SIERRA BANCORP

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for credit losses on loans, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for credit losses on loans. Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance. The Company recorded a provision for credit losses of $1.2 million for the third quarter of 2024, as compared to a $0.1 million in the third quarter of 2023. There was a year-to-date provision for credit losses on loans of $2.3 million in 2024, as compared to $0.4 million for the same period in 2023. The Company's $1.1 million increase in the provision for credit losses on loans in the third quarter of 2024, as compared to the third quarter of 2023, and the $1.8 million year to date increase in the provision for credit losses on loans, compared to the same period in 2023, was primarily due to the impact of $3.0 million in net charge-offs in the first nine months of 2024, with only $0.4 million in net charge-offs for the first nine months of 2023. The increase in net charge-offs was primarily related to a single office building, which was subsequently foreclosed upon and sold.

The allowance for credit losses on loans is at a level that, in Management’s judgment, is adequate to absorb probable credit losses on loans related to individually identified loans as well as probable credit losses in the remaining loan portfolio.

The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 10 to the consolidated financial statements, and below, under “Allowance for Credit Losses.” The process utilized to establish an appropriate credit allowance for losses on loans can result in a high degree of variability in the Company’s credit loss provision, and consequently in net earnings.