7. LOANS AND LEASE FINANCE RECEIVABLES AND

ALLOWANCE FOR LOAN LOSSES

The following table provides a summary of total loans and lease finance receivables, excluding PCI loans, by type.


	June 30, 2016		December 31, 2015
		(Dollars in thousands)
Commercial and industrial	$	479,133	$	434,099
SBA		111,762		106,867
Real estate:
Commercial real estate		2,884,332		2,643,184
Construction		94,009		68,563
SFR mortgage		237,488		233,754
Dairy & livestock and agribusiness		213,830		305,509
Municipal lease finance receivables		71,929		74,135
Consumer and other loans		79,725		69,278

Gross loans, excluding PCI loans		4,172,208		3,935,389
Less: Deferred loan fees, net		(7,872)		(8,292)

Gross loans, excluding PCI loans, net of deferred loan fees		4,164,336		3,927,097
Less: Allowance for loan losses		(60,628)		(59,156)

Net loans, excluding PCI loans		4,103,708		3,867,941

PCI Loans		76,022		93,712
Discount on PCI loans		(2,430)		(3,872)
Less: Allowance for loan losses		(310)		-

PCI loans, net		73,282		89,840

Total loans and lease finance receivables	$	4,176,990	$	3,957,781

As of June 30, 2016, 69.13% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 2.25% of the total loan portfolio consisted of construction loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2016, $190.5 million, or 6.60% of the total commercial real estate loans included loans secured by farmland, compared to $173.0 million, or 6.54%, at December 31, 2015. The loans secured by farmland included $135.6 million for loans secured by dairy & livestock land and $54.8 million for loans secured by agricultural land at June 30, 2016, compared to $128.4 million for loans secured by dairy & livestock land and $44.6 million for loans secured by agricultural land at December 31, 2015. As of June 30, 2016, dairy & livestock and agribusiness loans of $213.8 million were comprised of $200.2 million for dairy & livestock loans and $14.1 million for agribusiness loans, compared to $287.0 million for dairy & livestock loans and $18.5 million for agribusiness loans at December 31, 2015.

At June 30, 2016, the Company held approximately $2.04 billion of total fixed rate loans, including PCI loans.

At June 30, 2016 and December 31, 2015, loans totaling $3.13 billion and $2.91 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

Credit Quality Indicators

Central to our credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:

Pass – These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – Loans classified as substandard are inadequately protected by current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

The following table summarizes each type of loans, excluding PCI loans, according to our internal risk ratings for the periods presented.


	June 30, 2016
	Pass		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	440,455	$	21,264	$	17,407	$	7	$	479,133
SBA		93,259		11,697		6,582		224		111,762
Real estate:
Commercial real estate
Owner occupied		827,887		87,431		18,617		-		933,935
Non-owner occupied		1,909,707		24,804		15,886		-		1,950,397
Construction
Speculative		47,301		-		7,651		-		54,952
Non-speculative		39,057		-		-		-		39,057
SFR mortgage		229,984		4,965		2,539		-		237,488
Dairy & livestock and agribusiness		145,897		48,122		19,811		-		213,830
Municipal lease finance receivables		67,188		4,741		-		-		71,929
Consumer and other loans		75,378		1,867		2,377		103		79,725

Total gross loans, excluding PCI loans	$	3,876,113	$	204,891	$	90,870	$	334	$	4,172,208


	December 31, 2015
	Pass		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	398,651	$	33,000	$	2,403	$	45	$	434,099
SBA		87,441		13,169		4,854		1,403		106,867
Real estate:
Commercial real estate
Owner occupied		772,114		54,758		11,481		-		838,353
Non-owner occupied		1,741,615		26,170		37,046		-		1,804,831
Construction
Speculative		38,186		-		7,651		-		45,837
Non-speculative		22,726		-		-		-		22,726
SFR mortgage		227,207		3,556		2,991		-		233,754
Dairy & livestock and agribusiness		285,647		19,862		-		-		305,509
Municipal lease finance receivables		69,194		4,941		-		-		74,135
Consumer and other loans		64,844		1,618		2,708		108		69,278

Total gross loans, excluding PCI loans	$	3,707,625	$	157,074	$	69,134	$	1,556	$	3,935,389

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the ALLL methodology, including loss factors and economic risk factors. The Bank’s Director Loan Committee provides Board oversight of the ALLL process and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at June 30, 2016 and December 31, 2015. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

The following tables present the balance and activity related to the allowance for loan losses for held-for-investment loans by type for the periods presented.


