10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014.

or

[    ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.

Commission File Number:  000-25020

HERITAGE OAKS BANCORP

(Exact name of registrant as specified in its charter)

California	77-0388249
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1222 Vine Street,

Paso Robles, California 93446

(Address of principal executive offices) (Zip Code)

(805) 369-5200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ]   NO [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES [ X ]   NO [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer [   ]   Accelerated filer [ X ]   Non-accelerated filer (Do not check if a smaller reporting company)[    ] Smaller reporting company [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [    ]    NO [ X ]

As of October 24, 2014 there were 33,094,717 shares of the registrant’s common stock outstanding.

FORM 10-Q

Heritage Oaks Bancorp

For the Three Months and Nine Months Ended

September 30, 2014

INDEX

			Page
Part I.		Financial Information
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013	4
		Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2014 and September 30, 2013	5
		Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2014 and September 30, 2013	6
		Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2014 and September 30, 2013	7
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 2013	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	75
	Item 4.	Controls and Procedures	77
Part II.		Other Information
	Item 1.	Legal Proceedings	78
	Item 1A.	Risk Factors	79
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
	Item 3.	Defaults Upon Senior Securities	80
	Item 4.	Mine Safety Disclosures	80
	Item 5.	Other Information	80
	Item 6.	Exhibits	81
		Signatures	82

Heritage Oaks Bancorp | - 2 -

Part I.  Financial Information

Item 1. Financial Statements

Condensed Consolidated Financial Statements and the notes thereto begin on the next page.

Heritage Oaks Bancorp | - 3 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

	September 30,			December 31,
	2014			2013
	(dollars in thousands except per share data)
Assets
Cash and due from banks	$	14,993		$	11,336
Interest earning deposits in other banks	35,834			14,902
Total cash and cash equivalents	50,827			26,238
Investment securities available for sale, at fair value	382,437			276,795
Loans held for sale, at lower of cost or fair value	5,977			2,386
Gross loans	1,151,576			827,484
Net deferred loan fees	(1,414		)	(1,281		)
Allowance for loan and lease losses	(16,787		)	(17,859		)
Net loans held for investment	1,133,375			808,344
Premises and equipment, net	36,937			24,220
Premises and equipment held for sale	2,070			-
Deferred tax assets, net	27,914			21,624
Bank-owned life insurance	24,549			15,826
Federal Home Loan Bank stock	7,853			4,739
Goodwill	24,536			11,237
Other intangible assets	5,644			1,344
Other assets	14,105			10,898
Total assets	$	1,716,224		$	1,203,651
Liabilities
Non-interest bearing deposits	$	469,435		$	291,856
Interest bearing deposits	953,499			682,039
Total deposits	1,422,934			973,895
Short term FHLB borrowing	10,000			29,000
Long term FHLB borrowing	65,562			59,500
Junior subordinated debentures	13,179			8,248
Other liabilities	10,430			6,581
Total liabilities	1,522,105			1,077,224
Shareholders’ equity
Preferred stock, 5,000,000 shares authorized:
Series C preferred stock, $3.25 per share stated value; issued and outstanding: 1,189,538 shares as of September 30, 2014 and December 31, 2013	3,604			3,604
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 33,082,205 shares and 25,397,780 shares as of September 30, 2014 and December 31, 2013, respectively	161,924			101,511
Additional paid in capital	6,382			6,020
Retained earnings	22,303			18,717
Accumulated other comprehensive loss, net of tax benefit of ($69) and ($2,395) as of September 30, 2014 and December 31, 2013, respectively	(94		)	(3,425		)
Total shareholders’ equity	194,119			126,427
Total liabilities and shareholders’ equity	$	1,716,224		$	1,203,651

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Heritage Oaks Bancorp | - 4 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(dollars in thousands except per share data)
Interest Income
Loans, including fees	$	14,745	$	10,064	$	41,134	$	29,448
Investment securities	1,946		1,347		5,355		3,993
Other interest-earning assets	204		98		535		216
Total interest income	16,895		11,509		47,024		33,657
Interest Expense
Deposits	918		731		2,661		2,101
Other borrowings	406		296		1,158		717
Total interest expense	1,324		1,027		3,819		2,818
Net interest income before provision for loan losses	15,571		10,482		43,205		30,839
Provision for loan and lease losses	-		-		-		-
Net interest income after provision for loan and lease losses	15,571		10,482		43,205		30,839
Non-Interest Income
Fees and service charges	1,410		1,195		3,949		3,330
Net gain on sale of mortgage loans	411		513		967		1,949
Other mortgage fee income	64		143		223		570
Gain on sale of investment securities	450		344		549		3,935
Other income	647		228		1,533		1,212
Total non-interest income	2,982		2,423		7,221		10,996
Non-Interest Expense
Salaries and employee benefits	6,164		4,529		18,121		14,535
Occupancy and equipment	1,776		1,176		4,989		3,629
Information technology	756		658		2,403		1,925
Professional services	1,839		729		3,610		2,082
Regulatory assessments	351		212		862		851
Sales and marketing	232		170		595		438
Foreclosed asset costs and write-downs	55		23		182		131
Provision for mortgage loan repurchases	27		-		27		570
Amortization of intangible assets	297		100		760		300
Merger, restructure, and integration	748		-		8,785		-
Other expense	1,137		954		3,073		2,478
Total non-interest expense	13,382		8,551		43,407		26,939
Income before income taxes	5,171		4,354		7,019		14,896
Income tax expense	1,742		1,593		2,406		5,689
Net income	3,429		2,761		4,613		9,207
Dividends and accretion on preferred stock	-		181		-		898
Net income available to common shareholders	$	3,429	$	2,580	$	4,613	$	8,309
Earnings Per Common Share
Basic	$	0.10	$	0.10	$	0.14	$	0.32
Diluted	$	0.10	$	0.10	$	0.14	$	0.31

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Heritage Oaks Bancorp | - 5 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2014			2013			2014			2013
	(dollars in thousands)
Net income	$	3,429		$	2,761		$	4,613		$	9,207
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities arising during the period	983			(1,959		)	6,206			(7,685		)
Reclassification for net (gains) on investments included in net income	(450		)	(344		)	(549		)	(3,935		)
Other comprehensive income (loss), before income tax expense (benefit)	533			(2,303		)	5,657			(11,620		)
Income tax expense (benefit) related to items of other comprehensive income	217			(947		)	2,326			(4,782		)
Other comprehensive income (loss)	316			(1,356		)	3,331			(6,838		)
Comprehensive income	$	3,745		$	1,405		$	7,944		$	2,369

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Heritage Oaks Bancorp | - 6 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

														Accumulated
				Common Stock				Additional						Other			Total
	Preferred			Number of				Paid-In			Retained			Comprehensive			Shareholders’
	Stock			Shares		Amount		Capital			Earnings			Income/(loss)			Equity
	(dollars in thousands except per share data)
Balance, January 1, 2013	$	24,140		25,307,110		$	101,354	$	7,337		$	8,773		$	3,925		$	145,529
Repurchase of Series A preferred stock	(20,725		)					(275		)							(21,000		)
Repurchase of warrants								(1,575		)							(1,575		)
Accretion on Series A preferred stock discount	189										(189		)				-
Dividends declared on series A preferred stock											(708		)				(708		)
Exercise of stock options				20,339		78											78
Issuance of restricted share awards				72,786													-
Forfeiture of restricted share awards				(8,892	)	7											7
Tax impact of share-based compensation expense																	-
Share-based compensation expense								392									392
Net income											9,207						9,207
Other comprehensive loss														(6,838		)	(6,838		)
Balance, September 30, 2013	$	3,604		25,391,343		$	101,439	$	5,879		$	17,083		$	(2,913	)	$	125,092
Balance, January 1, 2014	$	3,604		25,397,780		$	101,511	$	6,020		$	18,717		$	(3,425	)	$	126,427
Issuance of common stock in merger				7,541,326		60,255											60,255
Stock issuance costs								(381		)							(381		)
Dividends declared ($0.03 per share)											(1,027		)				(1,027		)
Exercise of stock options				44,217		158											158
Share-based compensation expense								723									723
Tax impact of share-based compensation expense								20									20
Issuance of restricted share awards				124,744													-
Forfeiture of restricted share awards				(25,862	)												-
Retirement of restricted share awards
Net income											4,613						4,613
Other comprehensive income														3,331			3,331
Balance, September 30, 2014	$	3,604		33,082,205		$	161,924	$	6,382		$	22,303		$	(94	)	$	194,119

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Heritage Oaks Bancorp | - 7 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

	For the Nine Months Ended
	September 30,
	2014			2013
	(dollars in thousands)
Cash flows from operating activities:
Net income	$	4,613		$	9,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,394			1,050
Write-downs on premises and equipment held for sale	988			-
Amortization of premiums / discounts on investment securities, net	3,499			3,110
Amortization of intangible assets	760			300
Accretion of discount on purchased loans	(1,791		)	-
Amortization of premium on junior subordinated debentures	118			-
Share-based compensation expense	723			392
Gain on sale of available for sale securities	(549		)	(3,935		)
Originations of loans held for sale	(62,385		)	(120,520		)
Proceeds from sale of loans held for sale	58,794			137,606
Net increase in bank owned life insurance	(460		)	(361		)
Decrease in deferred tax asset	3,269			5,354
Excess tax benefit from exercise of stock options	(20		)	-
Increase in other assets and other liabilities	1,206			434
Net cash provided by operating activities	10,159			32,637
Cash flows from investing activities:
Net cash and cash equivalents acquired in MISN merger	28,891			-
Purchase of securities, available for sale	(155,956		)	(170,063		)
Sale of securities, available for sale	98,379			144,027
Maturities and calls of securities, available for sale	-			544
Proceeds from principal paydowns of securities, available for sale	30,799			35,200
Proceeds from the sale of premises and equipment held for sale	3,594			-
Purchase of FHLB stock	(941		)	(164		)
Increase in loans, net	(44,855		)	(90,254		)
Allowance for loan loss recoveries	705			1,201
Purchase of property, premises and equipment, net	(5,122		)	(9,223		)
Proceeds from sale of foreclosed collateral	1,628			1,374
Net cash used in investing activities	(42,878		)	(87,358		)
Cash flows from financing activities:
Increase in deposits, net	77,538			86,082
Proceeds from Federal Home Loan Bank borrowing	25,000			183,500
Repayments of Federal Home Loan Bank borrowing	(44,000		)	(192,500		)
Proceeds from exercise of stock options, including tax benefits	178			85
Stock issuance costs	(381		)	-
Dividends declared	(1,027		)	-
Dividends on Series A preferred stock	-			(708		)
Retirement of Series A preferred stock and related warrants	-			(22,575		)
Net cash provided by financing activities	57,308			53,884
Net increase / (decrease) in cash and cash equivalents	24,589			(837		)
Cash and cash equivalents, beginning of period	26,238			34,116
Cash and cash equivalents, end of period	$	50,827		$	33,279
Supplemental Cash Flow Information
Cash Flow Information
Interest paid	$	3,631		$	2,791
Income taxes paid	$	600		$	2,100
Non-Cash Flow Information
Change in unrealized gain on available for sale securities	$	5,657		$	(11,620	)
Loans transferred to foreclosed collateral	$	1,564		$	1,374
Land and buildings transferred to held for sale	$	1,730		$	-
Accretion of preferred stock discount	$	-		$	189

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Heritage Oaks Bancorp | - 8 -

Heritage Oaks Bancorp

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1.  Summary of Significant Accounting Policies

Description of Business

Heritage Oaks Bancorp (“Bancorp”) is a California corporation organized in 1994 to act as the holding company for Heritage Oaks Bank (the “Bank”), which opened for business in 1983.  The Bank operates within San Luis Obispo, Santa Barbara and Ventura counties.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as commercial and consumer loans to customers who are predominately small to medium-sized businesses and individuals.  Bancorp and subsidiaries are collectively referred to herein as the “Company.”  The Company is subject to a concentration risk associated with its banking operations in San Luis Obispo, Santa Barbara and Ventura Counties. No one customer accounts for more than 10% of revenue or assets in any period presented. The Company has no assets nor does it generate any revenue from outside of the United States. While the chief decision-makers of the Company monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual financial statements are not included herein. In the opinion of management, all adjustments (which consist solely of normal recurring accruals) considered necessary for a fair presentation of results for the interim periods presented have been included. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2013 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 4, 2014; file number 000-25020.

The consolidated financial statements include the accounts of Bancorp and its wholly-owned financial subsidiary, Heritage Oaks Bank.  All significant inter-company balances and transactions have been eliminated. On February 28, 2014, the Company acquired 100% of the outstanding common shares of Mission Community Bancorp (“MISN”).  MISN’s results of operations have been included in the Company’s results beginning March 1, 2014.  Heritage Oaks Capital Trust II (“Trust II”), Mission Community Capital Trust I (“Trust III”) and Santa Lucia Bancorp (CA) Capital Trust (“Trust IV”), which were formed solely for the purpose of issuing trust preferred securities, are unconsolidated subsidiaries, as the Company is not the primary beneficiary of the trusts. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  Some items in the prior year financial statements were reclassified to conform to the current presentation.  Reclassifications had no effect on prior year net income or shareholders’ equity.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses (“ALLL”), the valuation of real estate acquired through foreclosure, the carrying value of the Company’s deferred tax assets and estimates used in the determination of the fair value of certain financial instruments, assets and liabilities acquired in the MISN transaction and accruals for restructuring activities, as described in Note 11.

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s Annual Report filed on Form 10-K.  There have been no changes to these policies or their application other than as noted below, related to purchased credit impaired loans.

Heritage Oaks Bancorp | - 9 -

Note 1.  Summary of Significant Accounting Policies - continued

Acquired Loans and Leases

Purchased loans and leases are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an ALLL is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition for evidence of deterioration in credit quality since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments.  Such loans are classified as purchased credit impaired loans (“PCI loans”), while all other acquired loans are classified as non-impaired.

The Company has elected to account for purchased credit impaired loans on an individual loan level.  The Company estimates the amount and timing of expected cash flows for each loan, and the expected cash flow in excess of the loan’s fair value is referred to as the accretable yield, and is recorded as interest income over the remaining life of the loan.  The excess of the loan’s contractual principal and interest over expected cash flows is referred to as the non-accretable difference, and is not recorded in the Company’s financial statements.

Quarterly, management performs an evaluation of expected future cash flows for PCI loans.  If current expectations of future cash flows are less than management’s previous expectations, an ALLL is recorded with a charge to current period earnings through provision for loan losses.  If there has been a probable and significant increase in expected future cash flows over that which was previously expected, the Company would first reduce any previously established ALLL, and then record an adjustment to interest income through an increase in the accretable yield.

Business Combinations and Related Matters

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the MISN acquisition that was consummated in 2014.

Recent Accounting Guidance Adopted

There has been no new accounting guidance that has been adopted by the Company since December 31, 2013.

Recent Accounting Guidance Not Yet Effective

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.  This update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”).  Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed.  Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  The amendments within this update are effective for annual and interim periods beginning after December 15, 2014.  The Company does not believe the adoption of this update will have a material impact of the Company’s consolidated financial statements.

Heritage Oaks Bancorp | - 10 -

Note 1.  Summary of Significant Accounting Policies - continued

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.  The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.  The amendments within this update are effective for the quarter ending March 31, 2017.  The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on the Company’s consolidated financial statements.

On January 17, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force.  This Update provides clarification as to when an in-substance repossession or foreclosure has occurred, i.e., the creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and, therefore, the loan receivable should be derecognized and the real estate property should be recognized.  Under ASU No. 2014-04, a creditor has received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the property upon completion of a foreclosure or (2) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or a similar legal agreement.  The Update also will require disclosure in annual and interim financial statements of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  For public business entities, the amendments in this Update are effective for annual and interim periods beginning after December 15, 2014.  The Company expects to adopt the provisions of ASU No. 2014-04 in the first quarter of 2015.  Adoption of this Update is not expected to have a material impact on the Company’s consolidated financial statements.

Heritage Oaks Bancorp | - 11 -

Note 2.  Business Combination

On February 28, 2014, the Company acquired 100% of the outstanding common shares of Mission Community Bancorp (“MISN”) and all unexercised warrants and options to purchase MISN common stock were cancelled, in exchange for 7,541,326 shares of the Company’s common stock and $8.7 million in cash.  In conjunction with the merger, MISN’s wholly-owned bank subsidiary, Mission Community Bank, was merged with and into Heritage Oaks Bank.  The transaction was valued at $69.0 million, based on the Company’s closing stock price of $7.99 on February 28, 2014.  With the acquisition, the Company believes it has created a more valuable community bank franchise, with a low-cost core deposit base, strong capital ratios, attractive net interest margins, lower operating costs, and better overall returns for the shareholders of the combined company.  The Company also believes it now has a banking platform that is well positioned for future growth, both organically and through acquisitions.

The acquired assets and liabilities assumed have been recorded at fair value at the date of acquisition in these financial statements.  The following table presents a summary of acquired assets and liabilities assumed:

	February 28, 2014
	(dollars in thousands)
Assets acquired
Cash and due from banks	$	3,212
Interest earning deposits in other banks	34,386
Securities available for sale	76,159
Loans held for sale	338
Loans and leases receivable	280,316
Premises and equipment	15,922
Deferred tax assets, net	11,885
Goodwill	13,299
Core deposit intangible asset	5,060
Bank owned life insurance	8,263
Other assets	4,895
Total assets acquired	$	453,735
Liabilities assumed
Deposits	$	371,501
Advances from Federal Home Loan Bank	6,071
Junior subordinated debentures	4,804
Other liabilities	2,397
Total liabilities assumed	$	384,773
Total consideration paid	$	68,962

The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired as of the acquisition date, since they have not exhibited evidence of deterioration in credit quality since origination, and have been classified as non-PCI loans. The fair value adjustments were determined using discounted contractual cash flows, adjusted for expected losses and prepayments, where appropriate. Non-PCI loans acquired as of the acquisition date had a fair value and gross contractual payments receivable of $267.3 million and $328.2 million, respectively.  As of the acquisition date, contractual cash flows not expected to be collected on these non-PCI loans totaled $5.4 million, which has been recorded as the credit risk component of the purchase discount, and which represented 2.0% of their gross outstanding principal balances.

Heritage Oaks Bancorp | - 12 -

Note 2.  Business Combination - continued

Goodwill of $13.3 million arising from the acquisition is largely attributable to synergies and cost savings resulting from combining the operations of the companies.  As this transaction was structured as a tax-free exchange, the goodwill will not be deductible for tax purposes.

The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate more accurate or appropriate values for the assets acquired and liabilities assumed, which may be reflective of conditions or events that existed at the acquisition date.  The fair value of $280.7 million of loans and leases receivable, $15.9 million of premises and equipment (including $3.5 million of premises and equipment held for sale), $11.9 million of income tax attributes related to the purchase accounting adjustments and MISN’s legacy deferred tax assets are subject to change pending receipt of the final valuations and analyses.  The fair value of premises and equipment held for sale may be adjusted upon final sale or revised appraised values.  Deferred tax assets may be adjusted for purchase accounting adjustments on open areas such as loans and leases or premises and equipment held for sale,(See also Note 6. Income Taxes).  The closing equity balance for MISN is also subject to adjustments for invoices received after the close of the transaction that were attributable to MISN’s operations through February 28, 2014.  Such adjustments would be reflected as additional liabilities as of the acquisition date, with a corresponding increase to goodwill.

The following table summarizes the consideration paid for MISN:

	February 28, 2014
	(dollars in thousands)
Consideration paid
Cash payments for MISN shares outstanding	$	2,554
Cash payments for MISN warrants	5,766
Cash payments for MISN options	387
Shares issued, @ $7.99 per share	60,255
Total consideration	$	68,962

The following table presents unaudited pro forma information as if the MISN acquisition had occurred on January 1, 2013, which includes the pre-acquisition period for MISN.  The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits and borrowings acquired, and the related income tax effects.  The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(dollars in thousands except per share data)
Net interest income	$	15,395	$	14,989	$	45,761	$	44,198
Provision for loan and lease losses	-		210		-		310
Noninterest income	2,982		2,295		7,835		12,499
Noninterest expense	13,384		12,898		46,844		40,127
Income before income taxes	4,993		4,176		6,752		16,260
Income tax expense	1,682		1,528		2,315		6,210
Net income	$	3,311	$	2,648	$	4,437	$	10,050
Earnings Per Common Share
Basic	$	0.10	$	0.10	$	0.13	$	0.30
Diluted	$	0.10	$	0.10	$	0.13	$	0.29

Heritage Oaks Bancorp | - 13 -

Note 3.  Fair Value of Assets and Liabilities

Recurring Basis

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Obligations of U.S. government agencies	$	16,891	$	-	$	16,891	$	-
Mortgage backed securities
U.S government sponsored entities and agencies	241,130		-		241,130		-
Non-agency	11,936		-		11,936		-
State and municipal securities	80,687		-		80,687		-
Asset backed securities	31,793		-		31,793		-
Total assets measured on a recurring basis	$	382,437	$	-	$	382,437	$	-

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Obligations of U.S. government agencies	$	6,208	$	-	$	6,208	$	-
Mortgage backed securities
U.S government sponsored entities and agencies	182,931		-		182,931		-
Non-agency	11,032		-		11,032		-
State and municipal securities	50,030		-		50,030		-
Asset backed securities	26,594		-		26,594		-
Total assets measured on a recurring basis	$	276,795	$	-	$	276,795	$	-

Non-recurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at a fair value that was below cost.   Impaired loans disclosed in the table below represent loans for which fair value was determined using the fair market value of the collateral, less estimated costs to sell.   The discounted cash flow method as prescribed by ASC 310, Receivables, is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate, which is not a market rate. Therefore, impaired loans disclosed in the table below do not include loans where fair value was measured using a discounted cash flow approach.

Heritage Oaks Bancorp | - 14 -

Note 3.  Fair Value of Assets and Liabilities - continued

The following tables provide a summary of assets the Company measures at fair value on a non-recurring basis:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable		Year To
	Assets At		Identical Assets		Inputs		Inputs		Date Losses/
	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Recoveries)
	(dollars in thousands)
Assets
Impaired loans
Commercial real estate	$	1,325	$	-	$	-	$	1,325	$	1,026
Land	4,170		-		-		4,170		(793		)
Total assets measured on a non-recurring basis	$	5,495	$	-	$	-	$	5,495	$	233

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable		Year To
	Assets At		Identical Assets		Inputs		Inputs		Date Losses/
	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Recoveries)
	(dollars in thousands)
Assets
Impaired loans
Land	$	4,170	$	-	$	-	$	4,170	$	(1,270	)
Total assets measured on a non-recurring basis	$	4,170	$	-	$	-	$	4,170	$	(1,270	)

Premises and equipment held for sale valued at $1.7 million and impaired commercial real estate loans valued at $1.7 million were transferred into non-recurring Level 3 assets during the nine months ended September 30, 2014.  Transfers out of non-recurring level three assets during the nine months ended September 30, 2014 totaled $2.1 million, and related to the sale of premises and equipment held for sale.

There were no transfers into or out of Level 1 or Level 2 assets reported at fair value on either a recurring or non-recurring basis during the nine months ended September 30, 2014 and 2013.

Heritage Oaks Bancorp | - 15 -

Note 3.  Fair Value of Assets and Liabilities - continued

Fair Value of Financial Instruments

The following table provides a summary of the estimated fair value of financial instruments:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
	(dollars in thousands)
Assets
Cash and cash equivalents	$	50,827	$	50,827	$	-	$	-	$	50,827
Investment securities available for sale	382,437		-		382,437		-		382,437
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,150,162		-		-		1,155,003		1,155,003
Loans held for sale	5,977		-		5,977		-		5,977
Accrued interest receivable	5,376		-		1,735		3,641		5,376
Liabilities
Non-interest bearing deposits	469,435		469,435		-		-		469,435
Interest bearing deposits	953,499		-		956,269		-		956,269
Federal Home Loan Bank advances	75,562		-		75,586		-		75,586
Junior subordinated debentures	13,179		-		-		9,867		9,867
Accrued interest payable	426		-		426		-		426

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
	(dollars in thousands)
Assets
Cash and cash equivalents	$	26,238	$	26,238	$	-	$	-	$	26,238
Investment securities available for sale	276,795		-		276,795		-		276,795
Federal Home Loan Bank stock	4,739		-		-		-		N/A
Loans receivable, net of deferred fees and costs	826,203		-		-		827,105		827,105
Loans held for sale	2,386		-		2,386		-		2,386
Accrued interest receivable	4,027		-		1,397		2,630		4,027
Liabilities
Non interest-bearing deposits	291,856		291,856		-		-		291,856
Interest-bearing deposits	682,039		-		684,345		-		684,345
Federal Home Loan Bank advances	88,500		-		86,990		-		86,990
Junior subordinated debentures	8,248		-		-		7,595		7,595
Accrued interest payable	239		-		239		-		239

Information on off-balance-sheet instruments follows:

	September 30, 2014				December 31, 2013
	Notional		Cost to Cede		Notional		Cost to Cede
	Amount		or Assume		Amount		or Assume
	(dollars in thousands)
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	254,590	$	2,546	$	198,481	$	1,985

Heritage Oaks Bancorp | - 16 -

Note 4.  Investment Securities

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are reported as available for sale:

	September 30, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	16,923	$	87	$	(119	)	$	16,891
Mortgage backed securities
U.S. government sponsored entities and agencies	242,947		989		(2,806		)	241,130
Non-agency	11,913		41		(18		)	11,936
State and municipal securities	78,829		2,033		(175		)	80,687
Asset backed securities	31,988		-		(195		)	31,793
Total available for sale securities	$	382,600	$	3,150	$	(3,313	)	$	382,437

	December 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	6,243	$	11	$	(46	)	$	6,208
Mortgage backed securities
U.S. government sponsored entities and agencies	186,981		342		(4,392		)	182,931
Non-agency	10,924		156		(48		)	11,032
State and municipal securities	51,532		269		(1,771		)	50,030
Asset backed securities	26,935		-		(341		)	26,594
Total available for sale securities	$	282,615	$	778	$	(6,598	)	$	276,795

The following table provides a summary of investment securities in an unrealized loss position:

	September 30, 2014
	Less Than Twelve Months				Twelve Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
	(dollars in thousands)
Obligations of U.S. government agencies	$	3,780	$	(58)	$	2,639	$	(61)	$	6,419	$	(119	)
Mortgage backed securities
U.S. government sponsored entities and agencies	82,816		(977)		59,407		(1,829)		142,223		(2,806		)
Non-agency	3,001		(8)		501		(10)		3,502		(18		)
State and municipal securities	9,344		(64)		10,861		(111)		20,205		(175		)
Asset backed securities	5,558		(29)		17,364		(166)		22,922		(195		)
Total	$	104,499	$	(1,136)	$	90,772	$	(2,177)	$	195,271	$	(3,313	)

	December 31, 2013
	Less Than Twelve Months				Twelve Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
	(dollars in thousands)
Obligations of U.S. government agencies	$	2,773	$	(45)	$	40	$	(1)	$	2,813	$	(46	)
Mortgage backed securities
U.S. government sponsored entities and agencies	118,554		(3,140)		18,863		(1,252)		137,417		(4,392		)
Non-agency	3,210		(48)		-		-		3,210		(48		)
State and municipal securities	32,967		(1,675)		2,458		(96)		35,425		(1,771		)
Asset backed securities	7,978		(246)		9,747		(95)		17,725		(341		)
Total	$	165,482	$	(5,154)	$	31,108	$	(1,444)	$	196,590	$	(6,598	)

Heritage Oaks Bancorp | - 17 -

Note 4.  Investment Securities - continued

A total of 83 securities were in an unrealized loss position as of September 30, 2014, and 96 as of December 31, 2013.  As of September 30, 2014, the Company believes that unrealized losses on its investment securities are not attributable to credit quality, but rather fluctuations in market prices for these investments.  In the case of the agency mortgage related securities, they have contractual cash flows guaranteed by agencies of the U.S. Government.  While the Company’s investment security holdings have contractual maturity dates that range from 1 to 40 years, they have a much shorter effective duration dependent on the instrument’s priority in the overall cash flow structure and the characteristics of the loans underlying the investment security. Management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery in value.  As of September 30, 2014, the Company does not believe unrealized losses related to any of its securities are other than temporary.

Other than Temporary Impairment (“OTTI”)

At the end of the first quarter of 2013, the Company sold two private label mortgage backed securities in which OTTI losses had been recognized, as part of it’s repositioning of the longer duration portion of the investment portfolio, thereby eliminating all securities in the portfolio for which OTTI losses had been incurred.  As of September 30, 2014, and December 31, 2013, there were no securities which management deemed to be other than temporarily impaired.

Sales of Available for Sale Securities

The proceeds from the sales and calls of securities and the associated gains and losses are listed below:

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2014			2013		2014			2013
	(dollars in thousands)
Proceeds	$	19,991		$	38,930	$	98,379		$	144,571
Gross gains	457			970		814			5,349
Gross losses	(7		)	(626)		(265		)	(1,414		)

The income tax expense related to net realized gains on the sale of securities was $189 thousand and $145 thousand for the three months ended September 30, 2014 and 2013, respectively, and $231 thousand and $1.7 million for the nine months ended September 30, 2014 and 2013, respectively.

Maturities of Available for Sale Securities

The amortized cost and fair value maturities of available for sale investment securities at September 30, 2014 are shown below. The table reflects the expected lives of mortgage backed securities, based on the Company’s historical prepayment experience, because borrowers may have the right to prepay obligations without prepayment penalties. Contractual maturities are reflected for all other security types. Actual maturities may differ from contractual maturities because the individual borrowers who are party to the loans underlying these securities have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2014
	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
	(dollars in thousands)
Obligations of U.S. government agencies	$	117	$	476	$	14,503	$	1,795	$	16,891
Mortgage backed securities
U.S. government sponsored entities and agencies	36,510		96,446		56,776		51,398		241,130
Non-agency	731		10,704		501		-		11,936
State and municipal securities	975		14,473		60,808		4,431		80,687
Asset backed securities	-		2,534		11,794		17,465		31,793
Total available for sale securities	$	38,333	$	124,633	$	144,382	$	75,089	$	382,437
Amortized cost	$	38,459	$	124,890	$	143,476	$	75,775	$	382,600
Weighted average yield	1.92%		2.00%		2.52%		2.76%		2.34%

Heritage Oaks Bancorp | - 18 -

Note 4.  Investment Securities - continued

Securities having an amortized cost and a fair value of $70.7 million and $70.9 million, respectively, at September 30, 2014, and $41.9 million and $40.4 million, respectively, at December 31, 2013 were pledged to secure public deposits. As of September 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of total securities.

The following table summarizes earnings on both taxable and tax-exempt investment securities:

	For The Three Months Ended				For The Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(dollars in thousands)
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	112	$	33	$	226	$	86
Mortgage backed securities	1,152		847		3,370		2,470
State and municipal securities	38		-		40		5
Corporate debt securities	-		-		6		-
Asset backed securities	99		113		261		350
Non-taxable earnings on investment securities
State and municipal securities	545		354		1,452		1,082
Total	$	1,946	$	1,347	$	5,355	$	3,993

Note 5.  Loans and Allowance for Loan and Lease Losses

The following table provides a summary of outstanding loan balances:

									December 31,
	September 30, 2014								2013
	Non-PCI			PCI		Total Loans			Non-PCI
	Loans			Loans		Receivable			Loans
	(dollars in thousands)
Real Estate Secured
Multi-family residential	$	76,821		$	-	$	76,821		$	31,140
Residential 1 to 4 family	120,500			561		121,061			88,904
Home equity lines of credit	37,886			81		37,967			31,178
Commercial	577,639			4,961		582,600			432,203
Farmland	92,292			1,673		93,965			50,414
Land	23,763			871		24,634			24,523
Construction	17,845			-		17,845			13,699
Total real estate secured	946,746			8,147		954,893			672,061
Commercial
Commercial and industrial	142,076			1,785		143,861			119,121
Agriculture	42,787			1,417		44,204			32,686
Other	20			-		20			38
Total commercial	184,883			3,202		188,085			151,845
Installment loans to individuals	8,198			-		8,198			3,246
Overdrafts	400			-		400			332
Total gross loans held for investment	1,140,227			11,349		1,151,576			827,484
Net deferred loan fees	(1,414		)	-		(1,414		)	(1,281		)
Allowance for loan and lease losses	(16,787		)	-		(16,787		)	(17,859		)
Total net loans held for investment	$	1,122,026		$	11,349	$	1,133,375		$	808,344
Loans held for sale	$	5,977		$	-	$	5,977		$	2,386

Heritage Oaks Bancorp | - 19 -

Note 5.  Loans and Allowance for Loan and Lease Losses - continued

Total net loans in the table above include $280.3 million of loans acquired through the MISN acquisition at fair value on the acquisition date.  $267.5 million of these loans were acquired with no impairment while the remaining $12.8 million were determined to be PCI loans.  Loans held for sale are primarily single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this category are sold within thirty to sixty days.

Under a blanket lien to the Federal Home Loan Bank (“FHLB”), the Bank has pledged $816.6 million in loans to secure a credit facility totaling $417.8 million, of which $75.6 million is outstanding as of September 30, 2014.  Of this credit facility, $11.5 million is available as a line of credit and $340.9 million is available for potential future borrowings.  The Bank also has a collateralized borrowing line with the Federal Reserve Bank secured by $12.3 million of loans as of September 30, 2014.

Concentration of Credit Risk

The Company held loans that were collateralized by various forms of real estate totaling $954.9 million and $672.1 million at September 30, 2014 and December 31, 2013, respectively.  Such loans are generally made to borrowers located in the counties of San Luis Obispo, Santa Barbara and Ventura.  The Company attempts to reduce its concentration of credit risk by making loans which are diversified by product type.  While management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that deterioration in the California real estate market, or the impact of the current California drought on our real estate collateralized loans, would not expose the Company to significantly greater credit risk.

Loans Serviced for Others

Loans serviced for others are not included in the accompanying balance sheets.  The unpaid principal balance of loans serviced for others, exclusive of Small Business Administration (“SBA”) loans, was $46.9 million at September 30, 2014 and $22.6 million at December 31, 2013.

From time to time, the Company also originates SBA loans for sale for which it retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2014 and December 31, 2013, the unpaid principal balance of SBA loans serviced for others totaled $16.1 million and $6.6 million, respectively.  The Company recognized $16 thousand and $43 thousand in gains from the sale of SBA loans during the three and nine months ended September 30, 2014.  Gains on the sale of SBA loans during the three and nine months ended September 30, 2013 totaled $4 thousand and $0.4 million, respectively.

Heritage Oaks Bancorp | - 20 -

Note 5.  Loans and Allowance for Loan and Lease Losses - continued

Impaired Loans

The following tables provide a summary of the Company’s recorded investment in non-PCI and PCI impaired loans as of and for the three and nine months ended September 30, 2014:

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	217	$	354	$	-	$	222	$	6	$	496	$	16
Home equity lines of credit	100		183		-		100		-		100		-
Commercial	2,014		4,423		-		2,269		6		1,862		19
Farmland	289		288		-		292		2		294		12
Construction	380		375		-		380		5		380		5
Land	460		1,152		-		935		2		1,170		32
Commercial
Commercial and industrial	2,316		3,480		-		3,152		51		3,616		111
Agriculture	722		761		-		724		2		741		2
Installment loans to individuals	117		205		-		118		1		145		3
Total	6,615		11,221		-		8,192		75		8,804		200
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-		-		-		-		-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	331		331		58		331		-		331		-
Farmland	-		-		-		-		-		-		-
Construction	-		-		-		-		-		-		-
Land	6,087		9,755		1,764		6,380		16		6,602		58
Commercial			-		-		-		-		-		-
Commercial and industrial	1,887		1,809		260		1,916		41		2,013		90
Agriculture	-		-		-		-		-		-		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	8,305		11,895		2,082		8,627		57		8,946		148
Total non-PCI impaired loans	$	14,920	$	23,116	$	2,082	$	16,819	$	132	$	17,750	$	348

(1)Recorded investment includes net deferred loan fees and costs attributable to these loans.

Heritage Oaks Bancorp | - 21 -

Note 5.  Loans and Allowance for Loan and Lease Losses – continued

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	564	$	888	$	-	$	565	$	13	$	585	$	29
Home equity lines of credit	82		98		-		81		2		81		4
Commercial	4,981		6,903		-		4,993		130		5,160		327
Farmland	1,681		2,044		-		1,699		20		1,706		64
Land	874		1,019		-		923		21		943		47
Commercial
Commercial and industrial	1,790		2,322		-		2,081		185		2,236		263
Agriculture	1,425		1,492		-		1,301		34		1,291		62
Installment loans to individuals	-		-		-		-		-		-		-
Total	11,397		14,766		-		11,643		405		12,002		796
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-		-		-		-		-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	-		-		-		-		-		-		-
Farmland	-		-		-		-		-		-		-
Land	-		-		-		-		-		-		-
Commercial
Commercial and industrial	-		-		-		-		-		-		-
Agriculture	-		-		-		-		-		-		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	-		-		-		-		-		-		-
Total PCI loans	$	11,397	$	14,766	$	-	$	11,643	$	405	$	12,002	$	796

(1)Recorded investment includes accrued interest receivable for PCI impaired loans.

Heritage Oaks Bancorp | - 22 -

Note 5.  Loans and Allowance for Loan and Lease Losses - continued

The following table provides a summary of the Company’s recorded investment in non-PCI impaired loans as of and for the three and nine months ended September 30, 2013.  The Company did not have any PCI loans during 2013.

