2. LOANS

The composition of the Company's loan portfolio, by loan class, is as follows:

($ in thousands)	March 31, 2016			December 31, 2015

Commercial	$	130,414		$	136,095
Commercial Real Estate		316,950			292,316
Agriculture		77,185			84,813
Residential Mortgage		41,412			43,375
Residential Construction		16,760			12,110
Consumer		43,386			45,386
		626,107			614,095
Allowance for loan losses		(9,607	)		(9,251	)
Net deferred origination fees and costs		1,034			1,009
Loans, net	$	617,534		$	605,853

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies.

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses. These loans are generally secured by the receivables, equipment, and real property of the business and are susceptible to the related risks described above. Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate means.

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment, receivables or other personal property or unsecured. Losses on loans secured by owner-occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space. Losses are dependent on the value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means.

Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or payments for services. Agricultural loans are generally secured by inventory, receivables, equipment, and real property. Agricultural loans are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions, including drought conditions such as those affecting California. Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections. Based on this information, the Company may decide to take any of several courses of action including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks: non-payment due to diminished or lost income; over-extension of credit; a lack of borrower's cash flow to sustain payments; and shortfalls in collateral value. In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts.

Residential construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion. Losses are primarily related to underlying collateral value and changes therein as described above. Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate means.

Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income; over-extension of credit; a lack of borrower's cash flow to sustain payments; and shortfall in the collateral value. In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly upward movements in the unemployment rate, loss of collateral value, and demand shifts.

As of March 31, 2016, approximately 50% in principal amount of the Company's loans were secured by commercial real estate, consisting primarily of loans secured by commercial properties and construction and land development loans. Approximately 7% in principal amount of the Company's loans were residential mortgage loans. Approximately 3% in principal amount of the Company's loans were residential construction loans. Approximately 12% in principal amount of the Company's loans were for agriculture and 21% in principal amount of the Company's loans were for general commercial uses including professional, retail and small businesses. Approximately 7% in principal amount of the Company's loans were consumer loans.

Once a loan becomes delinquent and repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment. If this is not forthcoming and payment in full is unlikely, the Company will consider the loan to be collateral dependent and will estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount. Depending on the length of time until final collection, the Company may periodically revalue the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower's other assets.

At March 31, 2016 and December 31, 2015, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank.

Non-accrual and Past Due Loans

The Company's non-accrual loans by loan class, as of March 31, 2016 and December 31, 2015, were as follows:

($ in thousands)	March 31, 2016		December 31, 2015

Commercial	$	275	$	112
Commercial Real Estate		600		964
Agriculture		—		—
Residential Mortgage		1,083		1,092
Residential Construction		—		—
Consumer		70		560
	$	2,028	$	2,728

Non-accrual loans amounted to $2,028,000 at March 31, 2016 and were comprised of five commercial loans totaling $275,000, two commercial real estate loans totaling $600,000, four residential mortgage loans totaling $1,083,000 and two consumer loans totaling $70,000. Non-accrual loans amounted to $2,728,000 at December 31, 2015 and were comprised of four residential mortgage loans totaling $1,092,000, four commercial real estate loans totaling $964,000, four commercial loans totaling $112,000, and four consumer loans totaling $560,000. It is generally the Company's policy to charge-off the portion of any non-accrual loan that the Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral.

An age analysis of past due loans, segregated by loan class, as of March 31, 2016 and December 31, 2015 is as follows:

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Loans
March 31, 2016
Commercial	$	108	$	166	$	57	$	331	$	130,083	$	130,414
Commercial Real Estate		493		5,426		—		5,919		311,031		316,950
Agriculture		—		—		—		—		77,185		77,185
Residential Mortgage		117		—		—		117		41,295		41,412
Residential Construction		—		—		—		—		16,760		16,760
Consumer		—		—		12		12		43,374		43,386
Total	$	718	$	5,592	$	69	$	6,379	$	619,728	$	626,107

December 31, 2015
Commercial	$	218	$	—	$	57	$	275	$	135,820	$	136,095
Commercial Real Estate		130		—		232		362		291,954		292,316
Agriculture		—		—		—		—		84,813		84,813
Residential Mortgage		—		—		—		—		43,375		43,375
Residential Construction		—		—		—		—		12,110		12,110
Consumer		19		5		429		453		44,933		45,386
Total	$	367	$	5	$	718	$	1,090	$	613,005	$	614,095

The Company had no loans that were 90 days or more past due and still accruing at March 31, 2016 and one loan totaling $2,000 that was 90 days or more past due and still accruing at December 31, 2015. Included in the aging loan category labeled "current" are non-accrual loans that were not delinquent with respect to contractual principal and interest payments as of March 31, 2016 and December 31, 2015. These loans are categorized as non-accrual loans and are not accruing interest as of March 31, 2016 and December 31, 2015. Non-accrual loans outstanding at March 31, 2016 and December 31, 2015 are disclosed in the table above.

