UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

Amendment No. 1

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2013

 

Commission file number:  000-33063

 

 

SIERRA BANCORP

(Exact name of registrant as specified in its charter)

 

  California   33-0937517  
  (State of incorporation)   (I.R.S. Employer Identification No.)  

 

  86 North Main Street, Porterville, California 93257  
  (Address of principal executive offices) (Zip Code)  

 

(559) 782-4900

Registrant’s telephone number, including area code

 

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

  Title of each class Name of each exchange on which registered
  Common Stock, No Par Value The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes          þ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

¨ Yes          þ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes          ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes          ¨ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

  Large accelerated filer ¨   Accelerated filer þ
  Non-accelerated filer ¨ (Do not check if a smaller reporting company)   Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

¨ Yes          þ No

 

As of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $160 million, based on the closing price reported to the registrant on that date of $14.80 per share. Shares of Common Stock held by each officer and director and each person or control group owning more than ten percent of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares of common stock of the registrant outstanding as of February 28, 2014 was 14,240,399.

 

Documents Incorporated by Reference:  Portions of the definitive proxy statement for the 2014 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.

 

 
 

 

EXPLANATORY NOTE

 

This Amendment No. 1 to the Annual Report on Form 10-K for Sierra Bancorp (the “Company”) for the fiscal year ended December 31, 2013 initially filed on March 13, 2014 (the “Original Filing”), is being filed to reflect certain corrections by our independent registered public accounting firm to their reports included in the Original Filing. Specifically, this Amendment includes (i) the revised accountants’ report concerning the Company’s consolidated financial statements, to specifically include the Company’s consolidated statements of comprehensive income with the financial statements listed in the first paragraph of that report; and (ii) the revised accountants’ report concerning the Company’s internal control over financial reporting, to reference the fact that the Company utilized the original (1992) version of the Internal Control – Integrated Framework issued by COSO.

 

This Amendment is specifically intended to make only the two changes described above to the Company’s 10-K for the year ended December 31, 2013. In addition, this Amendment includes new Section 302 and Section 906 certifications as required by SEC Rule 12b-15, and modifies the list of exhibits as necessary due to the filing of this Amendment. All other information presented in the Original Filing is unaffected by this Amendment, and has thus not been reiterated herein. All information in this Amendment is as of the date of the Original Filing and does not reflect any subsequent information or events occurring after the date of the Original Filing. As this Amendment does not include any changes to the financial statements or notes thereto, only a correction to the scope of the accountants’ report, the interactive data files pursuant to Rule 405 of Regulation S-T have not been updated in this Amendment.

 

2
 

 

Item 8.Financial Statements and Supplementary Data

 

The following financial statements and independent auditors’ reports listed below are included herein:

 

    Page
I. Independent Auditor’s Report from Vavrinek, Trine, Day & Co., LLP 4
     
II. Consolidated Balance Sheets – December 31, 2013 and 2012 5
     
III. Consolidated Statements of Income – Years Ended
December 31, 2013, 2012, and 2011		 6
     
IV. Consolidated Statements of Comprehensive Income – Years Ended
December 31, 2013, 2012, and 2011		 7
     
V. Consolidated Statements of Changes in Shareholders’ Equity – Years Ended
December 31, 2013, 2012, and 2011		 8
     
VI. Consolidated Statements of Cash Flows – Years Ended
December 31, 2013, 2012, and 2011		 9
     
VII. Notes to Consolidated Financial Statements 10

 

3
 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors

Sierra Bancorp and Subsidiary

Porterville, California

 

We have audited the accompanying consolidated balance sheets of Sierra Bancorp and Subsidiary (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sierra Bancorp and Subsidiary as of December 31, 2013 and 2012, and the results of its operations, changes in its shareholders' equity, and its cash flows for each of the years in the three year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2014 expressed an unqualified opinion thereon.

 

/s/ Vavrinek, Trine, Day & Co., LLP  
   
Rancho Cucamonga, California  
March 13, 2014  

 

4
 

  

SIERRA BANCORP AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

 

December 31, 2013 and 2012

(dollars in thousands)

 

    2013     2012  
ASSETS              
Cash and due from banks   $ 51,342   $ 42,079  
Interest-bearing deposits in banks     26,664     19,739  
Cash and cash equivalents     78,006     61,818  
Investment securities available-for-sale     425,044     380,188  
Loans held-for-sale     105     210  
Loans and leases:              
Gross loans and leases     803,242     879,795  
Allowance for loan and lease losses     (11,677)     (13,873)  
Deferred loan and lease fees, net     1,522     1,156  
Net Loans and Leases     793,087     867,078  
Premises and equipment, net     20,393     21,830  
Operating leases, net     -     12  
Foreclosed assets     8,185     19,754  
Goodwill     5,544     5,544  
Other assets     79,885     81,469  
Total Assets   $ 1,410,249   $ 1,437,903  
               
LIABILITIES AND SHAREHOLDERS' EQUITY              
Deposits:              
Non-interest bearing   $ 365,997   $ 352,597  
Interest bearing     808,182     821,437  
               
Total Deposits     1,174,179     1,174,034  
               
Federal funds purchased and repurchase agreements     5,974     1,419  
Short-term borrowings     -     36,650  
Long-term borrowings     -     5,000  
Subordinated debentures     30,928     30,928  
Other liabilities     17,494     15,980  
               
Total liabilities     1,228,575     1,264,011  
               
Commitments and contingencies (Note 11)              
               
Shareholders' equity              
Serial Preferred stock, no par value; 10,000,000 shares authorized; none issued              
Common stock, no par value; 24,000,000 shares authorized; 14,217,199 and 14,106,959
    shares issued and outstanding in 2013 and 2012 resectively		     65,780     64,384  
Additional paid in capital     2,648     2,660  
Retained earnings     112,817     103,128  
Accumulated other comprehensive income, net of taxes of $300 in 2013 and $2,602 in
    2012		     429     3,720  
Total shareholders' equity     181,674     173,892  
Total liabilities and shareholders' equity   $ 1,410,249   $ 1,437,903  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5
 

  

SIERRA BANCORP AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME

 

Years Ended December 31, 2013, 2012 and 2011

(dollars in thousands, except per share data)

 

      2013     2012     2011  
Interest income:                    
Interest and fees on loans and leases   $ 44,030   $ 45,765   $ 46,959  
Interest on investment securities:                    
Taxable     4,916     6,364     8,753  
Exempt from federal tax     2,737     2,703     2,834  
Interest on Federal funds sold and interest-bearing deposits     102     70     68  
Total interest income     51,785     54,902     58,614  
                     
Interest expense:                    
Interest on deposits     2,455     3,208     4,305  
Interest on short-term borrowings     19     58     55  
Interest on long-term borrowings     33     281     569  
Interest on subordinated debentures     714     774     728  
Total interest expense     3,221     4,321     5,657  
                     
