BSRR Sierra Bancorp

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) January 29, 2024

SIERRA BANCORP

(Exact name of registrant as specified in its charter)

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(559) 782-4900

(Registrant’s telephone number including area code)

Not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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ITEM 2.02RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On January 29, 2024, Sierra Bancorp issued a press release announcing its unaudited consolidated financial results for the quarter and year ended December 31, 2023. A copy of the press release is attached as Exhibit 99.1 to this Current Report.

The information in this report (including Exhibit 99.1) is being furnished pursuant to Item 2.02 and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act.

ITEM 9.01FINANCIAL STATEMENTS AND EXHIBITS

(d)Exhibits. The information required to be furnished pursuant to this item is set forth in the Exhibit Index which appears below, immediately before the signatures.

EXHIBIT INDEX

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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Exhibit 99.1

FOR IMMEDIATE RELEASE

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SIERRA BANCORP REPORTS STRATEGIC SECURITIES TRANSACTION AS WELL AS FOURTH QUARTER AND YEAR END 2023 RESULTS

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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):

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Sierra Bancorp Financial Results

January 29, 2024

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

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“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.

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Financial Highlights

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Quarterly Changes (comparisons to the fourth quarter of 2022)

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Sierra Bancorp Financial Results

January 29, 2024

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

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Balance Sheet Changes (comparisons to December 31, 2022)

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Sierra Bancorp Financial Results

January 29, 2024

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Other financial highlights are reflected in the following table.

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INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income was $27.9 million for the fourth quarter of 2023, a $1.5 million decrease, or 5% over the fourth quarter of 2022, and increased $2.8 million, or 3%, to $112.4 million for the year ended 2023 relative to the same period in 2022.

For the fourth quarter of 2023, average interest-earning assets totaled $130.0 million, an increase of 4%, as compared to the fourth quarter of 2022. The yield on these balances was 62 basis points higher for the same period due mostly to an increase in yield of investment securities, as well as loan growth at higher yields. This increase in yield was offset by a 133 basis point increase in the cost of our interest-bearing liabilities for the same period. Although most transaction and savings deposit rates have not changed, the change in mix of liabilities caused the costs to increase. This was primarily affected due to average balances of time deposits and borrowed funds, including overnight purchases.

Net interest income for the comparative year-to-date periods increased $2.8 million, or 3%, due to a change in mix of average interest-earning assets. Investment balances, with an average yield of 5.09% increased $140.4 million, while gross average loan balances yielding 4.69% increased $57.7 million. The overall yield on the average balances of earning assets was 100 basis points higher for the comparative periods, offset by a 161 basis point increase in interest paid on liabilities. The net impact was a 10 basis point decrease in our net interest margin for the year ended December 31, 2023, as compared to the same period in 2022.

Sierra Bancorp Financial Results

January 29, 2024

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Interest expense was $14.6 million for the fourth quarter of 2023, an increase of $8.3 million, relative to the fourth quarter of 2022. For the year ended 2023, compared to the same period in 2022, interest expense increased $38.5 million, to $50.7 million. The increase in interest expense for the quarterly comparison is attributable to a $198.8 million increase in average interest-bearing liabilities with a 133 bps increase in cost. The increase was primarily in higher cost customer time deposits, wholesale brokered deposits and borrowed funds. Lower or no cost average transaction and savings accounts decreased $283.0 million for the quarterly comparison. For the year-to-date comparisons, the increase is attributable to a shift from lower cost transaction accounts to higher cost time accounts as well as an increase in borrowed funds. For the year ended 2023, higher cost customer time deposits increased $210.2 million, wholesale brokered deposits increased $88.5 million and borrowed funds increased $216.3 million, while lower cost or no cost deposits decreased $279.6 million.

In early 2024, the Company initiated a strategic securities transaction by selling $196.7 million of bonds. These securities were identified as an intent to be sold at December 31, 2023. This transaction realized a $14.5 million loss in the fourth quarter of 2023, as discussed previously. The average yield on these bonds was 2.61% and the proceeds were used to paydown short-term borrowings at an average rate of 5.52%. This transaction is expected to increase our earnings stream beginning in 2024 by increasing net interest income as interest expense on borrowed funds will be reduced by more than the reduction in interest income on the securities sold.