	For the Three Months Ended June 30, 2016
	Ending Balance March 31, 2016		Charge-offs		Recoveries		(Recapture of) Provision for Loan Losses		Ending Balance June 30, 2016
	(Dollars in thousands)
Commercial and industrial	$	8,731	$	(24)	$	141	$	539	$	9,387
SBA		1,236		-		2		(61)		1,177
Real estate:
Commercial real estate		38,286		-		496		1,137		39,919
Construction		1,151		-		875		(798)		1,228
SFR mortgage		2,202		-		-		299		2,501
Dairy & livestock and agribusiness		5,176		-		107		(401)		4,882
Municipal lease finance receivables		1,165		-		-		(50)		1,115
Consumer and other loans		1,389		(1)		6		(975)		419
PCI loans		-		-		-		310		310
Unallocated (1)		-		-		-		-		-

Total allowance for loan losses	$	59,336	$	(25)	$	1,627	$	-	$	60,938


	For the Three Months Ended June 30, 2015
	Ending Balance March 31, 2015		Charge-offs		Recoveries		(Recapture of) Provision for Loan Losses		Ending Balance June 30, 2015
	(Dollars in thousands)
Commercial and industrial	$	7,502	$	-	$	197	$	(514)	$	7,185
SBA		2,196		-		3		(114)		2,085
Real estate:
Commercial real estate		34,848		(107)		783		(110)		35,414
Construction		1,043		-		41		(338)		746
SFR mortgage		2,425		(215)		-		354		2,564
Dairy & livestock and agribusiness		3,746		-		111		117		3,974
Municipal lease finance receivables		1,030		-		-		(16)		1,014
Consumer and other loans		825		(20)		52		(23)		834
Unallocated (1)		7,094		-		-		(1,356)		5,738

Total allowance for loan losses	$	60,709	$	(342)	$	1,187	$	(2,000)	$	59,554


	For the Six Months Ended June 30, 2016
	Ending Balance December 31, 2015		Charge-offs		Recoveries		(Recapture of) Provision for Loan Losses		Ending Balance June 30, 2016
	(Dollars in thousands)
Commercial and industrial	$	8,588	$	(85)	$	204	$	680	$	9,387
SBA		993		-		3		181		1,177
Real estate:
Commercial real estate		36,995		-		635		2,289		39,919
Construction		2,389		-		884		(2,045)		1,228
SFR mortgage		2,103		(102)		-		500		2,501
Dairy & livestock and agribusiness		6,029		-		206		(1,353)		4,882
Municipal lease finance receivables		1,153		-		-		(38)		1,115
Consumer and other loans		906		(1)		38		(524)		419
PCI loans		-		-		-		310		310
Unallocated (1)		-		-		-		-		-

Total allowance for loan losses	$	59,156	$	(188)	$	1,970	$	-	$	60,938


	For the Six Months Ended June 30, 2015
	Ending Balance December 31, 2014		Charge-offs		Recoveries		(Recapture of) Provision for Loan Losses		Ending Balance June 30, 2015
	(Dollars in thousands)
Commercial and industrial	$	7,074	$	(134)	$	232	$	13	$	7,185
SBA		2,557		(33)		37		(476)		2,085
Real estate:
Commercial real estate		33,373		(107)		1,640		508		35,414
Construction		988		-		50		(292)		746
SFR mortgage		2,344		(215)		185		250		2,564
Dairy & livestock and agribusiness		5,479		-		210		(1,715)		3,974
Municipal lease finance receivables		1,412		-		-		(398)		1,014
Consumer and other loans		1,262		(197)		61		(292)		834
Unallocated (1)		5,336		-		-		402		5,738

Total allowance for loan losses	$	59,825	$	(686)	$	2,415	$	(2,000)	$	59,554

(1)

Based upon changes to our ALLL methodology, as described in Note 3 – Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015, beginning with the fourth quarter of 2015 and coinciding with the implementation of the new ALLL methodology, the Bank’s previous “unallocated reserve” was absorbed into the qualitative component of the allowance.