Net Interest Income     48,564     50,581     52,957  
                     
Provision for loan and lease losses     4,350     14,210     12,000  
Net Interest Income after Provision for Loan and lease losses     44,214     36,371     40,957  
                     
Non-interest revenue:                    
Service charges on deposit accounts     9,022     9,676     9,543  
Gain on sale of loans     129     183     139  
Credit card fees     462     390     411  
Checkcard fees     3,749     2,787     2,519  
Gains on sales and calls of investment securities available-for-sale     6     1,762     1,660  
Other-than-temporary impairment losses on equity securities     -     -     (1,370)  
Increase in cash surrender value of life insurance     1,787     1,420     934  
Other income     1,908     1,908     1,156  
                     
Total non-interest revenue     17,063     18,126     14,992  
                     
Other operating expense:                    
Salaries and employee benefits     21,920     20,734     20,669  
Occupancy and equipment expense     6,274     6,381     6,758  
Other     16,621     19,541     20,178  
                     
Total non-interest expense     44,815     46,656     47,605  
                     
Income before income taxes     16,462     7,841     8,344  
                     
Provision for income taxes     3,093     (344)     564  
                     
Net Income   $ 13,369   $ 8,185   $ 7,780  
                     
Earnings per share:                    
Basic   $ 0.94   $ 0.58   $ 0.55  
                     
Diluted   $ 0.94   $ 0.58   $ 0.55  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6
 

 

SIERRA BANCORP AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

Years Ended December 31, 2013, 2012 and 2011

(dollars in thousands)

  

    2013   2012   2011  
                     
Net (loss) income   $ 13,369   $ 8,185   $ 7,780  
Other comprehensive income, before tax:                    
Unrealized gains on securities:                    
Unrealized holding (losses) gains arising during period     (5,588)     1,560     5,266  
Less: reclassification adjustment for gains included in net income     (6)     (1,762)     (1,660)  
Plus: reclassification adjustment or other-than-temporary impairment
         losses (credit portion)		     -     -     1,370  
Other comprehensive (loss) income, before tax     (5,594)     (202)     4,976  
Income tax benefit (expense) related to items of other comprehensive
    income, net of tax		     2,303     74     (2,026)  
Other comprehensive (loss) income     (3,291)     (128)     2,950  
                     
Comprehensive income   $ 10,078   $ 8,057   $ 10,730  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7
 

 

SIERRA BANCORP AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

For the Three Years Ended December 31, 2013

(dollars in thousands, except per share data)

 

              Additional         Accumulated Other        
    Common Stock   Paid In   Retained   Comprehensive   Shareholders'  
    Shares   Amount   Capital   Earnings   Income   Equity  
                                     
Balance, January 1, 2011   13,976,741   $ 63,477   $ 1,652   $ 93,570   $ 898   $ 159,597  
                                     
Net Income                     7,780           7,780  
Net change in unrealized gain on
    investment securities available- for-
    sale, net of tax		                           2,950     2,950  
Reversal of Cumulative effect of
    change in accounting principle
    (EITF 06-4)		                     191           191  
Issuance of Common stock         (23)                       (23)  
Exercise of stock options and related
    tax benefit		   124,868     867     109                 976  
Stock compensation costs               460                 460  
Cash dividends - $.24 per share                     (3,367)           (3,367)  
Balance, December 31, 2011   14,101,609     64,321     2,221     98,174     3,848     168,564  
                                     
Net Income                     8,185           8,185  
Net change in unrealized gain on
    investment securities available- for-
    sale, net of tax		                           (128)     (128)  
Reversal of Cumulative effect of
    change in accounting principle
    (EITF 06-4)		                     154           154  
Exercise of stock options and related
    tax benefit		   5,350     63     (48)                 15  
Stock compensation costs               487                 487  
Cash dividends - $.24 per share                     (3,385)           (3,385)  
Balance, December 31, 2012   14,106,959     64,384     2,660     103,128     3,720     173,892  
                                     
Net Income                     13,369           13,369  
Net change in unrealized gain on
    investment securities available- for-
    sale, net of tax		                           (3,291)     (3,291)  
Exercise of stock options and related
    tax benefit		   110,240     1,396     (280)                 1,116  
Stock compensation costs               268                 268  
Cash dividends - $.26 per share                     (3,680)           (3,680)  
Balance, December 31, 2013   14,217,199   $ 65,780   $ 2,648   $ 112,817   $ 429   $ 181,674  

 

The accompanying notes are an integral part of these consolidated financial statements

  

8
 

  

SIERRA BANCORP AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2013, 2012, and 2011

(dollars in thousands)

 

    2013   2012   2011  
Cash flows from operating activities:                  
Net income   $ 13,369   $ 8,185   $ 7,780  
Adjustments to reconcile net income to net cash provided by operating
    activities:		                    
Gain on investment of securities     (6)   $ (1,762)   $ (1,660)  
Other-than-temporary impairment loss     -     -     1,370  
Gain on sales of loans     (129)     (183)     (139)  
(Gain) loss on disposal of fixed assets     (15)     30     25  
Loss on sale of foreclosed assets     223     864     451  
Writedown of foreclosed assets     730     3,173     4,184  
Share-based compensation expense     268     487     460  
Provision for loan losses     4,350     14,210     12,000  
Depreciation and amortization     2,131     2,437     2,695  
Net amortization on securities premiums and discounts     8,177     8,500     5,874  
Decrease (increase) in unearned net loan fees     366     (535)     (509)  
Increase in cash surrender value of life insurance policies     (1,417)     (350)     (934)  
Proceeds from sales of loans     5,459     8,191     7,210  
Originations of Loans Held For Sale     (5,225)     (6,864)     (7,511)  
Decrease in interest receivable and other assets     2,225     610     2,354  
Increase in other liabilities     1,514     1,646     666  
Net decrease in FHLB stock, at cost     438     670     1,321  
Deferred income tax provision (benefit)     2,360     (564)     (881)  
Excess tax benefit from equity based compensation     (280)     (48)     (109)  
                     
Net cash provided by operating activities     34,538     38,697     34,647  
                     
Cash flows from investing activities:                    
Maturities of securities available for sale     1,724     1,120     7,107  
Proceeds from sales/calls of securities available for sale     4,135     63,776     46,872  
Purchases of securities available for sale     (160,251)     (150,305)     (205,500)  
Principal paydowns on securities available for sale     95,772     104,752     76,171  
Decrease (increase) in loans receivable, net     64,868     (163,789)     24,661  
Purchases of premises and equipment, net     (667)     (3,411)     (2,734)  
Proceeds from sales of foreclosed assets     15,023     15,538     7,212  
Purchase of bank owned life insurance     -     -     (5,132)  
                     
Net cash provided by (used in) investing activities     20,604     (132,319)     (51,343)  
                     
