Note 14. Shareholders' Equity

Preferred Stock

Under its Amended Articles of Incorporation, the Company is authorized to issue up to 5,000,000 shares of preferred stock, in one or more series, having such voting powers, designations, preferences, rights, qualifications, limitations and restrictions as determined by the Board of Directors.

On June 4, 2015, the holder of the Company's Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock") completed the exchange of its remaining 348,697 shares of Series C Preferred Stock outstanding for shares of the Company's common stock on a one-for-one exchange ratio basis. The exchange was pursuant to terms of an Exchange Agreement between the Company and the holder of the Series C Preferred Stock entered into on October 29, 2014, which was subsequently amended on December 22, 2014 allowing for an initial exchange of 840,841 Series C Preferred Stock that took place on December 24, 2014. As of December 31, 2015, there were no remaining shares of the Company's Series C Preferred Stock issued and outstanding.

On the date the Company made a firm commitment to issue the Series C Preferred Stock, the fair market value of the Company's common stock was higher than the conversion price of $3.25 per share of the Series C Preferred Stock. As a result, the Series C Preferred Stock was issued with a beneficial conversion feature associated with it. In connection with each exchange of Series C Preferred Stock, the Company recorded charges to retained earnings of $70 thousand and $168 thousand during the years ended December 31, 2015 and 2014, respectively.

Cash Dividends

During the years ended December 31, 2016 and 2015, the Company paid dividends on its common stock totaling $0.24 per share and $0.23 per share, respectively. The holder of the Company's Series C Preferred Stock, which was outstanding through June 2015, participated in these dividends during the period of time the Series C Preferred Stock was outstanding.

As discussed in Note 25. Subsequent Events, of these consolidated financial statements, On January 25, 2017, the Company's Board of Directors declared a cash dividend of $0.06 per share, payable on February 28, 2017, to shareholders of the Company's common stock as of February 15, 2017.

See also Note 15. Restrictions on Transfers of Funds to Parent, of these consolidated financial statements for additional information on limitations on dividends on common stock.

Stock Repurchase Program

On July 22, 2016, the Company announced it had amended its previously announced program for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18. Under the amended program, repurchase activity was able to commence on August 6, 2016 and could continue until February 8, 2017, the program's new expiration date, or expire earlier upon the completion of the repurchase of $5.0 million of the Company's common stock in addition to what had already been purchased under the program, as well as under certain other circumstances as set forth in the amended program. The Company had no obligation to repurchase any shares under this program, and was able to suspend or discontinue it at any time. All shares repurchased as part of the repurchase program were cancelled, and therefore no longer available for reissuance.

During the year ended December 31, 2016, the Company repurchased and cancelled 226,170 shares of its common stock at an aggregate cost of $1.6 million, or $7.23 per share. As of December 31, 2016, the Company had repurchased and cancelled a total of 281,598 shares of its common stock under this plan at an aggregate total cost of $2.1 million or $7.28 per share. Repurchases of the Company's common stock were made pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18.

On December 13, 2016, the Company's previously announced stock repurchase plan for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18, automatically terminated pursuant to its terms as a result of the public announcement of the Merger Agreement, whereby the Company has agreed to be merged with and into Pacific Premier Bancorp, Inc. Please also see Note 2. Merger Agreement, of these consolidated financial statements, for additional information concerning the Merger Agreement.

Regulatory Capital

Capital ratios for commercial banks in the United States are generally calculated using four different formulas. These calculations are referred to as the "Leverage Ratio," and three "risk-based" calculations known as: "Common Equity Tier I Capital Ratio," "Tier One Risk Based Capital Ratio" and "Total Risk Based Capital Ratio." These metrics were developed through joint efforts of banking authorities from different countries around the world. The standards are based on the premise that different types of assets have different levels of risk associated with them and take into consideration the off-balance sheet exposures of banks when assessing capital adequacy.

The Bank seeks to maintain strong levels of capital in order to generally be considered "well-capitalized" under the Prompt Corrective Action framework as determined by regulatory agencies. The Company's potential sources of capital include retained earnings and the issuance of equity, while the Bank's primary sources of capital include retained earnings and capital contributions from Bancorp.

At December 31, 2016 and 2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization. Management believes as of December 31, 2016, the Company and the Bank meet all capital adequacy requirement to which they are subject.