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2013						September 30, 2013				September 30, 2013
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	703	$	735	$	-	$	-	$	-	$	269	$	-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	552		811		-		2		-		90		-
Land	1,013		1,367		-		852		-		724		-
Commercial
Commercial and industrial	1,208		1,546		-		1,041		-		1,314		-
Agriculture	745		779		-		1,022		-		937		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	4,221		5,238		-		2,917		-		3,334		-
With related allowance
Real Estate Secured
Residential 1 to 4 family	109		230		17		339		-		190		-
Commercial	642		1,114		91		26		-		21		-
Land	7,050		10,726		3,854		112		4		116		4
Commercial
Commercial and industrial	3,463		3,650		2,826		3,430		8		2,969		11
Agriculture	65		69		27		41		-		29		-
Installment loans to individuals	26		71		10		7,116		-		6,573		-
Total	11,355		15,860		6,825		11,064		12		9,898		15
Total non-PCI impaired loans	$	15,576	$	21,098	$	6,825	$	13,981	$	12	$	13,232	$	15

(1)Recorded investment includes net deferred loan fees and costs attributable to these loans.

Heritage Oaks Bancorp | - 23 -

Note 5.  Loans and Allowance for Loan and Lease Losses - continued

The following table provides a summary of the Company’s recorded investment in non-PCI impaired loans as of December 31, 2013.  The Company did not have any PCI loans during 2013.

	December 31, 2013
			Unpaid		Specific
	Recorded		Principal		Allowance for
	Investment (1)		Balance		Impaired Loans
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	944	$	1,102	$	-
Home equity lines of credit	-		-		-
Commercial	901		1,646		-
Farmland	-		-		-
Land	1,221		1,948		-
Commercial
Commercial and industrial	1,857		2,241		-
Agriculture	789		824		-
Installment loans to individuals	118		190		-
Total	5,830		7,951		-
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-
Home equity lines of credit	-		-		-
Commercial	-		-		-
Farmland	-		-		-
Land	6,706		10,158		2,531
Commercial
Commercial and industrial	3,480		3,602		623
Agriculture	-		-		-
Installment loans to individuals	-		-		-
Total	10,186		13,760		3,154
Total non-PCI impaired loans	$	16,016	$	21,711	$	3,154

(1)Recorded investment includes net deferred loan fees and costs attributable to these loans.

The Company did not record income from the receipt of cash payments related to non-accruing loans during the three and nine months ended September 30, 2014 and 2013. Interest income recognized on impaired loans in the tables above, if any, represents interest the Company recognized on accruing troubled debt restructurings. Because loans identified as impaired have unique risk characteristics, the Company has determined the related valuation allowances for such loans on a loan-by-loan basis.

Heritage Oaks Bancorp | - 24 -

Note 5.  Loans and Allowance for Loan and Lease Losses - continued

Troubled Debt Restructurings (“TDR”)

The majority of the Bank’s TDRs were granted concessions regarding interest rates, payment structure and/or maturity.  Modifications for the three and nine months ended September 30, 2014, and 2013 include a combination of partial charge-offs of principal along with extensions of the maturity date at the loan’s original interest rate, which was lower than the current market rate for new debt with similar risk.  The maturity date extensions granted were for periods ranging from 6 months to 10 years.  As of September 30, 2014, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.

The following table provides a summary of loans that were classified as TDRs as of the dates indicated below:

	September 30, 2014						December 31, 2013
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Residential 1 to 4 family	$	128	$	89	$	217	$	499	$	109	$	608
Commercial	370		83		453		225		136		361
Farmland	289		-		289		-		-		-
Construction	380		-		380		-		-		-
Land	1,320		5,103		6,423		2,010		5,883		7,893
Commercial
Commercial and industrial	2,426		1,398		3,824		3,119		903		4,022
Agriculture	36		-		36		-		45		45
Installment loans to individuals	70		-		70		-		-		-
Total non-PCI loans	5,019		6,673		11,692		5,853		7,076		12,929
PCI loans (1)
Real estate secured
Commercial	226		-		226		-		-		-
Commercial
Commercial and industrial	-		118		118		-		-		-
Total PCI loans	226		118		344		-		-		-
Total TDRs	$	5,245	$	6,791	$	12,036	$	5,853	$	7,076	$	12,929

(1)The Company did not have any PCI loans at December 31, 2013.

Heritage Oaks Bancorp | - 25 -

Note 5.  Loans and Allowance for Loan and Lease Losses – continued

The following tables summarize loan modifications which resulted in TDRs for non-PCI and PCI loans during the periods presented below:

	For the Three Months Ended September 30, 2014					For the Nine Months Ended September 30, 2014
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial real estate	-	$	-	$	-	1	$	166	$	166
Farmland
Land	1	168		168		3	444		444
Construction	1	367		367		1	367		367
Commercial
Commercial and industrial	4	377		377		14	1,604		1,604
Agriculture	-	-		-		1	662		662
Other
Installment loans to individuals	-	-		-		1	73		73
PCI Loans
Real Estate Secured
Commercial real estate	-	-		-		1	230		230
Commercial
Commercial and industrial	-	-		-		2	138		138
Total	6	$	912	$	912	24	$	3,684	$	3,684

	For the Three Months Ended September 30, 2013					For the Nine Months Ended September 30, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	1	$	227	$	227	1	$	227	$	227
Commercial
Commercial and industrial	-	-		-		3	91		91
Agriculture	1	49		49		2	67		67
Total	2	$	276	$	276	6	$	385	$	385

The following tables summarize loans that were modified as troubled debt restructurings within the twelve months prior to the balance sheet date, and for which there was a payment default during the periods presented below:

	For the Three Months Ended September 30, 2014			For the Nine Months Ended September 30, 2014
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	30
Total	-	$	-	1	$	30

Heritage Oaks Bancorp | - 26 -

Note 5.  Loans and Allowance for Loan and Lease Losses - continued

	For the Three Months Ended September 30, 2013			For the Nine Months Ended September 30, 2013
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	-	$	-	1	$	97
Commercial
Commercial and industrial	-	-		3	843
Agriculture	1	18		1	18
Total	1	$	18	5	$	958

Credit Quality

The following tables stratify loans held for investment by the Company’s internal risk grading system:

	September 30, 2014
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	75,627	$	-	$	1,194	$	-	$	76,821
Residential 1 to 4 family	119,613		202		685		-		120,500
Home equity lines of credit	37,539		-		347		-		37,886
Commercial	549,595		11,890		16,154		-		577,639
Farmland	88,030		2,680		1,582		-		92,292
Land	17,197		-		6,566		-		23,763
Construction	17,467		378		-		-		17,845
Commercial
Commercial and industrial	133,940		995		6,984		157		142,076
Agriculture	41,609		456		722		-		42,787
Other	20		-		-		-		20
Installment loans to individuals	8,090		-		108		-		8,198
Overdrafts	400		-		-		-		400
Total non-PCI loans	1,089,127		16,601		34,342		157		1,140,227
PCI loans
Real estate secured
Multi-family residential	-		-		-		-		-
Residential 1 to 4 family	-		-		561		-		561
Home equity lines of credit	-		-		81		-		81
Commercial	127		-		4,834		-		4,961
Farmland	-		-		1,673		-		1,673
Land	310		-		561		-		871
Construction	-		-		-		-		-
Commercial
Commercial and industrial	41		102		1,546		96		1,785
Agriculture	-		-		1,417		-		1,417
Other	-		-		-		-		-
Installment loans to individuals	-		-		-		-		-
Total PCI loans	478		102		10,673		96		11,349
Total loans held for investment	$	1,089,605	$	16,703	$	45,015	$	253	$	1,151,576

Heritage Oaks Bancorp | - 27 -

Note 5.  Loans and Allowance for Loan and Lease Losses – continued

	December 31, 2013
	Credit Risk Grades								Total
			Special						Non-PCI
	Pass		Mention		Substandard		Doubtful		Loans
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	30,560	$	-	$	580	$	-	$	31,140
Residential 1 to 4 family	87,350		490		1,064		-		88,904
Home equity lines of credit	31,021		-		157		-		31,178
Commercial	414,058		3,574		14,571		-		432,203
Farmland	47,988		975		1,451		-		50,414
Land	15,244		862		8,417		-		24,523
Construction	13,699		-		-		-		13,699
Commercial
Commercial and industrial	105,991		5,276		7,854		-		119,121
Agriculture	31,279		196		1,211		-		32,686
Other	38		-		-		-		38
Installment loans to individuals	3,050		10		186		-		3,246
Overdrafts	332		-		-		-		332
Total loans held for investment	$	780,610	$	11,383	$	35,491	$	-	$	827,484

The Company did not have any PCI loans as of December 31, 2013.

Heritage Oaks Bancorp | - 28 -

Note 5.  Loans and Allowance for Loan and Lease Losses – continued

Aging of Loans Held for Investment

The following tables summarize the aging of loans held for investment as of the dates indicated below:

	September 30, 2014
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Multi-family residential	$	76,821	$	-	$	-	$	-	$	-	$	76,821
Residential 1 to 4 family	120,403		-		-		-		97		120,500
Home equity lines of credit	37,786		-		-		-		100		37,886
Commercial	575,701		-		-		-		1,938		577,639
Farmland	92,292		-		-		-		-		92,292
Land	18,537		-		-		-		5,226		23,763
Construction	17,845		-		-		-		-		17,845
Commercial
Commercial and industrial	140,254		36		-		-		1,786		142,076
Agriculture	42,102		-		-		-		685		42,787
Other	20		-		-		-		-		20
Installment loans to individuals	8,152		-		-		-		46		8,198
Overdrafts	400		-		-		-		-		400
Total non-PCI loans	1,130,313		36		-		-		9,878		1,140,227
PCI loans
Real estate secured
Multi-family residential	-		-		-		-		-		-
Residential 1 to 4 family	561		-		-		-		-		561
Home equity lines of credit	81		-		-		-		-		81
Commercial	4,961		-		-		-		-		4,961
Farmland	1,673		-		-		-		-		1,673
Land	871		-		-		-		-		871
Construction	-		-		-		-		-		-
Commercial
Commercial and industrial	1,389		-		-		-		396		1,785
Agriculture	1,417		-		-		-		-		1,417
Total PCI loans	10,953		-		-		-		396		11,349
Total loans held for investment	$	1,141,266	$	36	$	-	$	-	$	10,274	$	1,151,576
	December 31, 2013
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	31,140	$	-	$	-	$	-	$	-	$	31,140
Residential 1 to 4 family	88,455		-		-		-		449		88,904
Home equity lines of credit	31,178		-		-		-		-		31,178
Commercial	431,531		-		-		-		672		432,203
Farmland	50,414		-		-		-		-		50,414
Land	18,613		-		-		-		5,910		24,523
Construction	13,699		-		-		-		-		13,699
Commercial
Commercial and industrial	116,841		100		-		-		2,180		119,121
Agriculture	31,897		-		-		-		789		32,686
Other	38		-		-		-		-		38
Installment loans to individuals	3,127		-		2		-		117		3,246
Overdrafts	332		-		-		-		-		332
Total loans held for investment	$	817,265	$	100	$	2	$	-	$	10,117	$	827,484

The Company did not have any PCI loans as of December 31, 2013.

Heritage Oaks Bancorp | - 29 -

Note 5.  Loans and Allowance for Loan and Lease Losses – continued

Purchased Credit Impaired Loans

As part of the merger described in Note 2. Business Combination, the Company acquired on February 28, 2014, a portfolio of loans, some of which have shown evidence of credit deterioration since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount and unpaid principal balance of those loans are as follows:

	September 30, 2014
	Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	$	888	$	561
Home equity lines of credit	98		81
Commercial	6,903		4,961
Farmland	2,044		1,673
Land	1,019		871
Total real estate secured	10,952		8,147
Commercial
Commercial and industrial	2,322		1,785
Agriculture	1,492		1,417
Total commercial	3,814		3,202
Total PCI loans	$	14,766	$	11,349

No ALLL was recorded on purchased credit impaired loans as of September 30, 2014.  Purchased credit impaired loans acquired during the nine months ended September 30, 2014 for which it was probable at acquisition that not all contractually required payments would be collected are as follows:

	February 28, 2014
	(dollars in thousands)
Contractually required payments including interest	$	19,827
Nonaccretable difference	(2,320		)
Cash flows expected to be collected	17,507
Accretable difference	(4,673		)
Fair value at acquisition	$	12,834

The following table summarizes the accretable yield, or income expected to be collected for PCI loans:

	Nine Months Ended
	September 30, 2014
	(dollars in thousands)
Balance at January 1, 2014	$	-
New loans purchased	4,673
Accretion of income	(796		)
Reclassifications from nonaccretable difference	619
Balance at September 30, 2014	$	4,496

Discount accretion on PCI loans was $392 thousand and $796 thousand for the three and nine months ended September 30, 2014, respectively.

Heritage Oaks Bancorp | - 30 -

Note 5.  Loans and Allowance for Loan and Lease Losses – continued

Allowance for Loan and Lease Losses

The following table summarizes the activity in the allowance for loan and lease losses by portfolio segment for the periods presented below:

	For the Three Months Ended September 30, 2014
	Balance June 30, 2014		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2014
	(dollars in thousands)
Land	$	2,944	$	-		$	8		$	(727	)	$	2,225
Other real estate secured	8,857		(10		)	(19		)	808			9,636
Commercial	4,436		-			174			(296		)	4,314
Installment loans to individuals	73		(2		)	1			2			74
All other loans	27		-			-			8			35
Unallocated	298		-			-			205			503
Total	$	16,635	$	(12	)	$	164		$	-		$	16,787
	For the Nine Months Ended September 30, 2014
	Balance December 31, 2013		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2014
	(dollars in thousands)
Land	$	3,402	$	-		$	30		$	(1,207	)	$	2,225
Other real estate secured	9,283		(1,119		)	37			1,435			9,636
Commercial	4,781		(650		)	628			(445		)	4,314
Installment loans to individuals	99		(8		)	10			(27		)	74
All other loans	32		-			-			3			35
Unallocated	262		-			-			241			503
Total	$	17,859	$	(1,777	)	$	705		$	-		$	16,787
	For the Three Months Ended September 30, 2013
	Balance June 30, 2013		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2013
	(dollars in thousands)
Land	$	4,431	$	-		$	11		$	189		$	4,631
Other real estate secured	6,663		(41		)	20			(112		)	6,530
Commercial	6,584		(736		)	475			(197		)	6,126
Installment loans to individuals	100		(207		)	12			183			88
All other loans	31		-			-			1			32
Unallocated	125		-			-			(65		)	60
Total	$	17,934	$	(984	)	$	518		$	-		$	17,468
	For the Nine Months Ended September 30, 2013
	Balance December 31, 2012		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2013
	(dollars in thousands)
Land	$	4,670	$	(34	)	$	45		$	(50	)	$	4,631
Other real estate secured	7,192		(300		)	145			(507		)	6,530
Commercial	6,154		(1,137		)	947			162			6,126
Installment loans to individuals	64		(380		)	64			340			88
All other loans	38		-			-			(6		)	32
Unallocated	-		-			-			60			60
Total	$	18,118	$	(1,851	)	$	1,201		$	-		$	17,468

Heritage Oaks Bancorp | - 31 -

Note 5.  Loans and Allowance for Loan and Lease Losses – continued

The following tables disaggregate the allowance for loan and lease losses and the recorded investment in loans by impairment methodology as of the dates presented below:

	September 30, 2014
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Land	$	1,764	$	461	$	-	$	6,547	$	17,213	$	874
Other real estate secured	58		9,578		-		3,331		919,620		7,308
Commercial	260		4,054		-		4,925		179,945		3,215
Installment loans to individuals	-		74		-		117		8,081		-
All other loans	-		35		-		-		400		-
Unallocated	-		503		-		-		-		-
Total	$	2,082	$	14,705	$	-	$	14,920	$	1,125,259	$	11,397
	December 31, 2013
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Land	$	2,532	$	870	$	-	$	7,696	$	16,827	$	-
Other real estate secured	-		9,283		-		1,462		646,076		-
Commercial	623		4,158		-		5,291		146,554		-
Installment loans to individuals	-		99		-		-		3,246		-
All other loans	-		32		-		-		332		-
Unallocated	-		262		-		-		-		-
Total	$	3,155	$	14,704	$	-	$	14,449	$	813,035	$	-

At September 30, 2014, total gross loans of $1.2 billion in the table above include $244.9 million of loans acquired through the MISN acquisition (at fair value on the acquisition date).  The loans acquired through the MISN acquisition carry no related ALLL at September 30, 2014, as the remaining un-accreted purchase discounts associated with these loans has been deemed sufficient to absorb probable credit losses associated within the acquired MISN portfolio.  At September 30, 2014, legacy Heritage Oaks loans totaled $906.6 million.  The ALLL as a percentage of legacy Heritage Oaks loans was 1.9% at September 30, 2014.

Note 6.  Income Taxes

As of September 30, 2014, the Company’s deferred tax assets total approximately $27.9 million, of which $11.9 million was due to the MISN merger as described in Note 2. Business Combination.  As of December 31, 2013, the Company’s deferred tax assets totaled $21.6 million.  The Company is subject to income taxation by both federal and state taxing authorities.

Income tax returns for the years ended December 31, 2013, 2012, and 2011, are open to audit by federal and state taxing authorities, and 2010 remains open to audit by the California Franchise Tax Board.  The Company does not have any uncertain income tax positions and has not accrued for any interest or penalties as of September 30, 2014 and December 31, 2013.

Management assessed the impact of the MISN transaction for limitations under I.R.C. Section 382 and determined that, given the assumption that the Company generates sufficient future taxable income to utilize NOLs, no loss of NOL utilization would result from the estimated annual I.R.C. Section 382 base limitation resulting from the transaction. Furthermore, due to the fact that MISN was in a net unrealized built-in gain position (“NUBIG”) the Company’s annual I.R.C. section 382 limitation will likely increase over the next five years for realized built-in gains (“RBIG”).

Heritage Oaks Bancorp | - 32 -

Note 7.  Goodwill and Other Intangible Assets

At September 30, 2014 and December 31, 2013 the balance of goodwill was $24.5 million and $11.2 million, respectively.  The change in the balance of goodwill in 2014 relates to the MISN acquisition, as more fully discussed in Note 2. Business Combination.

Core deposit intangible assets (“CDI”) are attributable to the acquisition of core deposit balances, including those acquired in the MISN acquisition.  These assets are subject to amortization.  At September 30, 2014 and December 31, 2013 the balance of CDI was $5.6 million, and $1.3 million, respectively.  Amortization of CDI for the three and nine months ended September 30, 2014 totaled $0.3 million, and $0.8 million, respectively.  Amortization for the three and nine months ended September 30, 2013 totaled $0.1 million, and $0.3 million, respectively.

The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount of CDI as of September 30, 2014, and provides an estimate for future amortization for 2014 and the next five years:

	September 30, 2014
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(3,617)	$	5,644

	September 30, 2014
	Beginning		Acquired		Estimated			Projected Ending
	Balance		CDI’s		Amortization			Balance
	(dollars in thousands)
Period
Year 2014	$	1,344	$	5,060	$	(1,056	)	$	5,348
Year 2015	5,348				(1,049		)	4,299
Year 2016	4,299				(944		)	3,355
Year 2017	3,355				(588		)	2,767
Year 2018	2,767				(549		)	2,218
Year 2019	2,218				(522		)	1,696

Note 8.  Share-Based Compensation Plans

As of September 30, 2014, the Company had two share-based employee compensation plans, which are more fully described in Note 14, Share-Based Compensation Plans, of the consolidated financial statements in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013.  These plans include the “1997 Stock Option Plan” and the “2005 Equity Based Compensation Plan.”

The following table provides a summary of the expenses the Company has recognized related to share-based compensation for the periods indicated below:

	For the Three Months Ended				For the Nine Months Ended
	September  30,				September  30,
	2014		2013		2014		2013
	(dollars in thousands)
Share-based compensation expense:
Stock options	$	109	$	68	$	370	$	183
Restricted stock	148		80		353		208
Total expense	$	257	$	148	$	723	$	391
Unrecognized compensation expense:
Stock options	$	1,156	$	762
Restricted stock	1,067		775
Total unrecognized expense	$	2,223	$	1,537

Heritage Oaks Bancorp | - 33 -

Note 8.  Share-Based Compensation Plans - continued

At September 30, 2014 unrecognized compensation expense related to non-vested stock options and restricted stock awards is expected to be recognized over weighted average periods of 2.9 years and 2.4 years, respectively.

The following table provides a summary of activity related to options granted, exercised, and forfeited:

	Options Outstanding				Options
	Number		Weighted Average		Available for
	of Shares		Exercise Price		Grant
Balance, December 31, 2013	562,257		$	6.34	1,593,616
Granted	312,582		7.41
Forfeited	(68,082	)	8.03
Expired	(2,604	)	10.12
Exercised	(44,217	)	3.60
Balance, September 30, 2014	759,936		$	6.78	2,021,355

The Company grants restricted stock periodically as a part of the 2005 Equity Based Compensation Plan for the benefit of employees.  Restricted stock issued typically vests ratably over a period of three to five years depending on the specific terms of the grant.  Restricted stock grants may be subject to the achievement of certain performance goals.  Compensation costs related to restricted stock awards are charged to earnings (included in salaries and employee benefits) over the vesting period of those awards.  The fair value of performance-based grants is initially based on the assumption that performance goals will be achieved.  If such performance conditions are not met, no compensation cost is recognized and previously-recognized compensation cost is reversed. The following table provides a summary of activity related to restricted stock granted, vested and forfeited:

	Number of		Average Grant
	Shares		Date Fair Value
Balance December 31, 2013	195,048		$	4.87
Granted	124,744		7.37
Vested	(32,005	)	6.41
Forfeited	(25,862	)	5.80
Balance September 30, 2014	261,925		$	5.78

Included in the table above are performance-based grants of restricted stock totaling 21,241 shares as of September 30, 2014.

The following table provides a summary of the aggregate intrinsic value of options vested and expected to vest and exercisable:

	September 30, 2014
				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	721,414	$	6.77	7.78	$	731,352
Exercisable at September 30, 2014	310,873	$	6.64	6.00	$	576,739

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, which is subject to change based on the fair market value of the Company’s stock.  The aggregate intrinsic value of options exercised was $174 thousand for the nine months ended September 30, 2014.

Heritage Oaks Bancorp | - 34 -

Note 8.  Share-Based Compensation Plans - continued

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted:

	For the Nine Months Ended
	September  30,
	2014		2013
Expected volatility	49.83%		55.32%
Expected term (years)	5.66		6.00
Dividend yield	0.59%		0.00%
Risk free rate	1.76%		1.55%
Weighted-average grant date fair value	$	3.39	$	3.31

Note 9.  Shareholders’ Equity

Regulatory Capital

The following table sets forth the Company’s and the Bank’s actual regulatory capital ratios:

	Regulatory
	Standard to	September 30, 2014		December 31, 2013
	be Well	Heritage Oaks		Heritage Oaks
Ratio	Capitalized	Bancorp	Bank	Bancorp	Bank
Leverage ratio	5.00%	10.00%	9.77%	10.20%	9.82%
Tier I capital to risk weighted assets	6.00%	12.87%	12.58%	12.91%	12.42%
Total risk based capital to risk weighted assets	10.00%	14.12%	13.83%	14.17%	13.68%

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 March 12, 2010, the Company sold 1,189,538 shares of its Series C Convertible Perpetual Preferred Stock (“Series C Preferred Stock”) for $3.6 million as part of the overall $60 million private placement of securities completed at that time.

Series C Preferred Stock is a non-voting class of stock with a liquidation preference over the Company’s common stock equal to the original conversion per share price of $3.25, plus any accrued but unpaid dividends.  The Series C Preferred Stock will convert to shares of common stock on a one share for one share basis if the original holder of such shares transfers them to an unaffiliated third party or otherwise makes a “Permissible Transfer,” as defined in the terms of the Series C Preferred Stock.  The Series C Preferred Stock will not be redeemable by either the Company or by the holders.  However, the parties could mutually agree to convert or exchange the stock at any time.  Holders of the Series C Preferred Stock do not have any voting rights, including the right to elect any directors, other than the customary limited voting rights with respect to matters significantly and adversely affecting the rights and privileges of the Series C Preferred Stock.  There is no stated dividend rate for shares of Series C Preferred Stock.  However, in the event that a common stock dividend is declared, holders of Series C Preferred Stock are entitled to a per share dividend equivalent to that declared for each common share into which Series C Preferred Stock is then convertible.

Heritage Oaks Bancorp | - 35 -

Note 9.  Shareholders’ Equity - continued

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 on the date the Company made a firm commitment to issue the Series C Preferred Stock.  Therefore, the Series C Preferred Stock has a contingent beneficial conversion feature associated with it.  However, since the conversion of the Series C Preferred Stock remains contingent upon the holder’s transfer of the securities to an unaffiliated third party with no specified date for its conversion to common stock, the Company will record the contingent beneficial conversion feature as an initial discount on Series C Preferred Stock and additional paid in capital, with a concurrent immediate accretion of the established discount and corresponding charge to retained earnings on the date the Series C Preferred Stock converts to common stock.  The amount of the contingent beneficial conversion feature is approximately $0.2 million and will be recorded as described upon the original holder’s transfer of Series C Preferred Stock through a Permissible Transfer.  Such transfer has not occurred as of September 30, 2014.  Series C Preferred Stock holders participate in dividends declared on the Company’s common stock and were paid preferred stock dividends of $36 thousand concurrent with the September 15, 2014 common dividend payment paid to our common shareholders.

On October 29, 2014, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Castle Creek Capital Partners IV, LP “Castle Creek”), the sole holder of the Series C Preferred Stock.  Pursuant to the terms of the Exchange Agreement, the parties have mutually agreed that Castle Creek will exchange 1,189,538 shares of the Series C Preferred Stock for shares of the Company’s common stock on a one-for-one exchange ratio basis.  The consummation of the transactions contemplated by the Exchange Agreement is subject to (i) Castle Creek having received a non-control determination with respect to the Company from the Board of Governors of the Federal Reserve System (or the Federal Reserve Bank of San Francisco) and the California Department of Business Oversight, Division of Financial Institutions, (ii) the receipt of any approvals, non-objections or authorizations of all governmental entities required for the consummation of the transactions contemplated by the Exchange Agreement, and (iii) the satisfaction or waiver of certain other customary closing conditions. The Company agreed in the Exchange Agreement to file, as soon as practicable, and in any event within 30 days of the closing of the transactions contemplated by the Exchange Agreement, a registration statement on Form S-3 under the Securities Act covering the resale by Castle Creek of all of the shares of the Company’s common stock received in the exchange, and to cause such shares to be authorized for listing on The NASDAQ Capital Market.  The Company anticipates that the closing of the transactions contemplated by the Exchange Agreement should occur during the fourth quarter of 2014.

Note 10.  Earnings Per Share

Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted-average number of common and participating preferred shares outstanding for the reporting period, including the Series C Preferred Stock.  In periods when the Company generates a net loss, preferred shares are not included in the calculation of basic loss per share.  Diluted earnings per common share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding over the reporting period, adjusted to include the effect of potentially dilutive common shares.  Potentially dilutive common shares are calculated using the treasury stock method and include incremental shares issuable upon exercise of outstanding stock options, other share-based compensation awards and any other security in which its conversion / exercise may result in the issuance of common stock, such as the warrant the Company issued to the U.S. Treasury during 2009, which was repurchased and cancelled in August 2013.  The computation of diluted earnings per common share excludes the impacts of the assumed exercise or issuance of securities that would have an anti-dilutive effect, which can occur when the Company reports a net loss or when the market price for the Company’s stock falls below the exercise price of equity awards issued by the Company.

Heritage Oaks Bancorp | - 36 -

Note 10.  Earnings Per Share - continued

The following tables set forth the number of shares used in the calculation of both basic and diluted earnings per common share:

	For the Three Months Ended September 30,
	2014			2013
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands except per share data)
Net income	$	3,429		$	2,761
Dividends and accretion on preferred stock	-			(181)
Net income available to common shareholders	$	3,429		$	2,580
Weighted average shares outstanding			33,992,465			26,362,467
Basic earnings per common share	$	0.10		$	0.10
Dilutive effect of share-based compensation awards			153,735			187,101
Weighted average diluted shares outstanding			34,146,200			26,549,568
Diluted earnings per common share	$	0.10		$	0.10
	For the Nine Months Ended September 30,
	2014			2013
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands except per share data)
Net income	$	4,613		$	9,207
Dividends and accretion on preferred stock	-			(898)
Net applicable to common shareholders	$	4,613		$	8,309
Weighted average shares outstanding			32,322,194			26,327,948
Basic earnings per common share	$	0.14		$	0.32
Dilutive effect of share-based compensation awards			197,324			212,156
Weighted average diluted shares outstanding			32,519,518			26,540,104
Diluted earnings per common share	$	0.14		$	0.31

For the three months ended September 30, 2014 and 2013, common stock equivalents totaling approximately 35,000 and 418,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.  For the nine months ended September 30, 2014 and 2013, anti-dilutive common stock equivalents totaling approximately 114,000 shares and 358,000 shares, respectively, were excluded from the diluted earnings per share calculation.

Heritage Oaks Bancorp | - 37 -

Note 11.  Restructuring Activities

In conjunction with the MISN merger described in Note 2. Business Combination, the Company has initiated a restructuring and integration plan which is expected to result in total non-interest expenses of approximately $0.6 million related to integration of MISN systems into the Company’s systems, $2.4 million related to elimination of owned and leased facilities and related fixed assets, $1.7 million related to contract cancellation costs of duplicative systems and services and $3.8 million related to both termination benefits paid to employees displaced as a result of the merger and for retention of key employees through integration-related milestone dates.  During the nine months ended September 30, 2014, $8.1 million of these costs have already been incurred.

Expected costs of this restructuring and integration plan are as follows:

	Total Costs		Amount		Amount			Amount		Cumulative
	Expected To		Incurred		Incurred			Incurred		Incurred
	Be Incurred		Q1 2014		Q2 2014			Q3 2014		YTD 9/30/2014
	(dollars in thousands)
System integration	$	578	$	223	$	(20	)	$	312	$	515
Fixed asset consolidation	2,387		2,350		(268		)	41		2,123
Contract cancellation costs	1,746		1,656		-			90		1,746
Employee termination and retention	3,836		2,641		803			274		3,718
Total restructuring costs	$	8,547	$	6,870	$	515		$	717	$	8,102

The following table summarizes the change in the accrued liability related to the Company’s restructuring and integration plan associated with the MISN acquisition for the periods presented below:

		For the Three		For the Nine
		Months Ended		Months Ended
		September 30,		September 30,
		2014		2014
		(dollars in thousands)
Balance, beginning of period		$	2,896	$	-
New charges (1)		930		8,759
Cash payments		(2,404)		(6,893)
Other adjustments (2)		(213)		(657)
Balance, end of period		$	1,209	$	1,209
(1)	Represents initial charges the Company incurred related to the restructuring and integration plan associated with the MISN acquisition.
(2)	Adjustments related to previously accrued amounts associated with planned staff reduction, contract terminations, and other adjustments.

Note 12.  Commitments and Contingencies

In the normal course of business, various claims and lawsuits are brought by and against the Company.  In the opinion of management and the Company’s general counsel, the disposition of all pending or threatened proceedings will not have a material effect on the Company’s consolidated financial statements.

Commitments to Extend Credit

In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers.  These financial commitments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the statement of financial position.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to a third party.  Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis and the amount of collateral obtained, if deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

Heritage Oaks Bancorp | - 38 -

Note 12.  Commitments and Contingencies - continued

The Bank’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments as is done for loans reflected in the Company’s consolidated financial statements.

As of September 30, 2014 and December 31, 2013, the Company had the following outstanding financial commitments, which contractual amounts represent credit risk:

	September 30,		December 31,
	2014		2013
	(dollars in thousands)
Commitments to extend credit	$	229,464	$	181,445
Standby letters of credit	15,430		17,036
Total commitments and standby letters of credit	$	244,894	$	198,481

Commitments to extend credit and standby letters of credit are made at both fixed and variable rates of interest.  At September 30, 2014 and December 31, 2013, the Company had $39.6 million and $31.6 million in fixed rate commitments, and $205.3 million and $166.9 million in variable rate commitments.

Note 13. Subsequent Events

Consent Order

On October 29, 2014, the Bank entered into a Stipulation to the Issuance of a Consent Order with its bank regulatory agencies, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Business Oversight (“CDBO”), consenting to the issuance of a consent order (“the Consent Order”)  relating to identified deficiencies in the Bank’s centralized Bank Secrecy Act and anti-money laundering compliance program, which is designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the “BSA/AML Requirements”). Per the Consent Order, the Bank must review, update and implement an enhanced risk assessment process based on the 2010 Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) Examination Manual. Some of the areas highlighted in the Consent Order include the requirements to: i) enhance customer due-diligence procedures; ii) improve the enhanced due diligence analysis for high-risk customers; iii) ensure the proper identification and reporting of suspicious activity; iv) address and correct the noted violations of law; v) ensure that there is sufficient and qualified staff; and vi) ensure that all staff are properly trained to carry out the BSA/AML programs. Certain activities, including expansionary activities, that otherwise require regulatory approval will likely be impeded while the Consent Order remains outstanding. Management and the Board have been working diligently to comply with the Consent Order and believe they have allocated sufficient resources to address the corrective actions required by the FDIC and CDBO. Compliance and resolution of the Consent Order will ultimately be determined by the FDIC and CDBO.

CEO Employment Agreement

On October 29, 2014, the Company and the Bank entered into an employment agreement with its President and Chief Executive Officer, Simone Lagomarsino.  The employment agreement was approved by the Board of Directors of the Company and the Bank as it was determined that it was advisable and in the best interest of the Company, the Bank and the Company’s shareholders that Ms. Lagomarsino be provided with an employment agreement that aligns her interests with the interests of the Company and incentivizes her to remain in the employ of the Company. The employment agreement provides that Ms. Lagomarsino shall serve on the Board of Directors of the Company and the Bank.  The term of Ms. Lagomarsino’s employment agreement shall continue until terminated in accordance with its terms.  Pursuant to the terms and conditions of the employment agreement, Ms. Lagomarsino will receive an annual base salary, is eligible to earn an annual cash bonus award, and is entitled to receive certain other benefits that the Bank extends to all of its executive employees, such as life insurance, disability insurance, health, dental, vision and other insurance benefits, 401(k) plan participation and certain fringe benefits and perquisites.  Under the employment agreement, the Company may grant from time to time to Ms. Lagomarsino equity awards under and subject to the terms and conditions of the equity incentive plan that the Company is then regularly granting equity awards to its executive officers under.

Heritage Oaks Bancorp | - 39 -

Note 13. Subsequent Events - continued

The employment agreement provides that if Ms. Lagomarsino terminates her employment for “Good Reason” or is terminated without “Cause,” as those terms are defined in the employment agreement, she is entitled to certain severance payments detailed in the employment agreement.  The employment agreement also provides for a “double-trigger” change in control payment in the event Ms. Lagomarsino terminates her employment for “Good Reason” or is terminated without “Cause” within twelve months of a “Change in Control” as that term is defined in the employment agreement.  Finally, the employment agreement provides for certain benefits in the event of the “Disability,” as that term is defined in the employment agreement, or death of Ms. Lagomarsino. As a condition to the receipt of any of the foregoing payments and benefits (except in the case of termination of employment due to death), Ms. Lagomarsino is required to provide the Company and the Bank with a general release from any and all claims, known and unknown, that Ms. Lagomarsino may have against the Company and/or the Bank.

The employment agreement contains standard confidentiality and other business protection covenants, including covenants not to solicit or disparage.  Generally speaking, Ms. Lagomarsino agrees not to induce any employees to leave or otherwise interfere with or disrupt the relationships between the Bank and its employees, or divert or attempt to divert from the Bank any of its customers, during the term of her employment and for a period of one year following her separation from the Bank.  The employment agreement also contains a standard indemnification provision.

Exchange Agreement

As more fully described in Note 9. Shareholders’ Equity, on October 29, 2014 the Company and Castle Creek entered into the Exchange Agreement, pursuant to which, among other things, the parties agree, subject to certain conditions to closing, to the exchange of the outstanding shares of Series C Preferred Stock for shares of the Company’s common stock on a one-for-one basis.

Dividend Declaration

On October 29, 2014, the Company’s Board of Directors declared a cash dividend of $0.05 per share, payable on December 1, 2014, to shareholders of the Company’s common stock as of November 17, 2014.  Holders of the Company’s Series C Preferred Stock are also entitled to a per share dividend equivalent to the common dividend declared for which each share of Series C Preferred Stock is convertible into common stock.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  You can find many but not all of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “likely,” “would,” “could,” “may” and other similar expressions in this Quarterly Report on Form 10-Q.  The Company claims the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995, as amended.  The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the Company’s beliefs, and on assumptions made by, and information available to management at the time such statements are first made.  The actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control or ability to predict.  Although the Company believes that management’s assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect.  As a result, the Company’s actual future results can be expected to differ from management’s expectations, and those differences may be material and adverse to the Company’s business, results of operations and financial condition.  Accordingly, investors should use caution in relying on forward-looking statements to anticipate future results or trends.

Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed herein include the following: uncertainty as to whether the financial crisis in the United States has fully been resolved, including continuing relative softness in the California real estate market, and the response of federal and state governments and our banking regulators thereto; a decline in general economic conditions in those areas in which the Company operates; changes in the Company’s business strategy or development plans; the Company’s ability to effectively integrate its merger with Mission Community Bancorp into its business; the threat and impact of cyber-attacks on our and our third party vendors information technology infrastructure; environmental conditions, including the prolonged drought in California, natural disasters such as earthquakes, landslides and wildfires, that may disrupt business, impede operations, or negatively impact the ability of certain borrowers to repay their loans and/or values of collateral securing loans; the possibility of an unfavorable ruling in a legal matter in which the Company is involved, and the potential impact that it may have on earnings, reputation, or the Company’s operations; and the possibility that any expansionary activities will be impeded while the FDIC’s and CA DBO’s joint Consent Order remains outstanding, and that we will be unable to comply with the requirements set forth in the Consent Order, which could result in restrictions on our operations.

Additional information on these risks and other factors that could affect operating results and financial condition are detailed in reports filed by the Company with the U.S. Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed by the Company with the U.S. Securities and Exchange Commission on March 4, 2014. Forward looking statements speak only as of the date they are made, and the Company does not undertake to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made, whether as a result of new information, future developments or otherwise, and specifically disclaims any obligation to revise or update such forward looking statements for any reason, except as may be required by law.

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Executive Overview

This overview of management’s discussion and analysis highlights selected information in the financial results of the Company and may not contain all of the information that is important to you.  For a more complete understanding of trends, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document.  Each of these items could have an impact on the Company’s consolidated financial condition and results of operations.

Heritage Oaks Bancorp (“Bancorp”) is a California corporation organized in 1994 to act as a holding company for Heritage Oaks Bank (the “Bank” and together with Bancorp hereinafter collectively referred to as the “Company”), a bank founded in 1983 that serves San Luis Obispo, Santa Barbara and Ventura counties.  As of September 30, 2014, Heritage Oaks Bank operated two branch offices in Paso Robles, San Luis Obispo and Santa Maria, one branch office in Arroyo Grande, Atascadero, Cambria, Templeton, Morro Bay, and Santa Barbara, as well as loan production offices in Goleta and Ventura/Oxnard.

The principal business of the Bank consists of attracting deposits from the general public and investing these funds primarily in commercial real estate (“CRE”) and commercial business loans, loans secured by first mortgages on one-to-four single family residences, operating and real estate procurement loans for agricultural businesses, multi-family residential property loans and a variety of consumer loans.  The Bank offers a variety of deposit accounts for both individuals and businesses with varying rates and terms, which generally include savings accounts, money market deposits, certificates of deposit and checking accounts.  The Bank solicits deposits primarily in its market area, and in the past has accepted brokered deposits.  The Bank also originates one-to-four family residential mortgages for sale in the secondary market.  During the first quarter of 2014, the Bank received approval to sell home loans directly to Fannie Mae.  The Bank also provides SBA loans, as a member of the SBA’s Preferred Lender Program.

Other than holding the shares of the Bank, Bancorp conducts no significant activities.  As a bank holding company, Bancorp generally is prohibited from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.  The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or regulation or order of the Federal Reserve Board, have been identified as activities closely related to the business of banking or managing or controlling banks.  In October 2006, Bancorp formed Heritage Oaks Capital Trust II (“Trust II”).  Trust II is a statutory business trust formed under the laws of the State of Delaware and is a wholly-owned, non-financial, non-consolidated subsidiary of Bancorp, the sole purpose of which is to issue trust preferred securities.  In conjunction with our acquisition of Mission Community Bank (discussed below), Bancorp assumed two additional trusts: Mission Community Capital Trust I (“Trust III”), and Santa Lucia Bancorp (CA) Capital Trust (“Trust IV”), both of which are statutory business trusts formed under the laws of the State of Delaware, the sole purpose of which is to issue trust preferred securities.

On February 28, 2014, the Company completed the acquisition of Mission Community Bancorp and its subsidiary Mission Community Bank (collectively “MISN”).  The total value of the transaction was $69.0 million, which is comprised of cash of $8.7 million and 7,541,326 shares of Bancorp’s common stock valued at $60.3 million, based on the $7.99 closing price of Bancorp’s stock on February 28, 2014.  The operating results of MISN beginning on March 1, 2014 are included in the Company’s results for the first nine months of 2014 and are presented in Note 2. Business Combination, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.  The impact of the MISN acquisition to the Company’s total loans and deposits was a 34% increase in total loans and 38% increase in total deposits as of February 28, 2014.

Strategic Initiatives

·Continue as a public company with a common stock that is quoted and traded on a national exchange.  In addition to providing access to growth capital, we believe a “public currency” provides flexibility in structuring acquisitions and will allow us to attract and retain qualified management through equity-based compensation.

·Expand our commercial and agribusiness loan portfolios to diversify both our customer base and maturities of the loan portfolio and to benefit from the low cost deposits associated with individual accounts and the professional, general business accounts connected to our commercial and agribusiness customers.  The Bank successfully recruited and installed an agribusiness team in 2012 which contributed to a significant increase in the Bank’s agribusiness lending presence in the Central Coast region of California.

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·Enhance the residential lending product mix and loan sale alternatives with Fannie Mae approval by originating qualified loans that are subsequently sold directly to Fannie Mae.

·Invest in Infrastructure in order to have the ability to scale efficiently and effectively, in line with our long-term goal of creating a community banking franchise of $3.0 billion to $5.0 billion in total assets.  During the month of July, 2014 the Company successfully integrated the operating platform of Mission Community Bank into our existing banking platform.  As of October 31, 2014 we have consolidated all but one of the MISN branches into our existing branches and have sold all but one MISN branch building.  We anticipate that both the branch consolidation and building sale will be completed by the end of 2014 and that substantially all of the costs of restructuring the Company’s operations will be concluded.

The comparability of the Company’s operating results for the three months and nine months ended September 30, 2014 and 2013 is significantly impacted by the Company’s acquisition of MISN on February 28, 2014.

Financial Highlights

The Company generated net income of $3.4 million or $0.10 per diluted common share, and $4.6 million or $0.14 per diluted common share for the three and nine months ended September 30, 2014, respectively as compared to net income available to common shareholders of $2.6 million or $0.10 per diluted common share and $8.3 million or $0.31 per diluted common share for the same periods a year earlier.

Significant factors impacting the Company’s net income during the third quarter and year to date through September 30, 2014 are discussed below:

·Net interest income was $15.6 million, or 3.98% of average interest earning assets (“net interest margin”), for the third quarter of 2014 compared with $10.5 million, and a 4.04% net interest margin, for the same period in the prior year.  Net interest income was $43.2 million, and net interest margin was 3.98% for the year to date through September 30, 2014 compared with $30.8 million, and a 4.07% net interest margin, for the same prior year period.  Net interest income increased for the three and nine months ended September 30, 2014 as compared to the same periods in 2013 due primarily to the increase generated from MISN’s loan and securities portfolios.  We have continued to experience declining yields on our loan portfolio due to the historically low interest rate environment and increasing competition in our lending market; however, the impact of accretion from purchased MISN loans and the increase in average balances from our organic loan growth (exclusive of MISN) over the last two years has significantly offset the impact of declining loan yields on our net interest income when compared to the third quarter and year to date through September 30, 2013.  We have actually experienced an increase in loan yields for the third quarter of 2014 as compared to the same prior year period, marking the first time that loan yields have increased as compared to the same prior year quarter in 2014.  This increase can be attributed primarily to discount accretion on acquired loans.  However, our loan yields are still lower, on a year to date basis, than they were in the prior year.  We also have continued to experience compressed yields on our investment securities portfolio; however, securities’ yields were essentially unchanged for the nine months ended September 30, 2014 when compared to the same prior year period, and are down only slightly for the third quarter of 2014 as compared to the prior year period, due to both the change in the composition of the securities portfolio, and a deceleration in prepayment speeds, which resulted in less premium amortization relative to the prior year.

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·Non-interest expense increased to $13.4 million for the three months and $43.4 million for the nine months ended September 30, 2014, from $8.6 million and $26.9 million, respectively, for the same periods a year earlier.  The increase in non-interest expense for both the third quarter and year to date, 2014, as compared to the same prior year periods, was largely attributable to the addition of MISN’s operating expenses and merger, restructure and integration related costs.  We experienced quarterly and year to date increases in the following expense categories with the primary driver being attributable to the addition of MISN’s operations:

nsalaries and benefits increases of $1.6 million and $3.6 million, respectively,

noccupancy and equipment expense increases of $0.6 million and $1.4 million, respectively, and

namortization of intangible expense increases of $0.2 million and $0.5 million, respectively.

MISN related merger, restructure, and integration costs of $0.7 million for the three months and $8.8 million for the nine months ended September 30, 2014, respectively, also contributed to the year-over-year increase in non-interest expense.  The Company also experienced an increase in professional services expense of $1.1 million for the third quarter and $1.5 million for the year to date, September 30, 2014 as compared to prior year periods.  The increase in professional services expense for both the quarter and year to date is primarily attributable to litigation costs with a specific borrower and increased BSA monitoring and compliance costs, which were incurred in response to the issues raised in connection with the issuance of the Consent Order.  Other expenses also increased by $0.2 million and $0.6 million for the three and nine months ended September 30, 2014, respectively.  For the year to date period through September 30, 2014 these increases to non-interest expense were partially offset by a reduction in the provision for mortgage loan repurchases.  We expect MISN operating costs to continue to decline until the end of 2014 as we execute our plan for consolidating 17 branches into 11 branches.  As of September 30, 2014 a majority of restructuring costs have concluded, because we have completed the systems conversion of MISN’s core banking systems and consolidated all but one of the MISN branch locations.

·No provision for loan and lease losses was recorded in the three and nine months ended September 30, 2014 and 2013.  Although we recorded net charge-offs of $1.1 million for the first nine months of 2014, no additional provision was required to cover such charge-offs due to the offsetting positive trends in our historical loan loss experience, and level of non-performing and delinquent loans.  As of September 30, 2014, MISN legacy loans have no ALLL allocated to them, as the existing un-accreted purchase discounts, which represent 3.27% of these loans has been deemed adequate by management to absorb losses inherent in the acquired portfolio.

·Non-interest income increased by $0.6 million to $3.0 million for the third quarter of 2014, and decreased by $3.8 million to $7.2 million for the year to date through September 30, 2014 compared to $2.4 million and $11.0 million for the same prior year periods, respectively.  Non-interest income declined for the year to date through September 30, 2014, primarily as a result of a $3.4 million decline of gain on the sale of investment securities, and a decline in mortgage banking income, both of which were partially offset by increased customer fee income attributable to the new MISN customer accounts.  The increase in non-interest income for the third quarter of 2014 as compared to the prior year period was largely the result of other income generated by the recovery of fully charged-off former MISN loans, which had no value at the acquisition date, as well as increases in fee and service charge income, and gain on the sale of investment securities.  These quarterly increases were all partially offset by a decline in mortgage banking income.

Critical Accounting Policies and Estimates

Our accounting policies are integral to understanding the Company’s financial condition and results of operations.  Accounting policies that management considers to be significant, including newly issued standards to be adopted in future periods, are disclosed in Note 1, Summary of Significant Accounting Policies, of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially and adversely from those estimates.

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Estimates that are particularly susceptible to significant change relate to the determination of purchase accounting adjustments to the fair value of assets purchased and liabilities assumed through strategic acquisitions, the ALLL, the valuation of real estate acquired through foreclosure, the carrying value of the Company’s net deferred tax assets and estimates used in the determination of the fair value of certain financial instruments.

Fair Value of Assets Purchased and Liabilities Assumed through Strategic Acquisitions

When the Company acquires the assets and assumes the liabilities of other financial institutions, GAAP requires an assessment of the fair value of those individual assets and liabilities.  This fair value may differ from the cost basis recorded on the acquired institution’s financial statements.  Management performs an initial assessment to determine which assets and liabilities must be designated for fair value analysis.  Management typically engages experts in the field of valuation to perform the valuation of significant assets and liabilities and, after assessing the resulting fair value computation, will utilize such value in computing the initial purchase accounting adjustments for the acquired institution.  It is possible that these values could be viewed differently through either alternative valuation approaches or if performed by different experts.  Management is responsible for determining that the values determined by experts are reasonable.  These computations are also left open for final adjustments for a period of up to one year, primarily to allow for completion of analysis and for possible new information that existed as of the acquisition date to be incorporated into the purchase accounting.  See also Note 7. Goodwill and Other Intangible Assets, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.

Allowance for Loan Losses and Valuation of Foreclosed Real Estate

In connection with the determination of the specific credit component of the ALLL for non-performing loans in the loan portfolio and the value of foreclosed real estate, management obtains independent appraisals at least once a year for significant properties.  Although management uses available information to recognize losses on non-performing loans and foreclosed real estate, future additions to the ALLL may be necessary based on changes in local economic conditions or other factors outside our control.

The general portfolio component of the ALLL is determined by pooling performing loans by collateral type and purpose.  These loans are then further segmented by an internal loan grading system that classifies the credit quality of loans as: pass, special mention, substandard and doubtful.  Estimated loss rates are then applied to each segment according to loan grade to determine the amount of the general portfolio allocation.  Estimated loss rates are determined through an analysis of historical loss rates for each segment of the loan portfolio, based on the Company’s prior experience with such loans.  In addition, qualitatively determined adjustments are made to the historical loss history to give effect to certain internal and external factors that may have either a positive or negative impact on the overall credit quality of the loan portfolio.

Because of all the variables that go into the determination of both the specific and general allocation components of the ALLL, as well as the valuation of foreclosed real estate, it is reasonably possible that the ALLL and foreclosed real estate values may change in future periods and those changes could be material and have an adverse effect on our financial condition and results of operations.  See also Note 5. Loans and Allowance for Loan and Lease Losses, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.

Realizability of Deferred Tax Assets

The Company uses an estimate of its future earnings in determining if it is more likely than not that the carrying value of its deferred tax assets will be realized over the period they are expected to reverse.  If based on all available evidence, the Company believes that a portion or all of its deferred tax assets will not be realized, a valuation allowance must be established.  See also Note 6. Income Taxes, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.

Fair Value of Financial Instruments

The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of observable pricing.  Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment is utilized in measuring the fair value of such instruments.  Observable pricing is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and the characteristics specific to the financial instrument, including but not limited to credit and duration profiles.  See also Note 3. Fair Value of Assets and Liabilities, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.

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Accrual for Restructuring Activities

From time to time the Company plans organizational restructuring activities to optimize the efficiency of its operations.  Generally accepted accounting principles allow the Company to accrue for certain future restructuring expenses, such as employee termination, retention and relocation costs, contract cancellation costs and fixed asset disposal costs, as long as the Company has adopted a board approved plan for restructuring activities and notified the affected personnel, landlords and vendors within a prescribed timeframe.  See Note 11. Restructuring Activities, of the Condensed Consolidated Financial Statements filed on this Form 10-Q.

Where You Can Find More Information

Under Section 13 of the Securities Exchange Act of 1934, as amended, periodic and current reports must be filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company electronically files the following documents with the SEC: Annual Reports on Form 10-K; Quarterly Reports on Form 10-Q; Current Reports on Form 8-K; and Definitive Proxy Statements on Form DEF 14A. The Company may file additional documents from time to time. The SEC maintains an internet site, www.sec.gov, from which all documents filed or furnished electronically may be accessed. Additionally, all documents filed with the SEC and additional shareholder information is available free of charge on the Company’s website: www.heritageoaksbancorp.com.

The Company posts these reports and other filings to its website as soon as reasonably practicable after filing them with or furnishing them to the SEC.  None of the information on or hyperlinked from the Company’s website is incorporated into this Quarterly Report on Form 10-Q.

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Selected Financial Data

The table below provides selected financial data that highlights the Company’s quarterly performance results:

	At or For The Three Months Ended
	9/30/2014			6/30/2014			3/31/2014			12/31/2013			9/30/2013
	(dollars in thousands except per share data)
Consolidated Income Data:
Interest income	$	16,895		$	16,541		$	13,602		$	11,736		$	11,509
Interest expense	1,324			1,344			1,151			1,049			1,027
Net interest income	15,571			15,197			12,451			10,687			10,482
Provision for loan losses	-			-			-			-			-
Net interest income after provision for loan and lease losses	15,571			15,197			12,451			10,687			10,482
Non-interest income	2,982			2,476			1,750			1,879			2,423
Non-interest expense	13,382			12,986			17,038			9,624			8,551
Income (loss) before income tax expense (benefit)	5,171			4,687			(2,837		)	2,942			4,354
Income tax expense (benefit)	1,742			1,738			(1,074		)	1,308			1,593
Net income (loss)	3,429			2,949			(1,763		)	1,634			2,761
Dividends and accretion on preferred stock	-			-			-			-			181
Net income (loss) available to common shareholders	$	3,429		$	2,949		$	(1,763	)	$	1,634		$	2,580
Share Data:
Earnings (loss) per common share - basic	$	0.10		$	0.09		$	(0.06	)	$	0.06		$	0.10
Earnings (loss) per common share - diluted	$	0.10		$	0.09		$	(0.06	)	$	0.06		$	0.10
Dividends declared per common share	$	0.03		$	-		$	-		$	-		$	-
Common book value per share	$	5.76		$	5.68		$	5.55		$	4.84		$	4.78
Tangible common book value per share	$	4.85		$	4.76		$	4.61		$	4.34		$	4.29
Actual shares outstanding at end of period	33,082,205			33,032,436			33,003,414			25,397,780			25,391,343
Weighted average shares outstanding - basic	33,992,465			33,967,670			27,816,911			26,382,523			26,362,467
Weighted average shares outstanding - diluted	34,146,200			34,142,364			27,816,911			26,550,442			26,549,568
Consolidated Balance Sheet Data:
Total cash and cash equivalents	$	50,827		$	83,756		$	65,857		$	26,238		$	33,281
Total investments and other securities	$	382,437		$	359,630		$	347,977		$	276,795		$	267,179
Total gross loans	$	1,151,576		$	1,096,883		$	1,114,070		$	827,484		$	777,154
Allowance for loan and lease losses	$	(16,787	)	$	(16,635	)	$	(17,968	)	$	(17,859	)	$	(17,468	)
Total assets	$	1,716,224		$	1,677,672		$	1,662,200		$	1,203,651		$	1,153,843
Total deposits	$	1,422,934		$	1,394,183		$	1,365,829		$	973,895		$	956,952
Federal Home Loan Bank borrowings	$	75,562		$	67,566		$	85,571		$	88,500		$	57,500
Junior subordinated debt	$	13,179		$	13,125		$	13,071		$	8,248		$	8,248
Total shareholders’ equity	$	194,119		$	191,205		$	186,640		$	126,427		$	125,092
Selected Other Balance Sheet Data:
Average assets	$	1,691,508		$	1,667,486		$	1,362,466		$	1,180,936		$	1,123,875
Average earning assets	$	1,552,548		$	1,532,149		$	1,267,400		$	1,088,741		$	1,028,879
Average shareholders’ equity	$	193,061		$	189,804		$	149,042		$	127,087		$	129,517
Selected Financial Ratios:
Return (loss) on average assets	0.80%			0.71%			-0.52%			0.55%			0.97%
Return (loss) on average equity	7.05%			6.23%			-4.80%			5.10%			8.46%
Return (loss) on average tangible common equity	8.55%			7.61%			-5.74%			5.85%			9.04%
Net interest margin (1)	3.98%			3.98%			3.98%			3.89%			4.04%
Efficiency ratio (2)	71.91%			71.90%			118.28%			75.33%			67.10%
Non-interest expense to average assets	3.14%			3.12%			5.07%			3.23%			3.02%
Capital Ratios:
Average equity to average assets	11.41%			11.38%			10.94%			10.76%			11.52%
Leverage Ratio	10.00%			9.83%			11.64%			10.20%			10.58%
Tier 1 Risk-Based Capital ratio	12.87%			12.85%			12.25%			12.91%			13.27%
Total Risk-Based Capital ratio	14.12%			14.10%			13.50%			14.17%			14.53%
Selected Asset Quality Ratios:
Non-performing loans to total gross loans (3)	0.89%			1.04%			0.89%			1.22%			1.63%
Non-performing assets to total assets (4)	0.60%			0.69%			0.62%			0.84%			1.10%
Allowance for loan and lease losses to total gross loans	1.46%			1.52%			1.61%			2.16%			2.25%
Net charge-offs (recoveries) to average loans	-0.06%			0.48%			-0.05%			-0.20%			0.24%

(1)Net interest margin represents net interest income as a percentage of average interest-earning assets.

(2)The efficiency ratio is defined as total non-interest expense as a percent of the combined net interest income plus non-interest income, exclusive of gains and losses on security sales, other than temporary impairment losses, gains and losses on sale of OREO and other OREO related costs, gains and losses on sale of fixed assets, and the amortization of intangible assets.

(3)Non-performing loans are defined as loan that are past due 90 days or more as well as loan placed in non-accrual status.

(4)Non-performing assets are defined as loans that are past due 90 days or more and loans placed in non-accrual status plus other real estate owned.

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Results of Operations

Net Interest Income and Margin

Net interest income, the primary component of the net earnings of a financial institution, refers to the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings.  The net interest margin is the amount of net interest income expressed as a percentage of average interest earning assets.  Factors considered in the analysis of net interest income are the composition and volume of interest-earning assets and interest-bearing liabilities, the amount of non-interest bearing liabilities and non-accrual loans, and changes in market interest rates.

For the three months ended September 30, 2014 and 2013, net interest margin was 3.98% and 4.04%, respectively.  Net interest margin for the nine months ended September 30, 2014 and 2013 was 3.98% and 4.07%, respectively.  The tables below set forth the details that make up net interest margin including, average balance sheet information, interest income and expense, average yields and rates and net interest income and margin:

	For the Three Months Ended							For the Three Months Ended
	September 30, 2014							September 30, 2013
				Yield/		Income/					Yield/		Income/
	Balance			Rate (4)		Expense		Balance			Rate (4)		Expense
	(dollars in thousands)
Interest Earning Assets
Interest earning deposits in other banks	$	72,348		0.20	%	$	36	$	11,729		0.27	%	$	8
Investment securities	374,359			2.06	%	1,946		254,997			2.10	%	1,347
Other investments	9,839			6.77	%	168		6,642			5.38	%	90
Loans (1) (2)	1,096,002			5.34	%	14,745		755,511			5.28	%	10,064
Total interest earning assets	1,552,548			4.32	%	16,895		1,028,879			4.44	%	11,509
Allowance for loan and lease losses	(16,696		)					(18,055		)
Other assets	155,656							113,051
Total assets	$	1,691,508						$	1,123,875
Interest Bearing Liabilities
Interest bearing demand	$	106,382		0.11	%	$	30	$	80,523		0.10	%	$	21
Savings	104,757			0.10	%	26		41,563			0.10	%	10
Money market	438,824			0.29	%	317		303,842			0.34	%	257
Time deposits	289,886			0.75	%	545		201,670			0.87	%	443
Total interest bearing deposits	939,849			0.39	%	918		627,598			0.46	%	731
Federal Home Loan Bank borrowing	65,824			1.59	%	264		62,598			1.61	%	254
Junior subordinated debentures	13,145			4.29	%	142		8,248			2.02	%	42
Total borrowed funds	78,969			2.04	%	406		70,846			1.66	%	296
Total interest bearing liabilities	1,018,818			0.52	%	1,324		698,444			0.58	%	1,027
Non interest bearing demand	467,868							288,380
Total funding	1,486,686			0.35	%	1,324		986,824			0.41	%	1,027
Other liabilities	11,761							7,534
Total liabilities	1,498,447							994,358
Shareholders’ Equity
Total shareholders’ equity	193,061							129,517
Total liabilities and shareholders’ equity	$	1,691,508						$	1,123,875
Net interest margin (3)				3.98	%						4.04	%
Interest rate spread				3.80	%	$	15,571				3.86	%	$	10,482

(1) Non-accruing loans have been included in total loans.

(2) Loan fees have been included in interest income computation.

(3) Net interest margin has been calculated by dividing the net interest income by total average earning assets.

(4) Yield / Rate is annualized using actual number of days in period.

Heritage Oaks Bancorp | - 48 -

	For the Nine Months Ended							For the Nine Months Ended
	September 30, 2014							September 30, 2013
				Yield/		Income/					Yield/		Income/
	Balance			Rate (4)		Expense		Balance			Rate (4)		Expense
	(dollars in thousands)
Interest Earning Assets:
Interest earning deposits in other banks	$	57,818		0.18	%	$	77	$	15,007		0.22	%	$	25
Investment securities	343,561			2.08	%	5,355		256,462			2.08	%	3,993
Other investments	8,920			6.86	%	458		6,573			3.89	%	191
Loans (1) (2)	1,041,358			5.28	%	41,134		734,271			5.36	%	29,448
Total interest earning assets	1,451,657			4.33	%	47,024		1,012,313			4.45	%	33,657
Allowance for loan and lease losses	(17,559		)					(17,986		)
Other assets	140,930							104,247
Total assets	$	1,575,028						$	1,098,574
Interest Bearing Liabilities:
Interest bearing demand	$	101,677		0.11	%	$	83	$	75,153		0.10	%	$	59
Savings	92,013			0.10	%	67		40,322			0.10	%	30
Money market	407,086			0.31	%	931		294,123			0.33	%	722
Time deposits	276,912			0.76	%	1,580		193,502			0.89	%	1,290
Total interest bearing deposits	877,688			0.41	%	2,661		603,100			0.47	%	2,101
Federal Home Loan Bank borrowing	77,548			1.38	%	801		57,866			1.37	%	592
Junior subordinated debentures	12,061			3.96	%	357		8,248			2.03	%	125
Total borrowed funds	89,609			1.73	%	1,158		66,114			1.45	%	717
Total interest bearing liabilities	967,297			0.53	%	3,819		669,214			0.56	%	2,818
Non interest bearing demand	419,949							276,499
Total funding	1,387,246			0.37	%	3,819		945,713			0.40	%	2,818
Other liabilities	10,331							11,444
Total liabilities	1,397,577							957,157
Shareholders’ Equity:
Total shareholders’ equity	177,451							141,417
Total liabilities and shareholders’ equity	$	1,575,028						$	1,098,574
Net interest margin (3)				3.98	%						4.07	%
Interest rate spread				3.80	%	$	43,205				3.89	%	$	30,839

(1) Non-accruing loans have been included in total loans.

(2) Loan fees have been included in interest income computation.

(3) Net interest margin has been calculated by dividing net interest income by total average earning assets.

(4) Yield / Rate is annualized using actual number of days in period.

Heritage Oaks Bancorp | - 49 -

The volume and rate variance tables below set forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities as compared to the corresponding period a year earlier, and the amount of such change attributable to changes in average balances (volume), changes in average yields and rates (rate) and the interplay of the impacts of the changes in rates and volumes (rate/volume):

	For The Three Months Ended,										For The Nine Months Ended,
	September 30, 2014 over 2013										September 30, 2014 over 2013
	Volume		Rate			Rate/Volume			Total		Volume		Rate			Rate/Volume			Total
	(dollars in thousands)
Interest income:
Interest bearing deposits in other banks	$	41	$	(2	)	$	(11	)	$	28	$	70	$	(4	)	$	(14	)	$	52
Investment securities	632		(26		)	(7		)	599		1,355		-			7			1,362
Other investments	43		23			12			78		68		146			53			267
Loans	4,531		114			36			4,681		12,311		(439		)	(186		)	11,686
Net increase (decrease)	5,247		109			30			5,386		13,804		(297		)	(140		)	13,367
Interest expense:
Interest bearing demand	7		2			-			9		20		6			(2		)	24
Savings	16		-			-			16		39		-			(2		)	37
Money market	116		(38		)	(18		)	60		279		(44		)	(26		)	209
Time deposits	193		(61		)	(30		)	102		555		(188		)	(77		)	290
Federal Home Loan Bank borrowing	13		(3		)	-			10		202		4			3			209
Long term borrowings	25		47			28			100		58		119			55			232
Net increase (decrease)	370		(53		)	(20		)	297		1,153		(103		)	(49		)	1,001
Total net increase (decrease)	$	4,877	$	162		$	50		$	5,089	$	12,651	$	(194	)	$	(91	)	$	12,366

For the three-month and nine-month periods ended September 30, 2014, as compared to the corresponding periods in 2013, the continued current low interest rate environment has had an adverse impact on yields of new and renewing loans.  However, the purchase discount accretion of the acquired MISN loan portfolio has provided a significant offset to the decline in new loan yields for both the three and nine month periods ended September 30, 2014.  Total discount accretion on acquired loans was $0.9 million, and $2.2 million for the three and nine months ended September 30, 2014, respectively.  This mix of these positive and negative factors has resulted in an increase of 6 basis points, and a decrease of 8 basis points for the three and nine months ended September 30, 2014, respectively.  The low interest rate environment and relative flatness of interest yield curves have had a compounding impact on securities’ yields as new investments are typically providing lower yields.  Such lower yields however, have been partially offset by slower prepayment speeds in 2014.  These offsetting factors have resulted in no change in securities yields on a year to date basis, and a 4 basis point decrease on a quarterly basis, when comparing the quarter and year to date ended September 30, 2014, to the same prior year periods.  The final significant factor impacting earning asset yields for both periods ended September 30, 2014 is the shift in asset mix to a greater proportion of lower-yielding interest earning deposits in other banks, which resulted in a lower proportion of investment securities and loans when compared to the same prior year periods.  These combined factors have resulted in a decline in the yield on earning assets for both the three and nine month periods ended September 30, 2014 of 12 basis points, as compared to the corresponding periods in 2013.

While the loan portfolio has continued to grow since the second quarter of 2013, both due to the acquisition of MISN loans and through organic loan production, and continues to contribute to a more favorable earning asset mix, we continue to hold a large portion of our earning assets in lower yielding investment securities and, more recently, in much lower yielding interest earning deposits in other banks.  Modest decreases in funding costs related to shifts in the composition of deposits from interest-bearing accounts to more liquid non-interest bearing deposit accounts, along with reduced rates of interest paid on interest bearing deposits, have resulted in a lower cost of funds that has partially offset the reduced yields on interest-earning assets. These factors have resulted in 6 and 9 basis point declines, respectively, in our net interest margin for the three and nine month periods ended September 30, 2014, as compared to the same periods a year earlier.

The decrease in loan yields for the third quarter and year to date, through September 30, 2014, as compared to the same periods a year earlier, are attributable to the repayment of existing Heritage Oaks loans and origination of lower yielding new loans, which had negative 39 and 46 basis point impacts to loan yields, respectively.  The impact of loan prepayment fees offset this negative trend for both the three and nine months ended September 30, 2014 by 2 basis points, however, loan prepayment fees contributed 5 and 1 less basis points to loan yields during the first three months and nine months of 2014 as compared to the same prior year period.

Heritage Oaks Bancorp |- 50 -

The third quarter of 2014 represents the second full quarter of contribution from MISN earning assets to the Company’s net interest margin. The average yield of acquired MISN earning assets was 18 basis points lower than that of the legacy Heritage Oaks earning asset yield at the time of acquisition.  However, the impact of purchase loan discount accretion had positive 22 and 20 basis point impacts to both the net interest margin and earning asset yields for the third quarter of 2014 and the year to date September 30, 2014, respectively.

Forgone interest on non-accrual loans continued to negatively impact interest income for the three month and nine month periods ended September 30, 2014.  Total forgone interest related to non-accrual loans, which includes (1) the initial accrued interest reversal when a loan is transferred to non-accrual status, (2) interest lost prospectively for the period of time a loan is on non-accrual status and (3) lost interest due to restructuring terms below original note terms or below current market-rate terms, was approximately $0.2 million and $0.3 million during the three months ended September 30, 2014 and 2013, respectively, and $0.6 million and $0.8 million for the nine months periods ended September 30, 2014 and 2013.  Total forgone interest on non-accrual loans reduced the yield on the loan portfolio by 7 basis points for the three months and by 8 basis points for the nine months ended September 30, 2014 as compared to 13 basis points and 14 basis points for the corresponding periods in 2013, respectively.  The reasons for the reduced negative impact of foregone interest to the loan portfolio’s yield in 2014 is an increase in the average balance of the loan portfolio attributable to the MISN merger and organic growth achieved over the last year in the legacy Heritage Oaks loan portfolio, as well as a decline in the total dollar amount of forgone interest.

Our earnings are influenced by changes in interest rates.  The Company is in a net asset sensitive position.  A large percentage of our interest sensitive assets and liabilities re-price with changes in market interest rates.  A significant portion of the variable rate component of the Company’s loan portfolio has had the interest rates set to their respective contractual interest rate floors.  To the extent that overall interest rates rise, the Company will not experience the benefit of rising interest rates until such rates rise above such interest rate floors.  See Item 3, Qualitative and Quantitative Disclosures About Market Risk, included in this Quarterly Report on Form 10-Q, for further discussion of the Company’s sensitivity to interest rate movements based on our current net asset sensitive profile, as well as the impact of interest rate floors on the variable rate component of our loan portfolio.

The yield on investment securities for the third quarter of 2014 was 4 basis points lower at 2.06% compared to 2.10% for the third quarter of 2013.  The decrease in investment securities yield for the third quarter of 2014 is primarily attributable to decreased capital market interest rates which have contributed to decreased yields on reinvested cash flows.  Offsetting this trend has been an increase in the allocation of higher yielding tax-exempt bonds in 2014 as compared to 2013 which has helped to augment current year yields. The tax-exempt securities portfolio increased from 16.5% of the total portfolio in the third quarter of 2013 to 19.2% for the third quarter of 2014.

Investment securities yields were unchanged at 2.08% for the nine months ended September 30, 2013 and 2014.  The yield on the portfolio was unchanged due to the same competing influences of a decline in capital market interest rates and an increase in higher yielding tax-exempt municipal bonds discussed with regard to the quarterly yield.  The impact of these two factors on the year to date yield on investment securities resulted in no change in the yield for 2014 as compared to prior year.

For the three months ended September 30, 2014, average interest-earning assets increased $523.7 million, or 50.9%, over that reported in the corresponding period in 2013.  Average interest-earning assets for the nine months ended September 30, 2014 increased $439.3 million, or 43.4% over the corresponding period in 2013.  Growth in average earning assets for both the three month and nine month periods was largely driven by growth across all earning asset types due to the loans purchased and excess liquidity generated by the deposits assumed through the MISN merger.

The average balance of interest-bearing liabilities was $320.4 million, or 45.9%, higher for the three months ended September 30, 2014, as compared to the corresponding period a year earlier.  Average interest-bearing liabilities for the nine months ended September 30, 2014 increased by $298.1 million, or 44.5%, as compared to the corresponding period in 2013.  Growth in average interest-bearing liabilities was primarily the result of the merger with MISN.  Average interest-bearing deposits were $312.3 million, or 49.8%, higher for the three months ended September 30, 2014, as compared to the corresponding period a year earlier, and $274.6 million, or 45.5%, higher for the nine month period.

Heritage Oaks Bancorp |- 51 -

The rate paid on interest bearing deposits declined by 7 basis points, to 0.39%, for the three months, and declined by 6 basis points to 0.41%, for the nine months ended September 30, 2014 as compared to the same periods a year earlier.  This decline is in part due to the historically low interest rate environment that has existed for the last few years, but is also due to our efforts to systematically lower our cost of deposits over this same time period.  Although such efforts have contributed to a moderate decline in time deposits (for legacy Heritage Oaks balances), the overall deposit mix and cost of our deposit portfolio has greatly improved as a result of these efforts.  We also benefitted from lower cost of deposits acquired through the MISN merger in both the three and nine month periods ended September 30, 2014.  This benefit was fully realized in the second and third quarters of the 2014.  In addition to the favorable effects realized from these changes in our interest bearing deposits, our quarterly average non-interest bearing demand deposit balances have increased by $179.5 million, to $467.9 million, for the three months ended September 30, 2014 as compared to the prior year period.  The contribution to reduced funding costs of our non-interest bearing demand deposit balances has had a positive impact of 17 basis points on total funding costs for the three months ended September 30, 2014, and 2013; for the first nine months, of both 2014 and 2013, the impact of increased non-interest bearing deposit balances on our total cost of funds was 16 basis points.  Total cost of funds for the three-month and nine-month periods ended September 30, 2014 were 0.35% and 0.37% respectively, decreases of 6 basis points and 3 basis points, respectively, as compared to the corresponding periods in 2013.

For each of the three-month and nine-month periods ended September 30, 2014, the average rate paid on interest bearing liabilities was 0.52% and 0.53%, respectively as compared with 0.58% and 0.56%, respectively, for the corresponding periods in 2013.  The benefits from the deposit portfolio rate reductions previously discussed were substantially offset by an increase in funding costs for Federal Home Loan Bank (“FHLB”) borrowings and increased interest expense from the addition of MISN-acquired junior subordinated debentures (including purchase discount amortization expense, which is a component of interest expense), as the Company has strategically decided to lock in historically low fixed rates to match-fund longer term fixed rate loans, as well as an increase in the cost of junior subordinated debentures attributable to the MISN purchase discount.

Provision for Loan and Lease Losses

The ALLL is maintained at a level considered by management to be adequate to provide for probable credit losses inherent in the loan portfolio as of the balance sheet date and is based on methodologies applied on a consistent basis with the prior year.  Management’s review of the adequacy of the ALLL includes, among other things, an analysis of past loan loss experience and management’s evaluation of the loan portfolio under current economic conditions.  See also Note 5. Loans and Allowance for Loan and Lease Losses, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q, for additional detail on the ALLL.

