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Actionable news in BSRR: Sierra Bancorp,

Sierra Bancorp Reports Earnings

, or 27%, relative to the second quarter of 2016 for the following reasons: net interest income increased by 17% due primarily to a higher average balance of interest-earning assets; the Company recorded a $300,000 provision for loan losses in the second quarter of 2017, to provide for loan growth and replenish reserves; non-interest income went up by 17%, due in part to fees earned on an expanding deposit account base and increased activity on commercial accounts, a non-recurring prepayment penalty on a large loan, and higher income on bank-owned life insurance; and, non-interest expense increased by 10%, with much of the increase coming from costs associated with our expanded branch network pursuant to the Coast acquisition in 2016 and de novo branch openings. For the second quarter of 2017 the Company's return on average assets was 1.02%, return on average equity was 9.75%, and diluted earnings per share were $0.37.

For the first six months of 2017 the Company recognized net income of $9.754 million, which represents an increase of 20% relative to the same period in 2016. The Company's financial performance metrics for the first half of 2017 include an annualized return on average equity of 9.31%, a return on average assets of 0.98%, and diluted earnings per share of $0.70.

Total assets, loans, and deposits reached record levels at June 30, 2017, thanks to strong organic growth during the first six months of the year. Total assets increased by $45 million, or 2%, during the first half, ending the period at $2.1 billion. The increase in assets resulted primarily from organic growth in real estate loans and agricultural production loans and an increase in investment securities, partially offset by lower utilization on mortgage warehouse lines and a declining level of cash and balances due from banks. Gross loans totaled almost $1.3 billion at June 30, 2017. Total nonperforming assets were reduced by $797,000, or 9%, during the first half. Deposits were up $96 million, or 6%, ending the period at close to $1.8 billion due largely to strong growth in core non-maturity deposits.

"Therefore it is said that one may know how to win, but cannot necessarily do so." – Sun Tzu

"We continue our commitment to growth and expansion, and during this past quarter we saw strong organic increases in loans and deposits in addition to striking agreements to acquire Ojai Community Bank and the Woodlake branch of Citizens Business Bank," stated Kevin McPhaill, President and CEO. "It is our bankers and their drive for excellence that sets us apart; our entire banking team has dedicated themselves to delivering the very best community banking experience for our customers," he added. "We achieved new record highs in loans, deposits, and assets in the first half of the year and we move into the second half with the same energy and focus on growth, demonstrating not just our knowledge but our ability to execute and 'win'," concluded McPhaill.

Financial Highlights

As noted above, net income increased by $1.116 million, or 27%, in the second quarter of 2017 relative to the second quarter of 2016, and by $1.632 million, or 20%, for the first six months of 2017 as compared to the same period in 2016. Significant variances in the components of pre-tax income, including some items of a nonrecurring nature, are noted below.

Net interest income was up by $2.645 million, or 17%, for the second quarter, and $4.213 million, or 14%, for the first half due primarily to growth in average interest-earning assets totaling $260 million, or 16%, for the second quarter of 2017 over the second quarter of 2016, and growth of $232 million, or 14%, for the first half of 2017 over the first half of 2016. The increase in average earning assets came via organic growth, as well as our acquisition of Coast National Bank in mid-2016. The favorable impact of higher interest-earning assets was supplemented by an increase of four basis points in our net interest margin for the comparative quarters, which was caused primarily by higher loan yields partially offset by higher borrowing costs. The comparative results were also impacted by non-recurring interest income, which totaled $83,000 in the second quarter of 2017 relative to $22,000 in the second quarter of 2016, and $219,000 in the first half of 2017 as compared to only $65,000 in the first half of 2016. Non-recurring interest income is comprised of interest recoveries on non-accrual loans less any interest reversals for loans placed on non-accrual status, as well as accelerated fee recognition for loan prepayments, and late fees.

The Company recorded a provision for loan losses in the second quarter of 2017, for the first time since the second quarter of 2014. The provision became necessary due to loan growth, and to replenish reserves subsequent to the unanticipated charge-off of a $224,000 overdraft on a business account.