The following tables present the recorded investment in loans held-for-investment and the related allowance for loan losses by loan type, based on the Company’s methodology for determining the allowance for loan losses for the periods presented.


	June 30, 2016
	Recorded Investment in Loans						Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality
	(Dollars in thousands)
Commercial and industrial	$	1,447	$	477,686	$	-	$	526	$	8,861	$	-
SBA		3,498		108,264		-		42		1,135		-
Real estate:
Commercial real estate		17,908		2,866,424		-		1		39,918		-
Construction		7,651		86,358		-		45		1,183		-
SFR mortgage		5,734		231,754		-		13		2,488		-
Dairy & livestock and agribusiness		697		213,133		-		-		4,882		-
Municipal lease finance receivables		-		71,929		-		-		1,115		-
Consumer and other loans		829		78,896		-		3		416		-
PCI loans		-		-		76,022		-		-		310
Unallocated (1)		-		-		-		-		-		-

Total	$	37,764	$	4,134,444	$	76,022	$	630	$	59,998	$	310


	June 30, 2015
	Recorded Investment in Loans						Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality
	(Dollars in thousands)
Commercial and industrial	$	1,562	$	404,861	$	-	$	435	$	6,750	$	-
SBA		3,146		117,420		-		12		2,073		-
Real estate:
Commercial real estate		39,981		2,529,430		-		-		35,414		-
Construction		7,651		39,276		-		24		722		-
SFR mortgage		7,044		207,459		-		77		2,487		-
Dairy & livestock and agribusiness		7,091		176,893		-		-		3,974		-
Municipal lease finance receivables		-		74,691		-		-		1,014		-
Consumer and other loans		915		70,261		-		2		832		-
PCI loans		-		-		110,746		-		-		-
Unallocated (1)		-		-		-		-		5,738		-

Total	$	67,390	$	3,620,291	$	110,746	$	550	$	59,004	$	-

(1)

Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

A loan is reported as a Troubled Debt Restructured (“TDR”) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of these concessions, restructured loans are classified as impaired. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.

Generally, when loans are identified as impaired they are moved to our Special Assets Department. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral.

The following tables present the recorded investment in, and the aging of, past due and nonaccrual loans, excluding PCI loans, by type of loans for the periods presented.


	June 30, 2016

	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
		(Dollars in thousands)
Commercial and industrial	$	61	$	-	$	61	$	568	$	478,504		479,133
SBA		-		-		-		2,637		109,125		111,762
Real estate:
Commercial real estate
Owner occupied		-		-		-		1,759		932,176		933,935
Non-owner occupied		320		-		320		9,637		1,940,440		1,950,397
Construction
Speculative (2)		-		-		-		-		54,952		54,952
Non-speculative		-		-		-		-		39,057		39,057
SFR mortgage		-		-		-		2,443		235,045		237,488
Dairy & livestock and agribusiness		-		-		-		-		213,830		213,830
Municipal lease finance receivables		-		-		-		-		71,929		71,929
Consumer and other loans		97		-		97		428		79,200		79,725

Total gross loans, excluding PCI Loans	$	478	$	-	$	478	$	17,472	$	4,154,258	$	4,172,208

(1)

As of June 30, 2016, $15.6 million of nonaccruing loans were current, $84,000 were 30-59 days past due, $338,000 were 60-89 days past due and $1.4 million were 90+ days past due.

(2)

Speculative construction loans are generally for properties where there is no identified buyer or renter.