Cash flows from financing activities:                    
Increase in deposits     145     87,766     33,994  
(Decrease) increase in borrowed funds     (41,650)     9,530     2,470  
Increase (decrease) in Repurchase Agreements     4,555     (1,618)     3,037  
Cash dividends paid     (3,680)     (3,385)     (3,367)  
Issuance of Common Stock     -     -     (23)  
Stock options exercised     1,396     63     867  
Excess tax provision from equity based compensation     280     48     109  
                     
Net cash (used in) provided by financing activities     (38,954)     92,404     37,087  
                     
Increase (decrease) in cash and due from banks     16,188     (1,218)     20,391  
                     
Cash and cash equivalents, beginning of year     61,818     63,036     42,645  
                     
Cash and cash equivalents, end of year   $ 78,006   $ 61,818   $ 63,036  
                     
Supplemental disclosure of cash flow information:                    
                     
Cash paid during the year for:                    
Interest   $ 3,340   $ 4,531   $ 5,492  
Income taxes   $ -   $ -   $ 1,643  
                     
Non-cash investing activities                    
Real estate acquired through foreclosure   $ 4,990   $ 23,965   $ 6,520  
                     
Change in unrealized net (losses) gains on                    
Investment securities available-for-sale   $ (5,594)   $ (202)   $ 4,976  

 

The accompanying notes are an integral part of these consolidated financial statements

 

9
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.THE BUSINESS OF SIERRA BANCORP

 

Sierra Bancorp (the “Company”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in Porterville, California.  The Company was incorporated in November 2000 and acquired all of the outstanding shares of Bank of the Sierra (the “Bank”) in August 2001.  The Company’s principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish.  The Company’s only other direct subsidiaries are Sierra Statutory Trust II, which was formed in March 2004 solely to facilitate the issuance of capital trust pass-through securities, and Sierra Capital Trust III, which was formed in June 2006 for the same purpose. 

 

The Bank operates twenty-five full service branch offices, an online branch, a real estate industries group, an agricultural credit division, and an SBA lending unit.  The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.  The Bank maintains a diversified loan portfolio comprised of agricultural, commercial, consumer, real estate construction and mortgage loans.  Loans are made primarily within the market area of the South Central San Joaquin Valley of California, specifically, Tulare, Fresno, Kern, Kings, and Madera counties.  These areas have diverse economies with principal industries being agriculture, real estate and light manufacturing.

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Bank of the Sierra.  All significant intercompany balances and transactions have been eliminated.  Certain reclassifications have been made to prior years' balances to conform to classifications used in 2013.  The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and prevailing practices within the banking industry.

 

In accordance with U.S. GAAP, the Company’s investments in Sierra Statutory Trust II and Sierra Capital Trust III are not consolidated and are accounted for under the equity method and included in other assets on the consolidated balance sheet.  The subordinated debentures issued and guaranteed by the Company and held by the trusts are reflected on the Company’s consolidated balance sheet.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

 

Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan and lease losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of the allowances for loan and lease losses and other real estate, management obtains independent appraisals for significant properties, evaluates the overall loan portfolio characteristics and delinquencies and monitors economic conditions.

 

Cash Equivalents

 

For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and interest bearing deposits in banks.

 

10
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investment Securities

 

Investments are classified into the following categories:

 

  · Securities available-for-sale, reported at fair value, with unrealized gains and losses excluded from earnings and reflected, net of tax, as a separate component of shareholders’ equity in accumulated other comprehensive income.

 

  · Securities held-to-maturity, which the Company has the intent and has the ability to hold to maturity, are carried at cost, adjusted for amortization of premiums and the accretion of discounts.

 

Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances.  All transfers between categories are accounted for at fair value.  Although the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, the securities are all marketable and are currently classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. Potential credit impairment is also a consideration. If it is determined that OTTI exists on a security, the entire difference between amortized cost and fair value is recognized as a charge through earnings. 

 

Loans and Leases (Financing Receivables)

 

Our credit quality classifications of Loans and Leases include Pass, Special Mention, Substandard and Impaired. These classifications are defined in Note 4 (Loans and Leases) to our consolidated financial statements.

 

Loans and leases are reported at the principal amounts outstanding, adjusted for unearned income, deferred loan origination fees and costs, purchase premiums and discounts, write-downs, and the allowance for loan and lease losses.  Loan and lease origination fees, net of certain deferred origination costs, and purchase premiums and discounts are recognized as an adjustment to yield of the related loans and leases over the contractual life of the loan using both the effective interest and straight line methods.

 

Interest income for all performing loans, regardless of classification (Pass, Special Mention, Substandard and Impaired), is recognized on an accrual basis, with interest accrued daily. Costs associated with successful loan originations are netted from loan origination fees, with the net amount (net deferred loan fees) amortized over the contractual life of the loan in interest income. If a loan has scheduled periodic payments, the amortization of the net deferred loan fee is calculated using the effective interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight line basis over the contractual life of the loan. Fees received for loan commitments are recognized as interest income over the term of the commitment. When loans are repaid, any remaining unamortized balances of deferred fees and costs are accounted for through interest income.

  

11
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

  

Generally, the Company places a loans or lease on nonaccrual status and ceases recognizing interest income when it has become delinquent more than 90 days and/or when Management determines that the repayment of principal and collection of interest is unlikely. The Company may decide that it is appropriate to continue to accrue interest on certain loans more than 90 days delinquent if they are well-secured by collateral and collection is in process. When a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest income in the period in which the loan’s status changed. For loans with an interest reserve, i.e., where loan proceeds are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan is reversed when the loan is placed on non-accrual. Once a loan is on non-accrual status subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. Generally, loans and leases are not restored to accrual status until the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

 

Impaired loans are classified as either nonaccrual or accrual, depending on individual circumstances regarding the collectability of interest and principal according to the contractual terms.

 

Loans Modified in a Troubled Debt Restructuring

Loans are considered to have been modified in a troubled debt restructuring (“TDR”) when due to a borrower’s financial difficulties the Company makes certain concessions to the borrower that it would not otherwise consider.  Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.  Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan.  However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.  If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.  TDRs may be removed from TDR designation in the calendar year following the restructuring, if the loan is in compliance with all modified terms and is yielding a market rate of interest.

 

A TDR is generally considered to be in default when it appears likely that the customer will not be able to repay all principal and interest pursuant to the terms of the restructured agreement.