Total non-interest income increased by $790,000, or 17%, for the quarterly comparison, and $1.630 million, or 18% for the comparative year-to-date periods. Significant variances in non-interest income include the following: increases in service charges on deposits totaling $298,000, or 12%, for the quarter and $500,000, or 10%, for the first six months, resulting from fees earned on a higher number of deposit accounts, as well as a higher level of commercial deposit account activity and fee increases for higher-risk accounts; increases in bank-owned life insurance (BOLI) income totaling $129,000 for the quarter and $372,000 for the first six months, due in large part to higher income on BOLI associated with deferred compensation plans but also reflecting higher income crediting rates on other BOLI; and increases in other non-interest income of $451,000, or 26%, for the second quarter, and $814,000, or 24%, for the first half, including a $141,000 prepayment penalty on a large dairy loan that paid off in the second quarter of 2017 and a rising level of non-deposit service charges and fees, particularly debit card interchange income. Investment gains declined for the comparative periods, reflecting reductions of $88,000 for the second quarter and $56,000 for the first six months.

Total non-interest expense was up by $1.376 million, or 10%, for the second quarter of 2017 relative to the second quarter of 2016, and $3.598 million, or 13%, for the comparative six-month periods. The largest component of non-interest expense, salaries and benefits, increased by $629,000, or 9%, for the second quarter and $1.648 million, or 12%, for the first half, largely because salaries and benefits in 2017 include expenses for former Coast employees retained subsequent to the acquisition in July of 2016, as well as staffing costs for our Sanger branch which opened in May of 2016 and our newest Bakersfield branch that commenced operations in March of 2017. The increase also reflects salary adjustments in the normal course of business, a relatively large increase in group health insurance costs, and, for the year-to-date comparison, higher stock option expense stemming from options granted in February of 2017. Those increases were partially offset by lower overtime and temporary staffing costs, which were down $60,000 for the quarter and $72,000 for the first six months due to costs incurred in preparation for the Coast acquisition and related systems conversion in 2016. Compensation costs also benefited from stronger loan origination activity, since salaries directly related to successful loan originations, which are deferred and amortized as loan costs and thus reduce current period compensation expense, increased by $399,000 for the second quarter and $634,000 for the first six months.

Occupancy expense increased by $369,000, or 20%, in the second quarter of 2017 over the second quarter of 2016, and by $938,000, or 26%, for the comparative year-to-date periods, due to occupancy costs associated with the former Coast National Bank branches and our newer de-novo branches, higher rent and depreciation expense in other locations, and, for the year-to-date comparison, roughly $100,000 in non-recurring expenses associated with opening our newest Bakersfield branch in the first quarter of 2017. Other non-interest expense was up by $378,000, or 7%, for the quarter, and $1.012 million, or 10%, for the first six months. This category includes an $85,000 nonrecurring charge related to a legal settlement in the second quarter of 2017, as well as nonrecurring acquisition costs which totaled $166,000 in the second quarter of 2017 relative to $128,000 in the second quarter of 2016, and $161,000 for the first six months of 2017 as compared to $342,000 in the first six months of 2016. It also reflects recurring increases from the Coast acquisition in various core operating expense categories including data processing, deposit costs (including amortization expense on our core deposit intangible), telecommunications, supplies and travel expense. Additional non-interest expense areas experiencing relatively large increases include: directors' deferred compensation expense, in conjunction with the changes in BOLI income; stock option expense for directors; director retirement plan accruals, due to a non-recurring expense reversal of $173,000 in the first quarter of 2016; and, loan costs for the year-to-date comparison due to approximately $100,000 in non-recurring adjustments in the first quarter of 2017. Partially offsetting the increases were reductions in net OREO expense totaling $296,000 for the quarter and $286,000 for the year-to-date period, lower regulatory assessments, and a drop in operations-related losses.

The Company's provision for income taxes was 33% of pre-tax income in the second quarters of 2017 and 2016, and 31% for the first six months of 2017 relative to 33% for the first six months of 2016. The slightly lower tax accrual rate for the first half of 2017 is primarily the result of our adoption of FASB's Accounting Standards Update 2016-09 effective January 1, 2017, and the subsequent change in accounting methodology associated with the disqualifying disposition of Company shares issued pursuant to the exercise of incentive stock options (ISOs). Prior to January 1, 2017, the favorable tax impact of disqualifying dispositions was recorded directly to equity, whereas it is now reflected in the income statement as an adjustment to our income tax...


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