The ALLL is based on estimates, and actual losses may vary from current estimates.  Such variances could be material and could have an adverse effect on the Company’s performance.  The Company recognizes that the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the creditworthiness of the borrower over the term of the loan; and, in the case of a collateralized loan, the quality of the collateral for such loans.  The ALLL represents the Company’s best estimate of the amount necessary to provide for probable losses inherent in the portfolio as of the balance sheet date.

The Company did not record a provision for loan and lease losses during the three and nine months ended September 30, 2014 and 2013.  Although the Company recorded net charge-offs of $1.1 million during the first nine months of 2014, positive adjustments to the general reserve, driven by a reduction in our historical losses, negated the need for additional ALLL and related provision expense.  The lack of a loan loss provision in 2014 and 2013 is reflective of the continuing improvements in the overall credit quality of the loan portfolio, the overall improvement in the historical charge-off history over the last year, the improvement in property values that serve as collateral for a large portion of our loans, as well as the limited amount of new loans moving into non-accrual status and therefore requiring specific reserves, all of which were largely offset by increased ALLL requirements due to the growth in the loan portfolio.  As of September 30, 2014, the Company’s ALLL represented 1.46% of total gross loans.  For additional information, see the “Allowance for Loan and Lease Losses” discussion in the Financial Condition section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Heritage Oaks Bancorp |- 52 -

Non-Interest Income

The table below sets forth changes in non-interest income as compared to the corresponding period a year earlier:

	For the Three Months Ended				For the Nine Months Ended				Variances
	September 30,				September 30,				For the Three Months				For the Nine Months
	2014		2013		2014		2013		dollar			percentage	dollar			percentage
	(dollars in thousands)
Fees and service charges	$	1,410	$	1,195	$	3,949	$	3,330	$	215		18.0%	$	619		18.6%
Net gain on sale of loans	411		513		967		1,949		(102		)	-19.9%	(982		)	-50.4%
Mortgage origination income	64		143		223		570		(79		)	-55.2%	(347		)	-60.9%
Gain on sale of investment securities	450		344		549		3,935		106			30.8%	(3,386		)	-86.0%
Other income	647		228		1,533		1,212		419			183.8%	321			26.5%
Total	$	2,982	$	2,423	$	7,221	$	10,996	$	559		23.1%	$	(3,775	)	-34.3%

Non-interest income increased by $0.6 million, to $3.0 million, for the third quarter of 2014, from $2.4 million for the same prior year period, and decreased by $3.8 million to $7.2 million for the year to date through September 30, 2014, from $11.0 million for the same prior year period.  The increase in quarterly non-interest income for the third quarter of 2014 as compared to the same prior year period was due to a $0.4 million increase in other income, primarily attributable to the recovery of fully charged-off former MISN loans, which had no value at the acquisition date, and a $0.2 million increase in fees and service charge income, attributable to the new MISN customer accounts. These positive quarterly variances were offset by a $0.1 million decline in both mortgage origination and gain on sale income.

The decline in non-interest income for the year to date through September 30, 2014 is primarily the result of a $3.4 million decline of gains on the sale of investment securities for 2014 as compared to the same prior year period.  This decline was attributable to the gain on sale of $89.3 million of securities which were sold in the first quarter of 2013.  These securities were sold to reduce the overall duration of the investment securities portfolio to limit interest rate risk and to provide a funding source for our growing loan demand.  In addition, we experienced a reduction in the gain on mortgage loan sales and mortgage origination fee income of $1.3 million during the first nine months of 2014 as compared to the same prior year period. These negative year to date variances were partially offset by increases in fees and service charges of $0.6 million, and in other income of $0.3 million attributable to the recovery of fully charged-off former MISN loans, which had no value at the acquisition date.

Non-Interest Expenses

The table below sets forth changes in non-interest expenses as compared to the corresponding period last year:

	For the Three Months Ended				For the Nine Months Ended				Variances			Variances
	September 30,				September 30,				For the Three Months			For the Nine Months
	2014		2013		2014		2013		dollar		percentage	dollar			percentage
	(dollars in thousands)
Salaries and employee benefits	$	6,164	$	4,529	$	18,121	$	14,535	$	1,635	36.1%	$	3,586		24.7%
Occupancy and equipment	1,776		1,176		4,989		3,629		600		51.0%	1,360			37.5%
Information technology	756		658		2,403		1,925		98		14.9%	478			24.8%
Professional services	1,839		729		3,610		2,082		1,110		152.3%	1,528			73.4%
Regulatory assessments	351		212		862		851		139		65.6%	11			1.3%
Sales and marketing	232		170		595		438		62		36.5%	157			35.8%
Foreclosed asset costs and write-downs	55		23		182		131		32		139.1%	51			38.9%
Provision for mortgage loan repurchases	27		-		27		570		27		-	(543		)	-95.3%
Amortization of intangible assets	297		100		760		300		197		197.0%	460			153.3%
Merger, restructure and integration	748		-		8,785		-		748		-	8,785			-
Other expense	1,137		954		3,073		2,478		183		19.2%	595			24.0%
Total	$	13,382	$	8,551	$	43,407	$	26,939	$	4,831	56.5%	$	16,468		61.1%

Non-interest expense increased by $4.8 million and $16.5 million for the three and nine month periods ended September 30, 2014, as compared to the same prior year periods. These increases were largely driven by the impacts of the MISN merger.  Increases of $1.6 million in salaries and employee benefits costs and $0.6 million in occupancy and equipment costs for the three months ended September 30, 2014 were primarily attributable to the addition of MISN operating costs and MISN merger, restructure and integration costs contributed another $0.7 million to the third quarter, 2014 increase in non-interest expenses as compared to the third quarter of 2013.  Another significant component of the increase in quarterly non-interest expenses was due to increased professional service expenses of: 1) legal expenses of $0.6 million primarily related to a borrower litigation, 2) $0.3 million of outsourced bank secrecy act and anti-money laundering compliance, monitoring, and auditing services, and 3) $0.2 million related to the outsourcing of information technology management services, when compared to the third quarter of 2013.   Amortization of the intangible assets derived from the MISN purchase accounting and other expenses each contributed another $0.2 million increase in quarterly non-interest expenses for the third quarter, 2014 as compared to the same prior year period as well.

Heritage Oaks Bancorp |- 53 -

The largest variances for the nine month period ended September 30, 2014 were: 1) $8.8 million of merger, restructure, and integration costs, 2) $3.6 million increase in salaries and employee benefits, 3) $1.5 million increase in professional services, and 4) $1.4 million increase in occupancy and equipment expense.  MISN related merger, restructure and integration costs included $3.7 million of accruals related to termination benefits paid to employees displaced as a result of the merger and for retention of key employees through integration-related milestone dates, $2.1 million attributable to elimination of owned and leased facilities and related fixed assets, $1.8 million related to contractual cancellation costs of duplicative systems and services, $0.5 million to integrate the two banks’ operating systems, and $0.7 million of professional services paid to help facilitate the merger and integration. The addition of MISN operations is the primary reason for the $3.6 million increase in salaries and employee benefits and $1.4 million increase in occupancy and equipment expense for the nine months ended September 30, 2014 as compared to the same prior year period.   Professional services expenses were also elevated by $1.5 million on a year to date basis through September 30, 2014 due to: 1) increased costs related to the outsourcing of information technology management services of $0.5 million, 2) $0.4 million of outsourced bank secrecy act and anti-money laundering compliance, monitoring, and auditing services, and 3) $0.4 million due to litigation with a borrower, when compared to the same period in 2013. Amortization of the intangible assets derived from the MISN purchase accounting and other expenses contributed $0.5 million and $0.6 million increases in quarterly non-interest expenses for the third quarter, 2014, respectively, as compared to the same prior year period.  The first nine months of 2014 were also favorably impacted by the $0.5 million decline in the provision for mortgage repurchases.

Excluding the $8.8 million of merger, restructure, and integration costs from the first nine months of 2014 would result in total non-interest expense of $34.6 million, or 2.9% of assets on an annualized basis.  This compares with $26.9 million for the first nine months of 2013, or 3.3% of assets, annualized.

Provision for Income Taxes

For the three-month and nine-month periods ended September 30, 2014, the Company recorded income tax expense of approximately $1.7 million and $2.4 million, respectively.  This compares to an income tax provision of $1.6 million and $5.7 million for the comparable periods in 2013.  The changes in the provision for income taxes for the 2014 periods, as compared to the corresponding periods in 2013, can be attributed to the incremental changes in the components of earnings before taxes discussed above, most notably due to the merger, restructure, and integration expenses incurred in 2014 related to the merger with MISN.  The Company’s effective tax rate was 33.7% for the three months ended September 30, 2014, and 34.3% for the nine months ended September 30, 2014.  The effective tax rate for the corresponding periods in 2013 were 36.6% and 38.2%, respectively.  During the third quarter of 2014, the Bank’s combined overall federal and state tax rate before the impact of permanent differences increased to 42.05% from 41.67%, resulting in a one-time true-up to the balance of deferred tax assets.  Excluding the impact of this change, the Company’s effective overall tax rate for the three and nine months ended September 30, 2014 would have been 37.9% and 37.4%, respectively.  Excluding the impact of the merger and integration expenses in 2014, the effective tax rate would have been 39.1% for the nine months ended September 30, 2014.

The determination as to whether a valuation allowance should be established against deferred tax assets is based on the consideration of all available evidence using a “more likely than not” standard.  Management evaluates the realizability of the deferred tax assets on a quarterly basis.  Please see Note 6. Income Taxes, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q for additional information concerning the Company’s deferred tax assets.

Financial Condition

At September 30, 2014, total assets were approximately $1.7 billion.  This represents an increase of $513 million or 42.6% from that reported at December 31, 2013, of which $454 million was attributable to the merger with MISN.

At September 30, 2014, total deposits were approximately $1.4 billion, which was $449 million, or 46.1%, more than that reported at December 31, 2013.  The merger with MISN contributed $372 million to total deposits as of the merger date.

Heritage Oaks Bancorp | - 54 -

Total Cash and Cash Equivalents

Total cash and cash equivalents were $50.8 million and $26.2 million at September 30, 2014 and December 31, 2013, respectively. This line item will vary depending on daily cash settlement activities, the amount of highly liquid assets needed based on known events such as the repayment of borrowings or loans expected to be funded in the near future, and actual cash on hand in the branches.  On February 28, 2014, $37.6 million in cash and cash equivalents were acquired in conjunction with the MISN merger.

Investment Securities and Other Earning Assets

Other earning assets are comprised of interest-earning deposits with the Federal Reserve, Federal Funds Sold (funds the Company lends on a short-term basis to other banks), investments in securities and short-term interest-earning deposits at other financial institutions.  These assets are maintained for the liquidity needs of the Company, collateralization of public deposits, and diversification of the earning asset mix.

Securities Available for Sale

The Company manages its securities portfolio to provide a source of both liquidity and earnings.  The Company has invested in a mix of securities including obligations of U.S government agencies, mortgage backed securities and state and municipal securities. The Company has an Asset/Liability Committee that has developed investment policies based upon the Company’s operating needs and market circumstances.  The Company’s investment policy is formally reviewed and approved annually by the Board of Directors.  The Asset/Liability Committee is responsible for reporting and monitoring compliance with the investment policy.  Reports are provided to the Company’s Board of Directors on a regular basis.

The following table provides a summary of investment securities by securities type:

	September 30, 2014				December 31, 2013
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	16,923	$	16,891	$	6,243	$	6,208
Mortgage backed securities
U.S. government sponsored entities and agencies	242,947		241,130		186,981		182,931
Non-agency	11,913		11,936		10,924		11,032
State and municipal securities	78,829		80,687		51,532		50,030
Asset backed securities	31,988		31,793		26,935		26,594
Total available for sale securities	$	382,600	$	382,437	$	282,615	$	276,795

At September 30, 2014, the fair value of the investment portfolio was approximately $382.4 million, or $105.6 million higher than that reported at December 31, 2013.  The increase in the balance of the portfolio can primarily be attributed to the $76.2 million in investments acquired in the merger with MISN coupled with deposit growth over the year increasing available cash to invest.  Also during the first three quarters of 2014, the Bank sold $98.4 million of securities from the portfolio at a net gain of $549 thousand.

Securities available for sale are carried at fair value with related unrealized net gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital.  At September 30, 2014, the securities portfolio had unrealized losses, net of taxes, of approximately $0.1 million, an improvement of approximately $3.3 million from that reported at December 31, 2013.  Fluctuations in the fair value of the investment portfolio in the last three years can be attributed to market turbulence and volatility in overall interest rates, stemming in part from economic conditions. All fixed and adjustable rate mortgage pools and collateralized mortgage obligations contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages, where prepayments are directly impacted by interest rate changes.  The Company uses computer simulation models to test the average life, duration, market volatility and yield volatility of mortgage pools and collateralized mortgage obligations under various interest rate assumptions to monitor volatility.

The majority of the Company’s mortgage backed securities were issued by The Government National Mortgage Association (“Ginnie Mae”); The Federal National Mortgage Association (“Fannie Mae”); and The Federal Home Loan Mortgage Corporation (“Freddie Mac”).  These securities carry the guarantee of the issuing agencies.  At September 30, 2014, approximately $241.1 million or 95.3% of the Company’s mortgage related securities were issued by a government agency or government sponsored entities.

Heritage Oaks Bancorp |- 55 -

The following table sets forth the maturity distribution of available for sale securities in the investment portfolio and the weighted average yield for each category:

	September 30, 2014
	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
	(dollars in thousands)
Obligations of U.S. government agencies	$	117	$	476	$	14,503	$	1,795	$	16,891
Mortgage backed securities
U.S. government sponsored entities and agencies	36,510		96,446		56,776		51,398		241,130
Non-agency	731		10,704		501		-		11,936
State and municipal securities	975		14,473		60,808		4,431		80,687
Asset backed securities	-		2,534		11,794		17,465		31,793
Total available for sale securities	$	38,333	$	124,633	$	144,382	$	75,089	$	382,437
Amortized cost	$	38,459	$	124,890	$	143,476	$	75,775	$	382,600
Weighted average yield	1.92%		2.00%		2.52%		2.76%		2.34%

Federal Home Loan Bank (“FHLB”) Stock

As a member of the FHLB of San Francisco, the Company is required to hold a specified amount of FHLB capital stock based on the level of borrowings the Company has obtained from the FHLB.  As such, the amount of FHLB stock the Company carries can vary from one period to another based on, among other things, the current liquidity needs of the Company.  At September 30, 2014 and December 31, 2013, the Company held approximately $7.9 million and $4.7 million, respectively, in FHLB stock.  The increase of FHLB stock from December 31, 2013 was primarily due to FHLB stock acquired in the MISN merger.

Loans

Summary of Market Conditions

The addition of a new sales team focused on our region’s largest industry—agriculture—as well as the commercial and small business segments of the market, and single-family mortgages, has continued to contribute to net loan growth in 2014.  Gross loans increased $324.1 million during the first nine months of 2014, of which $280.3 million can be attributed to loans acquired in the MISN acquisition (as of February 28, 2014).  Excluding the impact of the loans acquired in the MISN acquisition, gross loans increased $43.8 million during the first nine months of 2014.  This increase is attributable to the Bank’s continued focus on organic loan growth in our region following our attention to the integration and retention of MISN customers during the second quarter of 2014, as well as $27.2 million in selective multi-family loan purchases during the third quarter of 2014 which were acquired for portfolio diversification.  We continue to see improving borrower activity and we anticipate that this increased activity in our existing markets, in conjunction with the Bank’s new sales team and our expansion into Ventura and Santa Barbara Counties with the opening of loan production offices during 2012 and 2013, have positioned the Bank for continued growth in the loan portfolio.

Although we are seeing some signs of stabilization in the local economies in which the Company operates, management realizes that a renewed decline in the global, national, state or local economies, and / or continued drought conditions on the Central Coast of California, may negatively impact local borrowers, as well as negatively impact values of real estate within our market footprint. As such, management continues to closely monitor credit trends and leading indicators for renewed signs of deterioration.  The Bank employs stringent lending standards and remains very selective with regard to loan originations, including CRE, real estate construction, land and commercial loans that it chooses to originate, in an effort to effectively manage risk in the current credit environment.  Additionally, purchased loans are evaluated under the same standards as originated loans.  The Company is focused on monitoring credit in order to take proactive steps, when and if necessary, to mitigate any material adverse impacts on the Company.

Heritage Oaks Bancorp | - 56 -

Credit Quality

The Company’s primary business is the extension of credit to individuals and businesses and the safekeeping of customers’ deposits. The Company’s policies concerning the extension of credit require risk analysis, including an extensive evaluation of the purpose for the loan request and the borrower’s ability and willingness to repay the Bank as agreed. The Company also considers other factors when evaluating whether or not to extend new credit to a potential borrower. These factors include the current level of diversification in the loan portfolio and the impact that funding a new loan will have on that diversification, legal lending limit constraints and any regulatory limitations concerning the extension of certain types of credit.

The credit quality of the loan portfolio is impacted by numerous factors, including the economic environment in the markets in which the Company operates, which can have a direct impact on the value of real estate securing collateral-dependent loans.  An inability of certain borrowers to continue to perform under the original terms of their respective loan agreements, in conjunction with declines in real estate collateral values, may result in increases in provisions for loan and lease losses that would, in turn, have an adverse impact on the Company’s operating results.  See also Note 5. Loans and Allowance for Loan and Lease Losses, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q for a more detailed discussion concerning credit quality, including the Company’s related policy.

Loans Held for Sale

Loans held for sale primarily consist of residential mortgage originations that have already been specifically designated for sale pursuant to correspondent mortgage loan investor agreements. There is minimal interest rate risk associated with these loans as purchase commitments are entered into with investors at the time the Company funds the loans. Settlement from the correspondents is typically within 30 to 60 days of funding the mortgage.  At September 30, 2014, mortgage correspondent loans (loans held for sale) totaled approximately $6.0 million compared to $2.4 million at December 31, 2013.  The increase in mortgage loans held for sale is reflective of increased activity in both purchase and refinance business.  Residential purchases have picked up due to the normal seasonal transition from the slow winter months, while refinance activity has been supported by the drop in interest rates from the start of the year.

Under the terms of the mortgage purchase agreements, the purchaser has the right to require the Company to either repurchase the mortgage or reimburse losses incurred by the purchaser, which are determined to have been directly caused by borrower fraud or misrepresentation.  Although the Company intends to vigorously challenge these and any future claims, the Company has a reserve of $0.4 million for these potential repurchases at September 30, 2014.  The Company has incurred losses of $1.6 million related to the settlement of nine loans since the beginning of 2011, the majority of which were associated with a group of loans originated and sold in 2007 that were made to related borrowers subsequently found guilty of financial fraud.

Heritage Oaks Bancorp |- 57 -

Summary of Loan Portfolio

At September 30, 2014, total gross loan balances were $1.2 billion.  This represents an increase of approximately $324.1 million, or 39.2%, from the $827.5 million reported at December 31, 2013.  The MISN merger provided $280.3 million of gross loans held for investment as of the February 28, 2014 merger date.

The following table provides a breakdown of total gross loans:

	September 30,			December 31,
	2014			2013			Variance
	Balance		Percentage	Balance		Percentage	Dollar		Percentage
	(dollars in thousands)
Real Estate Secured
Multi-family residential	$	76,821	6.7%	$	31,140	3.8%	$	45,681	146.7%
Residential 1 to 4 family	121,061		10.5%	88,904		10.7%	32,157		36.2%
Home equity line of credit	37,967		3.3%	31,178		3.8%	6,789		21.8%
Commercial	582,600		50.6%	432,203		52.1%	150,397		34.8%
Farmland	93,965		8.2%	50,414		6.1%	43,551		86.4%
Land	24,634		2.1%	24,523		3.0%	111		0.5%
Construction	17,845		1.5%	13,699		1.7%	4,146		30.3%
Total real estate secured	954,893		82.9%	672,061		81.2%	282,832		42.1%
Commercial
Commercial and industrial	143,861		12.5%	119,121		14.4%	24,740		20.8%
Agriculture	44,204		3.8%	32,686		4.0%	11,518		35.2%
Other	20		0.0%	38		0.0%	(18)		-47.4%
Total commercial	188,085		16.3%	151,845		18.4%	36,240		23.9%
Installment loans to individuals	8,198		0.8%	3,246		0.4%	4,952		152.6%
Overdrafts	400		0.0%	332		0.0%	68		20.5%
Total gross loans	1,151,576		100.0%	827,484		100.0%	324,092		39.2%
Deferred loan fees	(1,414)			(1,281)			(133)		10.4%
Allowance for loan and lease losses	(16,787)			(17,859)			1,072		-6.0%
Total net loans	$	1,133,375		$	808,344		$	325,031	40.2%
Loans held for sale	$	5,977		$	2,386		$	3,591	150.5%

Real Estate Secured Loans

As of September 30, 2014, real estate secured portfolios represented approximately $954.9 million or 82.9% of total gross loans.  When compared to that reported at December 31, 2013, this represents an increase of approximately $282.8 million, or 42.1%, of which $219.1 million can be attributed to the MISN merger.

Land Loans

The following table provides a break-down of the land segment of the Company’s real estate secured loan portfolio by property type:

	September 30, 2014							Percent of		Single
			Undisbursed		Total Bank		Percent	Total Risk	Number	Largest
	Balance		Commitment		Exposure		Composition	Based Capital	of Loans	Loan (1)
	(dollars in thousands)
Land
Single family residential	$	2,416	$	-	$	2,416	9.5%	1.4%	20	$	340
Single family residential - Spec.	447		-		447		1.8%	0.3%	4	303
Tract	8,833		-		8,833		34.7%	5.0%	6	10,673
Land - Multifamily	2,898		533		3,431		13.5%	1.9%	3	3,100
Commercial	9,480		258		9,738		38.3%	5.5%	23	1,680
Hospitality	560		-		560		2.2%	0.3%	1	599
Total land	$	24,634	$	791	$	25,425	100.0%	14.3%	57	$	10,673

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2014.

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At September 30, 2014, the land portfolio represented approximately $24.6 million, or 2.1%, of total gross loan balances, essentially unchanged from the corresponding balance reported at December 31, 2013.  The ratio of total land loans, including undisbursed commitments, to risk-based capital decreased from 20.0% at December 31, 2013 to 14.3% at September 30, 2014.

As of September 30, 2014, a total of $7.1 million of the land portfolio was risk graded special mention, substandard or doubtful.  This compares to $8.4 million of the land portfolio being risk graded special mention, substandard or doubtful as of December 31, 2013.

Construction Loans

The following table provides a break-down of the construction loan segment of the Company’s real estate secured loan portfolio by property type:

	September 30, 2014							Percent of		Single
			Undisbursed		Total Bank		Percent	Total Risk	Number	Largest
	Balance		Commitment		Exposure		Composition	Based Capital	of Loans	Loan (1)
	(dollars in thousands)
Construction
Single family residential	$	5,742	$	3,065	$	8,807	23.6%	5.0%	13	$	2,250
Single family residential - Spec.	395		1,178		1,573		4.2%	0.9%	3	1,000
Tract	811		-		811		2.2%	0.5%	2	812
Multi-family	195		2,500		2,695		7.2%	1.5%	2	2,500
Commercial	5,031		9,896		14,927		39.9%	8.4%	6	8,000
Hospitality	5,671		2,905		8,576		22.9%	4.8%	2	5,000
Total construction	$	17,845	$	19,544	$	37,389	100.0%	21.1%	28	$	8,000

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2014.

At September 30, 2014, the construction portfolio represented approximately $17.9 million, or 1.5%, of total gross loan balances, an increase of $4.2 million, or 30.3%, from that reported at December 31, 2013. This increase can be attributed to the MISN merger, which included $13.1 million of construction loans as of the merger date.  Construction loans are typically granted for a one year period and then refinanced at the completion of the construction project into permanent loans with varying maturities.  The ratio of total construction loans, including undisbursed commitments, to risk-based capital increased from 20.8% at December 31, 2013 to 21.1% at September 30, 2014.

As of September 30, 2014, there were $0.4 million of construction balances graded special mention, substandard or doubtful.  At December 31, 2013, there were no construction loans risk graded special mention, substandard or doubtful.

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Other Real Estate Secured Loans

The following table provides a break-down of all other real estate secured loans by type of real estate:

	September 30, 2014							Percent of		Single
			Undisbursed		Total Bank		Percent	Total Risk	Number	Largest		Owner
	Balance		Commitment		Exposure		Composition	Based Capital	of Loans	Loan (1)		Occupied
	(dollars in thousands)
Real Estate Secured
Retail	$	78,924	$	1	$	78,925	8.3%	44.5%	90	$	9,000	$	27,097
Professional	76,048		148		76,196		8.0%	43.0%	125	7,480		22,518
Hospitality	136,219		2,521		138,740		14.5%	78.3%	60	10,209		12,883
Multi-family	76,821		643		77,464		8.1%	43.7%	58	9,000		13,595
Home equity lines of credit	37,967		29,814		67,781		7.1%	38.3%	468	1,200		36,967
Residential 1 to 4 family	121,061		3,808		124,869		13.1%	70.5%	270	3,000		84,753
Farmland	93,965		4,598		98,563		10.3%	55.6%	61	6,900		58,317
Healthcare / medical	35,499		-		35,499		3.7%	20.0%	48	7,500		21,948
Restaurants / hospitality	12,998		-		12,998		1.4%	7.3%	24	2,393		8,569
Commercial	156,045		160		156,205		16.4%	88.2%	177	9,250		64,168
Other	86,867		206		87,073		9.1%	49.2%	66	13,713		36,634
Total real estate secured	$	912,414	$	41,899	$	954,313	100.0%	538.6%	1,447	$	13,713	$	387,449

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2014.

As of September 30, 2014, other real estate secured portfolios represented approximately $912.4 million or 79.2% of total gross loans.  When compared to that reported at December 31, 2013, this represents an increase of approximately $278.6 million, or 44.0%, of which $203.0 million can be attributed to the MISN merger.

As of September 30, 2014, a total of $41.9 million of the other real estate secured portfolio was risk graded as special mention, substandard or doubtful, with the largest single component being the commercial real estate segment, which represented $32.9 million.  This compares to $22.9 million of the other real estate secured balance and $18.1 million of commercial real estate loans being risk graded special mention, substandard or doubtful as of December 31, 2013.  Special mention, substandard or doubtful other real estate secured loans acquired in the MISN merger totaled $23.5 million, of which $20.8 million were in the commercial segment.  At September 30, 2014 and December 31, 2013, other real estate secured balances, including undisbursed commitments, represented 539% and 526%, respectively, of total risk-based capital. The increase in this percentage not only reflects impacts of the MISN merger, but also the increase in real estate lending over the first nine months of the year.

At September 30, 2014, approximately $387.5 million, or 42.5%, of the other real estate secured segment of the loan portfolio was considered owner occupied.

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Commercial Loans

The following table provides a break-down of the commercial and industrial (“C&I”) segment of the Company’s commercial loan portfolio by business type:

	September 30, 2014							Percent of		Single
			Undisbursed		Total Bank		Percent	Total Risk	Number	Largest
	Balance		Commitment		Exposure		Composition	Based Capital	of Loans	Loan (1)
	(dollars in thousands)
Commercial and Industrial
Agriculture	$	6,034	$	1,400	$	7,434	3.0%	4.2%	38	$	2,000
Oil gas and utilities	1,975		962		2,937		1.2%	1.7%	7	888
Construction	11,142		26,481		37,623		15.2%	21.2%	160	5,000
Manufacturing	18,012		11,377		29,389		11.9%	16.6%	116	3,000
Wholesale and retail	17,573		11,409		28,982		11.7%	16.4%	156	2,500
Transportation and warehousing	4,800		952		5,752		2.3%	3.2%	68	596
Media and information services	3,337		1,265		4,602		1.9%	2.6%	22	1,500
Financial services	7,176		2,333		9,509		3.8%	5.4%	40	3,000
Real estate / rental and leasing	19,271		14,425		33,696		13.6%	19.0%	116	6,522
Professional services	23,196		18,445		41,641		16.8%	23.5%	203	3,185
Healthcare / medical	8,342		8,007		16,349		6.6%	9.2%	106	11,464
Restaurants / hospitality	12,775		3,517		16,292		6.6%	9.2%	94	4,600
All other	10,228		3,473		13,701		5.4%	7.7%	247	2,000
Total commercial and industrial	$	143,861	$	104,046	$	247,907	100.0%	139.9%	1,373	$	11,464

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2014

At September 30, 2014, commercial and industrial loans represented approximately $143.9 million or 12.5% of total gross loan balances.  This represents an increase of approximately $24.7 million, or 20.8%, from December 31, 2013.  The year to date increase is attributed to the MISN merger, which added $34.6 million of commercial and industrial loans.  The ratio of total commercial and industrial loan balances, including undisbursed commitments, to risk-based capital decreased from 158% at December 31, 2013 to 140% at September 30, 2014.

The Company’s credit exposure within the commercial and industrial segment remains diverse with respect to the industries to which credit has been extended.  As of September 30, 2014, a total of $9.9 million of the commercial and industrial portfolio was risk graded as special mention, substandard or doubtful.  This compares to $13.1 million of the commercial and industrial portfolio being risk graded special mention, substandard or doubtful as of December 31, 2013.

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Agriculture Loans

The following table provides a break-down of the types of agriculture loans in the Company’s commercial loan portfolio:

	September 30, 2014							Percent of		Single
			Undisbursed		Total Bank		Percent	Total Risk	Number	Largest
	Balance		Commitment		Exposure		Composition	Based Capital	of Loans	Loan (1)
	(dollars in thousands)
Agriculture
Vegetable and mellon farming	$	9,320	$	5,770	$	15,090	17.7%	8.5%	17	$	4,000
Fruit and tree nut farming	16,765		19,215		35,980		42.2%	20.3%	31	6,470
Other crop farming	36		1,175		1,211		1.4%	0.7%	4	650
Animal production	2,850		5,542		8,392		9.8%	4.7%	39	1,500
Support activities for agriculture	3,485		4,574		8,059		9.4%	4.5%	22	1,800
Food, beverage and tobacco	6,881		3,917		10,798		12.7%	6.1%	26	2,000
Wholesale merchants	3,009		928		3,937		4.6%	2.2%	9	1,500
Transportation and warehousing	148		1		149		0.2%	0.1%	4	75
All other	1,710		-		1,710		2.0%	0.9%	4	1,600
Total agriculture	$	44,204	$	41,122	$	85,326	100.0%	48.2%	156	$	6,470

(1)          Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2014.

At September 30, 2014, the agriculture portfolio totaled approximately $44.2 million, or 3.8%, of total gross loan balances, which represents an increase of $11.5 million, or 35.2%, when compared to that reported at December 31, 2013.  The increase in the portfolio is associated with the MISN merger, which provided an additional $18.1 million of agriculture loans, partially offset by repayments of existing loans.  At September 30, 2014 and December 31, 2013, the agriculture portfolio, including undisbursed commitments, represented 48%, of the Bank’s total risk-based capital.

As of September 30, 2014, a total of $2.6 million of the agriculture portfolio was risk graded as special mention, substandard or doubtful.  This compares to $1.4 million of the agriculture portfolio being risk graded special mention, substandard or doubtful as of December 31, 2013.  The increase in the special mention, substandard or doubtful risk grades of agriculture loans is attributable to loans acquired in the MISN merger.

Consumer Installment Loans

At September 30, 2014, the installment loan portfolio totaled approximately $8.2 million, as compared to the $3.2 million reported at December 31, 2013.  This increase is due to the MISN merger, which included $7.5 million of consumer installment loans as of the merger date.  Installment loans include revolving credit plans, consumer loans and credit card balances.

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Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table provides a summary of the approximate maturities and sensitivity to changes in interest rates for the loan portfolio as well as information about fixed and variable rate loans.  A large portion of the growth in the loan portfolio is for loans with maturities of more than 5 years, which is consistent with the fact that much of the loan growth has been in the real estate secured segment. Variable rate loans currently at or below their floor are classified as variable in the table below:

	September 30, 2014
					Due Over		Due Over		Due Over
	Due Less		Due		12 Months		3 Years		5 Years
	Than 3		3 To 12		Through		Through		Through		Due Over
	Months		Months		3 Years		5 Years		15 Years		15 Years		Total
	(dollars in thousands)
Real Estate Secured
Multi-family residential	$	3,111	$	2,934	$	11,431	$	37,268	$	21,814	$	263	$	76,821
Residential 1 to 4 family	5,873		3,398		15,756		44,506		48,884		2,644		121,061
Home equity line of credit	37,840		80		38		-		-		9		37,967
Commercial	52,160		57,944		129,291		170,000		172,802		403		582,600
Farmland	11,610		377		13,018		13,701		55,259		-		93,965
Land	18,395		717		2,094		2,289		1,139		-		24,634
Construction	8,877		1,177		420		3,543		3,828		-		17,845
Commercial
Commercial and industrial	77,678		10,150		12,772		23,748		19,290		223		143,861
Agriculture	35,502		384		3,164		4,565		589		-		44,204
Other	-		20		-		-		-		-		20
Installment loans to individuals	800		307		338		610		5,072		1,071		8,198
Overdrafts	400		-		-		-		-		-		400
Total loans held for investment	$	252,246	$	77,488	$	188,322	$	300,230	$	328,677	$	4,613	$	1,151,576
Variable rate loans (1)	$	230,388	$	63,587	$	131,698	$	214,526	$	111,844	$	263	$	752,306
Fixed rate loans	21,858		13,901		56,624		85,704		216,833		4,350		399,270
Total loans held for investment	$	252,246	$	77,488	$	188,322	$	300,230	$	328,677	$	4,613	$	1,151,576

(1)Variable rate loans include $553.6 million of loans that are at or below their contractual floor rates.  To the extent that overall interest rates rise, the Company will not experience the benefit of rising interest rates until rates rise above their floors.

Allowance for Loan and Lease Losses

The Company maintains an ALLL to absorb probable incurred losses inherent in the loan and lease portfolio as of the balance sheet date.  The ALLL is based on ongoing assessments of the estimated probable losses presently inherent in the loan portfolio.  In evaluating the level of the ALLL, management considers the types of loans and leases and the amount of loans and leases in the portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  This methodology takes into account many factors, including the Company’s own historical loss trends, loan and lease level credit quality ratings, loan and lease specific attributes, along with a review of various credit metrics and trends.  The process involves subjective as well as complex judgments.  The Company uses a “stake in the ground” historical loss experience, which covers the Company’s losses for the period from October 2009 through current quarter end in analyzing an appropriate reserve factor for all loans.  The purpose of retaining the fourth quarter 2009 losses in our historical loss experience is to ensure that we retain a complete credit cycle in our ALLL analysis.  In addition, the Company uses adjustments for numerous factors, including those found in the Interagency Guidance on ALLL, which include current economic conditions, loan and lease seasoning, underwriting experience, and collateral value changes, among others.  The Company evaluates all impaired loans and leases individually, using guidance from ASC 310, primarily through the evaluation of cash flows or collateral values.

Heritage Oaks Bancorp |- 63 -

The ALLL is increased by provisions for loan and lease losses charged to earnings, and decreased by loan and lease charge-offs, net of recovered balances.  Please see Note 4. Loans, and Note 5. Allowance for Loan Losses of the Condensed Consolidated Financial Statements filed as part of the Annual Report on Form 10-K for the year ended December 31, 2013, for a detailed discussion concerning the Company’s methodology for determining an adequate ALLL.  Also see Note 1. Summary of Significant Accounting Policies, of the Consolidated Financial Statements filed as part of the Annual Report on Form 10-K for the year ended December 31, 2013, which contains additional discussion concerning the ALLL, loan charge-offs, and credit risk management.

The Company allocates the ALLL across product types within the loan portfolio.  The following table provides a summary of the ALLL and its allocation to each major product type of the loan portfolio, as well as the proportion that each major category’s ALLL represents as a percentage of the gross loan balances in the category:

	September 30,						December 31,
	2014			2013			2013
			Percent			Percent			Percent
	Amount		of Loan	Amount		of Loan	Amount		of Loan
	Allocated		Segment	Allocated		Segment	Allocated		Segment
				(dollars in thousands)
Real Estate Secured
Multi-family residential	$	441	0.6%	$	157	0.8%	$	239	0.8%
Residential 1 to 4 family	1,354		1.1%	685		1.4%	1,225		1.4%
Home equity line of credit	112		0.3%	146		0.4%	147		0.5%
Commercial	6,048		1.0%	4,789		1.1%	6,456		1.5%
Farmland	1,564		1.7%	514		1.1%	958		1.9%
Land	2,225		9.0%	4,631		19.6%	3,402		13.9%
Construction	117		0.7%	239		2.3%	258		1.9%
Commercial
Commercial and industrial	3,291		2.3%	5,155		4.6%	3,653		3.1%
Agriculture	1,023		2.3%	971		3.9%	1,128		3.5%
Other	-		0.0%	-		0.0%	-		0.0%
Installment loans to individuals	74		0.9%	88		2.1%	99		3.1%
Overdrafts	35		8.8%	32		19.4%	32		9.6%
Unallocated	503			60			262
Total allowance for loan and lease losses	$	16,787	1.5%	$	17,468	2.4%	$	17,859	2.2%

The Company acquired MISN on February 28, 2014 and the loans and leases acquired are recorded according to the guidance under ASC 805, “Accounting for Acquisitions.” See also Note 2. Business Combination of the Consolidated Financial Statements for more information concerning the acquisition of MISN.  The acquired loans and leases include loans and leases that are accounted for under ASC 310-30.  During the nine months ended September 30, 2014, there was no provision for loan and lease losses or ALLL related to these loans, as they were acquired at an aggregate $10.0 million, or 3.4%, discount to the aggregated unpaid principal balances.  As of September 30, 2014, the remaining unaccreted discount on the acquired MISN loans was $8.3 million and was determined by management to be adequate to absorb credit losses inherent in that portfolio.  Of the total loans acquired through the MISN transaction 5.7% are designated as PCI as of the acquisition date.  These PCI loans carried an average 23.2% discount at acquisition.  The remaining 94.3% of loans are accounted for under ASC 310 “Receivables” and carried an average discount of 2.3% at acquisition.  The Company may need to recognize provisions for loan and lease losses in the future if there is further deterioration in these loans after the purchase date such that the impairment exceeds the non-accretable yield and purchase discount.  On a quarterly basis, the Company re-forecasts its expected cash flows for the PCI loans relating to the MISN acquisition to determine if there is potential impairment, which may require additional provisions for loan and lease losses or, if projected cash flows are significantly improved, a reclassification of the non-accretable yield to accretable yield may result.  The third quarter 2014 cash flow re-forecast resulted in no adjustment to goodwill and did not result in any impairment.