The Company had $1.3 billion in adjustable and variable rate loans, $570.7 million in floating rate CLOs and $35.7 million in floating rate trust preferred securities at December 31, 2023, as compared to $1.3 billion in adjustable and variable rate loans, $498.4 million in floating rate CLOs and $35.5 million in floating rate trust preferred securities at December 31, 2022. The next rate adjustment date on the adjustable-rate loans vary and can be up to ten years. It is expected that $388.7 million of the Company’s adjustable and variable rate loans will reprice in the next twelve months.

Our net interest margin was 3.31% for the fourth quarter of 2023, as compared to 3.30% for the linked quarter and 3.63% for the fourth quarter of 2022.

Credit Loss Expense

The Company recorded expenses related to credit losses on loans of $3.6 million in the fourth quarter of 2023 relative to an expense of $6.5 million in the fourth quarter of 2022, and a year-to-date credit loss expense on loans of $4.1 million in 2023 as compared to a $10.9 million for the same period in 2022. The Company's $2.9 million favorable decrease in credit loss expense on loans in the fourth quarter of 2023 as compared to the fourth quarter of 2022, and the $6.8 million favorable decrease for the year ending 2023 compared to the same period in 2022 are primarily due to the impact of lower net charge-offs during the year ending 2023. The elevated net charge-offs in 2022 were mostly due to two loan relationships; one dairy loan relationship with total charge-offs of $8.7 million and 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. In the fourth quarter of 2023, there was a $2.3 million charge-off related to commercial real estate.

All debt securities in an unrealized loss position were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss.

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Noninterest Income

Total noninterest income reflects increases of $0.4 million or 5%, for the quarter ended December 31, 2023 as compared to the same quarter in 2022, and decreased of $0.4 million or 1%, for the year ended December 31, 2023 as compared to the same period in 2022. The quarterly and year-to-date comparisons were both impacted by favorable fluctuations in income on bank-owned life insurance (BOLI) with underlying investments mapped directly to the Company’s deferred compensation plan. The quarterly and year-to-date comparisons were also favorably impacted by a $15.3 million gain on the sale of Bank owned branch buildings (subsequently leased back), partially offset by realizing a $14.5 million loss on a securities strategy which identified $196.7 million in available-for-sale securities to be sold in January 2024. The year-to-date decrease was also unfavorably impacted by 2022 events that did not recur in 2023, including $3.6 million from gains on the sale of other assets, and the recovery of prior period legal expenses.

Sierra Bancorp Financial Results

January 29, 2024

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Service charges on customer deposit account income increased $0.3 million, or 6%, to $6.0 million in the fourth quarter of 2023 as compared to the fourth quarter of 2022. This increase is primarily due to higher overdraft income, ATM fees, and analysis income during the comparable periods. This service charge income was relatively unchanged at $23.1 million for the year ending December 31, 2023, as compared to the same period in 2022.

Noninterest Expense

Total noninterest expense increased by $2.6 million, or 12%, in the fourth quarter of 2023 relative to the fourth quarter of 2022, and increased by $7.9 million, or 9%, for the year ended 2023 as compared to the same period in 2022.

Salaries and Benefits were $1.4 million, or 12%, higher in the fourth quarter of 2023 as compared to the fourth quarter of 2022 and $3.9 million, or 8%, higher for the year ended 2023 compared to the same period in 2022. We had severance payments of $0.9 million due to 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 the bonus accrual. Overall full-time equivalent employees were 485 at December 31, 2023 as compared to 491 at December 31, 2022. The decrease in FTE was due to the reduction in force during the fourth quarter of 2023, as several management positions were eliminated due to operational efficiencies.

Occupancy expenses were $0.4 million higher for both the fourth quarter of 2023 and year-to-date as compared to the same periods in 2022. The primary reason for increase in the quarterly and year-to-date comparisons was a one-time payment of $0.2 million for home office stipends for staff that work remotely and regular rent escalations.

