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 benefit for credit losses on loans of $2.0 million for the third quarter of 2026, compared to credit loss expense on loans of $3.7 million for the third quarter of 2025. For the first nine months of 2026, provision for credit losses on loans totaled $0.3 million, compared to $6.9 million for the same period in 2025.

The third quarter 2026 benefit was primarily attributable to the resolution of a previously identified agricultural production lending relationship in the lumber industry that had been individually evaluated for expected credit losses. During the second quarter of 2026, the Company recorded a $2.5 million allowance allocation on this credit due to elevated repayment risk and uncertainty regarding ultimate collectability. During the third quarter of 2026, the relationship was resolved through the sale of the note to another creditor. As a result, the Company recovered substantially all principal, accrued interest, and fees associated with the relationship, resulting in an immaterial charge-off and the reversal of the allowance allocation previously established on the credit. The nonaccrual agricultural production credit discussed in the Net Interest Income section is unrelated to the previously reserved agricultural production relationship in the lumber industry discussed in the Provision for Credit Loss Expense.

The resolution of this relationship contributed to a decline in the allowance for credit losses on loans from $23.6 million at June 30, 2026, to $21.7 million at September 30, 2026. Excluding the impact of this individually evaluated relationship, credit quality trends across the remainder of the loan portfolio were generally stable to improved during the quarter. Nonperforming assets declined to $9.3 million at September 30, 2026, from $14.8 million at December 31, 2025, classified loans declined to $27.0 million from $31.4 million, and loans past due 30 to 89 days improved to $2.5 million from $6.8 million at year-end 2025.

The allowance for credit losses on loans is maintained 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.