLB Borrowing Availability

 

 

380,600

 

 

443,200

Unsecured Lines of Credit

 

 

80,000

 

 

80,000

Funds Available through Fed Discount Window

 

 

65,125

 

 

59,198

Totals

 

$

1,015,438

 

$

1,099,441

In addition to the primary and secondary sources of liquidity listed above, the Company has also been approved to borrow $12 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 throughout the third quarter of 2020 and expected liquidity in the fourth quarter of 2020, it has elected not to utilize the PPPLF at this time.

Total capital of $336.2 million at September 30, 2020 reflects an increase of $27.0 million, or 9%, relative to year-end 2019. The increase in equity during the first nine months of 2020 was due to the addition of $26.5 million in net income, and a $11.6 million favorable swing in accumulated other comprehensive income/loss, net of $9.1 million in dividends paid, and $2.6 million in stock repurchases prior to March 15, 2020.

Contacts

Kevin McPhaill, President/CEO

(559) 782‑4900 or (888) 454‑BANK

www.sierrabancorp.com

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