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SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Securities
Debt securities may be classified as held to maturity and carried at amortized cost when management has
the positive ability and intent to hold them to maturity. Debt securities are classified as available for sale
when they might be sold before maturity. Equity securities with readily determinable fair values are
classified as available for sale. Securities available for sale are carried at fair value with unrealized holding
gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums or discounts on
securities are amortized on the level-yield method without anticipating prepayments. Gains and losses on
sales are recorded on the trade date and determined using the specific identification method.
Management determines the appropriate classification of its investments at the time of purchase and may
only change the classification in certain limited circumstances. All transfers between categories are
accounted for at fair value.
Although the Company currently has the intent and the ability to hold the
securities in its investment portfolio to maturity, the securities are all marketable and are currently classified
as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity
management.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly
basis, and more frequently when economic or market conditions warrant such an evaluation. For securities
in an unrealized loss position, management considers the extent and duration of the unrealized loss and the
financial condition and near-term prospects of the issuer. Management also assesses whether it intends to
sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before
recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met,
the entire difference between amortized cost and fair value is recognized as impairment through earnings.
For debt securities that do not meet the aforementioned criteria, the amount of the impairment is split into
two components as follows: 1) OTTI related to credit loss, which must be recognized in the income
statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The
credit loss is defined as the difference between the present value of the cash flows expected to be collected
and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through
earnings.
Loans Held for Sale
The Company periodically originates loans intended to be sold on the secondary market. Loans originated
and intended for sale in the secondary market are carried at cost which approximates fair value since these
loans are typically sold shortly after origination. The loan’s cost basis includes unearned deferred fees and
costs, and premiums and discounts. If loans held for sale remain on our books for an extended period of
time the fair value of those loans is determined using quoted secondary market prices. Net unrealized losses,
if any, are recorded as a valuation allowance and charged to earnings.
Loans held for sale by the Company consist entirely of residential real estate loans. Loans classified as held
for sale are disclosed in Note 4 of these Consolidated Financial Statements.
Gains and losses on sales of loans are recognized at the time of sale and are calculated based on the
difference between the selling price and the allocated book value of loans sold. Book value allocations are
determined in accordance with U.S. GAAP. Any inherent risk of loss on loans sold is transferred to the
buyer at the date of sale.
The Company has issued various representations and warranties associated with the sale of loans. These
representations and warranties may require the Company to repurchase loans with underwriting deficiencies
as defined per the applicable sales agreements and certain past due loans within 90 days of the sale. The
Company did not experience losses during the years ended December 31, 2015, 2014, or 2013 regarding
these representations and warranties.