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SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
62
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans and Leases (Financing Receivables)
Our credit quality classifications of Loans and Leases include Pass, Special Mention, Substandard and
Impaired. These classifications are defined in Note 4 (Loans and Leases) to our consolidated financial
statements.
Loans and leases that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs,
purchase premiums and discounts, write-downs, and an allowance for loan and lease losses. Loan and lease
origination fees, net of certain deferred origination costs, and purchase premiums and discounts are
recognized in interest income as an adjustment to yield of the related loans and leases over the contractual
life of the loan using both the effective interest and straight line methods without anticipating prepayments.
Interest income for all performing loans, regardless of classification (Pass, Special Mention, Substandard
and Impaired), is recognized on an accrual basis, with interest accrued daily. Costs associated with
successful loan originations are netted from loan origination fees, with the net amount (net deferred loan
fees) amortized over the contractual life of the loan in interest income. If a loan has scheduled periodic
payments, the amortization of the net deferred loan fee is calculated using the effective interest method over
the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the
net deferred loan fee is recognized as interest income on a straight line basis over the contractual life of the
loan. Fees received for loan commitments are recognized as interest income over the term of the
commitment. When loans are repaid, any remaining unamortized balances of deferred fees and costs are
accounted for through interest income.
Generally, the Company places a loans or lease on nonaccrual status and ceases recognizing interest income
when it has become delinquent more than 90 days and/or when Management determines that the repayment
of principal and collection of interest is unlikely. The Company may decide that it is appropriate to continue
to accrue interest on certain loans more than 90 days delinquent if they are well-secured by collateral and
collection is in process. When a loan is placed on nonaccrual status, any accrued but uncollected interest for
the loan is reversed out of interest income in the period in which the loan’s status changed. For loans with
an interest reserve, i.e., where loan proceeds are advanced to the borrower to make interest payments, all
interest recognized from the inception of the loan is reversed when the loan is placed on non-accrual. Once
a loan is on non-accrual status subsequent payments received from the customer are applied to principal,
and no further interest income is recognized until the principal has been paid in full or until circumstances
have changed such that payments are again consistently received as contractually required. Generally, loans
and leases are not restored to accrual status until the obligation is brought current and has performed in
accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the
total contractual principal and interest is no longer in doubt.
Impaired loans are classified as either nonaccrual or accrual, depending on individual circumstances
regarding the collectability of interest and principal according to the contractual terms.
Purchased Credit Impaired Loans
The Company purchases individual loans and groups of loans, some of which show evidence of credit
deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount
paid, since there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are
recognized by an increase in the allowance for loan losses.
Such PCI loans are accounted for individually or aggregated into pools of loans based on common risk
characteristics. The Company estimates the amount and timing of expected cash flows for the loan or pool,
and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life
of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest
over expected cash flows is not recorded (nonaccretable difference).