	December 31, 2015

	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
		(Dollars in thousands)
Commercial and industrial	$	-	$	-	$	-	$	704	$	433,395	$	434,099
SBA		-		-		-		2,567		104,300		106,867
Real estate:
Commercial real estate
Owner occupied		-		-		-		4,174		834,179		838,353
Non-owner occupied		354		-		354		10,367		1,794,110		1,804,831
Construction
Speculative (2)		-		-		-		-		45,837		45,837
Non-speculative		-		-		-		-		22,726		22,726
SFR mortgage		1,082		-		1,082		2,688		229,984		233,754
Dairy & livestock and agribusiness		-		-		-		-		305,509		305,509
Municipal lease finance receivables		-		-		-		-		74,135		74,135
Consumer and other loans		-		-		-		519		68,759		69,278

Total gross loans, excluding PCI Loans	$	1,436	$	-	$	1,436	$	21,019	$	3,912,934	$	3,935,389

(1)

As of December 31, 2015, $7.9 million of nonaccruing loans were current, $456,000 were 30-59 days past due, $9.1 million were 60-89 days past due and $3.5 million were 90+ days past due.

(2)

Speculative construction loans are generally for properties where there is no identified buyer or renter.

Impaired Loans

At June 30, 2016, the Company had impaired loans, excluding PCI loans, of $37.8 million. Of this amount, there was $11.4 million of nonaccrual commercial real estate loans, $2.6 million of nonaccrual Small Business Administration (“SBA”) loans, $2.4 million of nonaccrual single-family residential (“SFR”) mortgage loans, $568,000 of nonaccrual commercial and industrial loans, and $428,000 of nonaccrual consumer and other loans. These impaired loans included $32.3 million of loans whose terms were modified in a troubled debt restructuring, of which $12.0 million were classified as nonaccrual. The remaining balance of $20.3 million consisted of 31 loans performing according to the restructured terms. The impaired loans had a specific allowance of $630,000 at June 30, 2016. At December 31, 2015, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $63.7 million with a related allowance of $669,000.

The following tables present information for held-for-investment loans, excluding PCI loans, individually evaluated for impairment by type of loans, as and for the periods presented.


	As of and For the Six Months Ended June 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
		(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	840	$	1,727	$	-	$	904	$	14
SBA		3,266		4,026		-		3,347		25
Real estate:
Commercial real estate
Owner occupied		4,386		5,573		-		4,623		87
Non-owner occupied		12,522		15,110		-		12,760		83
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		5,464		6,331		-		5,591		60
Dairy & livestock and agribusiness		697		697		-		709		17
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		816		1,373		-		845		8

Total		27,991		34,837		-		28,779		294

With a related allowance recorded:
Commercial and industrial		607		668		526		638		6
SBA		232		250		42		238		6
Real estate:
Commercial real estate
Owner occupied		1,000		1,000		1		392		28
Non-owner occupied		-		-		-		-		-
Construction
Speculative		7,651		7,651		45		7,651		193
Non-speculative		-		-		-		-		-
SFR mortgage		270		270		13		277		3
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		13		13		3		13		-

Total		9,773		9,852		630		9,209		236

Total impaired loans	$	37,764	$	44,689	$	630	$	37,988	$	530


	As of and For the Six Months Ended June 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
		(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,097	$	1,941	$	-	$	1,172	$	15
SBA		3,087		3,688		-		3,167		26
Real estate:
Commercial real estate
Owner occupied		5,987		7,080		-		5,865		127
Non-owner occupied		33,994		39,946		-		34,567		838
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		6,228		7,175		-		6,102		50
Dairy & livestock and agribusiness		7,091		7,559		-		7,269		167
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		906		1,426		-		940		8

Total		58,390		68,815		-		59,082		1,231

With a related allowance recorded:
Commercial and industrial		465		536		435		478		1
SBA		59		59		12		63		-
Real estate:
Commercial real estate
Owner occupied		-		-		-		-		-
Non-owner occupied		-		-		-		-		-
Construction
Speculative		7,651		7,651		24		7,651		192
Non-speculative		-		-		-		-		-
SFR mortgage		816		824		77		826		3
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		9		14		2		10		-

Total		9,000		9,084		550		9,028		196

Total impaired loans	$	67,390	$	77,899	$	550	$	68,110	$	1,427


	As of December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
		(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,017	$	1,894	$	-
SBA		3,207		3,877		-
Real estate:
Commercial real estate
Owner occupied		6,252		7,445		-
Non-owner occupied		34,041		37,177		-
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		5,665		6,453		-
Dairy & livestock and agribusiness		3,685		3,684		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		890		1,454		-

