Executive Summary / Key Takeaways

• Resilient Net Interest Income Growth: Sierra Bancorp demonstrated an increase in net interest income for both the third quarter and the first nine months of 2025, driven by a notable decrease in the cost of interest-bearing liabilities, despite a challenging interest rate environment.
• Strategic Loan and Deposit Expansion: The company achieved significant loan growth, particularly in mortgage warehouse lines and commercial real estate, alongside a favorable shift in its deposit mix towards lower-cost noninterest-bearing and interest-bearing demand deposits.
• Robust Liquidity and Capital Position: BSRR maintains a strong liquidity profile, with ample unencumbered assets and borrowing capacity, and its capital ratios remain well above regulatory minimums, supporting its stability and shareholder return initiatives.
• Focused Credit Risk Management: While facing an elevated provision for credit losses in Q3 2025 due to a specific agricultural loan, the company's overall nonperforming assets have improved, and management actively monitors credit quality.
• Community-Centric Model with Digital Imperatives: Sierra Bancorp leverages its deep community presence and diversified loan portfolio as key differentiators, but acknowledges the ongoing need to deploy new technology to enhance customer experience and maintain competitiveness against digitally advancing rivals.

A Community Banking Anchor in California's Dynamic Landscape

Sierra Bancorp (NASDAQ:BSRR), through its subsidiary Bank of the Sierra, stands as a foundational regional banking institution in California, with a history rooted in organic expansion and strategic acquisitions. Since its inception in 1978 as a single-branch operation, the company has grown to encompass 35 full-service branches, an online branch, and ATMs across California's South San Joaquin Valley, Central Coast, Ventura County, and Sacramento areas. This growth, punctuated by acquisitions such as Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in 2017, underscores a deliberate strategy to deepen its community ties and broaden its service reach. The company's core business model revolves around providing a comprehensive suite of retail and commercial banking services, including specialized lending units for commercial and industrial, commercial real estate, and mortgage warehouse borrowers.

In the competitive landscape, Sierra Bancorp occupies a mid-tier position among regional banks. Its strengths lie in its strong community presence, fostering deep customer loyalty and providing niche expertise, particularly in agricultural lending. This localized focus offers a qualitative edge against larger, more diversified competitors like CVB Financial Corp. (CVBF) and Pacific Premier Bancorp (PPBI), who may have broader networks but potentially less granular local market penetration. However, BSRR's smaller scale can lead to qualitatively higher operating costs compared to more efficient, larger rivals. The broader banking industry faces a difficult interest rate environment, persistent inflationary pressures, and an uncertain employment outlook. While the AI and data center boom presents potential lending opportunities in California, BSRR's ability to capitalize on these may be challenged by competitors with faster innovation cycles.

Operational Foundation and Digital Engagement

Sierra Bancorp's operational framework is built upon its extensive branch network, which serves as a cornerstone for its community-focused strategy. Complementing its physical footprint, the company offers a suite of digital banking services designed to enhance customer convenience and accessibility. These include an online branch, mobile check deposits, online lending solutions, automated telephone banking, and remote deposit capture and payroll services for business customers. These offerings are essential for modern banking and reflect BSRR's commitment to meeting evolving customer expectations.

While these digital services are standard for the industry, BSRR's continuous deployment of new technology is crucial for maintaining its competitive edge. The company recognizes the importance of successfully deploying new technology and managing cybersecurity risks as key operational challenges. This ongoing investment in its technological infrastructure is vital to enhance the customer experience, improve operational efficiency, and keep pace with rivals who may demonstrate faster innovation in digital banking. The strategic intent behind these technological efforts is to support its community banking model by providing accessible and efficient services, thereby solidifying customer relationships and enabling growth.

Financial Resilience Amidst Headwinds

Sierra Bancorp's financial performance in the first nine months of 2025 demonstrates resilience in a challenging economic climate. Net interest income for the third quarter of 2025 increased by $1.2 million, or 4%, compared to the same period in 2024, reaching $32 million. For the first nine months of 2025, net interest income rose by $3.1 million, or 3%, to $92.7 million. This improvement was primarily driven by a 27 basis point decrease in the cost of funds for the quarter and a 25 basis point decrease in the cost of interest-bearing liabilities for the year-to-date period. The loan portfolio's yield improved to 5.36% in Q3 2025, while the cost of funds decreased to 1.45%.

Gross loans expanded by $160.4 million, or 7%, during the first nine months of 2025, reaching $2.50 billion. This growth was largely fueled by a $126.3 million increase in mortgage warehouse line utilization and a $46.9 million rise in commercial real estate loans. Deposits also saw a year-to-date increase of $41.1 million, or 1%, totaling $2.90 billion. This growth was favorably skewed towards lower-cost funding, with noninterest-bearing deposits increasing by $65.7 million and interest-bearing demand deposits by $60.6 million, partially offsetting declines in higher-cost customer time deposits and brokered deposits. The proportion of noninterest-bearing deposits to total deposits increased to 36.60% at September 30, 2025, from 34.80% at December 31, 2024.

Profitability metrics for the trailing twelve months (TTM) show a Gross Profit Margin of 66.04%, an Operating Profit Margin of 28.24%, and a Net Profit Margin of 23.24%.