 

12
 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Loan and Lease Losses 

 

The allowance for loan and lease losses is maintained at a level which, in management’s judgment, is adequate to absorb loan and lease losses inherent in the loan and lease portfolio.  The allowance for loan and lease losses is increased by a provision for loan and lease losses, which is charged to expense, and reduced by principal charge-offs, net of recoveries.  The amount of the allowance is based on management’s evaluation of the collectability of the loan and lease portfolio, changes in its risk profile, credit concentrations, historical trends, and economic conditions.  This evaluation also considers the balance of impaired loans and leases.  A loan or lease is impaired when it is probable that the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan or lease agreement.  The impairment on certain individually identified loans or leases is measured based on the present value of expected future cash flows discounted at the original effective interest rate of the loan or lease. As a practical expedient, impairment may be measured based on the loan’s or lease’s observable market price or the fair value of collateral if the loan or lease is collateral dependent.  The amount of impairment, if any, is recorded through the provision for loan and lease losses and is added to the allowance for loan and lease losses, with any changes over time recognized as additional bad debt expense in our provision for loan losses. Impaired loans with homogenous characteristics, such as one-to-four family residential mortgages and consumer installment loans, may be subjected to a collective evaluation for impairment, considering delinquency and repossession statistics, historical loss experience, and other factors.

 

General reserves cover non-impaired loans and are based on historical net loss rates for each portfolio segment by call report code, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience.  Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in international, national, regional, and local economic and business conditions and developments; changes in nature and volume of the portfolio; changes in the experience, ability and depth of lending management and staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in quality of the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of the other external factors such as competition and legal and regulatory requirements.

 

Most of the Company’s business activity is with customers located within the South Central Valley of California, therefore the Company’s exposure to credit risk is significantly affected by changes in the economy in that region. The Company considers this concentration of credit risk when assessing and assigning qualitative factors in the allowance for loan losses. Portfolio segments identified by the Company include Direct Financing leases, Agricultural, Commercial and Industrial, Real Estate, Small Business Administration, and Consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and financial performance on non-consumer related loans; and credit scores, debt-to-income ratios, collateral type and loan-to-value ratios for consumer related loans.

 

Though management believes the allowance for loan and lease losses to be adequate, ultimate losses may vary from their estimates.  However, estimates are reviewed periodically, and as adjustments become necessary they are reported in earnings during the periods they become known.  In addition, the FDIC and the California Department of Business Oversight, as an integral part of their examination processes, review the allowance for loan and lease losses.  These agencies may require additions to the allowance for loan and lease losses based on their judgment about information available at the time of their examinations.

 

13
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Reserve for Off-Balance Sheet Commitments

 

In addition to the exposure to credit loss from outstanding loans, the Company is also exposed to credit loss from certain off-balance sheet commitments such as unused commitments from revolving lines of credit, mortgage warehouse lines of credit, unused commitments on construction loans and commercial and standby letters of credit.  Because the available funds have not yet been disbursed on these commitments the estimated losses are not included in the calculation of ALLL.  The reserve for off-balance sheet commitments is an estimated loss contingency which is included in other liabilities on the Consolidated Balance Sheets.  The adjustments to the reserve for off-balance sheet commitments are reported as a noninterest expense.  This reserve is for estimated losses that could occur when the Company is contractually obligated to make a payment under these instruments and must seek repayment from a party that may not be as financially sound in the current period as it was when the commitment was originally made.

 

Sale and Servicing of Loans

 

The Company periodically originates loans intended to be sold on the secondary market.  These loans are recorded as “held for sale” and reported at the lower of cost or fair value in the Consolidated Balance Sheets.  The loan’s cost basis includes unearned deferred fees and costs, and premiums and discounts. These loans are generally held between 30 to 90 days from their origination date.  Loans held for sale by the Company currently consist entirely of residential real estate loans.  Loans classified as held for sale are disclosed in Note 4 of these Consolidated Financial Statements.

 

Gains and losses on sales of loans are recognized at the time of sale and are calculated based on the difference between the selling price and the allocated book value of loans sold.  Book value allocations are determined in accordance with U.S. GAAP.  Any inherent risk of loss on loans sold is transferred to the buyer at the date of sale.

 

The Company has issued various representations and warranties associated with the sale of loans.  These representations and warranties may require the Company to repurchase loans with underwriting deficiencies as defined per the applicable sales agreements and certain past due loans within 90 days of the sale.  The Company did not experience losses during the years ended December 31, 2013, 2012 or 2011 regarding these representations and warranties.

 

Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets.  The useful lives of premises are estimated to be thirty years.  The useful lives of furniture, fixtures and equipment are estimated to be three to twenty years.  Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter.  When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to expense as incurred.

 

Impairment of long-lived assets is evaluated by management based upon an event or changes in circumstances surrounding the underlying assets which indicate long-lived assets may be impaired.

 

14
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Foreclosed Assets

 

Foreclosed assets include real estate and other property acquired in full or partial settlement of loan obligations.  When property is acquired, any excess of the recorded investment in the loan balance and accrued interest income over the appraised fair market value of the property, net of estimated selling costs, is charged against the allowance for loan and lease losses.  A valuation allowance for losses on foreclosed assets is maintained to provide for temporary declines in value.  The allowance is established through a provision for losses on foreclosed assets which is included in other non-interest expense.  Subsequent gains or losses on sales or write-downs resulting from permanent impairments are recorded in other non-interest income or expense as incurred.

 

Goodwill

 

The Company acquired Sierra National Bank in 2000, and the acquisition was accounted for using the purchase method of accounting.  The goodwill resulting from this transaction represents the amount by which the purchase price exceeded the fair value of the net assets. In accordance with U.S. GAAP the Company evaluates goodwill periodically for impairment.  There was no impairment recognized for the years ended December 31, 2013, 2012, and 2011.

 

Income Taxes

 

The Company files its income taxes on a consolidated basis with its subsidiary.  The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes.

 

Income taxes are accounted for using the asset and liability method.  Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

 

The Company adopted guidance issued by the FASB accounting for income taxes, effective January 1, 2007, which clarifies the accounting and disclosure for uncertainty in tax positions as defined.  This guidance seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  We have determined that as of December 31, 2013 all tax positions taken to date are highly certain and, accordingly, no accounting adjustment has been made to the financial statements.

 

The Company recognizes interest and penalties related to uncertain tax positions as part of income tax expense.

 

Salary Continuation Agreements and Directors’ Retirement Plan

 

The Company has entered into agreements to provide members of the Board of Directors and certain key executives, or their designated beneficiaries, with annual benefits for up to fifteen years after retirement or death.  The Company accrues for these future benefits from the effective date of the plan until the director’s or executive’s expected retirement date in a systematic and rational manner.  At the consolidated balance sheet date, the amount of accrued benefits equals the then present value of the benefits expected to be provided to the director or employee, any beneficiaries, and covered dependents in exchange for the director’s or employee’s services to that date.

 

15
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Comprehensive Income

 

Comprehensive income consists of net income and the net change in unrealized gains on securities available-for-sale, net of an adjustment for the effects of realized gains and losses and any applicable tax.  Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income that historically has not been recognized in the calculation of net income.  Unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income after adjusting for the effects of realized gains and losses.  Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statements of comprehensive income.