Total		54,757		61,984		-

With a related allowance recorded:
Commercial and industrial		626		695		626
SBA		41		47		10
Real estate:
Commercial real estate
Owner occupied		-		-		-
Non-owner occupied		-		-		-
Construction
Speculative		7,651		7,651		13
Non-speculative		-		-		-
SFR mortgage		588		640		20
Dairy & livestock and agribusiness		-		-		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		43		45		-

Total		8,949		9,078		669

Total impaired loans	$	63,706	$	71,062	$	669

The Company recognizes the charge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of June 30, 2016 and December 31, 2015 have already been written down to the estimated net realizable value. The impaired loans with a related allowance recorded are on nonaccrual loans where a charge-off is not yet processed, on nonaccrual SFR loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

Reserve for Unfunded Loan Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2016, compared to zero and a $500,000 recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2015, respectively. As of June 30, 2016 and December 31, 2015, the balance in this reserve was $7.2 million and was included in other liabilities.

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered impaired and charge-off amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a more detailed discussion regarding TDRs.

As of June 30, 2016, there were $32.3 million of loans classified as a TDR, of which $12.0 million were nonperforming and $20.3 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At June 30, 2016, performing TDRs were comprised of one construction loan of $7.7 million, nine commercial real estate loans of $6.5 million, 11 SFR mortgage loans of $3.3 million, six commercial and industrial loans of $879,000, two SBA loans of $861,000, one dairy & livestock and agribusiness loan of $697,000 and one consumer loan of $401,000. There were no loans removed from TDR classification during the three and six months ended June 30, 2016 and 2015.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated $609,000 and $607,000 of specific allowance to TDRs as of June 30, 2016 and December 31, 2015, respectively.

The following table provides a summary of the activity related to TDRs for the periods presented.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
	(Dollars in thousands)
Performing TDRs:
Beginning balance	$	37,321	$	45,376	$	42,687	$	53,589
New modifications		112		30		1,118		30
Payoffs and payments, net		(17,141)		(240)		(23,513)		(8,969)
TDRs returned to accrual status		-		-		-		516
TDRs placed on nonaccrual status		-		-		-		-

Ending balance	$	20,292	$	45,166	$	20,292	$	45,166

Nonperforming TDRs:
Beginning balance	$	12,360	$	16,774	$	12,622	$	20,285
New modifications		-		330		82		330
Charge-offs		-		-		(38)		-
Transfer to OREO		-		-		-		(842)
Payoffs and payments, net		(331)		(842)		(637)		(4,090)
TDRs returned to accrual status		-		(1,095)		-		(516)
TDRs placed on nonaccrual status		-		-		-		-

Ending balance	$	12,029	$	15,167	$	12,029	$	15,167

Total TDRs	$	32,321	$	60,333	$	32,321	$	60,333

The following tables summarize loans modified as troubled debt restructurings for the periods presented.

Modifications (1)


	For the Three Months Ended June 30, 2016
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2016		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		-	$	-	$	-	$	-	$	-
Change in amortization period or maturity		1		112		112		110		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Non-owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-

Total loans		1	$	112	$	112	$	110	$	-


	For the Three Months Ended June 30, 2015
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2015		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		-	$	-	$	-	$	-	$	-
Change in amortization period or maturity		1		30		30		30		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		1		330		330		330		12
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Non-owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-

Total loans		2	$	360	$	360	$	360	$	12


	For the Six Months Ended June 30, 2016
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2016		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		-	$	-	$	-	$	-	$	-
Change in amortization period or maturity		1		112		112		110		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		1		194		194		190		28
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		2		812		812		761		-
Non-owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		2		82		82		72		-

Total loans		6	$	1,200	$	1,200	$	1,133	$	28


	For the Six Months Ended June 30, 2015
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2015		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		-	$	-	$	-	$	-	$	-
Change in amortization period or maturity		1		30		30		30		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		1		330		330		330		12
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Non-owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-

Total loans		2	$	360	$	360	$	360	$	12

(1)

The tables above exclude modified loans that were paid off prior to the end of the period.

(2)

Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.

As of June 30, 2016, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2016.