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) July 24, 2023

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 July 24, 2023, Sierra Bancorp issued a press release announcing its unaudited consolidated financial results for the three- and six-month periods ended June 30, 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 IMPROVED FINANCIAL RESULTS FOR SECOND QUARTER AND FIRST SIX MONTHS OF 2023

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Porterville, CA – (BUSINESS WIRE) – 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%.

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Highlights for the second quarter of 2023:

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Sierra Bancorp Financial Results

July 24, 2023

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“Success isn't always about greatness. It's about consistency. Consistent hard work leads to success.

Greatness will come.” - Dwayne Johnson

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“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.

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Quarterly Income Changes (comparisons to the second quarter of 2022)

Sierra Bancorp Financial Results

July 24, 2023

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Linked Quarter Income Changes (comparisons to the three months ended March 31, 2023)

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Year to-Date Income Changes (comparisons to the first six-months of 2022)

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Balance Sheet Changes (comparisons to December 31, 2022)

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Sierra Bancorp Financial Results

July 24, 2023

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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 $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.

Sierra Bancorp Financial Results

July 24, 2023

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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.

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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.

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Sierra Bancorp Financial Results

July 24, 2023

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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 June 30, 2023, as compared to 491 at December 31, 2022 and 504 at June 30, 2022.

Occupancy expenses were relatively unchanged for the second quarter and the first half of 2023 as compared to the same periods in 2022.

Other noninterest expense increased $0.4 million, or 6%, for the second quarter 2023 as compared to the second quarter in 2022, and increased $2.2 million, or 16% for the first half of 2023 as compared to the same period in 2022. FDIC assessment costs increased for the both the quarterly and year-to-date comparisons by $0.4 million; there were increases in deferred compensation expense for directors of $0.9 million for the quarterly comparison and $1.4 million for the year-to-date comparison, which is linked to the changes in life insurance income, increasing $1.2 million for the quarterly comparison and $2.0 million for the year-to-date comparison. There were also non-recurring increases in debit card processing and ATM network costs for both the quarterly and year-to-date comparisons due to a branding change from Mastercard to Visa and the subsequent conversion costs related to that change. Those non-recurring charges are estimated to be $0.5 million for both the quarterly and year-to-date comparisons. Additionally, we incurred a $0.3 million loss from a 2017 event that is reflected in noninterest expense. These increases were partially offset in both the quarterly and year-to-date comparisons by decreases in recruitment costs associated with new hires in 2022, decreased postage costs, and lower non-recurring costs associated with restitution payments made to customers in 2022 for customers charged nonsufficient fund fees in the past five years for representment. For the year-to-date comparison there was also elevated foreclosed assets costs for the first half of 2023 as compared to the same period in 2022, due to the foreclosure and then subsequent sale one large credit in the first quarter of 2023.

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Sierra Bancorp Financial Results

July 24, 2023

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The Company's provision for income taxes was 26.2% of pre-tax income in the second quarter of 2023 relative to 26.3% in the second quarter of 2022, and 25.0% of pre-tax income for the first half of 2023 relative to 26.6% for the same period in 2022. The changes in effective tax rate for both the quarterly and year-to-date comparisons is due to the volatility in the Corporate Owned Life Insurance asset value associated with our non-qualified deferred compensation plans. In the second quarter and first half of 2023, the investments associated with the non-qualified deferred compensation plans increased in value, generating non-taxable income for the second quarter, and first half of 2023 while decreasing in value in the second quarter and first half of 2022 resulting in a non-deductible expense.

Balance Sheet Summary

Balance sheet changes during the first half of 2023 include an increase in total assets of $153.9 million, or 4%, primarily a result of a $41.5 million increase in gross loan balances, an $84.2 million increase in investment securities, and a $26.4 million increase in cash and due from banks.

The increase in gross loan balances as compared to December 31, 2022, was primarily a result of organic increases of $18.6 million in commercial and industrial loans, $8.6 million in commercial real estate loans and a favorable change of $45.2 million in mortgage warehouse balances. Counterbalancing these positive variances were loan paydowns and maturities resulting in net declines in many categories even with higher loan production. In particular, there was a $33.9 million net decrease in non-commercial real estate loans, mostly farmland.

As indicated in the loan roll forward table below, new credit extended for the second quarter of 2022, decreased $15.6 million over the linked quarter to $37.0 million and decreased $82.5 million over the same period in 2022. Sluggish organic loan growth is attributable to competitive pressures in our market and lower loan demand in the current interest rate environment. We also had $25.4 million in loan paydowns and maturities, offset by an increase of $42.1 million in mortgage warehouse line utilization and a $6.6 million increase in line of credit utilization.