 

Stock-Based Compensation

 

At December 31, 2013, the Company had one stock-based compensation plan, the Sierra Bancorp 2007 Stock Incentive Plan (the “2007 Plan”), which was adopted by the Company’s Board of Directors on March 15, 2007 and approved by the Company’s shareholders on May 23, 2007.  The 2007 Plan is for 1,500,000 shares of the Company’s authorized but unissued common stock, subject to adjustment for stock splits and dividends, and provides for the issuance of both “incentive” and “nonqualified” stock options to salaried officers and employees, and of “nonqualified” stock options to non-employee directors.  The 2007 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants. We have not issued, nor do we currently have plans to issue, restricted stock awards.  The 2007 plan supersedes the Company’s 1998 Stock Option plan (“1998 Plan”) which was terminated.  The outstanding options issued under the 1998 Plan were not affected by this termination.

 

The Company is using the Black-Scholes model to value stock options.  The “multiple option” approach is used to allocate the resulting valuation to actual expense for current period.  Expected volatility is based on historical volatility of the Company’s common stock.  The Company uses historical data to estimate option exercise and post-vesting termination behavior.  The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.  The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.  The fair value of each option is estimated on the date of grant using the following assumptions:

 

    Years Ended December 31,  
    2013 (a)   2012   2011  
Dividend yield   N/A   2.35 % 2.27 %
Expected Volatility   N/A   56.71 % 52.92 %
Risk-free interest rate   N/A   0.43 % 1.06 %
Expected option life   N/A   5.5 years   6.8 years  

 

(a) No stock options were issued in 2013.

 

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SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, with the goal of improving the reporting of reclassifications out of accumulated other comprehensive income.  ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income, by component.  In addition, if the amount reclassified is required under U.S. Generally Accepted Accounting Principles (GAAP) to be reclassified to net income in its entirety in the same reporting period, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts.  For public entities, this update became effective prospectively for reporting periods beginning after December 15, 2012.  We adopted ASU 2013-02 commencing with our report on Form 10-Q filed for the first quarter of 2013.

 

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SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

3.INVESTMENT SECURITIES AVAILABLE-FOR-SALE

 

The amortized cost and estimated fair value of investment securities available-for-sale are as follows (dollars in thousands):

  

    December 31, 2013  
      Amortized
Cost		     Gross
Unrealized
Gains		     Gross
Unrealized
Losses		     Estimated
Fair Value		  
                           
US Government Agencies   $ 5,395   $ 18   $ (109)   $ 5,304  
Mortgage-backed securities     320,223     3,269     (2,771)     320,721  
State and political subdivisions     97,361     1,723     (2,521)     96,563  
Equity securities     1,336     1,120     -     2,456  
Total investment securities   $ 424,315   $ 6,130   $ (5,401)   $ 425,044  

 

    December 31, 2012  
    Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Estimated
Fair Value		  
                           
US Government Agencies   $ 2,987   $ 3   $ (17)   $ 2,973  
Mortgage-backed securites     298,806     3,547     (964)     301,389  
State and political subdivisions     70,736     3,430     (180)     73,986  
Equity securities     1,336     508     (4)     1,840  
Total investment securities   $ 373,865   $ 7,488   $ (1,165)   $ 380,188  

 

For the years ended December 31, 2013, 2012, and 2011, proceeds from sales of securities available-for-sale were $700 thousand, $56.4 million, and $45.7 million, respectively. Gains and losses on the sale of investment securities are recorded on the trade date and are determined using the specific identification method.

 

Gross gains and losses from the sales and calls of investment securities for the years ended were as follows (dollars in thousands):

 

    December 31,  
    2013   2012   2011  
Gross Gains on Sales and Calls of Investment Securities   $ 6   $ 2,059   $ 1,666  
Gross Losses on Sales and Calls of Investment Securities     -     (297)     (6)  
Net Gains on Sales and Calls of Investment Securities   $ 6   $ 1,762   $ 1,660  

  

18
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

3.INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Continued)

 

At December 31, 2013 and 2012, the Company had 197 and 89 securities with unrealized gross losses, respectively.  Information pertaining to these securities aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):

 

    December 31, 2013  
    Less Than Twelve Months   Over Twelve Months  
    Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value  
                           
US Government Agencies   $ (92)   $ 1,913   $ (17)   $ 1,920  
Mortgage-backed securities     (642)     21,747     (2,129)     124,317  
State and political subdivisions     (461)     6,799     (2,060)     38,083  
Equity securities     -     -     -     -  
Total   $ (1,195)   $ 30,459   $ (4,206)   $ 164,320  

 

    December 31, 2012  
    Less Than Twelve Months   Over Twelve Months  
    Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value  
                           
US Government Agencies   $ (17)   $ 1,996   $ -   $ -  
Mortgage-backed securities     (903)     106,799     (61)     6,965  
State and political subdivisions     (180)     9,324     -     -  
Equity securities     (4)     242     -     -  
Total   $ (1,104)   $ 118,361   $ (61)   $ 6,965  

 

The Company has reviewed all sectors and securities in the investment portfolio for impairment.  During the year ended December 31, 2013, the Company realized slight gains and no losses from the sale of three debt securities which were sold to improve the credit quality of the portfolio by minimizing securities on our Municipal Bond Watch List. During the year ended December 31, 2012 the Company realized losses through earnings from the sale of 22 debt securities for $297,000. The securities were sold with 129 other debt securities for which $2,059,000 in gains were realized, as a part of a liquidity strategy to fund new loan growth.

 

The Company has concluded as of December 31, 2013 that all remaining securities, currently in an unrealized loss position, are not other-than-temporarily-impaired. This assessment was based on the following factors: 1) the Company has the ability to hold the security, 2) the Company does not intend to sell the security, 3) the Company does not anticipate it will be required to sell the security before recovery, 4) and the Company expects to eventually recover the entire amortized cost basis of the security.

 

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SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

3.INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Continued)

 

The amortized cost and estimated fair value of investment securities available-for-sale at December 31, 2013 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without penalties.

 

    Amortized
Cost		   Fair Value  
    (dollars in thousands)  
Maturing within one year   $ 2,294   $ 2,316  
Maturing after one year through five years     241,396     242,493  
Maturing after five years through ten years     59,572     59,402  
Maturing after ten years     49,674     47,737  
               
Investment securities not due at a single maturity date:              
U.S Government agencies collateralized by mortgage obligations     70,043     70,640  
Other securities     1,336     2,456  
    $ 424,315   $ 425,044  

 

Investment securities available-for-sale with amortized costs totaling $162,393,000 and estimated fair values totaling $164,390,000 were pledged to secure other contractual obligations and short-term borrowing arrangements at December 31, 2013. (see Note 8)

 

Investment securities available-for-sale with amortized costs totaling $174,930,000 and estimated fair values totaling $178,550,000 were pledged to secure public deposits, other contractual obligations and short-term borrowing arrangements at December 31, 2012. (see Note 8)

 

20
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES

 

The composition of the loan and lease portfolio is as follows (dollars in thousands):

 

 

    December 31,  
    2013   2012  
Real estate:              
Secured by residential, commercial and professional office properties,              
including construction and development   $ 318,383   $ 303,424  
Secured by residential properties     150,952     170,514  
Secured by farm land     108,504     71,851  
               
Total Real Estate Loans     577,839     545,789  
               
Agricultural     25,180     22,482  
Commercial and industrial     158,756     257,896  
Small Business Administration loans     14,905     20,523  
Direct Financing leases     3,026     4,233  
Consumer     23,536     28,872  
               
Total Loans     803,242     879,795  
               
Deferred loan and lease origination cost, net     1,522     1,156  
Allowance for loan and lease losses     (11,677)     (13,873)  
               
Loans, net   $ 793,087   $ 867,078  

 

The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention, substandard and impaired to characterize and qualify the associated credit risk. Loans classified as “loss” are immediately charged-off. The Company uses the following definitions of risk classifications:

 

Pass – Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

 

Special Mention – Loans classified as special mention have the potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position and some future date.

