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 loss expense on loans of $2.3 million for the second quarter of 2026, compared to $1.2 million for the second quarter of 2025. For the first six months of 2026, the provision for credit losses on loans was $2.4 million, compared to $3.2 million for the same period in 2025. A $2.5 million specific reserve established on an agricultural production loan during the second quarter of 2026 was the primary driver of the increase in credit loss expense for the quarterly comparison. Following the end of the second quarter, the Company received a $0.5 million payment on this loan. Management continues to work with the borrower to evaluate and pursue various resolution alternatives for this credit.

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.