Heritage Oaks Bancorp | - 64 -

The balance of the ALLL decreased by $1.1 million during the first nine months of 2014 due to net charge-offs, and decreased by 79 basis points as a percentage of gross loans, as compared to the corresponding period in 2013, primarily due to the fact that no ALLL has been provided for the MISN loans acquired at February 28, 2014 and because the credit quality of the legacy Heritage Oaks portfolio has improved over the last year.  The improvement in the credit quality of the legacy Heritage Oaks portfolio is reflected in a number of indicators, all of which have trended favorably over the last year, and virtually all of which are at or near their lowest levels since the credit crisis peaked in 2010.  The indicators we believe are most indicative of the improving credit quality of the legacy Heritage Oaks portfolio include: the level of legacy substandard and doubtful loans, which have declined $17.7 million or 38.6% since the third quarter of 2013; the level of Heritage Oaks’ legacy non-accrual loans, which have declined $2.8 million, or 22.0% since the third quarter of 2013; and the ratio of classified assets to Tier 1 capital plus the ALLL, which has improved from 33.6% to 24.9% since the third quarter of 2013.

The following table details changes in the ALLL for the periods indicated:

	For the Nine Months Ended
	September 30,
	2014		2013
	(dollars in thousands)
Balance, beginning of period	$	17,859	$	18,118
Charge-offs:
Real Estate Secured
Residential 1 to 4 family	92		23
Commercial	1,027		108
Land	-		34
Construction	-		169
Commercial
Commercial and industrial	650		770
Agriculture	-		367
Installment loans to individuals	8		380
Total charge-offs	1,777		1,851
Recoveries:
Real Estate Secured
Residential 1 to 4 family	-		43
Home equity line of credit	10		9
Commercial	25		77
Farmland	-		14
Land	30		45
Construction	2		2
Commercial
Commercial and industrial	582		832
Agriculture	46		115
Installment loans to individuals	10		64
Total recoveries	705		1,201
Net charge-offs	1,072		650
Balance, end of period	$	16,787	$	17,468
Gross loans, end of period	$	1,151,576	$	777,154
Allowance for loan and lease losses to total gross loans	1.46%		2.25%
Net charge-offs to average loans	0.14%		0.12%

Net charge-offs during the nine months ended September 30, 2014 totaled $1.1 million.  This compares to net charge-offs of approximately $0.7 million, reported for the corresponding period last year.  The charge-offs for the nine months ended September 30, 2014 were attributable primarily to two larger loans which totaled $1.7 million.  For the nine months ended September 30, 2013, charge-offs were largely attributable to a $0.2 million loss realized on the sale of collateral for the loan transferred into OREO in the first quarter of 2013.

Annualized net charge-offs to average loans for the three month and nine month periods ended September 30, 2014 were (0.06)% and 0.14%, respectively.  This compares to 0.24% and 0.12%, respectively, reported for the corresponding periods in 2013.  At September 30, 2014, the ALLL represented 1.46% of total gross loans compared to 2.25% reported at December 31, 2013.  The decline is due to the impact of MISN acquired loans on this ratio and the $1.1 million of net charge-offs for the year to date 2014 period.  MISN acquired loans are included in gross loans but have no ALLL as they are carried at their fair value.

Heritage Oaks Bancorp | - 65 -

The ALLL that was collectively evaluated for impairment on legacy Heritage loans and leases at September 30, 2014 was $14.7 million, or 1.64% of total legacy Heritage loans and leases, $14.7 million, or 1.81% of total legacy Heritage loans and leases, as of December 31, 2013 and $10.6 million or 1.40% at September 30, 2013.  Including the non-credit impaired loans acquired through the MISN acquisition, the ALLL that was collectively evaluated for impairment was $14.7 million as of September 30, 2014, which represents 1.31% of the total of such loans and leases.  The qualitative component of the ALLL that was collectively evaluated for impairment was $5.3 million, or 0.46%, at September 30, 2014, $4.1 million or 0.51% at December 31, 2013, and $2.8 million or 0.37% at September 30, 2013, as a percentage of loans and leases collectively evaluated for impairment.  When the impact of the inclusion of the MISN loans is removed from the percentage calculation of our qualitative factors as a percentage of gross loans, this component of the ALLL represents 0.58% of legacy Heritage loans and leases at September 30, 2014.  The qualitative component of the ALLL increased on a dollar basis and as a percentage basis of legacy Heritage loans over the last year primarily due to the potential impacts resulting from the concentration in CRE loans and of the prolonged California drought on our loan portfolio. We have increased our qualitative factors for the impact of the California drought on our customer’s businesses over the past quarter due to our concern about the impact directly to agriculture, and indirectly to other businesses such as hospitality and tourism, because of the continued lack of precipitation in California, and our region of the state. Evidence of the drought’s impact on agricultural businesses are noted in recent studies indicating that the 2014 drought is responsible for the greatest absolute reduction in water availability to agriculture ever seen in California and that it is statistically likely that the drought will continue through 2015, regardless of El Nino conditions. Furthermore, certain municipalities within California have also begun to mandate water conservation measures that cite specific usage reductions and have limited the use of water for particular applications such as landscape watering, car washing and other applications.  These facts along with discussions with some of our borrowers as it relates to expected decreases in cash flows related to the drought supported management’s decision to increase the qualitative factors within the ALLL for the impact of the drought on our loan portfolio.

The component of the ALLL that was for legacy Heritage and acquired MISN loans and leases individually evaluated for impairment was $2.1 million at September 30, 2014, compared to $3.1 million at December 31, 2013 and $6.8 million at September 30, 2013.  An unallocated ALLL of $503 thousand was held at September 30, 2014, as compared to $262 thousand as of December 31, 2013 and $60 thousand as of September 30, 2013.  The Company provided no provision for loan and lease losses during the nine-month periods ended September 30, 2014, and September 30, 2013.

As of September 30, 2014, management believes that the ALLL was sufficient to cover current estimable losses in the Company’s loan portfolio.

Non-Performing Assets

Non-performing assets are comprised of loans placed on non-accrual status and foreclosed assets (OREO and other repossessed assets). Generally, the Company places loans on non-accruing status when (1) the full and timely collection of all amounts due become uncertain, (2) a loan becomes 90 days or more past due (unless well-secured and in the process of collection) or (3) any portion of outstanding principal has been charged-off.  See Note 5. Loans and Allowance for Loan and Lease Losses, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q for additional discussion concerning non-performing loans, as well as a discussion concerning credit quality.

The following table provides a summary of non-performing loans and foreclosed assets:

	September 30,		December 31,		Variance
	2014		2013		Dollar			Percent
	(dollars in thousands)
Non-performing loans
Residential 1-4 family	$	97	$	449	$	(352	)	-78.4%
Home equity lines of credit	100		-		100			100.0%
Commercial real estate	1,938		672		1,266			188.4%
Land	5,226		5,910		(684		)	-11.6%
Commercial and industrial	2,182		2,180		2			0.1%
Agriculture	685		789		(104		)	-13.2%
Installment	46		117		(71		)	-60.7%
Total non-performing loans	10,274		10,117		157			1.6%
Other real estate owned	-		-		-			-
Total non-performing assets	$	10,274	$	10,117	$	157		1.6%
TDRs
Accruing	$	5,245	$	5,853	$	(608	)	-10.4%
Included in non-performing loans	6,791		7,076		(285		)	-4.0%
Total TDRs	$	12,036	$	12,929	$	(893	)	-6.9%
Ratio of allowance for loan and lease losses to total gross loans	1.46%		2.16%
Ratio of non-performing loans to total gross loans	0.89%		1.22%
Ratio of non-performing assets to total assets	0.60%		0.84%

Heritage Oaks Bancorp | - 66 -

At September 30, 2014, the balance of non-accruing loans was approximately $10.3 million or $0.2 million higher than that reported at December 31, 2013.  The increase in non-accruing loans during the first nine months of 2014 can be attributed to: $6.1 million of loans placed in non-accruing status, including $0.7 million of additions from the MISN transaction, net paydowns of $3.0 million, $2.1 million of loans returned to accrual status and $1.5 million of net charge-offs and transfers to foreclosed collateral.

The following tables reconcile the change in total non-accruing balances for the three and nine months ended September 30, 2014:

	Balance		Additions to					Transfers		Returns to						Balance
	June 30,		Non-Accruing		Net			to Foreclosed		Performing			Net			September 30,
	2014		Balances		Paydowns			Collateral		Status			Charge-offs			2014
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	$	101	$	-	$	(4	)	$	-	$	-		$	-		$	97
Home equity line of credit	100		-		-			-		-			-			100
Commercial	2,109		1,565		(501		)	-		(1,225		)	(10		)	1,938
Land	5,903		108		(785		)	-		-			-			5,226
Commercial
Commercial and industrial	2,455		249		(396		)	-		(126		)	-			2,182
Agriculture	724		-		(2		)	-		(37		)	-			685
Installment loans to individuals	19		29		(2		)	-		-			-			46
Totals	$	11,411	$	1,951	$	(1,690	)	$	-	$	(1,388	)	$	(10	)	$	10,274

	Balance		Additions to		Additions					Transfers			Returns to						Balance
	December 31,		Non-Accruing		due to		Net			to Foreclosed			Performing			Net			September 30,
	2013		Balances		merger		Paydowns			Collateral			Status			Charge-offs			2014
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	$	449	$	-	$	-	$	(12	)	$	(248	)	$	-		$	(92	)	$	97
Home equity line of credit	-		100		-		-			-			-			-			100
Commercial	672		4,388		137		(871		)	(137		)	(1,225		)	(1,026		)	1,938
Land	5,910		296		-		(980		)	-			-			-			5,226
Commercial
Commercial and industrial	2,180		1,283		568		(1,012		)	-			(837		)	-			2,182
Agriculture	789		-		-		(67		)	-			(37		)	-			685
Installment loans to individuals	117		31		-		(100		)	-			-			(2		)	46
Totals	$	10,117	$	6,098	$	705	$	(3,042	)	$	(385	)	$	(2,099	)	$	(1,120	)	$	10,274

Heritage Oaks Bancorp | - 67 -

Goodwill

The following table summarizes the consideration paid for MISN, the amounts of assets acquired and liabilities assumed and the resulting goodwill recognized at the acquisition date:

	February 28, 2014
	(dollars in thousands)
Consideration paid
Cash payments for MISN shares outstanding	$	2,554
Cash payments for MISN warrants	5,766
Cash payments for MISN options	387
Shares issued, @ $7.99 per share	60,255
Total consideration	$	68,962
Net assets pre-acquisition	41,526
Fair value adjustments:
Loans receivable	$	(9,982)
Allowance for loan and lease losses	4,441
Fixed Assets	845
Core deposit intangible	5,060
Deferred taxes assets, net	11,885
Other assets	(217)
Certificates of deposit purchase premium	(78)
Federal Home Loan Bank advances	(71)
Junior subordinated debentures	3,444
Lease liability	(1,217)
Other liabilities	27
Total fair value adjustments	14,137
Fair value of net assets acquired	55,663
Excess of consideration paid over fair value of net assets acquired, i.e., goodwill	$	13,299

The goodwill of $13.3 million arising from the acquisition represents the additional consideration paid above the fair value of net assets acquired.  As this transaction was structured as a tax-free exchange, the goodwill will not be deductible for tax purposes.

During the three months ended September 30, 2014, goodwill related to the MISN acquisition was increased by $60 thousand.  The net impact of decreases in goodwill resulting from upward revisions of deferred tax assets of $105 thousand and increases of goodwill, due to $102 thousand of decreased value of buildings held for sale, additional pre-acquisition expenses recognized of $39 thousand, and a $24 thousand reduction in the value of SBA servicing assets acquired, resulted in a combined increase to goodwill during the measurement period.

Other Real Estate Owned (“OREO”)

At September 30, 2014 and December 31, 2013 the Company held no OREO.  The Company foreclosed on one loan in the first quarter of 2013, and sold the underlying collateral within that same quarter at a loss of $0.2 million, which was reflected as a charge-off against the ALLL.  The Company also foreclosed on a $1.2 million commercial property that was the underlying collateral on a former MISN loan which carried no value at acquisition because the loan had been guaranteed by the Small Business Administration (“SBA”), and MISN had previously collected the 90% guarantee from the SBA upon borrower default and subsequently charged off the remaining 10%.  The Company received the rights to foreclose on the collateral after the February 28, 2014 acquisition date, and subsequently foreclosed on and sold the property in the third quarter of 2014.  The majority of the sales proceeds were returned to the SBA as a refund of their 90% guarantee; however there were additional funds from the collateral sale above the amount reimbursable to the SBA of $0.1 million which were recorded as other non-interest income.

Heritage Oaks Bancorp |- 68 -

Deposits and Borrowed Funds

Deposits

The following table provides a summary for the year to date change in various categories of deposit balances:

	September 30,		December 31,		Variance
	2014		2013		Dollar		Percentage
	(dollars in thousands)
Non-interest bearing deposits	$	469,435	$	291,856	$	177,579	60.84%
Interest bearing deposits:
NOW accounts	108,186		87,298		20,888		23.93%
Other savings deposits	106,211		42,648		63,563		149.04%
Money market deposit accounts	455,045		332,272		122,773		36.95%
Time deposits	284,057		219,821		64,236		29.22%
Total deposits	$	1,422,934	$	973,895	$	449,039	46.11%

As indicated in the table above, total deposit balances at September 30, 2014 were approximately $1.4 billion.  This represents an increase of approximately $449.0 million, or 46.1%, when compared to that reported at December 31, 2013.  The MISN merger contributed $371.5 million to deposit growth as of the merger date, including $137.6 million in non-interest bearing deposits.

The Company continues to focus on gathering and retaining core relationships, which has helped to reduce the overall cost of funding.  At September 30, 2014, core deposits, which are defined as total deposits exclusive of time deposits over $100,000, represented 85.1% of total deposits, up from the 84.7% reported at December 31, 2013, due largely to core deposits acquired in the MISN merger.

Borrowed Funds

The Bank has a variety of sources from which it may obtain secondary funding beyond deposit balances.  These sources include, among others, the FHLB, the FRB and credit lines established with correspondent banks.  At September 30, 2014, FHLB borrowings were $75.6 million, or $12.9 million lower than that reported at December 31, 2013.  Borrowings are obtained for a variety of reasons which include, but are not limited to: asset-liability management; funding loan growth; and to provide additional liquidity. The decrease in the level of FHLB borrowings in 2014 was the result of maturities of short-term borrowings that were not rolled over.

Capital

At September 30, 2014, the balance of shareholders’ equity was approximately $194.1 million.  This represents an increase of approximately $67.7 million over that reported at December 31, 2013.  The year to date change was primarily attributable to 7,541,326 shares issued at a price of $7.99 per common share as part of the consideration in the MISN merger, which totaled $60.3 million and was partially offset by $0.3 million of related stock issuance costs.  Current year net income contributed $4.6 million to shareholders’ equity and was offset by payment of $1.0 million of common stock dividends.  The components of comprehensive income (net income and unrealized gains on securities available for sale) provided $3.3 million of equity for the first nine months of 2014, while adjustments related to share based compensation provided an additional $0.9 million.

Dividends

On July 23, 2014, the Company’s Board of Directors declared a cash dividend of $0.03 per share, payable on September 15, 2014, to shareholders of the Company’s common stock as of August 29, 2014.  Holders of the Company’s Series C Preferred Stock are also entitled to a per share dividend equivalent to the common dividend declared for which each share of Series C Preferred Stock is convertible into common stock.

Heritage Oaks Bancorp |- 69 -

On October 29, 2014, the Company’s Board of Directors declared a cash dividend of $0.05 per share, payable on December 1, 2014, to shareholders of the Company’s common stock as of November 17, 2014.  Holders of the Company’s Series C Preferred Stock are also entitled to a per share dividend equivalent to the common dividend declared for which each share of Series C Preferred Stock is convertible into common stock.

The Company did not pay any dividends on its common stock in 2013.

Regulatory Capital

Bancorp and the Bank seek to maintain strong levels of capital in order to be considered “well-capitalized” as determined by regulatory agencies.  Bancorp’s potential sources of capital include retained earnings and the issuance of equity.

At September 30, 2014, Bancorp had $16.5 million in Junior Subordinated Deferrable Interest Debentures (the “debt securities”) issued and outstanding.  These debt securities were issued to three different trusts, as follows:

	Amount		Carrying		Current	Issue	Scheduled
	Issued		Value		Rate	Date	Maturity	Rate Type
	(dollars in thousands)
Heritage Oaks Capital Trust II	$	8,248	$	8,248	1.96%	27-Oct-06	Aug-37	Variable 3-month LIBOR + 1.72%
Mission Community Capital Trust I	$	3,093	$	2,128	3.18%	14-Oct-03	Oct-33	Variable 3-month LIBOR + 2.95%
Santa Lucia Bancorp (CA) Capital Trust	$	5,155	$	2,803	1.71%	28-Apr-06	Jul-36	Variable 3-month LIBOR + 1.48%

These three issues of debt securities are callable by Bancorp at par.  At September 30, 2014, the Company included $12.8 million of the debt securities in its Tier I Capital for regulatory reporting purposes.  For a more detailed discussion regarding junior subordinated debt securities, see Note 11, Borrowings, in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Beginning in April 2012 and through its termination in April 2013, the Bank operated subject to the terms of a MOU with the FDIC and the DFI, which replaced the consent order stipulated to by the Bank in March 2010.  Under the MOU the Bank agreed to continue to adhere to the 10.0% Tier 1 leverage ratio previously set by the consent order.  With the termination of the MOU in April 2013, the need to continue to adhere to the 10.0% leverage ratio was removed.  See also Note 19, Regulatory Matters, in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information related to the consent order and written agreement as they pertain to these requirements.

On July 17, 2013, Bancorp repurchased all 21,000 outstanding shares of the Series A Preferred Stock that was held by the U.S. Department of the Treasury under the TARP CPP program.  The shares were repurchased at par plus accrued but unpaid dividends for a total of $21.2 million.  On July 30, 2013, Bancorp reached an agreement with the U.S. Department of the Treasury to repurchase the related warrant to purchase 611,650 shares of Bancorp’s common stock for $1.6 million.  The decision to repurchase the Preferred Stock and the outstanding warrant was made to mitigate the dilutive effect these instruments had on common shareholders.  The funds for this repurchase were made available through a one-time dividend from the Bank to Bancorp.

The following table provides the general minimum regulatory capital ratios and a summary of Company and Bank regulatory capital ratios, which reflect that both Bancorp and Bank meet the criteria to be considered “well capitalized”:

	Regulatory
	Standard to	September 30, 2014		December 31, 2013		September 30, 2013
	be Well	Heritage Oaks		Heritage Oaks		Heritage Oaks
	Capitalized	Bancorp	Bank	Bancorp	Bank	Bancorp	Bank
Ratio
Leverage ratio	5.00%	10.00%	9.77%	10.20%	9.82%	10.58%	10.05%
Tier I capital to risk weighted assets	6.00%	12.87%	12.58%	12.91%	12.42%	13.27%	12.59%
Total capital to risk weighted assets	10.00%	14.12%	13.83%	14.17%	13.68%	14.53%	13.85%

Bancorp’s Leverage Ratio declined by 20 basis points to 10.00% for the third quarter of 2014 from 10.20% for the fourth quarter of 2013, primarily due to the increase in disallowed intangibles and deferred tax assets related to the MISN merger.  Comparing the components of our Leverage Ratio for the third quarter of 2014 to those reported for the fourth quarter of 2013 reveals that total capital increased by 53.5% compared to a 41.4% increase in average quarterly assets.

Heritage Oaks Bancorp |- 70 -

This implies that our Leverage Ratio may have increased as compared to the fourth quarter of 2013 however, the increase in disallowed intangibles and deferred tax assets muted the increase to Tier 1 Capital which only rose by 38.3%, after factoring in these adjustments, resulting in a slightly smaller increase to Tier 1 Capital than the increase to average quarterly assets for the third quarter of 2014 compared to the fourth quarter of 2013.  Bancorp’s Leverage Ratio declined by 58 basis points for the third quarter of 2014 when compared to the third quarter of 2013, for the same reason as the decline compared to December 31, 2013, however the decline was more pronounced due to a larger spread between the increase in Tier 1 Capital and the increase in average assets.

As of September 30, 2014, Bancorp’s Tier 1 Risk Based Capital Ratio and Total Risk Based Capital Ratio decreased from year-end 2013 by 4 and 5 basis points, to 12.87% and 14.12%, respectively, due primarily to the impact of the MISN acquisition.  Risk Weighted Assets, Total Risk Based Capital and Tier 1 Capital all increased by similar amounts due to the MISN merger and, therefore, there was not a material change in our Risk Based Capital Ratios as compared to the fourth quarter of 2013.  On a year over year basis, Bancorp’s Tier 1 Risk Based Capital Ratio and Total Risk Based Capital Ratio decreased by 40 and 41 basis points, because risk weighted assets grew by a faster rate than our Tier 1 Capital and Total Risk Based Capital.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.

In the ordinary course of business, the Company has entered into off-balance sheet arrangements consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.  For a more detailed discussion of these financial instruments, refer to Note 18, Commitments and Contingencies, in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

In the ordinary course of business, the Company is a party to various operating leases, including an office building lease obligation that was assumed in the MISN merger and expires in 2024.  Monthly rentals under this lease are currently approximately $44 thousand, subject to annual escalation based on the Consumer Price Index.  For a more detailed discussion of other operating leases, refer to Note 18, Commitments and Contingencies, in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Company is contingently liable for letters of credit made to its customers in the ordinary course of business totaling $15.4 million and $17.0 million at September 30, 2014 and December 31, 2013, respectively.  The Company has also guaranteed to a third party servicer, the repayment of the funded and available balances of credit card accounts acquired in the MISN acquisition.  This guarantee totaled approximately $0.8 million at September 30, 2014.  For a more detailed discussion of these financial instruments refer to Note 18, Commitments and Contingencies, in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  Additionally, at September 30, 2014 and December 31, 2013, the Company had undisbursed loan commitments made in the ordinary course of business totaling $229.5 million and $181.5 million, respectively.  These loan commitments and letters of credit are shown in the table below.

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	September 30,		December 31,
	2014		2013
	(dollars in thousands)
Commitments to extend credit
Home equity lines of credit	$	29,814	$	23,365
Credit card lines	1,565		1,770
Commitments secured by real estate	33,370		35,005
Commitments not secured by real estate	7,571		7,030
Commercial and industrial commitments	98,914		73,461
Agriculture commitments	41,122		28,010
Other unused commitments	17,108		12,804
Standby letters of credit	15,430		17,036
Total commitments and standby letters of credit	$	244,894	$	198,481

At both September 30, 2014 and December 31, 2013, the Company’s allowance for losses on unfunded loan commitments was $0.5 million and $0.4 million, respectively.

In connection with the $8.25 million in debt securities issued to Heritage Oaks Capital Trust II, the Company issued a full and unconditional payment guarantee of certain accrued distributions by Heritage Oaks Capital Trust II.  Similarly, for the $8.25 million in par value of trust preferred securities that the Company assumed as part of the merger with MISN, the Company is the full and unconditional guarantor of distributions of the issuing trusts.  There are no Special Purpose Entity trusts, corporations, or other legal entities established by the Company which reside off-balance sheet.  Management is not aware of any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

The following table provides a summary for the Company’s long-term debt and other long-term obligations, including the anticipated payments under salary continuation plans, assuming attainment of the designated retirement age, as of September 30, 2014:

	Less Than		One to Three		Three to Five		More than		September 30,		September 30,
	One Year		Years		Years		Five Years		2014		2013
	(dollars in thousands)
FHLB Advances and other borrowings	$	10,000	$	20,000	$	22,500	$	23,000	$	75,500	$	57,500
Operating lease obligations	1,884		2,574		1,850		2,978		9,286		3,054
Salary continuation payments	235		516		536		4,306		5,593		5,842
Junior subordinated debentures	-		-		-		16,496		16,496		8,248
Total obligations	$	12,119	$	23,090	$	24,886	$	46,780	$	106,875	$	74,644

The Company has leases that contain options to extend for periods from three to seven years.  Options to extend which have been exercised and the related lease commitments are included in the table above.

Liquidity

The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers.  Asset liquidity is primarily derived from loan payments and the maturity of other earning assets.  Liquidity from liabilities is obtained primarily from the receipt of new deposits.  The Company’s Asset Liability Committee (“ALCO”) is responsible for managing the on and off-balance sheet commitments to meet the needs of customers while achieving the Company’s financial objectives.  ALCO meets regularly to assess the projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual customer funding needs.  Deposits generated from the Company’s customers serve as the primary source of liquidity.  The Bank also has credit arrangements with correspondent banks that serve as a secondary liquidity source.  At September 30, 2014, these credit lines totaled $62.0 million and are unsecured.  Additionally, the Bank has a borrowing facility with the FRB. The amount of available credit under the FRB facility is determined by the collateral provided by the Bank.  As of September 30, 2014, the borrowing availability related to this facility was $7.7 million.  At September 30, 2014, the Bank had no borrowings against the credit lines or the FRB facility.  As previously mentioned, the Bank is a member of the FHLB and has available collateralized borrowing capacity of $340.9 million at September 30, 2014, in addition to the $75.6 million currently outstanding.

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The Bank also manages liquidity by maintaining an investment portfolio of readily marketable and liquid securities. These investments include mortgage backed securities and obligations of state and political subdivisions (municipal bonds) that provide a stream of cash flows.  As of September 30, 2014, the Company believes investments in the portfolio can be liquidated at their current fair values in the event they are needed to provide liquidity.  The ratio of liquid assets not pledged for collateral and other purposes as a percentage of deposits and other liabilities was 26.4% at September 30, 2014 compared to 26.3% at December 31, 2013.  The ratio of gross loans to deposits, another key liquidity ratio, decreased to 80.9% at September 30, 2014 compared to 85.0% at December 31, 2013, due to the MISN acquisition.

In addition to the Bank’s sources of liquidity, Bancorp has a $10.0 million revolving line of credit arrangement with a correspondent bank, subject to annual renewal.  Bancorp pays a 0.25% annual fee to maintain the credit facility plus 0.25% (annual rate) on the unused portion of the line.  Interest on borrowings will be at the prime rate (floating) or, at Bancorp’s option, at a fixed rate based on LIBOR.  The line had no outstanding balance as of September 30, 2014.

Management believes the level of liquid assets and available credit facilities are sufficient to meet current and anticipated funding needs.  In addition, the Bank’s ALCO oversees the Company’s liquidity position by reviewing a monthly liquidity report.  Management is not aware of any trends, demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material change in the Company’s liquidity.

Subsequent Events

Consent Order

On October 29, 2014, the Bank entered into a Stipulation to the Issuance of a Consent Order with its bank regulatory agencies, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Business Oversight (“CDBO”), consenting to the issuance of a consent order (“the Consent Order”)  relating to identified deficiencies in the Bank’s centralized Bank Secrecy Act and anti-money laundering compliance program, which is designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the “BSA/AML Requirements”). Per the Consent Order, the Bank must review, update and implement an enhanced risk assessment process based on the 2010 Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) Examination Manual. Some of the areas highlighted in the Consent Order include the requirements to: i) enhance customer due-diligence procedures; ii) improve the enhanced due diligence analysis for high-risk customers; iii) ensure the proper identification and reporting of suspicious activity; iv) address and correct the noted violations of law; v) ensure that there is sufficient and qualified staff; and vi) ensure that all staff are properly trained to carry out the BSA/AML programs. Management and the Board have been working diligently to comply with the Consent Order and believe they have allocated sufficient resources to address the corrective actions required by the FDIC and CDBO. Compliance and resolution of the Consent Order will ultimately be determined by the FDIC and CDBO.

The foregoing summary description of the Consent Order is not complete and is qualified in its entirety by reference to the full text of the Consent Order, a copy of which is filed as Exhibit 10.1 to a Current Report on Form 8-K that was filed with the SEC on October 29, 2014.

CEO Employment Agreement

On October 29, 2014, the Company and the Bank entered into an employment agreement with its President and Chief Executive Officer, Simone Lagomarsino.  The employment agreement was approved by the Board of Directors of the Company and the Bank as it was determined that it was advisable and in the best interest of the Company, the Bank and the Company’s shareholders that Ms. Lagomarsino be provided with an employment agreement that aligns her interests with the interests of the Company and incentivizes her to remain in the employ of the Company. The employment agreement provides that Ms. Lagomarsino shall serve on the Board of Directors of the Company and the Bank.  The term of Ms. Lagomarsino’s employment agreement shall continue until terminated in accordance with its terms.  Pursuant to the terms and conditions of the employment agreement, Ms. Lagomarsino will receive an annual base salary, is eligible to earn an annual cash bonus award, and is entitled to receive certain other benefits that the Bank extends to all of its executive employees, such as life insurance, disability insurance, health, dental, vision and other insurance benefits, 401(k) plan participation and certain fringe benefits and perquisites.  Under the employment agreement, the Company may grant from time to time to Ms. Lagomarsino equity awards under and subject to the terms and conditions of the equity incentive plan that the Company is then regularly granting equity awards to its executive officers under.

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The employment agreement provides that if Ms. Lagomarsino terminates her employment for “Good Reason” or is terminated without “Cause,” as those terms are defined in the employment agreement, she is entitled to certain severance payments detailed in the employment agreement.  The employment agreement also provides for a “double-trigger” change in control payment in the event Ms. Lagomarsino terminates her employment for “Good Reason” or is terminated without “Cause” within twelve months of a “Change in Control” as that term is defined in the employment agreement.  Finally, the employment agreement provides for certain benefits in the event of the “Disability,” as that term is defined in the employment agreement, or death of Ms. Lagomarsino. As a condition to the receipt of any of the foregoing payments and benefits (except in the case of termination of employment due to death), Ms. Lagomarsino is required to provide the Company and the Bank with a general release from any and all claims, known and unknown, that Ms. Lagomarsino may have against the Company and/or the Bank.

The employment agreement contains standard confidentiality and other business protection covenants, including covenants not to solicit or disparage.  Generally speaking, Ms. Lagomarsino agrees not to induce any employees to leave or otherwise interfere with or disrupt the relationships between the Bank and its employees, or divert or attempt to divert from the Bank any of its customers, during the term of her employment and for a period of one year following her separation from the Bank.  The employment agreement also contains a standard indemnification provision.

The foregoing description of Ms. Lagomarsino’s employment agreement is not complete and is qualified in its entirety by reference to the full text of the agreement, a copy of which is filed as Exhibit 10.2 to a Current Report on Form 8-K that was filed with the SEC on October 29, 2014.

Exchange Agreement

On October 29, 2014, the Company entered into an Exchange Agreement with Castle Creek Capital Partners IV, LP “Castle Creek”).  Pursuant to the terms of the Exchange Agreement, Castle Creek will exchange 1,189,538 shares of the Company’s Series C Convertible Perpetual Preferred Stock having a liquidation preference of $3.25 per share for shares of the Company’s common stock, no par value, on a one-for-one exchange ratio basis.  The consummation of the transactions contemplated by the Exchange Agreement is subject to (i) Castle Creek having received a non-control determination with respect to the Company from the Board of Governors of the Federal Reserve System (or the Federal Reserve Bank of San Francisco) and the California Department of Business Oversight, Division of Financial Institutions, (ii) the receipt of any approvals, non-objections or authorizations of all governmental entities required for the consummation of the transactions contemplated by the Exchange Agreement, (iii) no provision of law and no judgment, injunction, order or decree of any governmental entity shall prohibit consummation of the transactions contemplated by the Exchange Agreement, and (iv) the satisfaction or waiver of certain other customary closing conditions. The Company agreed in the Exchange Agreement to file, as soon as practicable, and in any event within 30 days of the closing of the transactions contemplated by the Exchange Agreement, a registration statement on Form S-3 under the Securities Act covering the resale by Castle Creek of all of the shares of the Company’s common stock received in the exchange, and to cause such shares to be authorized for listing on The NASDAQ Capital Market.  The Company anticipates that the closing of the transactions contemplated by the Exchange Agreement should occur during the fourth quarter of 2014.

The foregoing description of the Exchange Agreement is not complete and is qualified in its entirety by reference to the full text of the Exchange Agreement, a copy of which is filed as Exhibit 10.3 to a Current Report on Form 8-K that was filed with the SEC on October 29, 2014.

Dividend Declaration

On October 29, 2014, the Company’s Board of Directors declared a cash dividend of $0.05 per share, payable on December 1, 2014, to shareholders of the Company’s common stock as of November 17, 2014.  Holders of the Company’s Series C Preferred Stock are also entitled to a per share dividend equivalent to the common dividend declared for which each share of Series C Preferred Stock is convertible into common stock.

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Item 3.  Quantitative and Qualitative Disclosure About Market Risk

The assets and liabilities of a financial institution are primarily monetary in nature.  As such, they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices.  Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay their obligations and upward pressure on operating expenses.  Although inflationary pressures are not considered to be of any particular hindrance in the current economic environment, they may have an impact on the Company’s future earnings in the event those pressures become more prevalent.

As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Other than $13.1 million in subordinated debentures issued by the Company’s subsidiary grantor trusts, virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level.

Based on the foregoing, virtually all of the Company’s interest rate risk exposure lies at the Bank level. As a result, all significant interest rate risk procedures are performed at the Bank level. In addition to risk related to interest rate changes, the Bank’s real estate loan portfolio, concentrated primarily within Santa Barbara and San Luis Obispo Counties in California, is subject to risks of changes in the underlying value of collateral as a result of changes in the local economy.

The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest earning assets re-price differently than its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.

The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure.  Historically, management believes it has effectively managed the effect of changes in interest rates on its operating results and believes that it can continue to manage the short-term effect of interest rate changes under various interest rate scenarios.

Management employs asset and liability management software to measure the Company’s exposure to potential future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of September 30, 2014.  This means that the Company would expect (all other things being equal) to experience a limited change in its net interest income if rates rise or fall over the near term but a positive impact to net interest income over the long term if market rates move higher.  The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s ALCO policies.  Management will continue to perform this analysis each quarter.

The hypothetical impact of sudden interest rate movements applied to the Company’s asset and liability balances are modeled quarterly.  The results of these models indicate how much of the Company’s net interest income is “at risk” from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. Management believes the results for the Company’s September 30, 2014 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (“bp”) and 200bp rate increase and a 100bp decrease is acceptable to management and within policy guidelines at this time.  Given the low interest rate environment, a 200bp decrease is not considered a realistic possibility and is therefore not modeled.

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The results in the table below indicate the change in net interest income the Company would expect to see, if interest rates were to change in the amounts set forth:

	September 30, 2014
	Rate Shock Scenarios
	-100bp		Base		+100bp		+200bp
	(dollars in thousands)
Net interest income	$	65,614	$	65,436	$	65,564	$	66,472
$ Change from base	$	178	$	-	$	128	$	1,036
% Change from base	0.27%		0.00%		0.20%		1.58%

It is important to note that the above table is a summary of several forecasts, actual results may vary from any of the forecasted amounts and such difference may be material and adverse. The forecasts are based on estimates and assumptions made by management that may turn out to be incorrect and may change over time. Factors affecting these estimates and assumptions include, but are not limited to: 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses to each of the foregoing. Factors that vary significantly from the assumptions and estimates may have material and adverse effects on the Company’s net interest income; therefore, the results of this analysis should not be relied upon as indicative of actual future results.

The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily and fixed rate loans:

	September 30, 2014
			Percent of
	Balance		Total
	(dollars in thousands)
Rate Type
Variable - daily	$	190,286	16.5%
Variable other than daily	562,020		48.8%
Fixed rate	399,270		34.7%
Total gross loans	$	1,151,576	100.0%

The table above identifies approximately 16.5% of the loan portfolio that will re-price immediately in a changing rate environment.  At September 30, 2014, approximately $752.3 million or 65.3% of the Company’s loan portfolio is considered variable.