Other noninterest expense increased $0.8 million, or 12%, for the fourth quarter 2023 as compared to the fourth quarter in 2022, and increased $3.5 million, or 12%, for the year ended 2023 as compared to the same period in 2022. The variance for the fourth quarter of 2023 compared to the same period in 2022 was primarily driven by higher FDIC assessment costs, increased marketing costs associated with a deposit acquisition campaign, higher travel costs due to our expanded remote work force, and elevated debit card losses. These increased expenses were partially offset by lower costs in core processing and internet banking costs. For the year-over-year comparison, the categories of increase were the same as with the quarterly comparison, along with a $2.0 million unfavorable variance in directors deferred compensation expense, linked to the changes in BOLI income, a $0.6 million increase in foreclosed asset costs related to the foreclosure and subsequent sale of one large loan relationship in the first quarter of 2023. Positive variances for the year-over-year comparison included a $0.2 million decrease in deposit statement costs and a $0.3 million decrease in miscellaneous losses due to restitution payments made to customers in 2022 who were charged nonsufficient funds fees on representments.

The Company's provision for income taxes was 23.8% of pre-tax income in the fourth quarter of 2023 relative to 21.1% in the fourth quarter of 2022, and 25.0% of pre-tax income for the years ended December 31, 2023 and 2022. The increase in effective tax rate in the fourth quarter is due to tax credits and tax-exempt income representing a smaller percentage of total taxable income. The decline in tax-exempt income is due mostly to tax exempt municipal securities representing a smaller portion of total taxable securities.

Balance Sheet Summary

Balance sheet changes for the year ended December 31, 2023 include an increase in total assets of $121.2 million, or 3%, primarily as a result of a $67.5 million increase in investment securities, a $37.1 million increase in gross loans, a $19.8 million increase in other assets, net of a $5.6 million decrease in Bank owned premises and equipment.

The increase in investment securities of $68.2 million in 2023 consisted primarily of increases in AAA tranches of collateralized loan obligations of $72.3 million and in callable government agency securities for $51.6 million, partially offset by decreases in mortgage-backed securities, corporate bonds and state and municipal bonds.

Gross loan balances increased $37.1 million during the year ended December 31, 2023. The increase was primarily a result of a $50.6 million increase in mortgage warehouse utilization, $18.8 million increase in commercial real estate,

Sierra Bancorp Financial Results

January 29, 2024

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and a $51.6 million increase in other commercial loans. Negatively impacting these positive variances were loan paydowns and maturities resulting in net declines in many categories even with solid loan production. In particular there was a $46.1 million decrease in farmland, $12.2 million decrease in other construction and $25.4 million decrease in residential real estate. Further, SBA PPP loan forgiveness resulted in a $1.3 million decline in loan balances, included in the other commercial loan variance noted above.

As indicated in the loan roll forward below, new credit extended for the fourth quarter of 2023 decreased $40.5 million over the same period in 2022 and decreased $106.9 million for the year-to-date comparisons. This decline in organic loan growth is attributable to extensive competition for quality new loans coupled with reduced demand in the current elevated rate environment. Contributing to this negative variance, we did not purchase any loans during 2023, had $161.4 million in loan paydowns and maturities, and a $37.3 million decrease in line of credit utilization. Offsetting a portion of these negative variances we experienced a $50.6 million increase in mortgage warehouse line utilization.

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Unused commitments, excluding mortgage warehouse and overdraft lines, were $203.6 million at December 31, 2023, compared to $219.7 million at December 31, 2022. Total line utilization, excluding mortgage warehouse and overdraft lines, was 62% at December 31, 2023 and 59% at December 31, 2022 and was 53% at December 31, 2023 and 32% at December 31, 2022, including mortgage warehouse lines. Mortgage warehouse utilization increased to 36% at December 31, 2023, as compared to 10% at December 31, 2022. Total mortgage warehouse availability declined to $204.5 million at December 31, 2023 as compared to $594.6 million at December 31, 2022. With current industry volumes down due to decreased purchase and refinance activity we experienced some lenders leaving the Bank and others decreasing their lines of credit to match their current volumes.

