Sierra Bancorp Reports Record Earnings

PORTERVILLE, Calif., Oct. 23 /PRNewswire-FirstCall/ -- Sierra Bancorp , parent of Bank of the Sierra, today announced record operating results for the nine months ended September 30, 2006. Net income for that period totaled $14.5 million, a 22% increase relative to the same period in 2005. Diluted earnings per share were $1.41 for the first nine months of 2006, representing an increase of 24% over earnings per share for the same period in 2005. Net income for the third quarter of 2006 was $4.9 million, a 1% increase relative to third quarter 2005. Diluted earnings per share were $0.48 for the quarter, an increase of 2% in comparison to diluted earnings per share of $0.47 in the third quarter of 2005. The improvement in earnings was not as pronounced for the quarter as for year-to-date results, since third quarter 2005 earnings include a $536,000 recovery of interest and fees and a reduced loan loss provision enabled by the recovery of previously charged-off loan balances.

Sierra Bancorp's return on average equity during the first nine months was 23.3% in 2006 compared to 21.3% in 2005, and its return on average assets for the same period was 1.7% in 2006 and 1.6% in 2005. The Company generated a third quarter return on average equity of 22.7% in 2006 versus 25.0% in 2005, while return on assets was 1.7% for the third quarter of 2006 as compared to 1.9% in the third quarter of 2005.

"Our financial accomplishments in 2006 are the result of a united team effort," commented James C. Holly, President and CEO. "Highly dedicated employees with a strong sense of accountability to our shareholders have created a dynamic momentum within the Bank," Holly explained, "and we plan to capitalize on this energy to develop an even better bank going forward."

Financial Highlights

Loan balances experienced robust growth in the third quarter of 2006, although at a slightly lower rate than in the previous two quarters. Gross outstanding loan and lease balances increased by $33 million during the third quarter of 2006, relative to increases of $40 million and $54 million, respectively, in the second quarter and first quarter of this year. The growth in the third quarter brings the year-to-date 2006 increase in outstanding loan and lease balances to $127 million, due primarily to organic growth in commercial and real-estate loans. Management expects loan growth of $15 million to $20 million in the fourth quarter of 2006, although no assurance can be provided that this growth will materialize. Deposits have increased by $15 million thus far in 2006, but aggregate deposits would have declined if not for a $40 million increase in wholesale-sourced brokered deposits. Money market deposits have increased by $21 million during the year due to growth in money market sweep accounts, and time deposits under $100,000 are up by $15 million, but non-interest bearing demand deposits are down by $29 million and NOW/savings deposits are $17 million lower.

Growth in average earning assets has boosted net interest income in 2006, but our net interest margin has been negatively impacted because relatively high-cost brokered deposits have been used to replace core deposit runoff and Federal Home Loan Bank borrowings have been used to fund loan growth. The Company's net interest margin was 5.66% in the first nine months and 5.44% for the third quarter of 2006, but would have been about 12 basis points higher year-to-date and 16 basis points higher for the quarter had there been no growth in interest-earning assets during the year. Attrition in non-interest bearing demand deposits since year-end 2005 also reduced the year-to-date 2006 net interest margin by about 5 basis points and the third quarter 2006 net interest margin by 10 basis points.

Because the Company's interest rate risk profile is asset-sensitive, our net interest margin was also negatively impacted in the third quarter of 2006 by the stabilization (or slight decline) in short-term interest rates. It was, however, favorably impacted by a drop in non-performing assets, which have declined to $565,000 at September 30, 2006 from $3.6 million a year ago and $842,000 at year-end 2005. Net charge-offs, however, have increased to $1.6 million for the nine months ended September 30th and $729,000 for the third quarter of 2006, from net recoveries in the first nine months and the third quarter of 2005. Charge-offs for the third quarter of 2006 include an unsecured $443,000 loan, although the borrower has subsequently entered into an agreement with the Bank and full repayment of principal is now expected by January 2007.

Although strong loan growth has been a key factor in the Company's 2006 performance, growth in non-interest income and well-controlled non-interest operating expenses have also contributed. Non-interest income grew by 10% for the nine months ended September 30th and by 6% for the quarter, compared to 2005, due principally to higher service charges on deposits and an increase in other fees such as bill-pay income and operating lease income. The year-to- date increase came despite a $523,000 drop in loan sale income, caused by the bulk sale of $21 million in mortgage loans at a gain of over $500,000 in the first quarter of 2005. However, the first quarter of 2005 also includes a $330,000 write-down of the Company's investment in Diversified Holdings, Inc., a title insurance holding company.

The increase in non-interest expense was minimal mainly because of lower marketing, consulting, audit and legal costs, and because the prior year includes a $550,000 charge to write-down a foreclosed property (of which $350,000 was recognized in the third quarter of 2005). Salaries and benefits were about 7% higher for the first nine months of 2006 and 13% higher for the quarter, due to normal annual increases and the addition of staff for our two newest branches. The increase in year-to-date salaries would have been higher if not for the additional deferral of $386,000 in salaries directly related to loan originations, which constitutes an increase of 15% in the deferral for the first nine months of 2006 relative to 2005. Also having a positive impact on salaries and benefits for 2006 relative to 2005 were declines of $146,000 and $48,000 in workers compensation costs for the first nine months and third quarter, respectively. Occupancy expense increased by 6% for the first nine months and 8% for the third quarter of 2006 as the result of rent and depreciation related to new branches, an increase in physical security costs, and an increase in the cost of utilities. With regard to future operating expense expectations, Ken Taylor, Executive Vice President and Chief Financial Officer, noted that a $358,000 early termination fee associated with the Company's online banking platform conversion is expected as a non-recurring expense in the fourth quarter of 2006.