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The following table shows the repricing categories of the Company’s loan portfolio:

	September 30, 2014
			Percent of
	Balance		Total
	(dollars in thousands)
Re-Pricing
< 1 Year	$	370,990	32.2%
1-3 Years	258,957		22.5%
3-5 Years	286,868		24.9%
> 5 Years	234,761		20.4%
Total gross loans	$	1,151,576	100.0%

The following table provides a summary of the loans the Company can expect to see adjust above floor rates based on given movements in the index rate:

	September 30, 2014
	Move in Index Rate (bps)
	+100		+150		+200		+250		+300		+350
	(dollars in thousands)
Cumulative variable daily	$	97,501	$	115,292	$	127,752	$	133,490	$	135,655	$	147,090
Cumulative variable other than daily	229,827		287,309		311,874		336,379		343,308		357,540
Cumulative total variable at floor	$	327,328	$	402,601	$	439,626	$	469,869	$	478,963	$	504,630

Given the significant decline in short-term rates over the last several years, many loans in the portfolio possess floors higher than their fully indexed rate.  As indicated in the table above, the Company will need to see rates increase by 150 basis points before the majority of variable rate loans that contain a minimum floor rate in the portfolio experience a rise in their interest rates above their floors, thereby ending their fixed-rate interest rate risk profile and returning them to a fully variable interest rate risk profile.  When such event occurs, holding all other interest rate risk variables constant, the Company will become more net asset sensitive.  Historically, the Company has placed floors on new loan originations to protect net interest margin.  Management believes this strategy proved successful in insulating net interest margin in the declining interest rate environment experienced over the last several years.  As loans have repriced, through maturities and refinancing, the average floor rate has come down to remain competitive in the current interest rate environment.  The lowering of floor rates has contributed to an increasingly asset sensitive profile and decreased the average market rate movement to lift variable rate loans off their floors.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer, the Principal Financial Officer and Principal Accounting Officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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Management, with the participation of the Principal Executive Officer, the Principal Financial Officer, and the Principal Accounting Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Principal Executive Officer, the Principal Financial Officer, and the Principal Accounting Officer  have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including the Principal Executive Officer, the Principal Financial Officer, and the Principal Accounting Officer as appropriate, to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting in the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.  Other Information

Item 1.  Legal Proceedings

The Bank is party to the following litigation:

Corona Fruits & Veggies, Inc., et al v. Heritage Oaks Bank, et al, Santa Barbara County Sup. Ct. case no. 1390870, filed 2/8/2012. Corona Fruits & Veggies, Inc. (“Corona”) and related entities are seeking an unspecified amount in excess of $2,000,000 in damages for a variety of claims including breach of contract, misrepresentation, interference with contractual relations and promissory estoppel.  The alleged factual basis underlying the claims is that the Bank promised to extend agricultural and equipment financing to the plaintiffs and ultimately failed to do so, causing the plaintiffs’ damages. The Bank denies that it acted improperly in any respect toward plaintiffs or that it breached a loan commitment to the plaintiffs and is vigorously defending the matter. Some of the Corona claims are potentially covered by the Bank’s insurance and the Bank’s carriers are cooperating with the Bank in the defense of the matter. The case went to trial on July 21, 2014 and the trial concluded September 10, 2014.  The parties are currently awaiting the court’s ruling.

Sandra Keller, et al vs. Heritage Oaks Bank, et al, Superior Court of San Luis Obispo County, case no CV- 138124, filed 5/29/13. This is an identical complaint to one that was filed previously in the Federal court for the Central District of California and dismissed.  Sandra Keller, as guardian ad litem for Mary Mastagni, filed suit against the Bank and numerous other parties alleging damages from a conspiracy to commit elder financial abuse. The complaint is unclear as to the basis for the alleged damages against the Bank, and the Bank believes the complaint lacks any merit whatsoever.  The complaint asserts various causes of action arising from the sale by third parties of collateral for a commercial real estate loan from the Bank and the pay-off of the Bank’s loan in that transaction.  The Bank was served with process in September 2013 and successfully demurred; an amended complaint was filed on June 30, 2014 and the Bank is responding with another demurrer. The Bank does not expect the litigation to have a material impact on the Bank.

Grego v. Patel, Mission Asset Management, Inc., et al, Superior Court of San Luis Obispo County, case no. CV128369. This case was filed in 2013 against Mission Asset Management, Inc., (“MAM”) formerly a subsidiary of Mission Community Bancorp which was acquired by the Bank on February 28, 2014. MAM successfully demurred to all causes of action but one; the remaining cause of action is for conversion of personal property which allegedly occurred subsequent to the foreclosure of a commercial loan secured by a hotel property.  The Bank anticipates the matter will be resolved by the end of 2014 and does not expect the litigation to have a material impact on the Bank.

Except as indicated above, neither the Company nor the Bank is involved in any legal proceedings other than routine litigation incidental to the business of the Company or the Bank.

The outcome of the litigation summarized above and other legal and regulatory matters is inherently uncertain.  While the Company does not believe that any such claims, lawsuits or regulations will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our liquidity, reputation, consolidated financial position, results of operations, and/or stock price.

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Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which could materially and adversely affect the Company’s business, financial condition and results of operations. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not presently known to management or that management currently believes to be immaterial may also materially and adversely affect the Company’s business, financial condition or results of operations.

The following represents material changes in risk factors from that disclosed in the Company’s 2013 Annual Report filed on Form 10-K:

The Company and the Bank are operating under enhanced regulatory supervision that could materially and adversely affect our business.

On October 29, 2014, the FDIC and CDBO issued the Consent Order to the Bank.  The issuance of the Consent Order relates to deficiencies identified by the FDIC and CDBO in the Bank’s centralized Bank Secrecy Act and anti-money laundering compliance program, which is designed to comply with the BSA/AML Requirements. Per the Consent Order, the Bank must review, update and implement an enhanced risk assessment process based on the 2010 Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) Examination Manual. Some of the areas highlighted in the Consent Order include the requirements to: i) enhance customer due-diligence procedures; ii) improve the enhanced due diligence analysis for high-risk customers; iii) ensure the proper identification and reporting of suspicious activity; iv) address and correct the noted violations of law; v) ensure that there is sufficient and qualified staff; and vi) ensure that all staff are properly trained to carry out the BSA/AML programs. Certain activities, including expansionary activities, that otherwise require regulatory approval will likely be impeded while the Consent Order remains outstanding.  Our failure to comply with the Consent Order and successfully implement an enhanced BSA/AML Compliance Program may result in additional regulatory action, including civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings, which could have a material and adverse effect on our business, results of operations, financial condition, cash flows and stock price.

Our Results of Operations and Financial Condition Can Be Impacted By The Effect of the Drought in California on Our Agricultural and Related Business.

The Company provides financing to agricultural businesses and other industries dependent on agriculture in the Central Coast. We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices and changing climatic conditions, and attempt to manage these risks accordingly. The Company remains committed to providing credit to agricultural customers and will always have a material exposure to this industry.

In addition, the State of California has been experiencing drought conditions throughout much of 2013 and 2014.  Although management does not expect current conditions to have a material impact on credit quality, the lack of rain will have an adverse impact on our agricultural customers’ operating costs, crop yields and crop quality, which could impact such customers’ ability to repay their loans to us consistent with the terms of such loans. The longer the drought continues, the more significant this impact will become.  As a result, the Company’s results of operations, financial condition, cash-flows and stock price can be negatively influenced by the impact of the drought on the banking needs of our agricultural customers.

Management is not aware of any other material changes to the risk factors discussed in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Purchases of Equity Securities

None.

Heritage Oaks Bancorp|- 79 -

Item 3.  Defaults upon Senior Securities

(a)None.

(b)None.

Item 4.   Mine Safety Disclosures

None.

Item 5.  Other Information

None.

Heritage Oaks Bancorp|- 80 -

Item 6.  Exhibits

(a) Exhibits:

Exhibit 10.1 Consent Order issued by the Federal Deposit Insurance Corporation and California Department of Business Oversight, filed with the SEC on Form 8-K on October 29, 2014, Commission File No. 000-25020.

Exhibit 10.2 Employment Agreement between the Company and Bank and Simone Lagomarsino, filed with the SEC on Form 8-K on October 29, 2014, Commission File No. 000-25020.

Exhibit 10.3 Exchange Agreement between the Company and Castle Creek Partners IV, LP, filed with the SEC on Form 8-K on October  29, 2014, Commission File No. 000-25020.

Exhibit 31.1 Rule 13a-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 31.2 Rule 13a-14(a)  Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 31.3 Rule 13a-14(a)  Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.1 Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.2 Section 1350  Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.3 Section 1350  Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013, (ii) Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2014 and 2013 (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2014 and 2013 (unaudited), (iv) Condensed Consolidated Statements of Shareholders’ Equity, for the nine months ended September 30, 2014 and 2013 (unaudited), (v) Condensed Consolidated Statements of Cash Flows, for the nine months ended September 30, 2014 and 2013 (unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (unaudited).

* Filed herewith.

Heritage Oaks Bancorp|- 81 -

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Heritage Oaks Bancorp

Date: October 31, 2014

/s/ Simone Lagomarsino	/s/ Lonny D. Robinson
Simone Lagomarsino	Lonny D. Robinson
President and Chief Executive Officer	Executive Vice President, Chief Financial Officer
(Principal Executive Officer)	(Principal Financial Officer)
	/s/ Jason Castle
	Jason Castle
	Chief Accounting Officer
	(Principal Accounting Officer)

Heritage Oaks Bancorp|- 82 -

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Simone Lagomarsino, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Heritage Oaks Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.I have disclosed, based on my most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent function);

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  October 31, 2014
	/s/ Simone Lagomarsino
	Simone Lagomarsino
	President and Chief Executive Officer
	(Principal Executive Officer)

Heritage Oaks Bancorp

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Lonny D. Robinson, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Heritage Oaks Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.I have disclosed, based on my most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent function);

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  October 31, 2014

/s/ Lonny D. Robinson

Lonny D. Robinson

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Heritage Oaks Bancorp

EX-31.3

EXHIBIT 31.3

CERTIFICATIONS

I, Jason Castle, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Heritage Oaks Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.I have disclosed, based on my most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent function);

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  October 31, 2014

/s/ Jason Castle

Jason Castle

Chief Accounting Officer

(Principal Accounting Officer)

Heritage Oaks Bancorp

EX-32.1

EXHIBIT 32.1

HERITAGE OAKS BANCORP

Quarterly report on Form 10-Q

for the quarter ended September 30, 2014

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, who is the President and Chief Executive Officer of Heritage Oaks Bancorp (the “Company”), hereby certifies, pursuant to 18 USC Section 1350, that to my knowledge, (i) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, as filed by the Company with the Securities and Exchange Commission (the “Quarterly Report”), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: October 31, 2014	/s/ Simone Lagomarsino
	Simone Lagomarsino
	President and Chief Executive Officer
	(Principal Executive Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Heritage Oaks Bancorp, and will be retained by Heritage Oaks Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

Heritage Oaks Bancorp

EX-32.2

EXHIBIT 32.2

HERITAGE OAKS BANCORP

Quarterly report on Form 10-Q

for the quarter ended September 30, 2014

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, who is the Chief Financial Officer of Heritage Oaks Bancorp (the “Company”), hereby certifies, pursuant to 18 USC Section 1350, that to my knowledge, (i) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, as filed by the Company with the Securities and Exchange Commission (the “Quarterly Report”), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: October 31, 2014	/s/ Lonny D. Robinson
	Lonny D. Robinson
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Heritage Oaks Bancorp, and will be retained by Heritage Oaks Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

Heritage Oaks Bancorp

EX-32.3

EXHIBIT 32.3

HERITAGE OAKS BANCORP

Quarterly report on Form 10-Q

for the quarter ended September 30, 2014

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, who is the Chief Accounting Officer of Heritage Oaks Bancorp (the “Company”), hereby certifies, pursuant to 18 USC Section 1350, that to my knowledge, (i) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, as filed by the Company with the Securities and Exchange Commission (the “Quarterly Report”), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: October 31, 2014	/s/ Jason Castle
	Jason Castle
	Chief Accounting Officer
	(Principal Accounting Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Heritage Oaks Bancorp, and will be retained by Heritage Oaks Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

Heritage Oaks Bancorp

XML

Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total available for sale securities	$ 382,600	$ 282,615
Gross Unrealized Gains	3,150	778
Gross Unrealized Losses	(3,313)	(6,598)
Fair Value	382,437	276,795
Obligations of U.S. government agencies
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total available for sale securities	16,923	6,243
Gross Unrealized Gains	87	11
Gross Unrealized Losses	(119)	(46)
Fair Value	16,891	6,208
Mortgage-backed securities - U.S. government sponsored entities and agencies
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total available for sale securities	242,947	186,981
Gross Unrealized Gains	989	342
Gross Unrealized Losses	(2,806)	(4,392)
Fair Value	241,130	182,931
Mortgage-backed securities - Non-agency
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total available for sale securities	11,913	10,924
Gross Unrealized Gains	41	156
Gross Unrealized Losses	(18)	(48)
Fair Value	11,936	11,032
State and municipal securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total available for sale securities	78,829	51,532
Gross Unrealized Gains	2,033	269
Gross Unrealized Losses	(175)	(1,771)
Fair Value	80,687	50,030
Asset backed securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total available for sale securities	31,988	26,935
Gross Unrealized Losses	(195)	(341)
Fair Value	$ 31,793	$ 26,594

XML

Shareholders' Equity (Details)	Sep. 30, 2014	Dec. 31, 2013
Leverage ratio
Regulatory Standard, Well Capitalized Ratio (as a percent)	5.00%
Actual regulatory, Leverage ratio (as a percent)	10.00%	10.20%
Tier I capital to risk weighted assets
Regulatory Standard, Well Capitalized Ratio (as a percent)	6.00%
Actual regulatory, Tier I capital to risk weighted assets (as a percent)	12.87%	12.91%
Total risk based capital to risk weighted assets
Regulatory Standard, Well Capitalized Ratio (as a percent)	10.00%
Actual regulatory, Total risk based capital to risk weighted assets (as a percent)	14.12%	14.17%
Heritage Oaks Bank
Leverage ratio
Actual regulatory, Leverage ratio (as a percent)	9.77%	9.82%
Tier I capital to risk weighted assets
Actual regulatory, Tier I capital to risk weighted assets (as a percent)	12.58%	12.42%
Total risk based capital to risk weighted assets
Actual regulatory, Total risk based capital to risk weighted assets (as a percent)	13.83%	13.68%

XML

Loans and Allowance for Loan and Lease Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Non-PCI loans by the internal risk grading system
Total Gross loans	$ 1,151,576	$ 827,484
Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	954,893
Real Estate Secured | Purchased credit impaired loans
Non-PCI loans by the internal risk grading system
Total Gross loans	8,147
Real Estate Secured | Multi-family residential
Non-PCI loans by the internal risk grading system
Total Gross loans	76,821
Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	121,061
Real Estate Secured | Home equity lines of credit
Non-PCI loans by the internal risk grading system
Total Gross loans	37,967
Real Estate Secured | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	582,600
Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans	93,965
Real Estate Secured | Land
Non-PCI loans by the internal risk grading system
Total Gross loans	24,634
Real Estate Secured | Construction
Non-PCI loans by the internal risk grading system
Total Gross loans	17,845
Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	188,085
Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	143,861
Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	44,204
Commercial | Other
Non-PCI loans by the internal risk grading system
Total Gross loans	20
Installment loans to individuals
Non-PCI loans by the internal risk grading system
Total Gross loans	8,198
Overdrafts
Non-PCI loans by the internal risk grading system
Total Gross loans	400
Non-PCI Loans
Non-PCI loans by the internal risk grading system
Total Gross loans	1,140,227
Non-PCI Loans | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	1,089,127	780,610
Non-PCI Loans | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	16,601	11,383
Non-PCI Loans | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	34,342	35,491
Non-PCI Loans | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans	157
Non-PCI Loans | Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	946,746	672,061
Non-PCI Loans | Real Estate Secured | Multi-family residential
Non-PCI loans by the internal risk grading system
Total Gross loans	76,821	31,140
Non-PCI Loans | Real Estate Secured | Multi-family residential | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	75,627	30,560
Non-PCI Loans | Real Estate Secured | Multi-family residential | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	1,194	580
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	120,500	88,904
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	119,613	87,350
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	202	490
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	685	1,064
Non-PCI Loans | Real Estate Secured | Home equity lines of credit
Non-PCI loans by the internal risk grading system
Total Gross loans	37,886	31,178
Non-PCI Loans | Real Estate Secured | Home equity lines of credit | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	37,539	31,021
Non-PCI Loans | Real Estate Secured | Home equity lines of credit | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	347	157
Non-PCI Loans | Real Estate Secured | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	577,639	432,203
Non-PCI Loans | Real Estate Secured | Commercial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	549,595	414,058
Non-PCI Loans | Real Estate Secured | Commercial | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	11,890	3,574
Non-PCI Loans | Real Estate Secured | Commercial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	16,154	14,571
Non-PCI Loans | Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans	92,292	50,414
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	88,030	47,988
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	2,680	975
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	1,582	1,451
Non-PCI Loans | Real Estate Secured | Land
Non-PCI loans by the internal risk grading system
Total Gross loans	23,763	24,523
Non-PCI Loans | Real Estate Secured | Land | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	17,197	15,244
Non-PCI Loans | Real Estate Secured | Land | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans		862
Non-PCI Loans | Real Estate Secured | Land | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	6,566	8,417
Non-PCI Loans | Real Estate Secured | Construction
Non-PCI loans by the internal risk grading system
Total Gross loans	17,845	13,699
Non-PCI Loans | Real Estate Secured | Construction | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	17,467	13,699
Non-PCI Loans | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	184,883	151,845
Non-PCI Loans | Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	142,076	119,121
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	133,940	105,991
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	995	5,276
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	6,984	7,854
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans	157
Non-PCI Loans | Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	42,787	32,686
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	41,609	31,279
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	456	196
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	722	1,211
Non-PCI Loans | Commercial | Other
Non-PCI loans by the internal risk grading system
Total Gross loans	20	38
Non-PCI Loans | Commercial | Other | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	20	38
Non-PCI Loans | Installment loans to individuals
Non-PCI loans by the internal risk grading system
Total Gross loans	8,198	3,246
Non-PCI Loans | Installment loans to individuals | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	8,090	3,050
Non-PCI Loans | Installment loans to individuals | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans		10
Non-PCI Loans | Installment loans to individuals | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	108	186
Non-PCI Loans | Overdrafts
Non-PCI loans by the internal risk grading system
Total Gross loans	400	332
Non-PCI Loans | Overdrafts | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	400	332
PCI Loans
Non-PCI loans by the internal risk grading system
Total Gross loans	11,349
PCI Loans | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	478
PCI Loans | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	102
PCI Loans | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	10,673
PCI Loans | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans	96
PCI Loans | Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	561
PCI Loans | Real Estate Secured | Residential 1 to 4 family | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	561
PCI Loans | Real Estate Secured | Home equity lines of credit
Non-PCI loans by the internal risk grading system
Total Gross loans	81
PCI Loans | Real Estate Secured | Home equity lines of credit | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	81
PCI Loans | Real Estate Secured | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	4,961
PCI Loans | Real Estate Secured | Commercial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	127
PCI Loans | Real Estate Secured | Commercial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	4,834
PCI Loans | Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans	1,673
PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	1,673
PCI Loans | Real Estate Secured | Land
Non-PCI loans by the internal risk grading system
Total Gross loans	871
PCI Loans | Real Estate Secured | Land | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	310
PCI Loans | Real Estate Secured | Land | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	561
PCI Loans | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	3,202
PCI Loans | Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	1,785
PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	41
PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	102
PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	1,546
PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans	96
PCI Loans | Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	1,417
PCI Loans | Commercial | Agriculture | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	$ 1,417

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Shareholders' Equity (Details 2) (USD $)	0 Months Ended	9 Months Ended			0 Months Ended		9 Months Ended	0 Months Ended
	Mar. 12, 2010	Sep. 30, 2013	Sep. 30, 2014	Dec. 31, 2013	Oct. 29, 2014 Subsequent Events	Mar. 12, 2010 Series C preferred stock	Sep. 30, 2014 Series C preferred stock	Oct. 29, 2014 Series C preferred stock Subsequent Events
Preferred Stock
Preferred stock, shares authorized			5,000,000	5,000,000
Issuance of stock (in shares)						1,189,538
Gross proceeds from private placement	$ 60,000,000					$ 3,600,000
Preferred stock conversion ratio							1	1
Stated dividend rate (as a percent)							0.00%
Conversion price (in dollars per share)							$ 3.25
Value of contingent beneficial conversion feature to be recognized upon conversion							200,000
Preferred stock dividends paid		$ 708,000					$ 36,000
Conversion of Series C preferred stock to common stock (in shares)								1,189,538
Period from the closing of the transactions contemplated by the Exchange Agreement to file , a registration statement on Form S-3 under the Securities Act					30 days

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Loans and Allowance for Loan and Lease Losses (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	$ 6,615	$ 4,221	$ 6,615	$ 4,221	$ 5,830
Recorded investment with related allowance	8,305	11,355	8,305	11,355	10,186
Unpaid principal balance without related allowance	11,221	5,238	11,221	5,238	7,951
Unpaid principal balance with related allowance	11,895	15,860	11,895	15,860	13,760
Specific Allowance for Impaired Loans	2,082	6,825	2,082	6,825	3,154
Average recorded investment without related allowance	8,192	2,917	8,804	3,334
Average recorded investment with related allowance	8,627	11,064	8,946	9,898
Interest income recognized without related allowance	75		200
Interest income recognized with related allowance	57	12	148	15
Recorded Investment	14,920	15,576	14,920	15,576	16,016
Unpaid Principal Balance	23,116	21,098	23,116	21,098	21,711
Average Recorded Investment	16,819	13,981	17,750	13,232
Interest Income Recognized	132	12	348	15
PCI Loans
Investment in impaired loans
Recorded investment without related allowance	11,397		11,397
Unpaid principal balance without related allowance	14,766		14,766
Specific Allowance for Impaired Loans	11,349		11,349
Average recorded investment without related allowance	11,643		12,002
Interest income recognized without related allowance	405		796
Recorded Investment	11,397		11,397
Unpaid Principal Balance	14,766		14,766
Average Recorded Investment	11,643		12,002
Interest Income Recognized	405		796
Commercial and industrial | PCI Loans
Investment in impaired loans
Specific Allowance for Impaired Loans	3,202		3,202
Unpaid Principal Balance	3,814		3,814
Real Estate Secured | PCI Loans
Investment in impaired loans
Specific Allowance for Impaired Loans	8,147		8,147
Unpaid Principal Balance	10,952		10,952
Real Estate Secured | Residential 1 to 4 family | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	217	703	217	703	944
Recorded investment with related allowance		109		109
Unpaid principal balance without related allowance	354	735	354	735	1,102
Unpaid principal balance with related allowance		230		230
Specific Allowance for Impaired Loans		17		17
Average recorded investment without related allowance	222		496	269
Average recorded investment with related allowance		339		190
Interest income recognized without related allowance	6		16
Real Estate Secured | Residential 1 to 4 family | PCI Loans
Investment in impaired loans
Recorded investment without related allowance	564		564
Unpaid principal balance without related allowance	888		888
Specific Allowance for Impaired Loans	561		561
Average recorded investment without related allowance	565		585
Interest income recognized without related allowance	13
Unpaid Principal Balance	888		888
Real Estate Secured | Home equity lines of credit | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	100		100
Unpaid principal balance without related allowance	183		183
Average recorded investment without related allowance	100		100
Real Estate Secured | Home equity lines of credit | PCI Loans
Investment in impaired loans
Recorded investment without related allowance	82		82
Unpaid principal balance without related allowance	98		98
Specific Allowance for Impaired Loans	81		81
Average recorded investment without related allowance	81		81
Interest income recognized without related allowance	2		4
Unpaid Principal Balance	98		98
Real Estate Secured | Commercial | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	2,014	552	2,014	552	901
Recorded investment with related allowance	331	642	331	642
Unpaid principal balance without related allowance	4,423	811	4,423	811	1,646
Unpaid principal balance with related allowance	331	1,114	331	1,114
Specific Allowance for Impaired Loans	58	91	58	91
Average recorded investment without related allowance	2,269	2	1,862	90
Average recorded investment with related allowance	331	26	331	21
Interest income recognized without related allowance	6		19
Real Estate Secured | Commercial | PCI Loans
Investment in impaired loans
Recorded investment without related allowance	4,981		4,981
Unpaid principal balance without related allowance	6,903		6,903
Specific Allowance for Impaired Loans	4,961		4,961
Average recorded investment without related allowance	4,993		5,160
Interest income recognized without related allowance	130		327
Unpaid Principal Balance	6,903		6,903
Real Estate Secured | Farmland | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	289		289
Unpaid principal balance without related allowance	288		288
Average recorded investment without related allowance	292		294
Interest income recognized without related allowance	2		12
Real Estate Secured | Farmland | PCI Loans
Investment in impaired loans
Recorded investment without related allowance	1,681		1,681
Unpaid principal balance without related allowance	2,044		2,044
Specific Allowance for Impaired Loans	1,673		1,673
Average recorded investment without related allowance	1,699		1,706
Interest income recognized without related allowance	20		64
Unpaid Principal Balance	2,044		2,044
Real Estate Secured | Construction | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	380		380
Unpaid principal balance without related allowance	375		375
Average recorded investment without related allowance	380		380
Interest income recognized without related allowance	5		5
Real Estate Secured | Land | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	460	1,013	460	1,013	1,221
Recorded investment with related allowance	6,087	7,050	6,087	7,050	6,706
Unpaid principal balance without related allowance	1,152	1,367	1,152	1,367	1,948
Unpaid principal balance with related allowance	9,755	10,726	9,755	10,726	10,158
Specific Allowance for Impaired Loans	1,764	3,854	1,764	3,854	2,531
Average recorded investment without related allowance	935	852	1,170	724
Average recorded investment with related allowance	6,380	112	6,602	116
Interest income recognized without related allowance	2		2
Interest income recognized with related allowance	16	4	58	4
Real Estate Secured | Land | PCI Loans
Investment in impaired loans
Recorded investment without related allowance	874		874
Unpaid principal balance without related allowance	1,019		1,019
Specific Allowance for Impaired Loans	871		871
Average recorded investment without related allowance	923		943
Interest income recognized without related allowance	21		47
Unpaid Principal Balance	1,019		1,019
Commercial | Commercial and industrial | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	2,316	1,208	2,316	1,208	1,857
Recorded investment with related allowance	1,887	3,463	1,887	3,463	3,480
Unpaid principal balance without related allowance	3,480	1,546	3,480	1,546	2,241
Unpaid principal balance with related allowance	1,809	3,650	1,809	3,650	3,602
Specific Allowance for Impaired Loans	260	2,826	260	2,826	623
Average recorded investment without related allowance	3,152	1,041	3,616	1,314
Average recorded investment with related allowance	1,916	3,430	2,013	2,969
Interest income recognized without related allowance	51		111
Interest income recognized with related allowance	41	8	90	11
Commercial | Commercial and industrial | PCI Loans
Investment in impaired loans
Recorded investment without related allowance	1,790		1,790
Unpaid principal balance without related allowance	2,322		2,322
Specific Allowance for Impaired Loans	1,785		1,785
Average recorded investment without related allowance	2,081		2,236
Interest income recognized without related allowance	185		263
Unpaid Principal Balance	2,322		2,322
Commercial | Agriculture | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	722	745	722	745	789
Recorded investment with related allowance		65		65
Unpaid principal balance without related allowance	761	779	761	779	824
Unpaid principal balance with related allowance		69		69
Specific Allowance for Impaired Loans		27		27
Average recorded investment without related allowance	724	1,022	741	937
Average recorded investment with related allowance		41		29
Interest income recognized without related allowance	2		32
Commercial | Agriculture | PCI Loans
Investment in impaired loans
Recorded investment without related allowance	1,425		1,425
Unpaid principal balance without related allowance	1,492		1,492
Specific Allowance for Impaired Loans	1,417		1,417
Average recorded investment without related allowance	1,301		1,291
Interest income recognized without related allowance	34		62
Unpaid Principal Balance	1,492		1,492
Installment loans to individuals | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	117		117		118
Recorded investment with related allowance		26		26
Unpaid principal balance without related allowance	205		205		190
Unpaid principal balance with related allowance		71		71
Specific Allowance for Impaired Loans		10		10
Average recorded investment without related allowance	118		145
Average recorded investment with related allowance		7,116		6,573
Interest income recognized without related allowance	$ 1		$ 3

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Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended			9 Months Ended
	Sep. 30, 2014 segment	Dec. 31, 2013	Feb. 28, 2014 MISN	Sep. 30, 2014 All Non-United States countries
Nature of Operations
Number of business segments	1
Financial instruments of the Company measured at fair value on a recurring basis
Total assets	$ 1,716,224	$ 1,203,651		$ 0
Revenue				$ 0
Percentage acquired of outstanding common shares			100.00%

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Restructuring Activities (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended	3 Months Ended		9 Months Ended	3 Months Ended		9 Months Ended	3 Months Ended		9 Months Ended	3 Months Ended	9 Months Ended	3 Months Ended		9 Months Ended
	Sep. 30, 2014 MISN	Sep. 30, 2014 MISN	Jun. 30, 2014 Restructuring and integration plan	Mar. 31, 2014 Restructuring and integration plan	Sep. 30, 2014 Restructuring and integration plan	Jun. 30, 2014 Restructuring and integration plan System integration	Mar. 31, 2014 Restructuring and integration plan System integration	Sep. 30, 2014 Restructuring and integration plan System integration	Jun. 30, 2014 Restructuring and integration plan Fixed asset consolidation	Mar. 31, 2014 Restructuring and integration plan Fixed asset consolidation	Sep. 30, 2014 Restructuring and integration plan Fixed asset consolidation	Mar. 31, 2014 Restructuring and integration plan Contract cancellation costs	Sep. 30, 2014 Restructuring and integration plan Contract cancellation costs	Jun. 30, 2014 Restructuring and integration plan Employee termination and retention	Mar. 31, 2014 Restructuring and integration plan Employee termination and retention	Sep. 30, 2014 Restructuring and integration plan Employee termination and retention
Restructuring activities
Total Costs Expected To Be incurred					$ 8,547			$ 578			$ 2,387		$ 1,746			$ 3,836
Amount Incurred			515	6,870	717	(20)	223	312	(268)	2,350	41	1,656	90	803	2,641	274
Cumulative Incurred					8,102			515			2,123		1,746			3,718
Balance, beginning of the period	2,896
New charges	930	8,759
Cash payments	(2,404)	(6,893)
Other adjustments	(213)	(657)
Balance, end of the period	$ 1,209	$ 1,209

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2014

Investment Securities

Schedule of amortized cost and fair values of the Company's investment securities, all of which are reported as available for sale

	September 30, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	16,923	$	87	$	(119	)	$	16,891
Mortgage backed securities
U.S. government sponsored entities and agencies	242,947		989		(2,806		)	241,130
Non-agency	11,913		41		(18		)	11,936
State and municipal securities	78,829		2,033		(175		)	80,687
Asset backed securities	31,988		-		(195		)	31,793
Total available for sale securities	$	382,600	$	3,150	$	(3,313	)	$	382,437

	December 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	6,243	$	11	$	(46	)	$	6,208
Mortgage backed securities
U.S. government sponsored entities and agencies	186,981		342		(4,392		)	182,931
Non-agency	10,924		156		(48		)	11,032
State and municipal securities	51,532		269		(1,771		)	50,030
Asset backed securities	26,935		-		(341		)	26,594
Total available for sale securities	$	282,615	$	778	$	(6,598	)	$	276,795

Summary of investment securities in an unrealized loss position

	September 30, 2014
	Less Than Twelve Months				Twelve Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
	(dollars in thousands)
Obligations of U.S. government agencies	$	3,780	$	(58)	$	2,639	$	(61)	$	6,419	$	(119	)
Mortgage backed securities
U.S. government sponsored entities and agencies	82,816		(977)		59,407		(1,829)		142,223		(2,806		)
Non-agency	3,001		(8)		501		(10)		3,502		(18		)
State and municipal securities	9,344		(64)		10,861		(111)		20,205		(175		)
Asset backed securities	5,558		(29)		17,364		(166)		22,922		(195		)
Total	$	104,499	$	(1,136)	$	90,772	$	(2,177)	$	195,271	$	(3,313	)

	December 31, 2013
	Less Than Twelve Months				Twelve Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
	(dollars in thousands)
Obligations of U.S. government agencies	$	2,773	$	(45)	$	40	$	(1)	$	2,813	$	(46	)
Mortgage backed securities
U.S. government sponsored entities and agencies	118,554		(3,140)		18,863		(1,252)		137,417		(4,392		)
Non-agency	3,210		(48)		-		-		3,210		(48		)
State and municipal securities	32,967		(1,675)		2,458		(96)		35,425		(1,771		)
Asset backed securities	7,978		(246)		9,747		(95)		17,725		(341		)
Total	$	165,482	$	(5,154)	$	31,108	$	(1,444)	$	196,590	$	(6,598	)

Schedule of proceeds from the sales and calls of securities and the associated gains and losses

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2014			2013		2014			2013
	(dollars in thousands)
Proceeds	$	19,991		$	38,930	$	98,379		$	144,571
Gross gains	457			970		814			5,349
Gross losses	(7		)	(626)		(265		)	(1,414		)

Schedule of amortized cost and fair values maturities of available for sale investment securities

	September 30, 2014
	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
	(dollars in thousands)
Obligations of U.S. government agencies	$	117	$	476	$	14,503	$	1,795	$	16,891
Mortgage backed securities
U.S. government sponsored entities and agencies	36,510		96,446		56,776		51,398		241,130
Non-agency	731		10,704		501		-		11,936
State and municipal securities	975		14,473		60,808		4,431		80,687
Asset backed securities	-		2,534		11,794		17,465		31,793
Total available for sale securities	$	38,333	$	124,633	$	144,382	$	75,089	$	382,437
Amortized cost	$	38,459	$	124,890	$	143,476	$	75,775	$	382,600
Weighted average yield	1.92%		2.00%		2.52%		2.76%		2.34%

Summary of earnings on both taxable and tax-exempt investment securities

	For The Three Months Ended				For The Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(dollars in thousands)
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	112	$	33	$	226	$	86
Mortgage backed securities	1,152		847		3,370		2,470
State and municipal securities	38		-		40		5
Corporate debt securities	-		-		6		-
Asset backed securities	99		113		261		350
Non-taxable earnings on investment securities
State and municipal securities	545		354		1,452		1,082
Total	$	1,946	$	1,347	$	5,355	$	3,993

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Loans and Allowance for Loan and Lease Losses (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	$ 16,635	$ 17,934	$ 17,859	$ 18,118
Charge-offs	(12)	(984)	(1,777)	(1,851)
Recoveries	164	518	705	1,201
Balance, at the end of the period	16,787	17,468	16,787	17,468
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment	2,082		2,082		3,155
Allowance for loan and lease losses collectively evaluated for impairment	14,705		14,705		14,704
Recorded investment in loan individually evaluated for impairment	14,920		14,920		14,449
Recorded investment in loan collectively evaluated for impairment	1,125,259		1,125,259		813,035
Loans acquired with deteriorated credit quality	11,397		11,397
Total gross loans held for investment	1,151,576		1,151,576		827,484
MISN
Amount of allowance attributed to:
Total gross loans held for investment	244,900		244,900
Heritage Oaks
Amount of allowance attributed to:
Total gross loans held for investment	906,600		906,600
Total allowance to gross loans (as a percent)	1.90%		1.90%
Commercial
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	4,436	6,584	4,781	6,154
Charge-offs		(736)	(650)	(1,137)
Recoveries	174	475	628	947
Provision for loan losses	(296)	(197)	(445)	162
Balance, at the end of the period	4,314	6,126	4,314	6,126
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment	260		260		623
Allowance for loan and lease losses collectively evaluated for impairment	4,054		4,054		4,158
Recorded investment in loan individually evaluated for impairment	4,925		4,925		5,291
Recorded investment in loan collectively evaluated for impairment	179,945		179,945		146,554
Loans acquired with deteriorated credit quality	3,215		3,215
Total gross loans held for investment	188,085		188,085
Installment loans to individuals
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	73	100	99	64
Charge-offs	(2)	(207)	(8)	(380)
Recoveries	1	12	10	64
Provision for loan losses	2	183	(27)	340
Balance, at the end of the period	74	88	74	88
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment	74		74		99
Recorded investment in loan individually evaluated for impairment	117		117
Recorded investment in loan collectively evaluated for impairment	8,081		8,081		3,246
Total gross loans held for investment	8,198		8,198
All other loans
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	27	31	32	38
Provision for loan losses	8	1	3	(6)
Balance, at the end of the period	35	32	35	32
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment	35		35		32
Recorded investment in loan collectively evaluated for impairment	400		400		332
Unallocated
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	298	125	262
Provision for loan losses	205	(65)	241	60
Balance, at the end of the period	503	60	503	60
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment	503		503		262
Land
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	2,944	4,431	3,402	4,670
Charge-offs				(34)
Recoveries	8	11	30	45
Provision for loan losses	(727)	189	(1,207)	(50)
Balance, at the end of the period	2,225	4,631	2,225	4,631
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment	1,764		1,764		2,532
Allowance for loan and lease losses collectively evaluated for impairment	461		461		870
Recorded investment in loan individually evaluated for impairment	6,547		6,547		7,696
Recorded investment in loan collectively evaluated for impairment	17,213		17,213		16,827
Loans acquired with deteriorated credit quality	874		874
Other real estate secured
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	8,857	6,663	9,283	7,192
Charge-offs	(10)	(41)	(1,119)	(300)
Recoveries	(19)	20	37	145
Provision for loan losses	808	(112)	1,435	(507)
Balance, at the end of the period	9,636	6,530	9,636	6,530
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment	58		58
Allowance for loan and lease losses collectively evaluated for impairment	9,578		9,578		9,283
Recorded investment in loan individually evaluated for impairment	3,331		3,331		1,462
Recorded investment in loan collectively evaluated for impairment	919,620		919,620		646,076
Loans acquired with deteriorated credit quality	$ 7,308		$ 7,308

