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 Jun