 

Substandard – Loans classified as substandard are those loans with clear and well-defined weaknesses such as a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources or poor financial condition, which may jeopardize ultimate recoverability of the debt.

 

Impaired – A loan is considered impaired, when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, all loans classified as troubled debt restructurings are considered impaired.

 

21
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

Credit quality classifications as of December 31, 2013 were as follows (dollars in thousands):

          Special                    
    Pass   Mention   Substandard   Impaired   Total  
Real Estate:                                
1-4 family residential construction   $ 1,720   $ -   $ -   $ -   $ 1,720  
Other Construction/Land     18,243     334     203     6,751     25,531  
1-4 family - closed-end     67,051     1,305     770     17,898     87,024  
Equity Lines     51,019     254     1,429     1,021     53,723  
Multi-family residential     8,059     426     -     -     8,485  
Commercial real estate owner occupied     158,155     17,033     3,261     7,563     186,012  
Commercial real estate Non-owner occupied     89,475     3,630     240     13,495     106,840  
Farmland     105,623     1,780     819     282     108,504  
                                 
Total Real Estate     499,345     24,762     6,722     47,010     577,839  
                                 
Agricultural     24,178     532     -     470     25,180  
Commercial and Industrial     153,125     2,520     416     2,695     158,756  
Small Business Administration loans     10,498     838     820     2,749     14,905  
Direct finance leases     3,026     -     -     -     3,026  
Consumer loans     19,387     478     208     3,463     23,536  
                                 
Total Gross Loans and Leases   $ 709,559   $ 29,130   $ 8,166   $ 56,387   $ 803,242  

 

22
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

Credit quality classifications as of December 31, 2012 were as follows (dollars in thousands):

 

          Special              
    Pass   Mention   Substandard   Impaired   Total  
Real Estate:                                
1-4 family residential construction   $ 1,599   $ 1,333   $ 89   $ 153   $ 3,174  
Other Construction/Land     13,270     952     1,132     12,648     28,002  
1-4 family - closed-end     73,002     2,484     1,209     23,222     99,917  
Equity Lines     58,161     95     1,949     1,258     61,463  
Multi-family residential     5,351     609     -     -     5,960  
Commercial real estate owner occupied     144,207     22,895     6,562     8,950     182,614  
Commercial real estate Non-owner occupied     67,407     6,864     568     17,969     92,808  
Farmland     64,176     2,216     3,526     1,933     71,851  
                                 
Total Real Estate     427,173     37,448     15,035     66,133     545,789  
                                 
Agricultural     21,333     462     24     663     22,482  
Commercial and Industrial     247,375     5,020     1,845     3,656     257,896  
Small Business Administration loans     15,002     1,551     743     3,227     20,523  
Direct finance leases     4,076     22     -     135     4,233  
Consumer loans     23,881     445     198     4,348     28,872  
                                 
Total Gross Loans and Leases   $ 738,840   $ 44,948   $ 17,845   $ 78,162   $ 879,795  

 

23
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

A summary of the transactions in the allowance for loan and lease losses follows (dollars in thousands):

 

    Year Ended December 31,  
    2013   2012   2011  
Balance, beginning of year   $ 13,873   $ 17,283   $ 21,138  
Provision for loan and lease losses     4,350     14,210     12,000  
Losses charged to allowance     (8,263)     (18,778)     (16,987)  
Recoveries     1,717     1,158     1,132  
                     
Balance, end of year   $ 11,677   $ 13,873   $ 17,283  

 

Loans may or may not be collateralized, and collection efforts are continuously pursued. Loans or leases may be restructured by management when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms and where the Company believes the borrower will eventually overcome those circumstances and make full restitution. Loans and leases are charged off when they are deemed to be uncollectible, while recoveries are generally recorded only when cash payments are received subsequent to the charge-off.

 

The following table presents the activity in the allowance for loan losses for the year 2013 and the recorded investment in loans and impairment method as of December 31, 2013 by portfolio segment (dollars in thousands):

 

                Commercial       Direct              
                and   Small Business   Finance              
    Real Estate   Agricultural   Industrial   Administration   Leases   Consumer   Unallocated   Total  
Allowance for credit losses:                                                  
Beginning of year   $ 8,034   $ 258   $ 2,056   $ 1,246   $ 165   $ 2,114   $ -   $ 13,873  
Charge-offs     (4,205)     (473)     (1,268)     (294)     (106)     (1,917)     -     (8,263)  
Recoveries     618     -     747     37     18     297     -     1,717  
Provision     1,097     1,193     633     626     (73)     623     251     4,350  
                                                   
End of year   $ 5,544   $ 978   $ 2,168   $ 1,615   $ 4   $ 1,117   $ 251   $ 11,677  
                                                   
Reserves:                                                  
Specific   $ 2,867   $ 126   $ 655   $ 1,270   $ -   $ 431   $ -   $ 5,349  
General     2,677     852     1,513     345     4     686     251     6,328  
                                                   
    $ 5,544   $ 978   $ 2,168   $ 1,615   $ 4   $ 1,117   $ 251   $ 11,677  
                                                   
Loans evaluated for
     impairment:		                                                  
Individually   $ 47,010   $ 470   $ 2,695   $ 2,749   $ -   $ 3,463   $ -   $ 56,387  
Collectively     530,829     24,710     156,061     12,156     3,026     20,073     -     746,855  
                                                   
    $ 577,839   $ 25,180   $ 158,756   $ 14,905   $ 3,026   $ 23,536   $ -   $ 803,242  

 

24
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

The following table presents the activity in the allowance for loan losses for the year 2012 and the recorded investment in loans and impairment method as of December 31, 2012 by portfolio segment (dollars in thousands):

 

 

