SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
64
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Most of the Company’s business activity is with customers located in California within the Southern
Central San Joaquin Valley and the corridor stretching between Santa Paula and Santa Clarita, 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.
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.
Premises and Equipment
Land is carried at cost. 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 range between twenty-five to thirty-nine years. The useful lives of furniture,
fixtures and equipment range between 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.