Deposit balances declined $84.9 million, or 3%, during the year ended December 31, 2023. Core non-maturity deposits decreased by $255.4 million, or 11%, while customer time deposits increased by $155.5 million, or 39%. Although there has been some attrition, our customers are becoming more rate sensitive in the current higher rate environment and have moved funds from lower or no cost transaction accounts into higher cost time deposits. Wholesale brokered deposits increased by $15.0 million to $135.0 million. Overall noninterest-bearing deposits as a percent of total deposits at December 31, 2023, decreased to 37.0%, as compared to 38.2% at December 31, 2022.

Other interest-bearing liabilities of $467.6 million on December 31, 2023 consisted of $80.0 million in FHLB long term advances, $107.1 million in customer repurchase agreements, $130.0 million in overnight fed funds purchased, and $150.5 million in short term and overnight FHLB advances. Proceeds from the securities strategy, which involved selling $196.7 million in available-for-sale securities yielding 2.61% in January 2024 went to paydown a portion of these borrowed funds with an average rate of 5.52%. Other interest-bearing liabilities at December 31, 2022 consisted of $109.2 million in customer repurchase agreements, $125.0 million in overnight fed funds purchased, and $94.0 million in overnight FHLB advances.

Sierra Bancorp Financial Results

January 29, 2024

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The Company continues to have substantial liquidity. At December 31, 2023, and December 31, 2022, the Company had the following sources of primary and secondary liquidity (Dollars in Thousands, Unaudited):

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Total capital of $338.1 million at December 31, 2023 reflects an increase of $34.5 million, or 11%, relative to year-end 2022. The increase in equity during the year ended December 31, 2023 was primarily due $34.8 million in net income and a $20.6 million favorable swing in accumulated other comprehensive income (loss) partially offset by $13.7 million in dividends paid, and $8.5 million in share repurchases. The remaining difference is related to stock options exercised and restricted stock activity during the year.

Asset Quality

Total nonperforming assets, comprised of nonaccrual loans, decreased by $11.6 million to $8.0 million for the year ended December 31, 2023. The Company's ratio of nonperforming loans to gross loans decreased to 0.38% at December 31, 2023 from 0.95% at December 31, 2022. The decrease resulted from a decrease in non-accrual loan balances, primarily as a result of the foreclosure and sale of one loan relationship in the dairy industry consisting of four separate loans in the first quarter of 2023. At December 31, 2023, nonaccrual loans totaled $8.0 million compared to $19.6 million at December 31, 2022. All the Company's nonperforming assets are individually evaluated for credit loss quarterly and management believes the established allowance for credit loss on such loans is appropriate. The nonaccrual loans at December 31, 2023, are mostly due to a single commercial real estate relationship of $7.4 million.

The Company's allowance for credit losses on loans was $23.5 million at December 31, 2023, as compared to a balance of $23.1 million at December 31, 2022. The allowance was 1.12% of total loans at both December 31, 2023 and December 31, 2022. Although the Company experienced fewer net charge offs during the year, a specific allowance on one single commercial real estate relationship was the primary reason for the increase.

Management's detailed analysis indicates that the Company's allowance for credit losses on loans should be sufficient to cover credit losses inherent in loan portfolio balances outstanding as of December 31, 2023, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the credit loss allowance on loans.

About Sierra Bancorp

Sierra Bancorp is the holding Company for Bank of the Sierra (www.bankofthesierra.com), which is in its 47^th 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 in Templeton, California, and a dedicated loan production office in Roseville, California. In 2023, 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 and a BBB+ rating from Kroll.

Forward-Looking Statements

Sierra Bancorp Financial Results

January 29, 2024

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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, loan portfolio performance, 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, 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.

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Sierra Bancorp Financial Results

January 29, 2024

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Sierra Bancorp Financial Results

January 29, 2024

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Sierra Bancorp Financial Results

January 29, 2024

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