SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
63
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of
expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan and lease
losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as
part of future interest income.
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.
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.
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.
