Sierra Bancorp — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Sierra Bancorp is a California bank holding company whose principal subsidiary, Bank of the Sierra, serves communities in California’s San Joaquin Valley.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Interest income | $58.6 million | $63.8 million |
| Net interest income | $53.0 million | $56.2 million |
| Net interest margin, tax-equivalent | 4.59% | 4.90% |
| Non-interest income | $14.6 million | $17.9 million |
| Non-interest expense | $47.3 million | $50.2 million |
| Net income | $7.8 million | $7.4 million |
| Diluted earnings per share | $0.55 | $0.60 |
| Total assets | $1.335 billion | $1.287 billion |
| Gross loans and leases | $758.9 million | $805.5 million |
| Deposits | $1.086 billion | $1.052 billion |
| Shareholders’ equity | $168.6 million | $159.6 million |
- Cash flow: Operating activities provided $34.6 million; investing activities used $51.3 million; financing activities provided $37.1 million. Cash and cash equivalents increased $20.4 million to $63.0 million.
- Credit costs and asset quality: Provision for loan losses was $12.0 million, down from $16.7 million. Net charge-offs were $15.9 million. Nonperforming assets rose to $71.5 million, or 9.23% of gross loans and foreclosed assets, from $66.6 million, or 8.07%. The allowance was $17.3 million, 2.28% of gross loans and 30.80% of nonperforming loans.
- Liquidity and capital: Management reported a 37% liquidity ratio against an internal minimum of 8%, and $310 million in unpledged or excess-pledged debt securities. Consolidated regulatory capital ratios were 21.72% total risk-based, 20.46% Tier 1 risk-based, and 14.11% leverage; both the Company and Bank were classified as well capitalized.
- Debt: At year-end, the balance sheet included $3.0 million in repurchase agreements, $17.1 million in short-term borrowings, $15.0 million in long-term borrowings, and $30.9 million in subordinated debentures.
Changes versus 2010
- Net income increased 6%, the first year-over-year increase since 2007, but diluted EPS fell from $0.60 to $0.55, reflecting a higher weighted-average share count.
- Net interest income declined 6%, and the tax-equivalent margin narrowed 31 basis points. Lower loan balances and yields outweighed lower funding costs and higher average earning assets.
- Loans fell 6%, while available-for-sale investment securities grew 23% to $406.5 million. Deposits increased 3%, with growth concentrated in non-maturity deposits.
- Nonperforming loans increased 22%; foreclosed assets decreased 26%. Performing troubled debt restructurings increased to $36.1 million from $12.5 million.
- Non-interest income fell 18%, including lower deposit service charges and securities gains. Non-interest expense declined 6%, mainly from lower foreclosed-asset costs and FDIC assessments.
Outlook, commentary, and risks
- Management described local economic conditions as still stressed despite signs of national improvement. It expected possible continued slight margin contraction from competition for quality loans and cautioned that loan balances might keep declining in the near term.
- Key exposures include the California economy, real estate values, and agriculture. Real-estate-secured loans were approximately 76% of the portfolio; management highlighted commercial real estate concentration, construction and land-development exposure, and agricultural risks including water availability.
- Management said nonperforming assets may remain elevated and that resolution could be slow. Deteriorating collateral, further defaults, charge-offs, or required reserve increases could adversely affect earnings and capital.
- Interest-rate modeling indicated an asset-sensitive position: a 100-basis-point rate increase was estimated to raise next-12-month net interest income 4.52%, while a 100-basis-point decrease was estimated to reduce it 6.84%. The downside exceeded internal policy limits; management said it would monitor and take corrective action as appropriate.
- Unusual items included a $1.37 million impairment charge on equity securities and $1.66 million in securities-sale gains. Lower overdraft income reflected regulatory changes. Dodd-Frank implementation and related compliance costs remained uncertain.
- The Board maintained a $0.06 quarterly dividend, or $0.24 for the year; future payments remain subject to Bank earnings, capital, and regulatory restrictions. No specific earnings or growth guidance was provided.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls. Ordinary-course legal matters were not expected by management to be material.
Important facts for investors to verify
- Whether rising nonperforming loans and the lower allowance coverage result in additional provisions or charge-offs.
- Progress in resolving the $71.5 million of nonperforming assets and performance of the $36.1 million in performing TDRs.
- Whether loan demand recovers and whether deposit growth can offset loan runoff without pressuring margins.
- Actual margin sensitivity to changing rates and the effect of the expanded securities portfolio.
- Capacity to sustain dividends, given reliance on Bank dividends, subordinated debt obligations, and regulatory constraints.
- Reconcile figures against the audited statements and notes; the filing presents some loan and lease totals on different bases, including gross, net, and held-for-sale balances.