                Commercial         Direct                    
                and   Small Business   Finance                    
    Real Estate   Agricultural   Industrial   Administration   Leases   Consumer   Unallocated   Total  
Allowance for credit losses:                                                  
Beginning of year   $ 8,260   $ 19   $ 4,638   $ 1,447   $ 311   $ 2,608   $ -   $ 17,283  
Charge-offs     (11,108)     (634)     (3,517)     (753)     (198)     (2,568)     -     (18,778)  
Recoveries     302     -     483     95     -     278     -     1,158  
Provision     10,580     873     452     457     52     1,796     -     14,210  
                                                   
End of year   $ 8,034   $ 258   $ 2,056   $ 1,246   $ 165   $ 2,114   $ -   $ 13,873  
                                                   
Reserves:                                                  
Specific   $ 4,180   $ 28   $ 934   $ 1,038   $ 67   $ 878   $ -   $ 7,125  
General     3,854     230     1,122     208     98     1,236     -     6,748  
                                                   
    $ 8,034   $ 258   $ 2,056   $ 1,246   $ 165   $ 2,114   $ -   $ 13,873  
                                                   
Loans evaluated for
     impairment:		                                                  
Individually   $ 66,133   $ 663   $ 3,656   $ 3,227   $ 135   $ 4,348   $ -   $ 78,162  
Collectively     479,656     21,819     254,240     17,296     4,098     24,524     -     801,633  
                                                   
    $ 545,789   $ 22,482   $ 257,896   $ 20,523   $ 4,233   $ 28,872   $ -   $ 879,795  

 

25
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

Past due and nonaccrual loans as of December 31, 2013 were as follows (dollars in thousands):

 

 

    30-59 Days   60-89 Days   90 Days Or             Total Financing   Non-Accrual  
    Past Due   Past Due   More Past Due(1)   Total Past Due   Current   Receivables   Loans(2)  
Real Estate:                                            
1-4 family residential
    construction		   $ -   $ -   $ -   $ -   $ 1,720   $ 1,720   $ -  
Other Construction/Land     294     -     116     410     25,121     25,531     5,528  
1-4 family - closed-end     2,181     300     171     2,652     84,372     87,024     13,168  
Equity Lines     98     -     288     386     53,337     53,723     778  
Multi-family residential     -     -     -     -     8,485     8,485     -  
Commercial real estate
    owner occupied		     1,917     144     2,011     4,072     181,940     186,012     5,516  
Commercial real estate
    Non-owner occupied		     -     -     7,667     7,667     99,173     106,840     8,058  
Farmland     331     -     -     331     108,173     108,504     282  
Total Real Estate
     Loans		     4,821     444     10,253     15,518     562,321     577,839     33,330  
                                             
Agricultural     892     327     125     1,344     23,836     25,180     470  
Commercial and Industrial     342     78     24     444     158,312     158,756     685  
Small Business
    Administration Loans		     976     509     1,274     2,759     12,146     14,905     1,937  
Direct finance leases     -     -     -     -     3,026     3,026     -  
Consumer loans     181     -     -     181     23,355     23,536     992  
                                             
Total Gross Loans and Leases   $ 7,212   $ 1,358   $ 11,676   $ 20,246   $ 782,996   $ 803,242   $ 37,414  

 

(1) As of December 31, 2013 there were no loans over 90 days past due and still accruing.

(2) Included in Total Financing Receivables

 

26
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

Past due and nonaccrual loans as of December 31, 2012 were as follows (dollars in thousands):

 

    30-59 Days   60-89 Days   90 Days Or More               Total Financing   Non-Accrual  
    Past Due   Past Due   Past Due(1)   Total Past Due   Current   Receivables   Loans(2)  
Real Estate:                                            
1-4 family residential
    construction		   $ -   $ -   $ 153   $ 153   $ 3,021   $ 3,174   $ 153  
Other Construction/Land     374     211     -     585     27,417     28,002     11,163  
1-4 family - closed-end     1,335     88     376     1,799     98,117     99,916     15,381  
Equity Lines     473     40     66     579     60,885     61,464     1,026  
Multi-family residential     177     -     -     177     5,783     5,960     -  
Commercial real estate
    owner occupied		     1,372     813     1,289     3,474     179,140     182,614     5,314  
Commercial real estate
    Non-owner occupied		     7,831     -     1,499     9,330     83,478     92,808     11,642  
Farmland     231     -     1,679     1,910     69,941     71,851     1,933  
Total Real Estate
     Loans		     11,793     1,152     5,062     18,007     527,782     545,789     46,612  
                                             
Agricultural     24     157     506     687     21,795     22,482     664  
Commercial and Industrial     1,419     518     7     1,944     255,952     257,896     2,386  
Small Business
    Administration Loans		     905     -     1,574     2,479     18,044     20,523     2,159  
Direct finance leases     -     34     123     157     4,076     4,233     135  
Consumer loans     238     189     87     514     28,358     28,872     1,138  
                                             
Total Gross Loans and Leases   $ 14,379   $ 2,050   $ 7,359   $ 23,788   $ 856,007   $ 879,795   $ 53,094  

 

(1) As of December 31, 2012 there were no loans over 90 days past due and still accruing.

(2) Included in Total Financing Receivables

 

Generally, the Company places a loan or lease on nonaccrual status and ceases recognizing interest income when it has become delinquent more than 90 days and/or when Management determines that the repayment of principal and collection of interest is unlikely. The Company may decide that it is appropriate to continue to accrue interest on certain loans more than 90 days delinquent if they are well-secured by collateral and collection is in process.  When a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest income in the period in which the loan’s status changed.  Subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required.

 

The following is a summary of information pertaining to impaired and non-accrual loans (dollars in thousands):

 

    Years Ended December 31,  
    2013   2012  
               
Impaired loans without a valuation allowance   $ 25,722   $ 14,292  
Impaired loans with a valuation allowance     30,665     63,870  
Total impaired loans (1)   $ 56,387   $ 78,162  
Valuation allowance related to impaired loans   $ 5,349   $ 7,125  
Total non-accrual loans   $ 37,414   $ 53,094  
Total loans past-due ninety days or more and still accruing   $ -   $ -  

 

(1) Principal balance only

  

27
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

Individually impaired loans as of December 31, 2013 were as follows (dollars in thousands):

 