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Investment Securities (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Proceeds from the sales and calls of securities and the associated gains and losses
Proceeds	$ 19,991	$ 38,930	$ 98,379	$ 144,571
Gross gains	457	970	814	5,349
Gross losses	(7)	(626)	(265)	(1,414)
Income tax expense related to net realized gains on sale of securities	$ 189	$ 145	$ 231	$ 1,700

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Fair Value of Assets and Liabilities (Details 2) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
Recurring basis
Total Losses for assets measured at fair value on a non-recurring basis
Assets transfer from Level 1 to level 2	$ 0		$ 0
Assets transfer from Level 2 to level 1	0		0
Nonrecurring basis
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date losses/(Recoveries)	(233,000)	(1,270,000)
Assets transfer from Level 1 to level 2	0		0
Assets transfer from Level 2 to level 1	0		0
Nonrecurring basis | Commercial real estate
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date losses/(Recoveries) on impaired loans	1,026,000
Nonrecurring basis | Land
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date losses/(Recoveries) on impaired loans	(793,000)	(1,270,000)
Nonrecurring basis | Assets At Fair Value
Assets
Total assets measured on a non-recurring basis	5,495,000	4,170,000
Nonrecurring basis | Assets At Fair Value | Commercial real estate
Assets
Impaired loans	1,325,000
Nonrecurring basis | Assets At Fair Value | Land
Assets
Impaired loans	4,170,000	4,170,000
Nonrecurring basis | Significant Unobservable Inputs (Level 3)
Assets
Total assets measured on a non-recurring basis	5,495,000	4,170,000
Total Losses for assets measured at fair value on a non-recurring basis
Premises and equipment held for sale transferred into Level 3	1,700,000
Premises and equipment held for sale transferred out of Level 3	2,100,000
Nonrecurring basis | Significant Unobservable Inputs (Level 3) | Commercial real estate
Assets
Impaired loans	1,325,000
Total Losses for assets measured at fair value on a non-recurring basis
Impaired loans transferred into Level 3	1,700,000
Nonrecurring basis | Significant Unobservable Inputs (Level 3) | Land
Assets
Impaired loans	$ 4,170,000	$ 4,170,000

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Goodwill and Other Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Goodwill and Other Intangible Assets
Goodwill	$ 24,536		$ 24,536		$ 11,237
Core deposit intangible
Amortization of CDI	297	100	760	300
Gross Carrying Amount	9,261		9,261		4,200
Acquired CDI's			5,060
Accumulated Amortization	(3,617)		(3,617)
Projected Net Carrying Amount	5,644		5,644
Estimated Amortization
Year 2014	(1,056)		(1,056)
Year 2015	(1,049)		(1,049)
Year 2016	(944)		(944)
Year 2017	(588)		(588)
Year 2018	(549)		(549)
Year 2019	(522)		(522)
Year 2014
Core deposit intangible
Projected Net Carrying Amount	5,348		5,348		1,344
Year 2015
Core deposit intangible
Projected Net Carrying Amount	4,299		4,299		5,348
Year 2016
Core deposit intangible
Projected Net Carrying Amount	3,355		3,355		4,299
Year 2017
Core deposit intangible
Projected Net Carrying Amount	2,767		2,767		3,355
Year 2018
Core deposit intangible
Projected Net Carrying Amount	2,218		2,218		2,767
Year 2019
Core deposit intangible
Projected Net Carrying Amount	$ 1,696		$ 1,696		$ 2,218

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Loans and Allowance for Loan and Lease Losses (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014 TDR	Sep. 30, 2013 TDR	Sep. 30, 2014 TDR	Sep. 30, 2013 TDR	Dec. 31, 2013
Troubled debt restructurings
Accruing loans that were classified as TDRs	$ 5,245		$ 5,245		$ 5,853
Non-Accruing	6,791		6,791		7,076
Loans classified as TDRs	12,036		12,036		12,929
Number of TDRs	6	2	24	6
Pre-Modification Outstanding Recorded Investment	912	276	3,684	385
Post-Modification Outstanding Recorded Investment	912	276	36,840	385
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs		1	1	5
Recorded Investment		18	30	958
Real Estate Secured | Residential 1 to 4 family
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs				1
Recorded Investment				97
Commercial | Commercial
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs			1
Recorded Investment			30
Commercial | Commercial and industrial
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs				3
Recorded Investment				843
Commercial | Agriculture
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs		1		1
Recorded Investment		18		18
Non-PCI Loans
Troubled debt restructurings
Accruing loans that were classified as TDRs	5,019		5,019		5,853
Non-Accruing	6,673		6,673		7,076
Loans classified as TDRs	11,692		11,692		12,929
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Troubled debt restructurings
Accruing loans that were classified as TDRs	128		128		499
Non-Accruing	89		89		109
Loans classified as TDRs	217		217		608
Non-PCI Loans | Real Estate Secured | Commercial
Troubled debt restructurings
Accruing loans that were classified as TDRs	370		370		225
Non-Accruing	83		83		136
Loans classified as TDRs	453		453		361
Number of TDRs		1	1	1
Pre-Modification Outstanding Recorded Investment			166
Post-Modification Outstanding Recorded Investment			166
Non-PCI Loans | Real Estate Secured | Farmland
Troubled debt restructurings
Accruing loans that were classified as TDRs	289		289
Loans classified as TDRs	289		289
Non-PCI Loans | Real Estate Secured | Construction
Troubled debt restructurings
Accruing loans that were classified as TDRs	380		380
Loans classified as TDRs	380		380
Number of TDRs	1		1
Pre-Modification Outstanding Recorded Investment	367		367
Post-Modification Outstanding Recorded Investment	367		367
Non-PCI Loans | Real Estate Secured | Land
Troubled debt restructurings
Accruing loans that were classified as TDRs	1,320		1,320		2,010
Non-Accruing	5,103		5,103		5,883
Loans classified as TDRs	6,423		6,423		7,893
Number of TDRs	1		3
Pre-Modification Outstanding Recorded Investment	168		444
Post-Modification Outstanding Recorded Investment	168		444
Non-PCI Loans | Commercial
Troubled debt restructurings
Pre-Modification Outstanding Recorded Investment		227		227
Post-Modification Outstanding Recorded Investment		227		227
Non-PCI Loans | Commercial | Commercial and industrial
Troubled debt restructurings
Accruing loans that were classified as TDRs	2,426		2,426		3,119
Non-Accruing	1,398		1,398		903
Loans classified as TDRs	3,824		3,824		4,022
Number of TDRs	4		14	3
Pre-Modification Outstanding Recorded Investment	377		1,604	91
Post-Modification Outstanding Recorded Investment	377		1,604	91
Non-PCI Loans | Commercial | Agriculture
Troubled debt restructurings
Accruing loans that were classified as TDRs	36		36
Non-Accruing					45
Loans classified as TDRs	36		36		45
Number of TDRs		1	1	2
Pre-Modification Outstanding Recorded Investment		49	662	67
Post-Modification Outstanding Recorded Investment		49	662	67
Non-PCI Loans | Installment loans to individuals
Troubled debt restructurings
Accruing loans that were classified as TDRs	70		70
Loans classified as TDRs	70		70
Number of TDRs			1
Pre-Modification Outstanding Recorded Investment			73
Post-Modification Outstanding Recorded Investment			73
PCI Loans
Troubled debt restructurings
Accruing loans that were classified as TDRs	226		226
Non-Accruing	118		118
Loans classified as TDRs	344		344
PCI Loans | Real Estate Secured | Commercial
Troubled debt restructurings
Accruing loans that were classified as TDRs	226		226
Loans classified as TDRs	226		226
Number of TDRs			1
Pre-Modification Outstanding Recorded Investment			230
Post-Modification Outstanding Recorded Investment			230
PCI Loans | Commercial | Commercial and industrial
Troubled debt restructurings
Non-Accruing	118		118
Loans classified as TDRs	118		118
Number of TDRs			2
Pre-Modification Outstanding Recorded Investment			138
Post-Modification Outstanding Recorded Investment			$ 138

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2014

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1.  Summary of Significant Accounting Policies

Description of Business

Heritage Oaks Bancorp (“Bancorp”) is a California corporation organized in 1994 to act as the holding company for Heritage Oaks Bank (the “Bank”), which opened for business in 1983.  The Bank operates within San Luis Obispo, Santa Barbara and Ventura counties.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as commercial and consumer loans to customers who are predominately small to medium-sized businesses and individuals.  Bancorp and subsidiaries are collectively referred to herein as the “Company.”  The Company is subject to a concentration risk associated with its banking operations in San Luis Obispo, Santa Barbara and Ventura Counties. No one customer accounts for more than 10% of revenue or assets in any period presented. The Company has no assets nor does it generate any revenue from outside of the United States. While the chief decision-makers of the Company monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual financial statements are not included herein. In the opinion of management, all adjustments (which consist solely of normal recurring accruals) considered necessary for a fair presentation of results for the interim periods presented have been included. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2013 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 4, 2014; file number 000-25020.

The consolidated financial statements include the accounts of Bancorp and its wholly-owned financial subsidiary, Heritage Oaks Bank.  All significant inter-company balances and transactions have been eliminated. On February 28, 2014, the Company acquired 100% of the outstanding common shares of Mission Community Bancorp (“MISN”).  MISN’s results of operations have been included in the Company’s results beginning March 1, 2014.  Heritage Oaks Capital Trust II (“Trust II”), Mission Community Capital Trust I (“Trust III”) and Santa Lucia Bancorp (CA) Capital Trust (“Trust IV”), which were formed solely for the purpose of issuing trust preferred securities, are unconsolidated subsidiaries, as the Company is not the primary beneficiary of the trusts. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  Some items in the prior year financial statements were reclassified to conform to the current presentation.  Reclassifications had no effect on prior year net income or shareholders’ equity.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses (“ALLL”), the valuation of real estate acquired through foreclosure, the carrying value of the Company’s deferred tax assets and estimates used in the determination of the fair value of certain financial instruments, assets and liabilities acquired in the MISN transaction and accruals for restructuring activities, as described in Note 11.

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s Annual Report filed on Form 10-K.  There have been no changes to these policies or their application other than as noted below, related to purchased credit impaired loans.

Acquired Loans and Leases

Purchased loans and leases are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an ALLL is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition for evidence of deterioration in credit quality since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments.  Such loans are classified as purchased credit impaired loans (“PCI loans”), while all other acquired loans are classified as non-impaired.

The Company has elected to account for purchased credit impaired loans on an individual loan level.  The Company estimates the amount and timing of expected cash flows for each loan, and the expected cash flow in excess of the loan’s fair value is referred to as the accretable yield, and is recorded as interest income over the remaining life of the loan.  The excess of the loan’s contractual principal and interest over expected cash flows is referred to as the non-accretable difference, and is not recorded in the Company’s financial statements.

Quarterly, management performs an evaluation of expected future cash flows for PCI loans.  If current expectations of future cash flows are less than management’s previous expectations, an ALLL is recorded with a charge to current period earnings through provision for loan losses.  If there has been a probable and significant increase in expected future cash flows over that which was previously expected, the Company would first reduce any previously established ALLL, and then record an adjustment to interest income through an increase in the accretable yield.

Business Combinations and Related Matters

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the MISN acquisition that was consummated in 2014.

Recent Accounting Guidance Adopted

There has been no new accounting guidance that has been adopted by the Company since December 31, 2013.

Recent Accounting Guidance Not Yet Effective

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.  This update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”).  Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed.  Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  The amendments within this update are effective for annual and interim periods beginning after December 15, 2014.  The Company does not believe the adoption of this update will have a material impact of the Company’s consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.  The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.  The amendments within this update are effective for the quarter ending March 31, 2017.  The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on the Company’s consolidated financial statements.

On January 17, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force.  This Update provides clarification as to when an in-substance repossession or foreclosure has occurred, i.e., the creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and, therefore, the loan receivable should be derecognized and the real estate property should be recognized.  Under ASU No. 2014-04, a creditor has received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the property upon completion of a foreclosure or (2) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or a similar legal agreement.  The Update also will require disclosure in annual and interim financial statements of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  For public business entities, the amendments in this Update are effective for annual and interim periods beginning after December 15, 2014.  The Company expects to adopt the provisions of ASU No. 2014-04 in the first quarter of 2015.  Adoption of this Update is not expected to have a material impact on the Company’s consolidated financial statements.

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Investment Securities (Details 5) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Available for sale securities
One Year Or Less	$ 38,333
Over 1 Through 5 Years	124,633
Over 5 Years Through 10 Years	144,382
Over 10 Years	75,089
Total	382,437	276,795
Available for sale securities, Amortized cost
One Year Or Less	38,459
Over 1 Through 5 Years	124,890
Over 5 Years Through 10 Years	143,476
Over 10 Years	75,775
Total available for sale securities	382,600	282,615
Weighted average yield
One Year Or Less (as a percent)	1.92%
Over 1 Through 5 Years (as a percent)	2.00%
Over 5 Years Through 10 Years (as a percent)	2.52%
Over 10 Years (as a percent)	2.76%
Total (as a percent)	2.34%
Obligations of U.S. government agencies
Available for sale securities
One Year Or Less	117
Over 1 Through 5 Years	476
Over 5 Years Through 10 Years	14,503
Over 10 Years	1,795
Total	16,891	6,208
Available for sale securities, Amortized cost
Total available for sale securities	16,923	6,243
Mortgage-backed securities - U.S. government sponsored entities and agencies
Available for sale securities
One Year Or Less	36,510
Over 1 Through 5 Years	96,446
Over 5 Years Through 10 Years	56,776
Over 10 Years	51,398
Total	241,130	182,931
Available for sale securities, Amortized cost
Total available for sale securities	242,947	186,981
Mortgage-backed securities - Non-agency
Available for sale securities
One Year Or Less	731
Over 1 Through 5 Years	10,704
Over 5 Years Through 10 Years	501
Total	11,936	11,032
Available for sale securities, Amortized cost
Total available for sale securities	11,913	10,924
State and municipal securities
Available for sale securities
One Year Or Less	975
Over 1 Through 5 Years	14,473
Over 5 Years Through 10 Years	60,808
Over 10 Years	4,431
Total	80,687	50,030
Available for sale securities, Amortized cost
Total available for sale securities	78,829	51,532
Asset backed securities
Available for sale securities
Over 1 Through 5 Years	2,534
Over 5 Years Through 10 Years	11,794
Over 10 Years	17,465
Total	31,793	26,594
Available for sale securities, Amortized cost
Total available for sale securities	31,988	26,935
Securities pledged to secure public deposits
Available for sale securities
Total	70,700	41,900
Available for sale securities, Amortized cost
Total available for sale securities	$ 70,900	$ 40,400

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Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2014

Shareholders' Equity

Schedule of the Company's and the Bank's actual regulatory capital ratios

	Regulatory
	Standard to	September 30, 2014		December 31, 2013
	be Well	Heritage Oaks		Heritage Oaks
Ratio	Capitalized	Bancorp	Bank	Bancorp	Bank
Leverage ratio	5.00%	10.00%	9.77%	10.20%	9.82%
Tier I capital to risk weighted assets	6.00%	12.87%	12.58%	12.91%	12.42%
Total risk based capital to risk weighted assets	10.00%	14.12%	13.83%	14.17%	13.68%

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Share-Based Compensation Plans (Tables)

9 Months Ended

Sep. 30, 2014

Share-Based Compensation Plans

Summary of recognized and unrecognized share based compensation expense

	For the Three Months Ended				For the Nine Months Ended
	September  30,				September  30,
	2014		2013		2014		2013
	(dollars in thousands)
Share-based compensation expense:
Stock options	$	109	$	68	$	370	$	183
Restricted stock	148		80		353		208
Total expense	$	257	$	148	$	723	$	391
Unrecognized compensation expense:
Stock options	$	1,156	$	762
Restricted stock	1,067		775
Total unrecognized expense	$	2,223	$	1,537

Summary of activity related to options granted, exercised, and forfeited

	Options Outstanding				Options
	Number		Weighted Average		Available for
	of Shares		Exercise Price		Grant
Balance, December 31, 2013	562,257		$	6.34	1,593,616
Granted	312,582		7.41
Forfeited	(68,082	)	8.03
Expired	(2,604	)	10.12
Exercised	(44,217	)	3.60
Balance, September 30, 2014	759,936		$	6.78	2,021,355

Summary of activity related to restricted stock granted, vested and forfeited

	Number of		Average Grant
	Shares		Date Fair Value
Balance December 31, 2013	195,048		$	4.87
Granted	124,744		7.37
Vested	(32,005	)	6.41
Forfeited	(25,862	)	5.80
Balance September 30, 2014	261,925		$	5.78

Summary of the aggregate intrinsic value of options vested and expected to vest and exercisable

	September 30, 2014
				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	721,414	$	6.77	7.78	$	731,352
Exercisable at September 30, 2014	310,873	$	6.64	6.00	$	576,739

Schedule of assumptions used in the calculation of weighted average fair value of options granted

	For the Nine Months Ended
	September  30,
	2014		2013
Expected volatility	49.83%		55.32%
Expected term (years)	5.66		6.00
Dividend yield	0.59%		0.00%
Risk free rate	1.76%		1.55%
Weighted-average grant date fair value	$	3.39	$	3.31

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Calculation of both basic and diluted earnings (loss) per common share
Net income	$ 3,429	$ 2,761	$ 4,613	$ 9,207
Dividends and accretion on preferred stock		(181)		(898)
Net income available to common shareholders	$ 3,429	$ 2,580	$ 4,613	$ 8,309
Weighted average shares outstanding	33,992,465	26,362,467	32,322,194	26,327,948
Basic earnings per common share (in dollars per share)	$ 0.10	$ 0.10	$ 0.14	$ 0.32
Dilutive effect of share-based compensation awards (in shares)	153,735	187,101	197,324	212,156
Weighted average diluted shares outstanding	34,146,200	26,549,568	32,519,518	26,540,104
Diluted earnings per common share (in dollars per share)	$ 0.10	$ 0.10	$ 0.14	$ 0.31
Stock options
Shares excluded from the calculation of diluted earnings per share
Shares excluded from the calculation of diluted earnings per share	35,000	418,000	114,000	358,000

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Investment Securities (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Earnings on both taxable and tax-exempt investment securities
Total	$ 1,946	$ 1,347	$ 5,355	$ 3,993
Obligations of U.S. government agencies
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	112	33	226	86
Mortgage backed securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	1,152	847	3,370	2,470
State and municipal securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	38		40	5
Non-taxable earnings on investment securities	545	354	1,452	1,082
Corporate debt securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities			6
Asset backed securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	$ 99	$ 113	$ 261	$ 350

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2014

Earnings Per Share

Schedule of calculation of both basic and diluted earnings per common share

	For the Three Months Ended September 30,
	2014			2013
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands except per share data)
Net income	$	3,429		$	2,761
Dividends and accretion on preferred stock	-			(181)
Net income available to common shareholders	$	3,429		$	2,580
Weighted average shares outstanding			33,992,465			26,362,467
Basic earnings per common share	$	0.10		$	0.10
Dilutive effect of share-based compensation awards			153,735			187,101
Weighted average diluted shares outstanding			34,146,200			26,549,568
Diluted earnings per common share	$	0.10		$	0.10
	For the Nine Months Ended September 30,
	2014			2013
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands except per share data)
Net income	$	4,613		$	9,207
Dividends and accretion on preferred stock	-			(898)
Net applicable to common shareholders	$	4,613		$	8,309
Weighted average shares outstanding			32,322,194			26,327,948
Basic earnings per common share	$	0.14		$	0.32
Dilutive effect of share-based compensation awards			197,324			212,156
Weighted average diluted shares outstanding			32,519,518			26,540,104
Diluted earnings per common share	$	0.14		$	0.31

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Restructuring Activities (Tables)

9 Months Ended

Sep. 30, 2014

Restructuring Activities

Schedule of expected costs of restructuring and integration plan

	Total Costs		Amount		Amount			Amount		Cumulative
	Expected To		Incurred		Incurred			Incurred		Incurred
	Be Incurred		Q1 2014		Q2 2014			Q3 2014		YTD 9/30/2014
	(dollars in thousands)
System integration	$	578	$	223	$	(20	)	$	312	$	515
Fixed asset consolidation	2,387		2,350		(268		)	41		2,123
Contract cancellation costs	1,746		1,656		-			90		1,746
Employee termination and retention	3,836		2,641		803			274		3,718
Total restructuring costs	$	8,547	$	6,870	$	515		$	717	$	8,102

Schedule of change in the accrued liability related to restructuring and integration plan associated with the MISN acquisition

		For the Three		For the Nine
		Months Ended		Months Ended
		September 30,		September 30,
		2014		2014
		(dollars in thousands)
Balance, beginning of period		$	2,896	$	-
New charges (1)		930		8,759
Cash payments		(2,404)		(6,893)
Other adjustments (2)		(213)		(657)
Balance, end of period		$	1,209	$	1,209
(1)	Represents initial charges the Company incurred related to the restructuring and integration plan associated with the MISN acquisition.
(2)	Adjustments related to previously accrued amounts associated with planned staff reduction, contract terminations, and other adjustments.

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities:
Net income	$ 4,613	$ 9,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,394	1,050
Write-downs on premises and equipment held for sale	988
Amortization of premiums / discounts on investment securities, net	3,499	3,110
Amortization of intangible assets	760	300
Accretion of discount on purchased loans	(1,791)
Amortization of premium on junior subordinated debentures	118
Share-based compensation expense	723	392
Gain on sale of available for sale securities	(549)	(3,935)
Originations of loans held for sale	(62,385)	(120,520)
Proceeds from sale of loans held for sale	58,794	137,606
Net increase in bank owned life insurance	(460)	(361)
Decrease in deferred tax asset	3,269	5,354
Excess tax benefit from exercise of stock options	(20)
Increase in other assets and other liabilities	1,206	434
Net cash provided by operating activities	10,159	32,637
Cash flows from investing activities:
Net cash and cash equivalents acquired in MISN merger	28,891
Purchase of securities, available for sale	(155,956)	(170,063)
Sale of securities, available for sale	98,379	144,027
Maturities and calls of securities, available for sale		544
Proceeds from principal paydowns of securities, available for sale	30,799	35,200
Proceeds from the sale of premises and equipment held for sale	3,594
Purchase of FHLB stock	(941)	(164)
Increase in loans, net	(44,855)	(90,254)
Allowance for loan loss recoveries	705	1,201
Purchase of property, premises and equipment, net	(5,122)	(9,223)
Proceeds from sale of foreclosed collateral	1,628	1,374
Net cash used in investing activities	(42,878)	(87,358)
Cash flows from financing activities:
Increase in deposits, net	77,538	86,082
Proceeds from Federal Home Loan Bank borrowing	25,000	183,500
Repayments of Federal Home Loan Bank borrowing	(44,000)	(192,500)
Proceeds from exercise of stock options including tax benefits	178	85
Stock issuance costs	(381)
Dividends declared	(1,027)
Dividends on Series A preferred stock		(708)
Retirement of Series A preferred stock and related warrants		(22,575)
Net cash provided by financing activities	57,308	53,884
Net increase / (decrease) in cash and cash equivalents	24,589	(837)
Cash and cash equivalents, beginning of period	26,238	34,116
Cash and cash equivalents, end of period	50,827	33,279
Cash Flow Information
Interest paid	3,631	2,791
Income taxes paid	600	2,100
Non-Cash Flow Information
Change in unrealized gain on available for sale securities	5,657	(11,620)
Loans transferred to foreclosed collateral	1,564	1,374
Land and buildings transferred to held for sale	1,730
Accretion of preferred stock discount		$ 189

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies.

Schedule of outstanding financial commitments of the Bank whose contractual amount represents credit risk

	September 30,		December 31,
	2014		2013
	(dollars in thousands)
Commitments to extend credit	$	229,464	$	181,445
Standby letters of credit	15,430		17,036
Total commitments and standby letters of credit	$	244,894	$	198,481

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Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified			9 Months Ended
	Sep. 30, 2014 securities	Dec. 31, 2013 securities	Sep. 30, 2014 Investment securities Minimum	Sep. 30, 2014 Investment securities Maximum	Sep. 30, 2014 Obligations of U.S. government agencies	Dec. 31, 2013 Obligations of U.S. government agencies	Sep. 30, 2014 Mortgage-backed securities - U.S. government sponsored entities and agencies	Dec. 31, 2013 Mortgage-backed securities - U.S. government sponsored entities and agencies	Sep. 30, 2014 Mortgage-backed securities - Non-agency	Dec. 31, 2013 Mortgage-backed securities - Non-agency	Sep. 30, 2014 State and municipal securities	Dec. 31, 2013 State and municipal securities	Sep. 30, 2014 Asset backed securities	Dec. 31, 2013 Asset backed securities
Investment securities
Less Than Twelve Months, Fair Value	$ 104,499	$ 165,482			$ 3,780	$ 2,773	$ 82,816	$ 118,554	$ 3,001	$ 3,210	$ 9,344	$ 32,967	$ 5,558	$ 7,978
Less Than Twelve Months, Unrealized Loss	(1,136)	(5,154)			(58)	(45)	(977)	(3,140)	(8)	(48)	(64)	(1,675)	(29)	(246)
Twelve Months or More, Fair Value	90,772	31,108			2,639	40	59,407	18,863	501		10,861	2,458	17,364	9,747
Twelve Months or More, Unrealized Loss	(2,177)	(1,444)			(61)	(1)	(1,829)	(1,252)	(10)		(111)	(96)	(166)	(95)
Total, Fair Value	195,271	196,590			6,419	2,813	142,223	137,417	3,502	3,210	20,205	35,425	22,922	17,725
Total, Unrealized Loss	$ (3,313)	$ (6,598)			$ (119)	$ (46)	$ (2,806)	$ (4,392)	$ (18)	$ (48)	$ (175)	$ (1,771)	$ (195)	$ (341)
Securities were in an unrealized loss position	83	96
Securities in an unrealized loss position
Maturity period of available-for-sale securities			1 year	40 years

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Share-Based Compensation Plans (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Share-Based Compensation Plans
Number of share-based employee compensation plans	2		2
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense	$ 257	$ 148	$ 723	$ 391
Unrecognized compensation expense	2,223	1,537	2,223	1,537
Stock option
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense	109	68	370	183
Unrecognized compensation expense	1,156	762	1,156	762
Weighted-average period over which expense is expected to be recognized			2 years 10 months 24 days
Number of shares
Options outstanding, at the beginning of the period (in shares)			562,257
Granted (in shares)			312,582
Forfeited (in shares)			(68,082)
Expired (in shares)			(2,604)
Exercised (in shares)			(44,217)
Options outstanding, at the end of the period (in shares)	759,936		759,936
Weighted Average Exercise Price
Options outstanding, at the beginning of the period (in dollars per share)			$ 6.34
Granted (in dollars per share)			$ 7.41
Forfeited (in dollars per share)			$ 8.03
Expired (in dollars per share)			$ 10.12
Exercised (in dollars per share)			$ 3.60
Options outstanding, at the end of the period (in dollars per share)	$ 6.78		$ 6.78
Options Available for Grant (in shares)	2,021,355		2,021,355		1,593,616
Options vested or expected to vest
Shares	721,414		721,414
Weighted Average Exercise Price (in dollars per share)	$ 6.77		$ 6.77
Weighted Average Remaining Contractual Life			7 years 9 months 11 days
Aggregate Intrinsic Value	731,352		731,352
Options exercisable
Shares	310,873		310,873
Weighted Average Exercise Price (in dollars per share)	$ 6.64		$ 6.64
Weighted Average Remaining Contractual Life			6 years
Aggregate Intrinsic Value	576,739		576,739
Aggregate intrinsic value of options exercised
Aggregate intrinsic value of options exercised			174
Assumptions used in the calculation of the weighted average fair value of options granted
Expected volatility (as a percent)			49.83%	55.32%
Expected term			5 years 7 months 28 days	6 years
Dividend yield (as a percent)			0.59%	0.00%
Risk free rate (as a percent)			1.76%	1.55%
Weighted-average grant date fair value (in dollars per share)			$ 3.39	$ 3.31
Restricted stock
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense	148	80	353	208
Unrecognized compensation expense	$ 1,067	$ 775	$ 1,067	$ 775
Weighted-average period over which expense is expected to be recognized			2 years 4 months 24 days
Number of Shares
Balance at the beginning of the period (in shares)			195,048
Granted (in shares)			124,744
Vested (in shares)			(32,005)
Forfeited (in shares)			(25,862)
Balance at the end of the period (in shares)	261,925		261,925
Average Grant Date fair Value
Balance at the beginning of the period (in dollars per share)			$ 4.87
Granted (in dollars per share)			$ 7.37
Vested (in dollars per share)			$ 6.41
Forfeited (in dollars per share)			$ 5.80
Balance at the end of the period (in dollars per share)	$ 5.78		$ 5.78
Performance based grant (in shares)			21,241
Restricted stock | Minimum | 2005 Plan
Number of shares
Vesting period			3 years
Restricted stock | Maximum | 2005 Plan
Number of shares
Vesting period			5 years

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Assets
Cash and due from banks	$ 14,993	$ 11,336
Interest earning deposits in other banks	35,834	14,902
Total cash and cash equivalents	50,827	26,238
Investment securities available for sale, at fair value	382,437	276,795
Loans held for sale, at lower of cost or fair value	5,977	2,386
Gross loans	1,151,576	827,484
Net deferred loan fees	(1,414)	(1,281)
Allowance for loan and lease losses	(16,787)	(17,859)
Net loans held for investment	1,133,375	808,344
Premises and equipment, net	36,937	24,220
Premises and equipment held for sale	2,070
Deferred tax assets, net	27,914	21,624
Bank-owned life insurance	24,549	15,826
Federal Home Loan Bank stock	7,853	4,739
Goodwill	24,536	11,237
Other intangible assets	5,644	1,344
Other assets	14,105	10,898
Total assets	1,716,224	1,203,651
Liabilities
Non-interest bearing deposits	469,435	291,856
Interest bearing deposits	953,499	682,039
Total deposits	1,422,934	973,895
Short term FHLB borrowing	10,000	29,000
Long term FHLB borrowing	65,562	59,500
Junior subordinated debentures	13,179	8,248
Other liabilities	10,430	6,581
Total liabilities	1,522,105	1,077,224
Shareholders' equity
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 33,082,205 shares and 25,397,780 shares as of September 30, 2014 and December 31, 2013, respectively	161,924	101,511
Additional paid in capital	6,382	6,020
Retained earnings	22,303	18,717
Accumulated other comprehensive loss, net of tax benefit of ($69) and ($2,395) as of September 30, 2014 and December 31, 2013, respectively	(94)	(3,425)
Total shareholders' equity	194,119	126,427
Total liabilities and shareholders' equity	1,716,224	1,203,651
Series C preferred stock
Shareholders' equity
Preferred stock, 5,000,000 shares authorized: Series C preferred stock, $3.25 per share stated value; issued and outstanding: 1,189,538 shares as of September 30, 2014 and December 31, 2013	$ 3,604	$ 3,604

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Loans and Allowance for Loan and Lease Losses (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013	Dec. 31, 2012
Outstanding loan balances
Total gross loans held for investment	$ 1,151,576,000		$ 1,151,576,000			$ 827,484,000
Net loans held for investment	1,133,375,000		1,133,375,000			808,344,000
Loans pledged as collateral	0		0
Net deferred loan fees	(1,414,000)		(1,414,000)			(1,281,000)
Allowance for loan and lease losses	(16,787,000)	(17,468,000)	(16,787,000)	(17,468,000)	(16,635,000)	(17,859,000)	(17,934,000)	(18,118,000)
Loans held for sale	5,977,000		5,977,000			2,386,000
Reserve maintained for the exercise of repurchase option by buyer	12,300,000		12,300,000
Concentration of Credit Risk
Loan portfolio collateralized by various forms of real estate	954,900,000		954,900,000			672,100,000
Loans Serviced for Others
Unpaid principal balance of loans serviced for others, exclusive of SBA loans	46,900,000		46,900,000			22,600,000
Unpaid principal balance of SBA loans serviced for others	16,100,000		16,100,000			6,600,000
Recognized gains from the sale of SBA loans	43,000	4,000	43,000	400,000
Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	1,140,227,000		1,140,227,000
Net loans held for investment	1,122,026,000		1,122,026,000			808,344,000
Net deferred loan fees	(1,414,000)		(1,414,000)			(1,281,000)
Allowance for loan and lease losses	(16,787,000)		(16,787,000)			(17,859,000)
Loans held for sale	5,977,000		5,977,000			2,386,000
PCI Loans
Outstanding loan balances
Total gross loans held for investment	11,349,000		11,349,000
Net loans held for investment	11,349,000		11,349,000
Federal Reserve Bank
Outstanding loan balances
Loans pledged as collateral	816,600,000		816,600,000
FHLB secured credit facility	417,800,000		417,800,000
FHLB secured borrowings	75,600,000		75,600,000
FHLB secured line of credit	11,500,000		11,500,000
FHLB secured future borrowings	340,900,000		340,900,000
MISN
Outstanding loan balances
Total gross loans held for investment	244,900,000		244,900,000
Net loans held for investment	280,300,000		280,300,000
Net loans without impairment	267,500,000		267,500,000
Net loans with purchased credit impaired	12,800,000		12,800,000
Minimum
Outstanding loan balances
Period for sale of loans categorized as held for sale			30 days
Maximum
Outstanding loan balances
Period for sale of loans categorized as held for sale			60 days
Land
Outstanding loan balances
Allowance for loan and lease losses	(2,225,000)	(4,631,000)	(2,225,000)	(4,631,000)	(2,944,000)	(3,402,000)	(4,431,000)	(4,670,000)
Real Estate Secured
Outstanding loan balances
Total gross loans held for investment	954,893,000		954,893,000
Real Estate Secured | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	946,746,000		946,746,000			672,061,000
Real Estate Secured | Multi-family residential
Outstanding loan balances
Total gross loans held for investment	76,821,000		76,821,000
Real Estate Secured | Multi-family residential | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	76,821,000		76,821,000			31,140,000
Real Estate Secured | Residential 1 to 4 family
Outstanding loan balances
Total gross loans held for investment	121,061,000		121,061,000
Real Estate Secured | Residential 1 to 4 family | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	120,500,000		120,500,000			88,904,000
Real Estate Secured | Residential 1 to 4 family | PCI Loans
Outstanding loan balances
Total gross loans held for investment	561,000		561,000
Real Estate Secured | Home equity lines of credit
Outstanding loan balances
Total gross loans held for investment	37,967,000		37,967,000
Real Estate Secured | Home equity lines of credit | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	37,886,000		37,886,000			31,178,000
Real Estate Secured | Home equity lines of credit | PCI Loans
Outstanding loan balances
Total gross loans held for investment	81,000		81,000
Real Estate Secured | Commercial
Outstanding loan balances
Total gross loans held for investment	582,600,000		582,600,000
Real Estate Secured | Commercial | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	577,639,000		577,639,000			432,203,000
Real Estate Secured | Commercial | PCI Loans
Outstanding loan balances
Total gross loans held for investment	4,961,000		4,961,000
Real Estate Secured | Farmland
Outstanding loan balances
Total gross loans held for investment	93,965,000		93,965,000
Real Estate Secured | Farmland | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	92,292,000		92,292,000			50,414,000
Real Estate Secured | Farmland | PCI Loans
Outstanding loan balances
Total gross loans held for investment	1,673,000		1,673,000
Real Estate Secured | Land
Outstanding loan balances
Total gross loans held for investment	24,634,000		24,634,000
Real Estate Secured | Land | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	23,763,000		23,763,000			24,523,000
Real Estate Secured | Land | PCI Loans
Outstanding loan balances
Total gross loans held for investment	871,000		871,000
Real Estate Secured | Construction
Outstanding loan balances
Total gross loans held for investment	17,845,000		17,845,000
Real Estate Secured | Construction | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	17,845,000		17,845,000			13,699,000
Commercial
Outstanding loan balances
Total gross loans held for investment	188,085,000		188,085,000
Allowance for loan and lease losses	(4,314,000)	(6,126,000)	(4,314,000)	(6,126,000)	(4,436,000)	(4,781,000)	(6,584,000)	(6,154,000)
Commercial | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	184,883,000		184,883,000			151,845,000
Commercial | PCI Loans
Outstanding loan balances
Total gross loans held for investment	3,202,000		3,202,000
Commercial | Commercial and industrial
Outstanding loan balances
Total gross loans held for investment	143,861,000		143,861,000
Commercial | Commercial and industrial | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	142,076,000		142,076,000			119,121,000
Commercial | Commercial and industrial | PCI Loans
Outstanding loan balances
Total gross loans held for investment	1,785,000		1,785,000
Commercial | Agriculture
Outstanding loan balances
Total gross loans held for investment	44,204,000		44,204,000
Commercial | Agriculture | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	42,787,000		42,787,000			32,686,000
Commercial | Agriculture | PCI Loans
Outstanding loan balances
Total gross loans held for investment	1,417,000		1,417,000
Commercial | Other
Outstanding loan balances
Total gross loans held for investment	20,000		20,000
Commercial | Other | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	20,000		20,000			38,000
Installment loans to individuals
Outstanding loan balances
Total gross loans held for investment	8,198,000		8,198,000
Allowance for loan and lease losses	(74,000)	(88,000)	(74,000)	(88,000)	(73,000)	(99,000)	(100,000)	(64,000)
Installment loans to individuals | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	8,198,000		8,198,000			3,246,000
Overdrafts
Outstanding loan balances
Total gross loans held for investment	400,000		400,000
Overdrafts | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	$ 400,000		$ 400,000			$ 332,000

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Condensed Consolidated Statements of Shareholders' Equity (USD $) In Thousands, except Share data, unless otherwise specified	Total	Preferred Stock	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income/(loss)	Series A senior preferred stock	Series A senior preferred stock Preferred Stock	Series A senior preferred stock Retained Earnings
Balance at Dec. 31, 2012	$ 145,529	$ 24,140	$ 101,354	$ 7,337	$ 8,773	$ 3,925
Balance (in shares) at Dec. 31, 2012			25,307,110
Increase (Decrease) in Stockholders' Equity
Repurchase of preferred stock	(21,000)	(20,725)		(275)
Repurchase of warrants	(1,575)			(1,575)
Accretion on Series A preferred stock discount								189	(189)
Dividends declared on series A preferred stock							(708)		(708)
Exercise of stock options	78		78
Exercise of stock options (in shares)			20,339
Share-based compensation expense	392			392
Issuance of restricted share awards (in shares)			72,786
Forfeiture of restricted share awards	7		7
Forfeiture of restricted share awards (in shares)			(8,892)
Net income	9,207				9,207
Other comprehensive income (loss)	(6,838)					(6,838)
Balance at Sep. 30, 2013	125,092	3,604	101,439	5,879	17,083	(2,913)
Balance (in shares) at Sep. 30, 2013			25,391,343
Balance at Dec. 31, 2013	126,427	3,604	101,511	6,020	18,717	(3,425)
Balance (in shares) at Dec. 31, 2013			25,397,780
Increase (Decrease) in Stockholders' Equity
Issuance of common stock in merger	60,255		60,255
Issuance of common stock in merger (in shares)			7,541,326
Stock issuance costs	(381)			(381)
Dividends declared ($0.03 per share)	(1,027)				(1,027)
Exercise of stock options	158		158
Exercise of stock options (in shares)			44,217
Share-based compensation expense	723			723
Tax impact of share-based compensation expense	20			20
Issuance of restricted share awards (in shares)			124,744
Forfeiture of restricted share awards (in shares)			(25,862)
Net income	4,613				4,613
Other comprehensive income (loss)	3,331					3,331
Balance at Sep. 30, 2014	$ 194,119	$ 3,604	$ 161,924	$ 6,382	$ 22,303	$ (94)
Balance (in shares) at Sep. 30, 2014			33,082,205

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Subsequent Events (Details) (USD $)	9 Months Ended	0 Months Ended	9 Months Ended	0 Months Ended
	Sep. 30, 2014	Oct. 29, 2014 Subsequent Events	Sep. 30, 2014 Series C preferred stock	Oct. 29, 2014 Series C preferred stock Subsequent Events
Subsequent events
Period from a "Change in Control" within which termination of employment will result in a "double-trigger" change in control payment		12 months
Period from separation from bank during which Ms. Lagomarsino cannot induce any employee or customers to leave or otherwise interfere with or disrupt the relationships between the Bank and its employees, or divert or attempt to divert from the Bank any of its customers		1 year
Preferred stock conversion ratio			1	1
Cash dividend declared (in dollars per share)	$ 0.03	$ 0.05

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Business Combination (Details 2) (Mission Community, USD $) In Thousands, except Per Share data, unless otherwise specified	0 Months Ended	3 Months Ended		9 Months Ended
	Feb. 28, 2014	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Mission Community
Consideration Paid
Cash payments for MISN shares outstanding	$ 2,554
Cash payments for MISN warrants	5,766
Cash payments for MISN options	387
Shares issued, @7.99 per share	60,255
Total consideration paid	68,962
Pro Forma Financial Information
Net interest Income		15,395	14,989	45,761	44,198
Provision for loan and lease losses			210		310
Noninterest income		2,982	2,295	7,835	12,499
Noninterest expense		13,384	12,898	46,844	40,127
Income before income taxes		4,993	4,176	6,752	16,260
Income tax expense		1,682	1,528	2,315	6,210
Net Income		$ 3,311	$ 2,648	$ 4,437	$ 10,050
Earnings Per Common Share
Basic (in dollars per share)		$ 0.10	$ 0.10	$ 0.13	$ 0.30
Diluted (in dollars per share)		$ 0.10	$ 0.10	$ 0.13	$ 0.29

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2014

Summary of Significant Accounting Policies

Acquired Loans and Leases

Acquired Loans and Leases

Purchased loans and leases are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an ALLL is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition for evidence of deterioration in credit quality since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments.  Such loans are classified as purchased credit impaired loans (“PCI loans”), while all other acquired loans are classified as non-impaired.