"Our returns in 2006 have been high compared to most of our peer banks, and our net interest margin is still far in excess of industry averages," observed Taylor, "but we are keenly aware that deposit growth and margin compression are issues that demand immediate attention." He explained that much of the Company's energy is currently focused on deposits, but noted that the development of deposit relationships has a relatively long lead time. An enhanced retail deposit product line-up is in the works, and should be rolled out in January 2007 in unison with increased promotional efforts. Furthermore, remote deposit imaging capabilities are expected to be implemented within the next couple of months, adding to an already strong suite of products for commercial deposit customers. Internal incentive programs are also being utilized.

2005 Reclassifications

To provide consistency with 2006 financial reporting there were several reclassifications of 2005 income statement amounts, including but not necessarily limited to the following: Dividends received on restricted stock totaling $183,000 for the nine months ended September 30th and $55,000 for the third quarter were moved out of interest income and into other non-interest income; late charge income of $167,000 for the first nine months and $65,000 for the third quarter was reclassified from service charges on deposits to other non-interest income; the $330,000 write-down of Diversified Holdings was reclassified from a loss on investment to a reduction of other non-interest income; and tax credit partnership pass-through losses totaling $634,000 for the first nine months and $150,000 for the third quarter were reclassified from other non-interest expenses to a reduction of other non-interest income. Furthermore, average balances originally reported for the first nine months of 2005 were calculated using an extra day, and were thus slightly understated. They have been recalculated and reported herein using the correct number of days.

About Sierra Bancorp

Sierra Bancorp is the holding company for Bank of the Sierra (http://www.bankofthesierra.com/), which is in its 29th year of operations and is the largest independent bank headquartered in the South San Joaquin Valley. The Company has $1.17 billion in total assets and currently maintains twenty branch offices, an agricultural credit center, and an SBA center. In September 2006, Sierra Bancorp was ranked as the 13th best performing mid-tier bank in the nation by U.S. Banker magazine, based on three-year average return on equity.

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 de velopments 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 California economies, the Company's ability to attract and retain skilled employees, customers' service expectations, the Company's ability to successfully de ploy new technology and gain efficiencies there from, the success of branch expansion, changes in interest rates, loan portfolio performance, the Company's ability to secure buyers for foreclosed properties, and other factors detailed in the Company's SEC filings.

