SIERRA BANCORP Fair Value Disclosure
21. FAIR VALUE
Fair value is defined by U.S. GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| ● | Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
| ● | Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. |
| ● | Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would use in pricing an asset or liability. |
The Company used the following methods and significant assumptions to estimate fair values for each category of financial asset noted below:
Securities: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, live trading desk pricing from brokerages, or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities. In certain circumstances live trading desk pricing from brokerages and third-party internal models are used to value debt securities that we classify as Level 3.
Individually evaluated collateral dependent loans: Individually evaluated collateral dependent loans are measured based on the fair value of collateral when foreclosure is probable, or repayment is expected through the sale or operation of collateral and borrower is experiencing financial difficulty. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 10% of the appraised value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on Management’s historical knowledge, changes in market conditions from the time of the valuation, and Management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis and adjusted in accordance with the allowance for credit losses policy.
Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired or when foreclosure is imminent. Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are reported at fair value on a non-recurring basis. Fair values of OREO are based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost approach, and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Management also incorporates assumptions regarding market trends or other relevant factors and selling and commission costs ranging from 5% to 10%. Such adjustments can be significant and typically result in a
Level 3 classification of the unobservable inputs for determining fair value. Fair values for any other foreclosed assets are represented by estimated sales processed as determined using reasonably available sources. The valuation technique used for Level 3 non-recurring OREO is primarily the sales comparison approach less estimated selling costs.
Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):
Fair Value Measurements at December 31, 2025, using | |||||||||||||||
| Quoted Prices in | | Significant | | Significant | | Total | | Realized | ||||||
Securities: | |||||||||||||||
U.S. government agencies | $ | — | $ | 32,901 | $ | — | $ | 32,901 | $ | — | |||||
Mortgage-backed securities | — | 259,760 | — | 259,760 | — | ||||||||||
State and political subdivisions | — | 46,921 | — | 46,921 | — | ||||||||||
Corporate bonds | — | 85,154 | 1,313 | 86,467 | — | ||||||||||
Collateralized loan obligations | — | 199,281 | — | 199,281 | — | ||||||||||
Total available-for-sale securities | $ | — | $ | 624,017 | $ | 1,313 | $ | 625,330 | $ | — | |||||
Fair Value Measurements at December 31, 2024, using | |||||||||||||||
| Quoted Prices in | | Significant | | Significant | | Total | | Realized | ||||||
Securities: | |||||||||||||||
U.S. government agencies | $ | — | $ | 50,153 | $ | — | $ | 50,153 | $ | — | |||||
Mortgage-backed securities | — | 93,503 | — | 93,503 | — | ||||||||||
State and political subdivisions | — | 40,803 | — | 40,803 | — | ||||||||||
Corporate bonds | — | 2,909 | 55,653 | 58,562 | — | ||||||||||
Collateralized loan obligations | — | 412,946 | — | 412,946 | — | ||||||||||
Total available-for-sale securities | $ | — | $ | 600,314 | $ | 55,653 | $ | 655,967 | $ | — | |||||
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2025 and 2024 (dollars in thousands):
| Corporate Bonds | |||||
2025 | 2024 | |||||
Balance of recurring Level 3 assets at January 1, | $ | 55,653 | $ | 52,040 | ||
Total gains or losses for the period: | ||||||
Included in other comprehensive income | 213 | 5,613 | ||||
Sales | — | (2,000) | ||||
Transfers out of Level 3 | (54,553) | — | ||||
Balance of recurring Level 3 assets at December 31, | $ | 1,313 | $ | 55,653 | ||
Corporate bonds with a fair value of $54.5 million as of December 31, 2024 were transferred from Level 3 to Level 2 in the third quarter of 2025 because observable market data became available for the securities.
The following table present quantitative information about recurring level 3 fair value measurements at December 31, 2025 (dollars in thousands):
Range | |||||||||||||
| Fair Value | Valuation Technique(s) | | Unobservable Input(s) | Min | Max | Weighted Average | ||||||
Corporate Bonds | $ | 1,313 | Broker estimate | Discount rate | N/A | N/A | N/A | ||||||
The following table presents quantitative information about recurring level 3 fair value measurements at December 31, 2024 (dollars in thousands):
Range | |||||||||||||
| Fair Value | Valuation Technique(s) | | Unobservable Input(s) | Min | Max | Weighted Average | ||||||
Corporate Bonds | $ | 55,653 | New issue pricing | Risk appetite | N/A | N/A | N/A | ||||||
Secondary market pricing | Market volatility | ||||||||||||
Credit quality of issuer | |||||||||||||
Credit spread | |||||||||||||
Assets and liabilities measured at fair market value on a non-recurring basis are summarized below (dollars in thousands):
Year Ended December 31, 2025 | ||||||||||||
| Quoted Prices in | | Significant | | Significant | | Total | |||||
Collateral dependent loans | $ | — | $ | — | $ | 2,882 | $ | 2,882 | ||||
Foreclosed assets | $ | — | $ | — | $ | 1,565 | $ | 1,565 | ||||
Year Ended December 31, 2024 | ||||||||||||
| Quoted Prices in | | Significant | | Significant | | Total | |||||
Collateral dependent loans | $ | — | $ | 11,529 | $ | — | $ | 11,529 | ||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.