In 2013, the Board of Governors of the Federal Reserve System ("FRB"), the FDIC, and the Office of the Comptroller of the Currency ("OCC") issued final rules under Basel III (the "Basel III Capital Rules"), establishing a new comprehensive framework for regulatory capital for U.S. banking organizations. These rules implement the Basel Committee's December 2010 proposed framework, certain provisions of the Dodd-Frank Act, and revise the risk-based capital requirements applicable to bank-holding companies, and depository institutions, including the Company. These rules became effective for the Company on January 1, 2015, and are subject to phase-in periods for certain of their components through 2019.

The significant changes outlined under the Basel III Capital Rules that are applicable to the Company and the Bank include:


		•	A Common Equity Tier I ("CET I") capital measure, with a minimum ratio requirement of 4.5% CET I to risk-weighted assets, and for Prompt Corrective Action purposes 6.5% or greater to generally be considered "well-capitalized."
		•	The capital conservation buffer is determined in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019. The capital conservation buffer began phasing-in on January 1, 2016.
		•	The exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets and intangible assets. For 2016, certain deferred tax assets and intangible assets are phased-out of CET I at a rate of 60%, compared to 40% for 2015.

When Basel III Capital Rules are fully phased-in on January 1, 2019, the Company and the Bank will also be required to maintain a 2.5% "capital conservation buffer," which is designed to absorb losses during periods of economic stress. This capital conservation buffer will be comprised entirely of CET I, and will be in addition to minimum risk-weighted asset ratios outlined under the Basel III Capital Rules. If a banking organization fails to hold capital above minimum capital ratios, including the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.

The following table sets forth the Company's and the Bank's regulatory capital ratios, including those applicable following the implementation of Basel III Capital Rules on January 1, 2015:

	Actual				Capital Needed For Adequacy Purposes (1)				Capital Needed To Be Well Capitalized Under Prompt Corrective Action Provisions (2)
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
		(dollars in thousands)
As of December 31, 2016
Total capital to risk-weighted assets:
Company	$	212,148		13.87%	$	131,885		8.625%		N/A		N/A
Heritage Oaks Bank	$	203,986		13.35%	$	131,803		8.625%	$	152,815		10.0%
Tier I capital to risk-weighted assets:
Company	$	194,401		12.71%	$	101,303		6.625%		N/A		N/A
Heritage Oaks Bank	$	186,239		12.19%	$	101,240		6.625%	$	122,252		8.0%
Tier I capital to average assets:
Company	$	194,401		9.88%	$	78,705		4.000%		N/A		N/A
Heritage Oaks Bank	$	186,239		9.47%	$	78,636		4.000%	$	98,296		5.0%
Common Equity Tier I capital:
Company	$	185,889		12.16%	$	78,366		5.125%		N/A		N/A
Heritage Oaks Bank	$	186,239		12.19%	$	78,318		5.125%	$	99,330		6.5%
As of December 31, 2015
Total capital to risk-weighted assets:
Company	$	199,810		14.26%	$	112,096		8.0%		N/A		N/A
Heritage Oaks Bank	$	192,221		13.74%	$	111,951		8.0%	$	139,939		10.0%
Tier I capital to risk-weighted assets:
Company	$	182,234		13.01%	$	84,072		6.0%		N/A		N/A
Heritage Oaks Bank	$	174,667		12.48%	$	83,963		6.0%	$	111,951		8.0%
Tier I capital to average assets:
Company	$	182,234		9.90%	$	73,664		4.0%		N/A		N/A
Heritage Oaks Bank	$	174,667		9.50%	$	73,581		4.0%	$	91,976		5.0%
Common Equity Tier I capital:
Company	$	176,722		12.61%	$	63,054		4.5%		N/A		N/A
Heritage Oaks Bank	$	174,667		12.48%	$	62,972		4.5%	$	90,960		6.5%

(1) On a fully phased-in basis, effective January 1, 2019, under Basel III Capital rules, minimum capital ratios will be as follows: Common Equity Tier I capital: 7.0%; Leverage ratio: 6.5%; Tier I capital: 8.5%; Total risk-based capital: 10.5%.

(2) Reflects minimum threshold to be considered "well capitalized" under the Prompt Corrective Action framework, specific to depository institutions.

As of December 31, 2016 and 2015, the Company was able to include $10.2 million and $10.0 million of junior subordinated debt in its Tier I capital for regulatory capital purposes.