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Unused commitments, excluding mortgage warehouse and overdraft lines, were $216.0 million at June 30, 2023, compared to $219.7 million at December 31, 2022. Total line utilization, excluding mortgage warehouse and overdraft lines, was 59.3% at June 30, 2023 and 58.7% at December 31, 2022. Mortgage warehouse utilization increased to 25.7% at June 30, 2023, as compared to 9.9% at December 31, 2022.

PPP loans continue to decline as borrowers receive forgiveness on these loans. There were ten loans for $0.5 million outstanding at June 30, 2023, compared to fourteen loans for $1.8 million at December 31, 2022.

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Sierra Bancorp Financial Results

July 24, 2023

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Deposit balances reflect growth of $72.6 million, or 3%, during the first six months of 2023. Core non-maturity deposits decreased by $135.2 million, or 6%, while customer time deposits increased by $152.8 million, or 38%. Wholesale brokered deposits increased by $55.0 million. Overall noninterest-bearing deposits as a percent of total deposits at June 30, 2023, decreased to 36.5%, as compared to 38.2% at December 31, 2022 and 39.3% at June 30, 2022. Other interest-bearing liabilities of $483.8 million on June 30, 2023, consisted of $245.2 million in overnight borrowings, $80.0 million in term FHLB advances, $73.7 million in customer repurchase agreements, $35.6 million in trust preferred securities and $49.3 million in subordinated debentures.

Overall uninsured deposits are estimated to be approximately $799.7 million, or 27% of total deposit balances, excluding public agency deposits that are subject to collateralization through a letter of credit issued by the FHLB. In addition, uninsured deposits of the bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep (ICS) account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS). IntraFi allows for up to $225 million per customer of pass-through FDIC insurance which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance. The Bank maintains a diversified deposit base with no significant customer concentrations and does not bank any cryptocurrency companies. At June 30, 2023, the Company had approximately 121,000 accounts and the 25 largest deposit balance customers had balances of approximately 11% of overall deposits. During the second quarter of 2023, except for seasonality fluctuations in the normal course of business, there has been no change in the composition of our 25 largest deposit balance customers.

The Company continues to have substantial liquidity which is managed daily. At June 30, 2023, and December 31, 2022, the Company had the following sources of primary and secondary liquidity (Dollars in Thousands):

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Total capital of $309.6 million at June 30, 2023, reflects an increase of $6.0 million, or 2%, relative to year-end 2022. The increase in equity during the first half of 2023 was due to the addition of $18.7 million in net income, a $0.07 million favorable swing in accumulated other comprehensive income/loss due principally to changes in investment securities’ fair value, $3.8 million in share repurchases and net of $7.0 million in dividends paid. The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

Asset Quality

Total nonperforming assets, comprised of nonaccrual loans and foreclosed assets, decreased by $18.4 million to $1.1 million for the first half of 2023. The Company's ratio of nonperforming loans to gross loans decreased to 0.05% at June 30, 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. 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 Company's allowance for credit losses on loans and leases was $23.0 million at June 30, 2023, as compared to $23.1 million at December 31, 2022. The relatively flat allowance for credit losses on loans and leases was due to fewer net charge offs during the first half of 2023 along with relatively low loan growth.

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Sierra Bancorp Financial Results

July 24, 2023

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The allowance was 1.10% of gross loans at June 30, 2023, and 1.12% of gross loans at December 31, 2022, and 1.13% of gross loans at June 30, 2022. Management's detailed analysis indicates that the Company's allowance for credit losses on loans and leases should be sufficient to cover credit losses for the life of the loans and leases outstanding as of June 30, 2023, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the loan and lease loss allowance.

About Sierra Bancorp

Sierra Bancorp is the holding Company for Bank of the Sierra (www.bankofthesierra.com), which is in its 46^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.

Forward-Looking Statements

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 including the impact to the Company and its customers resulting from changes to, and the level of, inflation and interest rates; changes in laws, rules, regulations, or interpretations to which the Company is subject; the Company’s ability to maintain and grow its deposit base; loan demand and continued portfolio performance, the Company's ability to attract and retain skilled employees, customers' service expectations; cyber security risks: the Company's ability to successfully de­ploy new technology, the success of acquisitions and branch expansion; operational risks including the ability to detect and prevent errors and fraud; the effectiveness of the Company’s enterprise risk management framework; the impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks that could affect stock price; changes to valuations of the Company’s assets and liabilities including the allowance for credit losses, earning assets, and intangible assets; changes to the availability of liquidity sources including borrowing lines and the ability to pledge or sell certain assets; costs related to litigation; the effects of severe weather events, pandemics, other public health crises, acts of war or terrorism, and other external events on our business; 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

July 24, 2023

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Sierra Bancorp Financial Results

July 24, 2023

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Sierra Bancorp Financial Results

July 24, 2023

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