SIERRA BANCORP

ALLOWANCE FOR CREDIT LOSSES* – LOANS*

The allowance for credit losses on loans, a contra-asset, is established through periodic provisions for credit losses on loans. It is maintained at a level that is considered adequate to measure expected losses on individually identified loans, as well as expected losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off.

The Company's allowance for credit losses on loans was $22.7 million at September 30, 2024, and $23.5 million at December 31, 2023. The allowance was 0.98% of gross loans at September 30, 2024, and 1.12% of total loans at December 31, 2023. The decrease in the allowance resulted from a reduction in specific individual reserves on individually evaluated loans due to the charge-off associated with one commercial real estate loan. Management's detailed analysis indicates that the Company's allowance for credit losses on loans should be sufficient to cover credit losses for the life of the loans outstanding as of September 30, 2024, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the credit loss allowance for loans. Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce the Company to augment or reduce the allowance. The Company calculates the allowance for credit losses using a combination of quantitative and qualitative factors applied to loans segmented by call report category. The largest increase in loan balances was from mortgage warehouse lines which has the lowest reserve rate in the allowance for credit losses at 0.14%. Therefore, at September 30, 2024, approximately $0.5 million of the allowance for credit losses is attributable to mortgage warehouse lines. A separate allowance of $0.06 million for potential credit losses inherent in unused commitments is included in other liabilities at September 30, 2024, an increase of $0.1 million, from December 31, 2023.

Allowance for Credit Losses on Loans