While net income for the third quarter of 2025 decreased by $0.9 million, or 9%, to $9.70 million, and for the first nine months of 2025 decreased by $0.8 million, or 3%, to $29.43 million, the pre-tax, pre-provision income increased by 4% to $16.4 million in Q3 2025, indicating stronger underlying operational performance. The efficiency ratio also improved to 58.0% in Q3 2025 from 59.4% in the prior linked quarter. The company's current dividend yield stands at 3.34%, with a payout ratio of 35% of its trailing 12-month EPS, reflecting a commitment to shareholder returns.

Strengthening the Balance Sheet and Liquidity

Sierra Bancorp's balance sheet reflects a solid foundation for continued operations and growth. Total assets reached $3.70 billion at September 30, 2025, an increase of $95.1 million, or 3%, from December 31, 2024. Investment securities decreased by $70 million, or 7%, to $891.40 million, primarily due to the pay-off of collateralized loan obligations (CLOs), partially offset by new purchases of mortgage-backed securities and corporate bonds.

The company maintains a robust liquidity position, with a loan-to-deposit ratio of 85% at September 30, 2025, comfortably below its internal policy guideline of less than 90%. Available funding sources, including cash and cash equivalents, unpledged investment securities, excess pledged securities, and various lines of credit, totaled $2.20 billion at September 30, 2025. This represents 75% of total deposits and 293% of estimated uninsured and/or uncollateralized deposits, underscoring significant financial flexibility. The primary liquidity ratio stood at 18%, exceeding the internal policy guideline of greater than 15%.

Capital resources remain strong, with total shareholders' equity at $360.1 million as of September 30, 2025, an increase of $2.8 million from year-end 2024. This was driven by net income and a favorable $6.1 million swing in accumulated other comprehensive income/loss, partially offset by $24.3 million in share repurchases and $10.3 million in dividends paid. The subsidiary bank's regulatory leverage ratio was 11.73%, well above the 9% minimum for a well-capitalized community bank, and the consolidated tangible common equity ratio increased to 9.03%. The Board of Directors recently approved a new share repurchase program for up to 1 million shares, effective November 1, 2025, further signaling a commitment to shareholder value.

Managing Credit Quality and Risk

Credit risk management remains a critical focus for Sierra Bancorp. The provision for credit losses on loans increased to $3.7 million in the third quarter of 2025, a rise of $2.5 million compared to the same period in 2024. This was primarily attributed to a $3.5 million increase in individual reserves related to a single agricultural production loan, which had a remaining book balance of $3.50 million at September 30, 2025, fully offset by an individual reserve. Despite this specific challenge, total nonperforming assets saw a favorable decline of $3.8 million to $15.8 million for the first nine months of 2025. The ratio of nonperforming loans to gross loans decreased to 0.56% at September 30, 2025, from 0.84% at December 31, 2024. The allowance for credit losses on loans stood at $25.2 million at September 30, 2025, representing 1.01% of gross loans.

Beyond credit quality, Sierra Bancorp faces several key risks inherent in the banking sector. These include fluctuations in interest rates, which can impact net interest income and asset valuations, and the potential for adverse developments at other banks, which could affect general market sentiment. Operational risks, such as financial reporting errors, fraud, and the ability to successfully deploy new technology and manage cybersecurity risks, are also continuously monitored. The company's ability to diversify and grow its loan portfolio, attract and retain skilled employees, and navigate legal actions are additional factors influencing its risk profile.

Strategic Outlook and Competitive Imperatives

Sierra Bancorp's outlook is shaped by its asset-sensitive position and ongoing strategic initiatives. Management projects that an immediate and sustained upward adjustment of 100 basis points in interest rates would increase net interest income by $1.80 million, or 1.30%, over the next 12 months, relative to a stable rate scenario. Conversely, a 100 basis point downward adjustment would result in a $6.70 million, or 4.80%, drop in net interest income. All interest rate shock scenarios remain within internal policy guidelines, and management's modeling of economist forecasts suggests net interest income will be close to the base case scenario, indicating less sensitivity to interest rate changes than an immediate shock.

The company's strategic imperatives revolve around leveraging its strong balance sheet and experienced team to pursue growth while maintaining solid asset quality and capital positions. This includes continued focus on its specialized lending units and expanding its loan production capabilities, as evidenced by the Templeton, CA loan production office. In the competitive arena, BSRR differentiates itself through its deep community roots and personalized service, which can foster stronger customer relationships than larger, more transactional institutions. However, to compete effectively with rivals like Western Alliance Bancorporation (WAL) and Banner Bank (BANR), which may exhibit faster innovation in digital banking and broader market adaptability, BSRR must continue to invest in and deploy technology that enhances efficiency and customer experience. The company's recognition as a 5-star rated community bank by Bauer Financial underscores its operational excellence and strong performance within its peer group.

Conclusion

Sierra Bancorp continues to demonstrate a steady and disciplined approach to community banking, delivering consistent net interest income growth and maintaining a robust financial position despite a dynamic economic environment. The company's core investment thesis is anchored in its strong regional presence, diversified loan portfolio, and commitment to shareholder returns through dividends and share repurchases. While the banking sector faces ongoing challenges from interest rate volatility and competitive pressures, BSRR's strategic focus on local relationships and prudent risk management provides a stable foundation. The imperative for continuous technological enhancement remains crucial for BSRR to sustain its competitive standing and capture future growth opportunities, particularly as digital advancements reshape the broader financial services landscape. Investors should recognize BSRR's resilience and its strategic positioning as a community-focused institution, balanced against the need for ongoing adaptation to evolving market and technological demands.