    Year Emded December 31, 2013  
    Unpaid               Average   Interest  
    Principal   Recorded   Related   Recorded   Income  
    Balance(1)   Investment(2)   Allowance   Investment   Recognized(3)  
With an Allowance Recorded                                
Real Estate:                                
1-4 family residential construction   $ -   $ -   $ -   $ -   $ -  
Other Construction/Land     2,972     2,972     502     3,000     98  
1-4 Family - closed-end     13,522     13,522     1,324     13,630     260  
Equity Lines     528     528     123     530     13  
Multifamily residential     -     -     -     -     -  
Commercial real estate- owner occupied     2,047     2,047     217     2,069     135  
Commercial real estate- non-owner occupied     3,715     3,715     701     3,813     238  
Farmland     -     -     -     -     -  
Total Real Estate     22,784     22,784     2,867     23,042     744  
Agricultural     125     125     126     131     -  
Commercial and Industrial     1,870     1,857     655     2,009     85  
Small Business Administration     2,710     2,488     1,270     2,487     46  
Direct finance leases     -     -     -     -     -  
Consumer loans     3,411     3,411     431     3,591     172  
      30,900     30,665     5,349     31,260     1,047  
With no Related Allowance Recorded                                
Real Estate:                                
1-4 family residential construction   $ -   $ -   $ -   $ -   $ -  
Other Construction/Land     4,176     3,779     -     3,885     -  
1-4 Family - closed-end     4,655     4,376     -     4,687     1  
Equity Lines     565     493     -     493     -  
Multifamily residential     -     -     -     -     -  
Commercial real estate- owner occupied     7,436     5,516     -     5,568     -  
Commercial real estate- non-owner occupied     10,077     9,780     -     9,820     115  
Farmland     282     282     -     290     -  
Total Real Estate     27,191     24,226     -     24,743     116  
Agricultural     345     345     -     837     -  
Commercial and Industrial     891     838     -     1,346     57  
Small Business Administration     358     261     -     261     -  
Direct finance leases     -     -     -     -     -  
Consumer loans     241     52     -     77     -  
      29,026     25,722     -     27,264     173  
Total   $ 59,926   $ 56,387   $ 5,349   $ 58,524   $ 1,220  

(1)Contractual principal balance due from customer.

(2)Principal balance on Company's books, less any direct charge offs.

(3)Interest income is recognized on performing balances on a regular accrual basis.

  

28
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

Individually impaired loans as of December 31, 2012 were as follows (dollars in thousands):

 

    Year Ended December 31, 2012  
    Unpaid               Average   Interest  
    Principal   Recorded   Related   Recorded   Income  
    Balance(1)   Investment(2)   Allowance   Investment   Recognized(3)  
With an Allowance Recorded                                
Real Estate:                                
1-4 family residential construction   $ 153   $ 153   $ 23   $ 91   $ -  
Other Construction/Land     10,313     10,313     1,244     10,755     86  
1-4 Family - closed-end     19,218     18,910     955     19,024     401  
Equity Lines     1,142     1,142     163     1,144     9  
Multifamily residential     -     -     -     -     -  
Commercial real estate- owner occupied     5,846     5,585     563     5,666     126  
Commercial real estate- non-owner occupied     18,539     17,579     1,230     18,079     481  
Farmland     254     254     2     259     -  
Total Real Estate     55,465     53,936     4,180     55,018     1,103  
Agricultural     28     28     28     28     -  
Commercial and Industrial     2,955     2,920     934     3,100     51  
Small Business Administration     2,704     2,507     1,038     2,507     53  
Direct finance leases     135     135     67     135     -  
Consumer loans     4,349     4,344     878     4,493     183  
      65,636     63,870     7,125     65,281     1,390  
With no Related Allowance Recorded                                
Real Estate:                                
1-4 family residential construction   $ -   $ -   $ -   $ -   $ -  
Other Construction/Land     2,335     2,335     -     2,346     -  
1-4 Family - closed-end     4,312     4,312     -     4,491     -  
Equity Lines     116     116     -     155     1  
Multifamily residential     -     -     -     -     -  
Commercial real estate- owner occupied     4,298     3,365     -     3,540     -  
Commercial real estate- non-owner occupied     390     390     -     421     3  
Farmland     1,679     1,679     -     1,686     -  
Total Real Estate     13,130     12,197     -     12,639     4  
Agricultural     1,008     635     -     1,017     -  
Commercial and Industrial     735     736     -     740     -  
Small Business Administration     1,008     720     -     720     -  
Direct finance leases     -     -     -     -     -  
Consumer loans     4     4     -     7     -  
      15,885     14,292     -     15,123     4  
Total   $ 81,521   $ 78,162   $ 7,125   $ 80,404   $ 1,394  

(1)Contractual principal balance due from customer.

(2)Principal balance on Company's books, less any direct charge offs.

(3)Interest income is recognized on performing balances on a regular accrual basis.

 

29
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

Included in loans above are troubled debt restructurings that were classified as impaired. The Company had $3,714,000 and $3,427,000 in commercial loans, $32,960,000 and $40,639,000 in real estate secured loans and $3,250,000 and $3,976,000 in consumer loans, which were modified as troubled debt restructurings and consequently classified as impaired at December 31, 2013 and 2012, respectively.

 

Additional commitments to existing customers with restructured loans totaled $250,000 and $195,000 at December 31, 2013 and 2012 respectively.

 

Interest income recognized on impaired loans was $1,220,000, $1,394,000, and $1,214,000 for the years ended December 31, 2013, 2012 and 2011 respectively. There was no interest income recognized on a cash basis on impaired loans for the years ended December 31, 2013, 2012 and 2011 respectively.

 

The following is a summary of interest income from non-accrual loans in the portfolio at year-end that was not recognized (dollars in thousands):

 

    Years Ended December 31,  
    2013   2012   2011  
Interest that would have been recorded under the
     loans’ original terms		   $ 3,209   $ 4,084   $ 4,353  
Less gross interest recorded     304     2,088     1,328  
Foregone interest   $ 2,905   $ 1,996   $ 3,025  

 

Certain loans have been pledged to secure short-term borrowing arrangements (see Note 8). These loans totaled $413,369,000 and $392,644,000 at December 31, 2013 and 2012, respectively.

 

Salaries and employee benefits totaling $2,804,000, $2,745,000, and $2,586,000, have been deferred as loan and lease origination costs to be amortized over the estimated lives of the related loans and leases for the years ended December 31, 2013, 2012 and 2011, respectively.

 

30
 

 

SIERRA BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.LOANS AND LEASES (Continued)

 

During the periods ended December 31, 2013 and 2012, the terms of certain loans were modified as troubled debt restructurings. Types of modifications applied to these loans, include a reduction of the stated interest rate, a modification of term, an agreement to collect only interest rather than principal and interest for a specified period, or any combination thereof.

 

The following table presents troubled debt restructurings by type of modification during the period ending December 31, 2013 (dollars in thousands):

 

                                        Rate, Term        
                            Rate &   Term &   & Interest        
    Rate   Term   Interest Only   Rate & Term   Interest Only   Interest Only   Only        
    Modification   Modification   Modification   Modification   Modification   Modification   Modification   Total  
Troubled Debt Restructurings                                                  
Real Estate:                                                  
Other Construction/Land   $ -   $ 416   $ -   $ -   $ -   $ -   $ -   $ 416  
1-4 family - closed-end     -     3,338     -     238     -     -     102     3,678  
Equity Lines     -     -     40     -     -     -     -     40  
Commercial real estate
   owner occupied		     -     -     -     557     -     -     -     557  
Commercial real estate
   Non-owner occupied		     -     -     -     -     -     -     -     -  
Total Real Estate
    Loans		     -     3,754     40     795     -     -     102     4,691