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Loans considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 6 (substandard) or worse. Once identified, impaired loans are measured individually for impairment using one of three methods: present value of expected cash flows discounted at the loan's effective interest rate; the loan's observable market price; and the fair value of collateral if the loan is collateral dependent. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of March 31, 2016 and December 31, 2015 were as follows:

($ in thousands)	Unpaid Contractual Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
March 31, 2016
Commercial	$	1,076	$	82	$	980	$	1,062	$	188
Commercial Real Estate		925		600		291		891		41
Agriculture		—		—		—		—		—
Residential Mortgage		3,939		1,083		2,461		3,544		607
Residential Construction		996		206		791		997		114
Consumer		1,008		154		550		704		33
Total	$	7,944	$	2,125	$	5,073	$	7,198	$	983

December 31, 2015
Commercial	$	933	$	97	$	821	$	918	$	43
Commercial Real Estate		1,292		964		294		1,258		42
Agriculture		—		—		—		—		—
Residential Mortgage		3,968		1,092		2,484		3,576		615
Residential Construction		1,005		—		1,005		1,005		119
Consumer		1,625		631		690		1,321		33
Total	$	8,823	$	2,784	$	5,294	$	8,078	$	852

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the three months ended March 31, 2016 and March 31, 2015 was as follows:

($ in thousands)	Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	990	$	12	$	2,628	$	8
Commercial Real Estate		1,075		4		968		4
Agriculture		—		—		—		—
Residential Mortgage		3,560		24		4,621		31
Residential Construction		1,001		11		891		9
Consumer		1,013		45		1,494		11
Total	$	7,639	$	96	$	10,602	$	63

Troubled Debt Restructurings

The Company's loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), which are loans on which concessions in terms have been granted because of the borrowers' financial difficulties and, as a result, the Company receives less than the current market based compensation for the loan. These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may only be returned to accruing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.

The Company had $5,398,000 and $5,414,000 in TDR loans as of March 31, 2016 and December 31, 2015, respectively. Specific reserves for TDR loans totaled $983,000 and $852,000 as of March 31, 2016 and December 31, 2015, respectively. TDR loans performing in compliance with modified terms totaled $5,170,000 and $5,350,000 as of March 31, 2016 and December 31, 2015, respectively. There were no commitments to advance more funds on existing TDR loans as of March 31, 2016.

Loans modified as TDRs during the three months ended March 31, 2016 and March 31, 2015, were as follows:

($ in thousands)	Three Months Ended March 31, 2016
	Number of Contracts		Pre-modification outstanding recorded investment			Post-modification outstanding recorded investment
Commercial		1			180			180
Total		1		$	180		$	180

($ in thousands)	Three Months Ended March 31, 2015
	Number of Contracts		Pre-modification outstanding recorded investment			Post-modification outstanding recorded investment
Consumer		1			109			109
Total		1		$	109		$	109

The loan modifications generally involved reductions in the interest rate, payment extensions, forgiveness of principal, and forbearance. There were no loans modified as a TDR within the previous 12 months and for which there was a payment default during the three-month periods ended March 31, 2016 and March 31, 2015.

Credit Quality Indicators

All loans are rated using the credit risk ratings and criteria adopted by the Company. Risk ratings are adjusted as future circumstances warrant. All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss. For the definitions of each risk rating, see Note 4 to our condensed consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The following table presents the risk ratings by loan class as of March 31, 2016 and December 31, 2015:

($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
March 31, 2016
Commercial	$	120,371	$	7,595	$	2,448	$	—	$	—	$	130,414
Commercial Real Estate		292,519		9,762		14,669		—		—		316,950
Agriculture		75,409		1,059		717		—		—		77,185
Residential Mortgage		38,370		1,826		1,216		—		—		41,412
Residential Construction		16,162		449		149		—		—		16,760
Consumer		41,601		842		943		—		—		43,386
Total	$	584,432	$	21,533	$	20,142	$	—	$	—	$	626,107

December 31, 2015
Commercial	$	125,562	$	6,842	$	3,691	$	—	$	—	$	136,095
Commercial Real Estate		268,707		8,301		15,308		—		—		292,316
Agriculture		84,813		—		—		—		—		84,813
Residential Mortgage		40,231		1,847		1,297		—		—		43,375
Residential Construction		11,593		452		65		—		—		12,110
Consumer		42,990		1,025		1,371		—		—		45,386
Total	$	573,896	$	18,467	$	21,732	$	—	$	—	$	614,095

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by loan class for the three months ended March 31, 2016 and March 31, 2015:

Three months ended March 31, 2016
($ in thousands)	Commercial			Commercial Real Estate			Agriculture			Residential Mortgage			Residential Construction		Consumer			Unallocated		Total
Balance as of December 31, 2015	$	3,097		$	3,343		$	1,060		$	739		$	334	$	641		$	37	$	9,251
Provision for (reversal of) loan losses		(35	)		308			(95	)		(38	)		66		(53	)		297		450

Charge-offs		(100	)		(15	)		—			—			—		(20	)		—		(135	)
Recoveries		18			—			—			1			1		21			—		41
Net charge-offs		(82	)		(15	)		—			1			1		1			—		(94	)
Balance as of March 31, 2016	$	2,980		$	3,636		$	965		$	702		$	401	$	589		$	334	$	9,607
Period-end amount allocated to:
Loans individually evaluated for impairment		188			41			—			607			114		33			—		983
Loans collectively evaluated for impairment		2,792			3,595			965			95			287		556			334		8,624
Balance as of March 31, 2016	$	2,980		$	3,636		$	965		$	702		$	401	$	589		$	334	$	9,607

Three months ended March 31, 2015
($ in thousands)	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage			Residential Construction		Consumer			Unallocated		Total
Balance as of December 31, 2014	$	3,581		$	1,825	$	580	$	1,181		$	161	$	886		$	369	$	8,583
Provision for (reversal of) loan losses		(268	)		660		66		(134	)		33		(8	)		1		350

Charge-offs		—			—		—		—			—		(67	)		—		(67	)
Recoveries		12			—		—		—			1		15			—		28
Net charge-offs		12			—		—		—			1		(52	)		—		(39	)
Balance as of March 31, 2015	$	3,325		$	2,485	$	646	$	1,047		$	195	$	826		$	370	$	8,894
Period-end amount allocated to:
Loans individually evaluated for impairment		31			45		—		638			105		31			—		850
Loans collectively evaluated for impairment		3,294			2,440		646		409			90		795			370		8,044
Balance as of March 31, 2015	$	3,325		$	2,485	$	646	$	1,047		$	195	$	826		$	370	$	8,894

The following table details activity in the allowance for loan losses and the amount allocated to loans individually and collectively evaluated for impairment as of and for the period ended December 31, 2015.

Year ended December 31, 2015
($ in thousands)	Commercial			Commercial Real Estate			Agriculture		Residential Mortgage			Residential Construction		Consumer			Unallocated			Total
Balance as of December 31, 2014	$	3,581		$	1,825		$	580	$	1,181		$	161	$	886		$	369		$	8,583
Provision for (reversal of) loan losses		(542	)		1,507			480		(450	)		113		(126	)		(332	)		650

Charge-offs		(44	)		(7	)		—		(211	)		—		(175	)		—			(437	)
Recoveries		102			18			—		219			60		56			—			455
Net charge-offs		58			11			—		8			60		(119	)		—			18
Ending Balance		3,097			3,343			1,060		739			334		641			37			9,251
Period-end amount allocated to:
Loans individually evaluated for impairment		43			42			—		615			119		33			—			852
Loans collectively evaluated for impairment		3,054			3,301			1,060		124			215		608			37			8,399
Balance as of December 31, 2015	$	3,097		$	3,343		$	1,060	$	739		$	334	$	641		$	37		$	9,251

The Company's investment in loans as of March 31, 2016, March 31, 2015, and December 31, 2015 related to each balance in the allowance for loan losses by loan class and disaggregated on the basis of the Company's impairment methodology was as follows:

($ in thousands)	Commercial		Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer		Total
March 31, 2016
Loans individually evaluated for impairment	$	1,062	$	891	$	—	$	3,544	$	997	$	704	$	7,198
Loans collectively evaluated for impairment		129,352		316,059		77,185		37,868		15,763		42,682		618,909
Ending Balance	$	130,414	$	316,950	$	77,185	$	41,412	$	16,760	$	43,386	$	626,107

March 31, 2015
Loans individually evaluated for impairment	$	2,578	$	960	$	—	$	4,595	$	885	$	1,482	$	10,500
Loans collectively evaluated for impairment		113,355		263,920		54,719		45,101		9,211		47,693		533,999
Ending Balance	$	115,933	$	264,880	$	54,719	$	49,696	$	10,096	$	49,175	$	544,499

December 31, 2015
Loans individually evaluated for impairment	$	918	$	1,258	$	—	$	3,576	$	1,005	$	1,321	$	8,078
Loans collectively evaluated for impairment		135,177		291,058		84,813		39,799		11,105		44,065		606,017
Ending Balance	$	136,095	$	292,316	$	84,813	$	43,375	$	12,110	$	45,386	$	614,095