CONSOLIDATED INCOME STATEMENT (in $000's, 3-Month Period Ended: 9-Month Period Ended: % % unaudited) 9/30/2006 9/30/2005 Change 9/30/2006 9/30/2005 Change Interest Income $21,131 $16,921 24.9% $59,015 $46,807 26.1% Interest Expense 7,183 3,499 105.3% 17,467 9,408 85.7% Net Interest Income 13,948 13,422 3.9% 41,548 37,399 11.1% Provision for Loan & Lease Losses 1,051 450 133.6% 3,150 2,350 34.0% Net Int after Provision 12,897 12,972 -0.6% 38,398 35,049 9.6% Service Charges 1,498 1,447 3.5% 4,493 4,013 12.0% Loan Sale & Servicing Income 25 38 -34.2% 45 605 -92.6% Other Non-Interest Income 1,276 1,162 9.8% 3,676 2,819 30.4% Gain (Loss) on Investments 9 9 0.0% 9 9 0.0% Total Non-Interest Income 2,808 2,656 5.7% 8,223 7,446 10.4% Salaries & Benefits 4,083 3,630 12.5% 12,194 11,449 6.5% Occupancy Expense 1,672 1,544 8.3% 4,822 4,540 6.2% Other Non-Interest Expenses 2,536 2,854 -11.1% 7,835 8,798 -10.9% Total Non-Interest Expense 8,291 8,028 3.3% 24,851 24,787 0.3% Income Before Taxes 7,414 7,600 -2.4% 21,770 17,708 22.9% Provision for Income Taxes 2,512 2,754 -8.8% 7,319 5,850 25.1% Net Income $4,902 $4,846 1.2% $14,451 $11,858 21.9% Tax Data Tax-Exempt Muni Income $519 $398 30.4% $1,509 $1,095 37.8% Tax-Exempt BOLI Income $142 $198 -28.3% $578 $559 3.4% Interest Income - Fully Tax Equiv $21,410 $17,126 25.0% $59,828 $47,371 26.3% Net Charge-Offs (Recoveries) $729 $(213) $1,632 $(254) PER SHARE DATA (unaudited) 3-Month Period Ended: 9-Month Period Ended: % % 9/30/2006 9/30/2005 Change 9/30/2006 9/30/2005 Change Basic Earnings per Share $0.50 $0.50 0.0% $1.48 $1.21 22.3% Diluted Earnings per Share $0.48 $0.47 2.1% $1.41 $1.14 23.7% Common Dividends $0.14 $0.11 27.3% $0.40 $0.33 21.2% Wtd. Avg. Shares Outstanding 9,774,347 9,786,469 9,764,370 9,774,672 Wtd. Avg. Diluted Shares 10,289,189 10,366,161 10,276,702 10,385,287 Book Value per Basic Share (EOP) $9.08 $7.96 14.1% $9.08 $7.96 14.1% Tangible Book Value per Share (EOP) $8.51 $7.39 15.2% $8.51 $7.39 15.2% Common Shares Outstanding (EOP) 9,788,005 9,733,305 9,788,005 9,733,305 KEY FINANCIAL RATIOS 3-Month Period Ended: 9-Month Period Ended: (unaudited) 9/30/2006 9/30/2005 9/30/2006 9/30/2005 Return on Average Equity 22.73% 25.03% 23.31% 21.27% Return on Average Assets 1.68% 1.88% 1.74% 1.57% Net Interest Margin (Tax-Equiv.) 5.44% 5.89% 5.66% 5.61% Efficiency Ratio (Tax-Equiv.) 48.53% 49.06% 48.84% 54.02% Net C/O's to Avg Loans (not annualized) 0.09% -0.03% 0.20% -0.04% AVERAGE BALANCES (in $000's, 3-Month Period Ended: 9-Month Period Ended: unaudited) % % 9/30/2006 9/30/2005 Change 9/30/2006 9/30/2005 Change Average Assets $1,155,046 $1,022,206 13.0% $1,112,817 $1,008,308 10.4% Average Interest- Earning Assets $1,037,479 $918,305 13.0% $1,000,040 $905,419 10.5% Average Gross Loans & Leases $846,987 $712,345 18.9% $805,430 $698,999 15.2% Average Deposits $827,117 $786,848 5.1% $821,628 $772,790 6.3% Average Equity $85,564 $76,812 11.4% $82,879 $74,539 11.2% STATEMENT OF CONDITION (in $000's, End of Period: unaudited) 9/30/2006 12/31/2005 9/30/2005 Annual Chg ASSETS Cash and Due from Banks $41,870 $50,147 $43,508 -3.8% Securities and Fed Funds Sold 190,194 193,676 202,428 -6.0% Agricultural 12,373 9,898 9,639 28.4% Commercial & Industrial 138,093 110,683 111,612 23.7% Real Estate 628,528 537,182 523,077 20.2% SBA Loans 25,637 24,190 23,629 8.5% Consumer Loans 55,693 51,006 49,357 12.8% Consumer Credit Card Balances 8,169 8,401 8,136 0.4% Gross Loans & Leases 868,493 741,360 725,450 19.7% Deferred Loan Fees (3,250) (2,250) (1,598) 103.4% Loans & Leases Net of Deferred Fees 865,243 739,110 723,852 19.5% Allowance for Loan & Lease Losses (10,848) (9,330) (11,446) -5.2% Net Loans & Leases 854,395 729,780 712,406 19.9% Bank Premises & Equipment 18,343 18,055 17,469 5.0% Other Assets 68,427 61,028 60,814 12.5% Total Assets $1,173,229 $1,052,686 $1,036,625 13.2% LIABILITIES & CAPITAL Demand Deposits $253,926 $282,451 $262,004 -3.1% NOW / Savings Deposits 124,322 140,989 143,724 -13.5% Money Market Deposits 127,948 107,045 105,341 21.5% Time Certificates of Deposit 324,798 285,186 283,618 14.5% Total Deposits 830,994 815,671 794,687 4.6% Subordinated Debentures 46,392 30,928 30,928 50.0% Other Interest-Bearing Liabilities 190,571 113,861 119,133 60.0% Total Deposits & Int.- Bearing Liab. 1,067,957 960,460 944,748 13.0% Other Liabilities 16,396 13,463 14,436 13.6% Total Capital 88,876 78,763 77,441 14.8% Total Liabilities & Capital $1,173,229 $1,052,686 $1,036,625 13.2% CREDIT QUALITY DATA (in $000's, End of Period: unaudited) 9/30/2006 12/31/2005 9/30/2005 Annual Chg Non-Accruing Loans $565 $309 $2,932 -80.7% Over 90 Days PD and Still Accruing - - 143 -100.0% Other Real Estate Owned - 533 545 -100.0% Total Non-Performing Assets $565 $842 $3,620 -84.4% Non-Perf Loans to Total Loans 0.07% 0.04% 0.42% Non-Perf Assets to Total Assets 0.05% 0.08% 0.35% Allowance for Ln Losses to Loans 1.25% 1.26% 1.58% OTHER PERIOD-END STATISTICS End of Period: (unaudited) 9/30/2006 12/31/2005 9/30/2005 Shareholders Equity / Total Assets 7.6% 7.5% 7.5% Loans / Deposits 104.5% 90.9% 91.3% Non-Int. Bearing Dep. / Total Dep. 30.6% 34.6% 33.0%