6. ACQUIRED SJB ASSETS AND FDIC LOSS SHARING ASSET

FDIC Assisted Acquisition

On October 16, 2009, the Bank acquired San Joaquin Bank (“SJB”) and entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) that is more fully discussed in Note 3—Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans. The application of the purchase method of accounting resulted in an after-tax gain of $12.3 million which was included in 2009 earnings. The gain is the negative goodwill resulting from the acquired assets and liabilities recognized at fair value.

At June 30, 2016, the remaining discount associated with the PCI loans approximated $2.4 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $1.0 million of the related discount is expected to accrete into interest income over the remaining average lives of the respective pools, which approximates 3 years. The loss sharing agreement for commercial loans expired October 16, 2014.

The following table provides a summary of PCI loans and lease finance receivables by type and by internal risk ratings (credit quality indicators) for the periods indicated.


	June 30, 2016		December 31, 2015
		(Dollars in thousands)
Commercial and industrial	$	2,580	$	7,473
SBA		348		393
Real estate:
Commercial real estate		70,589		81,786
Construction		-		-
SFR mortgage		186		193
Dairy & livestock and agribusiness		503		1,429
Municipal lease finance receivables		-		-
Consumer and other loans		1,816		2,438

Gross PCI loans		76,022		93,712
Less: Purchase accounting discount		(2,430)		(3,872)

Gross PCI loans, net of discount		73,592		89,840
Less: Allowance for PCI loan losses		(310)		-

Net PCI loans	$	73,282	$	89,840

Credit Quality Indicators

The following table summarizes gross PCI loans by internal risk ratings for the periods indicated.


	June 30, 2016		December 31, 2015
		(Dollars in thousands)
Pass	$	60,181	$	76,401
Special mention		10,255		11,142
Substandard		5,586		6,169
Doubtful & loss		-		-

Total gross PCI loans	$	76,022	$	93,712

Allowance for Loan Losses (“ALLL”)

The Company’s Credit Management Division is responsible for regularly reviewing the ALLL methodology for PCI loans. The ALLL for PCI loans is determined separately from total loans, and is based on expectations of future cash flows from the underlying pools of loans or individual loans in accordance with ASC 310-30, as more fully described in Note 3— Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015. As of June 30, 2016, the allowance for loan losses included $310,000 for PCI loans, compared to no allowance for loan losses at December 31, 2015.