The Company has elected to account for purchased credit impaired loans on an individual loan level.  The Company estimates the amount and timing of expected cash flows for each loan, and the expected cash flow in excess of the loan’s fair value is referred to as the accretable yield, and is recorded as interest income over the remaining life of the loan.  The excess of the loan’s contractual principal and interest over expected cash flows is referred to as the non-accretable difference, and is not recorded in the Company’s financial statements.

Quarterly, management performs an evaluation of expected future cash flows for PCI loans.  If current expectations of future cash flows are less than management’s previous expectations, an ALLL is recorded with a charge to current period earnings through provision for loan losses.  If there has been a probable and significant increase in expected future cash flows over that which was previously expected, the Company would first reduce any previously established ALLL, and then record an adjustment to interest income through an increase in the accretable yield.

Business Combinations and Related Matters

Business Combinations and Related Matters

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the MISN acquisition that was consummated in 2014.

Recent Accounting Guidance Adopted

Recent Accounting Guidance Adopted

There has been no new accounting guidance that has been adopted by the Company since December 31, 2013.

Recent Accounting Guidance Not Yet Effective

Recent Accounting Guidance Not Yet Effective

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.  This update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”).  Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed.  Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  The amendments within this update are effective for annual and interim periods beginning after December 15, 2014.  The Company does not believe the adoption of this update will have a material impact of the Company’s consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.  The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.  The amendments within this update are effective for the quarter ending March 31, 2017.  The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on the Company’s consolidated financial statements.

On January 17, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force.  This Update provides clarification as to when an in-substance repossession or foreclosure has occurred, i.e., the creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and, therefore, the loan receivable should be derecognized and the real estate property should be recognized.  Under ASU No. 2014-04, a creditor has received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the property upon completion of a foreclosure or (2) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or a similar legal agreement.  The Update also will require disclosure in annual and interim financial statements of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  For public business entities, the amendments in this Update are effective for annual and interim periods beginning after December 15, 2014.  The Company expects to adopt the provisions of ASU No. 2014-04 in the first quarter of 2015.  Adoption of this Update is not expected to have a material impact on the Company’s consolidated financial statements.

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Fair Value of Assets and Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	$ 382,437	$ 276,795
Obligations of U.S. government agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	16,891	6,208
Mortgage-backed securities - U.S. government sponsored entities and agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	241,130	182,931
Mortgage-backed securities - Non-agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	11,936	11,032
State and municipal securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	80,687	50,030
Asset backed securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	31,793	26,594
Significant Other Observable Inputs (Level 2)
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	382,437	276,795
Recurring basis | Significant Other Observable Inputs (Level 2)
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	382,437	276,795
Recurring basis | Significant Other Observable Inputs (Level 2) | Obligations of U.S. government agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	16,891	6,208
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - U.S. government sponsored entities and agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	241,130	182,931
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - Non-agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	11,936	11,032
Recurring basis | Significant Other Observable Inputs (Level 2) | State and municipal securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	80,687	50,030
Recurring basis | Significant Other Observable Inputs (Level 2) | Asset backed securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	31,793	26,594
Recurring basis | Assets At Fair Value
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	382,437	276,795
Recurring basis | Assets At Fair Value | Obligations of U.S. government agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	16,891	6,208
Recurring basis | Assets At Fair Value | Mortgage-backed securities - U.S. government sponsored entities and agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	241,130	182,931
Recurring basis | Assets At Fair Value | Mortgage-backed securities - Non-agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	11,936	11,032
Recurring basis | Assets At Fair Value | State and municipal securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	80,687	50,030
Recurring basis | Assets At Fair Value | Asset backed securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on a recurring basis	$ 31,793	$ 26,594

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Fair Value of Assets and Liabilities (Tables)

9 Months Ended

Sep. 30, 2014

Fair Value of Assets and Liabilities

Summary of the financial instruments the Company measures at fair value on a recurring basis

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Obligations of U.S. government agencies	$	16,891	$	-	$	16,891	$	-
Mortgage backed securities
U.S government sponsored entities and agencies	241,130		-		241,130		-
Non-agency	11,936		-		11,936		-
State and municipal securities	80,687		-		80,687		-
Asset backed securities	31,793		-		31,793		-
Total assets measured on a recurring basis	$	382,437	$	-	$	382,437	$	-

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Obligations of U.S. government agencies	$	6,208	$	-	$	6,208	$	-
Mortgage backed securities
U.S government sponsored entities and agencies	182,931		-		182,931		-
Non-agency	11,032		-		11,032		-
State and municipal securities	50,030		-		50,030		-
Asset backed securities	26,594		-		26,594		-
Total assets measured on a recurring basis	$	276,795	$	-	$	276,795	$	-

Summary of assets the Company measures at fair value on a non-recurring basis

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable		Year To
	Assets At		Identical Assets		Inputs		Inputs		Date Losses/
	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Recoveries)
	(dollars in thousands)
Assets
Impaired loans
Commercial real estate	$	1,325	$	-	$	-	$	1,325	$	1,026
Land	4,170		-		-		4,170		(793		)
Total assets measured on a non-recurring basis	$	5,495	$	-	$	-	$	5,495	$	233

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable		Year To
	Assets At		Identical Assets		Inputs		Inputs		Date Losses/
	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Recoveries)
	(dollars in thousands)
Assets
Impaired loans
Land	$	4,170	$	-	$	-	$	4,170	$	(1,270	)
Total assets measured on a non-recurring basis	$	4,170	$	-	$	-	$	4,170	$	(1,270	)

Summary of the estimated fair value of financial instruments

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
	(dollars in thousands)
Assets
Cash and cash equivalents	$	50,827	$	50,827	$	-	$	-	$	50,827
Investment securities available for sale	382,437		-		382,437		-		382,437
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,150,162		-		-		1,155,003		1,155,003
Loans held for sale	5,977		-		5,977		-		5,977
Accrued interest receivable	5,376		-		1,735		3,641		5,376
Liabilities
Non-interest bearing deposits	469,435		469,435		-		-		469,435
Interest bearing deposits	953,499		-		956,269		-		956,269
Federal Home Loan Bank advances	75,562		-		75,586		-		75,586
Junior subordinated debentures	13,179		-		-		9,867		9,867
Accrued interest payable	426		-		426		-		426

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
	(dollars in thousands)
Assets
Cash and cash equivalents	$	26,238	$	26,238	$	-	$	-	$	26,238
Investment securities available for sale	276,795		-		276,795		-		276,795
Federal Home Loan Bank stock	4,739		-		-		-		N/A
Loans receivable, net of deferred fees and costs	826,203		-		-		827,105		827,105
Loans held for sale	2,386		-		2,386		-		2,386
Accrued interest receivable	4,027		-		1,397		2,630		4,027
Liabilities
Non interest-bearing deposits	291,856		291,856		-		-		291,856
Interest-bearing deposits	682,039		-		684,345		-		684,345
Federal Home Loan Bank advances	88,500		-		86,990		-		86,990
Junior subordinated debentures	8,248		-		-		7,595		7,595
Accrued interest payable	239		-		239		-		239

Summary of off-balance sheet instruments

	September 30, 2014				December 31, 2013
	Notional		Cost to Cede		Notional		Cost to Cede
	Amount		or Assume		Amount		or Assume
	(dollars in thousands)
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	254,590	$	2,546	$	198,481	$	1,985

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) (USD $)	9 Months Ended
	Sep. 30, 2014
Condensed Consolidated Statements of Shareholders' Equity
Dividends declared on common stock (in dollars per share)	$ 0.03

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Preferred stock
Preferred stock, shares authorized	5,000,000	5,000,000
Common stock, no par value (in dollars per share)
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	33,082,205	25,397,780
Common stock, shares outstanding	33,082,205	25,397,780
Accumulated other comprehensive loss, tax benefit (in dollars)	$ 69	$ (2,395)
Series C preferred stock
Preferred stock
Preferred stock, per share stated value (in dollars per share)	$ 3.25	$ 3.25
Preferred stock, shares issued	1,189,538	1,189,538
Preferred stock, shares outstanding	1,189,538	1,189,538

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Shareholders' Equity

9 Months Ended

Sep. 30, 2014

Shareholders' Equity

Shareholders' Equity

Note 9.  Shareholders’ Equity

Regulatory Capital

The following table sets forth the Company’s and the Bank’s actual regulatory capital ratios:

	Regulatory
	Standard to	September 30, 2014		December 31, 2013
	be Well	Heritage Oaks		Heritage Oaks
Ratio	Capitalized	Bancorp	Bank	Bancorp	Bank
Leverage ratio	5.00%	10.00%	9.77%	10.20%	9.82%
Tier I capital to risk weighted assets	6.00%	12.87%	12.58%	12.91%	12.42%
Total risk based capital to risk weighted assets	10.00%	14.12%	13.83%	14.17%	13.68%

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 March 12, 2010, the Company sold 1,189,538 shares of its Series C Convertible Perpetual Preferred Stock (“Series C Preferred Stock”) for $3.6 million as part of the overall $60 million private placement of securities completed at that time.

Series C Preferred Stock is a non-voting class of stock with a liquidation preference over the Company’s common stock equal to the original conversion per share price of $3.25, plus any accrued but unpaid dividends.  The Series C Preferred Stock will convert to shares of common stock on a one share for one share basis if the original holder of such shares transfers them to an unaffiliated third party or otherwise makes a “Permissible Transfer,” as defined in the terms of the Series C Preferred Stock.  The Series C Preferred Stock will not be redeemable by either the Company or by the holders.  However, the parties could mutually agree to convert or exchange the stock at any time.  Holders of the Series C Preferred Stock do not have any voting rights, including the right to elect any directors, other than the customary limited voting rights with respect to matters significantly and adversely affecting the rights and privileges of the Series C Preferred Stock.  There is no stated dividend rate for shares of Series C Preferred Stock.  However, in the event that a common stock dividend is declared, holders of Series C Preferred Stock are entitled to a per share dividend equivalent to that declared for each common share into which Series C Preferred Stock is then convertible.

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 on the date the Company made a firm commitment to issue the Series C Preferred Stock.  Therefore, the Series C Preferred Stock has a contingent beneficial conversion feature associated with it.  However, since the conversion of the Series C Preferred Stock remains contingent upon the holder’s transfer of the securities to an unaffiliated third party with no specified date for its conversion to common stock, the Company will record the contingent beneficial conversion feature as an initial discount on Series C Preferred Stock and additional paid in capital, with a concurrent immediate accretion of the established discount and corresponding charge to retained earnings on the date the Series C Preferred Stock converts to common stock.  The amount of the contingent beneficial conversion feature is approximately $0.2 million and will be recorded as described upon the original holder’s transfer of Series C Preferred Stock through a Permissible Transfer.  Such transfer has not occurred as of September 30, 2014.  Series C Preferred Stock holders participate in dividends declared on the Company’s common stock and were paid preferred stock dividends of $36 thousand concurrent with the September 15, 2014 common dividend payment paid to our common shareholders.

On October 29, 2014, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Castle Creek Capital Partners IV, LP “Castle Creek”), the sole holder of the Series C Preferred Stock.  Pursuant to the terms of the Exchange Agreement, the parties have mutually agreed that Castle Creek will exchange 1,189,538 shares of the Series C Preferred Stock for shares of the Company’s common stock on a one-for-one exchange ratio basis.  The consummation of the transactions contemplated by the Exchange Agreement is subject to (i) Castle Creek having received a non-control determination with respect to the Company from the Board of Governors of the Federal Reserve System (or the Federal Reserve Bank of San Francisco) and the California Department of Business Oversight, Division of Financial Institutions, (ii) the receipt of any approvals, non-objections or authorizations of all governmental entities required for the consummation of the transactions contemplated by the Exchange Agreement, and (iii) the satisfaction or waiver of certain other customary closing conditions. The Company agreed in the Exchange Agreement to file, as soon as practicable, and in any event within 30 days of the closing of the transactions contemplated by the Exchange Agreement, a registration statement on Form S-3 under the Securities Act covering the resale by Castle Creek of all of the shares of the Company’s common stock received in the exchange, and to cause such shares to be authorized for listing on The NASDAQ Capital Market.  The Company anticipates that the closing of the transactions contemplated by the Exchange Agreement should occur during the fourth quarter of 2014. 

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Oct. 24, 2014
Document and Entity Information
Entity Registrant Name	HERITAGE OAKS BANCORP
Entity Central Index Key	0000921547
Document Type	10-Q
Document Period End Date	Sep. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		33,094,717
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3

XML

Earnings Per Share

9 Months Ended

Sep. 30, 2014

Earnings Per Share

Earnings Per Share

Note 10.  Earnings Per Share

Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted-average number of common and participating preferred shares outstanding for the reporting period, including the Series C Preferred Stock.  In periods when the Company generates a net loss, preferred shares are not included in the calculation of basic loss per share.  Diluted earnings per common share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding over the reporting period, adjusted to include the effect of potentially dilutive common shares.  Potentially dilutive common shares are calculated using the treasury stock method and include incremental shares issuable upon exercise of outstanding stock options, other share-based compensation awards and any other security in which its conversion / exercise may result in the issuance of common stock, such as the warrant the Company issued to the U.S. Treasury during 2009, which was repurchased and cancelled in August 2013.  The computation of diluted earnings per common share excludes the impacts of the assumed exercise or issuance of securities that would have an anti-dilutive effect, which can occur when the Company reports a net loss or when the market price for the Company’s stock falls below the exercise price of equity awards issued by the Company.

The following tables set forth the number of shares used in the calculation of both basic and diluted earnings per common share:

	For the Three Months Ended September 30,
	2014			2013
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands except per share data)
Net income	$	3,429		$	2,761
Dividends and accretion on preferred stock	-			(181)
Net income available to common shareholders	$	3,429		$	2,580
Weighted average shares outstanding			33,992,465			26,362,467
Basic earnings per common share	$	0.10		$	0.10
Dilutive effect of share-based compensation awards			153,735			187,101
Weighted average diluted shares outstanding			34,146,200			26,549,568
Diluted earnings per common share	$	0.10		$	0.10
	For the Nine Months Ended September 30,
	2014			2013
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands except per share data)
Net income	$	4,613		$	9,207
Dividends and accretion on preferred stock	-			(898)
Net applicable to common shareholders	$	4,613		$	8,309
Weighted average shares outstanding			32,322,194			26,327,948
Basic earnings per common share	$	0.14		$	0.32
Dilutive effect of share-based compensation awards			197,324			212,156
Weighted average diluted shares outstanding			32,519,518			26,540,104
Diluted earnings per common share	$	0.14		$	0.31

For the three months ended September 30, 2014 and 2013, common stock equivalents totaling approximately 35,000 and 418,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.  For the nine months ended September 30, 2014 and 2013, anti-dilutive common stock equivalents totaling approximately 114,000 shares and 358,000 shares, respectively, were excluded from the diluted earnings per share calculation.

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Condensed Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Interest Income
Loans, including fees	$ 14,745	$ 10,064	$ 41,134	$ 29,448
Investment securities	1,946	1,347	5,355	3,993
Other interest-earning assets	204	98	535	216
Total interest income	16,895	11,509	47,024	33,657
Interest Expense
Deposits	918	731	2,661	2,101
Other borrowings	406	296	1,158	717
Total interest expense	1,324	1,027	3,819	2,818
Net interest income before provision for loan losses	15,571	10,482	43,205	30,839
Net interest income after provision for loan and lease losses	15,571	10,482	43,205	30,839
Non-Interest Income
Fees and service charges	1,410	1,195	3,949	3,330
Net gain on sale of mortgage loans	411	513	967	1,949
Other mortgage fee income	64	143	223	570
Gain on sale of investment securities	450	344	549	3,935
Other income	647	228	1,533	1,212
Total non-interest income	2,982	2,423	7,221	10,996
Non-Interest Expense
Salaries and employee benefits	6,164	4,529	18,121	14,535
Occupancy and equipment	1,776	1,176	4,989	3,629
Information technology	756	658	2,403	1,925
Professional services	1,839	729	3,610	2,082
Regulatory assessments	351	212	862	851
Sales and marketing	232	170	595	438
Foreclosed asset costs and write-downs	55	23	182	131
Provision for mortgage loan repurchases	27		27	570
Amortization of intangible assets	297	100	760	300
Merger, restructure, and integration	748		8,785
Other expense	1,137	954	3,073	2,478
Total non-interest expense	13,382	8,551	43,407	26,939
Income before income taxes	5,171	4,354	7,019	14,896
Income tax expense	1,742	1,593	2,406	5,689
Net income	3,429	2,761	4,613	9,207
Dividends and accretion on preferred stock		181		898
Net income available to common shareholders	$ 3,429	$ 2,580	$ 4,613	$ 8,309
Earnings Per Common Share
Basic (in dollars per share)	$ 0.10	$ 0.10	$ 0.14	$ 0.32
Diluted (in dollars per share)	$ 0.10	$ 0.10	$ 0.14	$ 0.31

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Investment Securities

9 Months Ended

Sep. 30, 2014

Investment Securities

Investment Securities

Note 4.  Investment Securities

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are reported as available for sale:

	September 30, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	16,923	$	87	$	(119	)	$	16,891
Mortgage backed securities
U.S. government sponsored entities and agencies	242,947		989		(2,806		)	241,130
Non-agency	11,913		41		(18		)	11,936
State and municipal securities	78,829		2,033		(175		)	80,687
Asset backed securities	31,988		-		(195		)	31,793
Total available for sale securities	$	382,600	$	3,150	$	(3,313	)	$	382,437

	December 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	6,243	$	11	$	(46	)	$	6,208
Mortgage backed securities
U.S. government sponsored entities and agencies	186,981		342		(4,392		)	182,931
Non-agency	10,924		156		(48		)	11,032
State and municipal securities	51,532		269		(1,771		)	50,030
Asset backed securities	26,935		-		(341		)	26,594
Total available for sale securities	$	282,615	$	778	$	(6,598	)	$	276,795

The following table provides a summary of investment securities in an unrealized loss position:

	September 30, 2014
	Less Than Twelve Months				Twelve Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
	(dollars in thousands)
Obligations of U.S. government agencies	$	3,780	$	(58)	$	2,639	$	(61)	$	6,419	$	(119	)
Mortgage backed securities
U.S. government sponsored entities and agencies	82,816		(977)		59,407		(1,829)		142,223		(2,806		)
Non-agency	3,001		(8)		501		(10)		3,502		(18		)
State and municipal securities	9,344		(64)		10,861		(111)		20,205		(175		)
Asset backed securities	5,558		(29)		17,364		(166)		22,922		(195		)
Total	$	104,499	$	(1,136)	$	90,772	$	(2,177)	$	195,271	$	(3,313	)

	December 31, 2013
	Less Than Twelve Months				Twelve Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
	(dollars in thousands)
Obligations of U.S. government agencies	$	2,773	$	(45)	$	40	$	(1)	$	2,813	$	(46	)
Mortgage backed securities
U.S. government sponsored entities and agencies	118,554		(3,140)		18,863		(1,252)		137,417		(4,392		)
Non-agency	3,210		(48)		-		-		3,210		(48		)
State and municipal securities	32,967		(1,675)		2,458		(96)		35,425		(1,771		)
Asset backed securities	7,978		(246)		9,747		(95)		17,725		(341		)
Total	$	165,482	$	(5,154)	$	31,108	$	(1,444)	$	196,590	$	(6,598	)

A total of 83 securities were in an unrealized loss position as of September 30, 2014, and 96 as of December 31, 2013.  As of September 30, 2014, the Company believes that unrealized losses on its investment securities are not attributable to credit quality, but rather fluctuations in market prices for these investments.  In the case of the agency mortgage related securities, they have contractual cash flows guaranteed by agencies of the U.S. Government.  While the Company’s investment security holdings have contractual maturity dates that range from 1 to 40 years, they have a much shorter effective duration dependent on the instrument’s priority in the overall cash flow structure and the characteristics of the loans underlying the investment security. Management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery in value.  As of September 30, 2014, the Company does not believe unrealized losses related to any of its securities are other than temporary.

Other than Temporary Impairment (“OTTI”)

At the end of the first quarter of 2013, the Company sold two private label mortgage backed securities in which OTTI losses had been recognized, as part of it’s repositioning of the longer duration portion of the investment portfolio, thereby eliminating all securities in the portfolio for which OTTI losses had been incurred.  As of September 30, 2014, and December 31, 2013, there were no securities which management deemed to be other than temporarily impaired.

Sales of Available for Sale Securities

The proceeds from the sales and calls of securities and the associated gains and losses are listed below:

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2014			2013		2014			2013
	(dollars in thousands)
Proceeds	$	19,991		$	38,930	$	98,379		$	144,571
Gross gains	457			970		814			5,349
Gross losses	(7		)	(626)		(265		)	(1,414		)

The income tax expense related to net realized gains on the sale of securities was $189 thousand and $145 thousand for the three months ended September 30, 2014 and 2013, respectively, and $231 thousand and $1.7 million for the nine months ended September 30, 2014 and 2013, respectively.

Maturities of Available for Sale Securities

The amortized cost and fair value maturities of available for sale investment securities at September 30, 2014 are shown below. The table reflects the expected lives of mortgage backed securities, based on the Company’s historical prepayment experience, because borrowers may have the right to prepay obligations without prepayment penalties. Contractual maturities are reflected for all other security types. Actual maturities may differ from contractual maturities because the individual borrowers who are party to the loans underlying these securities have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2014
	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
	(dollars in thousands)
Obligations of U.S. government agencies	$	117	$	476	$	14,503	$	1,795	$	16,891
Mortgage backed securities
U.S. government sponsored entities and agencies	36,510		96,446		56,776		51,398		241,130
Non-agency	731		10,704		501		-		11,936
State and municipal securities	975		14,473		60,808		4,431		80,687
Asset backed securities	-		2,534		11,794		17,465		31,793
Total available for sale securities	$	38,333	$	124,633	$	144,382	$	75,089	$	382,437
Amortized cost	$	38,459	$	124,890	$	143,476	$	75,775	$	382,600
Weighted average yield	1.92%		2.00%		2.52%		2.76%		2.34%

Securities having an amortized cost and a fair value of $70.7 million and $70.9 million, respectively, at September 30, 2014, and $41.9 million and $40.4 million, respectively, at December 31, 2013 were pledged to secure public deposits. As of September 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of total securities.

The following table summarizes earnings on both taxable and tax-exempt investment securities:

	For The Three Months Ended				For The Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(dollars in thousands)
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	112	$	33	$	226	$	86
Mortgage backed securities	1,152		847		3,370		2,470
State and municipal securities	38		-		40		5
Corporate debt securities	-		-		6		-
Asset backed securities	99		113		261		350
Non-taxable earnings on investment securities
State and municipal securities	545		354		1,452		1,082
Total	$	1,946	$	1,347	$	5,355	$	3,993

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Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2014

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

Note 3.  Fair Value of Assets and Liabilities

Recurring Basis

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Obligations of U.S. government agencies	$	16,891	$	-	$	16,891	$	-
Mortgage backed securities
U.S government sponsored entities and agencies	241,130		-		241,130		-
Non-agency	11,936		-		11,936		-
State and municipal securities	80,687		-		80,687		-
Asset backed securities	31,793		-		31,793		-
Total assets measured on a recurring basis	$	382,437	$	-	$	382,437	$	-

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Obligations of U.S. government agencies	$	6,208	$	-	$	6,208	$	-
Mortgage backed securities
U.S government sponsored entities and agencies	182,931		-		182,931		-
Non-agency	11,032		-		11,032		-
State and municipal securities	50,030		-		50,030		-
Asset backed securities	26,594		-		26,594		-
Total assets measured on a recurring basis	$	276,795	$	-	$	276,795	$	-

Non-recurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at a fair value that was below cost.   Impaired loans disclosed in the table below represent loans for which fair value was determined using the fair market value of the collateral, less estimated costs to sell.   The discounted cash flow method as prescribed by ASC 310, Receivables, is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate, which is not a market rate. Therefore, impaired loans disclosed in the table below do not include loans where fair value was measured using a discounted cash flow approach.

The following tables provide a summary of assets the Company measures at fair value on a non-recurring basis:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable		Year To
	Assets At		Identical Assets		Inputs		Inputs		Date Losses/
	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Recoveries)
	(dollars in thousands)
Assets
Impaired loans
Commercial real estate	$	1,325	$	-	$	-	$	1,325	$	1,026
Land	4,170		-		-		4,170		(793		)
Total assets measured on a non-recurring basis	$	5,495	$	-	$	-	$	5,495	$	233

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable		Year To
	Assets At		Identical Assets		Inputs		Inputs		Date Losses/
	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Recoveries)
	(dollars in thousands)
Assets
Impaired loans
Land	$	4,170	$	-	$	-	$	4,170	$	(1,270	)
Total assets measured on a non-recurring basis	$	4,170	$	-	$	-	$	4,170	$	(1,270	)

Premises and equipment held for sale valued at $1.7 million and impaired commercial real estate loans valued at $1.7 million were transferred into non-recurring Level 3 assets during the nine months ended September 30, 2014.  Transfers out of non-recurring level three assets during the nine months ended September 30, 2014 totaled $2.1 million, and related to the sale of premises and equipment held for sale.

There were no transfers into or out of Level 1 or Level 2 assets reported at fair value on either a recurring or non-recurring basis during the nine months ended September 30, 2014 and 2013.

Fair Value of Financial Instruments

The following table provides a summary of the estimated fair value of financial instruments:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2014		Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
	(dollars in thousands)
Assets
Cash and cash equivalents	$	50,827	$	50,827	$	-	$	-	$	50,827
Investment securities available for sale	382,437		-		382,437		-		382,437
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,150,162		-		-		1,155,003		1,155,003
Loans held for sale	5,977		-		5,977		-		5,977
Accrued interest receivable	5,376		-		1,735		3,641		5,376
Liabilities
Non-interest bearing deposits	469,435		469,435		-		-		469,435
Interest bearing deposits	953,499		-		956,269		-		956,269
Federal Home Loan Bank advances	75,562		-		75,586		-		75,586
Junior subordinated debentures	13,179		-		-		9,867		9,867
Accrued interest payable	426		-		426		-		426

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2013		Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
	(dollars in thousands)
Assets
Cash and cash equivalents	$	26,238	$	26,238	$	-	$	-	$	26,238
Investment securities available for sale	276,795		-		276,795		-		276,795
Federal Home Loan Bank stock	4,739		-		-		-		N/A
Loans receivable, net of deferred fees and costs	826,203		-		-		827,105		827,105
Loans held for sale	2,386		-		2,386		-		2,386
Accrued interest receivable	4,027		-		1,397		2,630		4,027
Liabilities
Non interest-bearing deposits	291,856		291,856		-		-		291,856
Interest-bearing deposits	682,039		-		684,345		-		684,345
Federal Home Loan Bank advances	88,500		-		86,990		-		86,990
Junior subordinated debentures	8,248		-		-		7,595		7,595
Accrued interest payable	239		-		239		-		239

Information on off-balance-sheet instruments follows:

	September 30, 2014				December 31, 2013
	Notional		Cost to Cede		Notional		Cost to Cede
	Amount		or Assume		Amount		or Assume
	(dollars in thousands)
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	254,590	$	2,546	$	198,481	$	1,985

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Business Combination (Tables)

9 Months Ended

Sep. 30, 2014

Business Combination

Summary of acquired assets and liabilities assumed

	February 28, 2014
	(dollars in thousands)
Assets acquired
Cash and due from banks	$	3,212
Interest earning deposits in other banks	34,386
Securities available for sale	76,159
Loans held for sale	338
Loans and leases receivable	280,316
Premises and equipment	15,922
Deferred tax assets, net	11,885
Goodwill	13,299
Core deposit intangible asset	5,060
Bank owned life insurance	8,263
Other assets	4,895
Total assets acquired	$	453,735
Liabilities assumed
Deposits	$	371,501
Advances from Federal Home Loan Bank	6,071
Junior subordinated debentures	4,804
Other liabilities	2,397
Total liabilities assumed	$	384,773
Total consideration paid	$	68,962

Summary of consideration paid for MISN

	February 28, 2014
	(dollars in thousands)
Consideration paid
Cash payments for MISN shares outstanding	$	2,554
Cash payments for MISN warrants	5,766
Cash payments for MISN options	387
Shares issued, @ $7.99 per share	60,255
Total consideration	$	68,962

Schedule of unaudited pro forma financial information

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(dollars in thousands except per share data)
Net interest income	$	15,395	$	14,989	$	45,761	$	44,198
Provision for loan and lease losses	-		210		-		310
Noninterest income	2,982		2,295		7,835		12,499
Noninterest expense	13,384		12,898		46,844		40,127
Income before income taxes	4,993		4,176		6,752		16,260
Income tax expense	1,682		1,528		2,315		6,210
Net income	$	3,311	$	2,648	$	4,437	$	10,050
Earnings Per Common Share
Basic	$	0.10	$	0.10	$	0.13	$	0.30
Diluted	$	0.10	$	0.10	$	0.13	$	0.29

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Restructuring Activities

9 Months Ended

Sep. 30, 2014

Restructuring Activities

Restructuring Activities

Note 11.  Restructuring Activities

In conjunction with the MISN merger described in Note 2. Business Combination, the Company has initiated a restructuring and integration plan which is expected to result in total non-interest expenses of approximately $0.6 million related to integration of MISN systems into the Company’s systems, $2.4 million related to elimination of owned and leased facilities and related fixed assets, $1.7 million related to contract cancellation costs of duplicative systems and services and $3.8 million related to both termination benefits paid to employees displaced as a result of the merger and for retention of key employees through integration-related milestone dates.  During the nine months ended September 30, 2014, $8.1 million of these costs have already been incurred.

Expected costs of this restructuring and integration plan are as follows:

	Total Costs		Amount		Amount			Amount		Cumulative
	Expected To		Incurred		Incurred			Incurred		Incurred
	Be Incurred		Q1 2014		Q2 2014			Q3 2014		YTD 9/30/2014
	(dollars in thousands)
System integration	$	578	$	223	$	(20	)	$	312	$	515
Fixed asset consolidation	2,387		2,350		(268		)	41		2,123
Contract cancellation costs	1,746		1,656		-			90		1,746
Employee termination and retention	3,836		2,641		803			274		3,718
Total restructuring costs	$	8,547	$	6,870	$	515		$	717	$	8,102

The following table summarizes the change in the accrued liability related to the Company’s restructuring and integration plan associated with the MISN acquisition for the periods presented below:

		For the Three		For the Nine
		Months Ended		Months Ended
		September 30,		September 30,
		2014		2014
		(dollars in thousands)
Balance, beginning of period		$	2,896	$	-
New charges (1)		930		8,759
Cash payments		(2,404)		(6,893)
Other adjustments (2)		(213)		(657)
Balance, end of period		$	1,209	$	1,209
(1)	Represents initial charges the Company incurred related to the restructuring and integration plan associated with the MISN acquisition.
(2)	Adjustments related to previously accrued amounts associated with planned staff reduction, contract terminations, and other adjustments.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2014

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Note 7.  Goodwill and Other Intangible Assets

At September 30, 2014 and December 31, 2013 the balance of goodwill was $24.5 million and $11.2 million, respectively.  The change in the balance of goodwill in 2014 relates to the MISN acquisition, as more fully discussed in Note 2. Business Combination.

Core deposit intangible assets (“CDI”) are attributable to the acquisition of core deposit balances, including those acquired in the MISN acquisition.  These assets are subject to amortization.  At September 30, 2014 and December 31, 2013 the balance of CDI was $5.6 million, and $1.3 million, respectively.  Amortization of CDI for the three and nine months ended September 30, 2014 totaled $0.3 million, and $0.8 million, respectively.  Amortization for the three and nine months ended September 30, 2013 totaled $0.1 million, and $0.3 million, respectively.

The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount of CDI as of September 30, 2014, and provides an estimate for future amortization for 2014 and the next five years:

	September 30, 2014
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(3,617)	$	5,644

	September 30, 2014
	Beginning		Acquired		Estimated			Projected Ending
	Balance		CDI’s		Amortization			Balance
	(dollars in thousands)
Period
Year 2014	$	1,344	$	5,060	$	(1,056	)	$	5,348
Year 2015	5,348				(1,049		)	4,299
Year 2016	4,299				(944		)	3,355
Year 2017	3,355				(588		)	2,767
Year 2018	2,767				(549		)	2,218
Year 2019	2,218				(522		)	1,696

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Loans and Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2014

Loans and Allowance for Loan and Lease Losses

Loans and Allowance for Loan and Lease Losses

Note 5.  Loans and Allowance for Loan and Lease Losses

The following table provides a summary of outstanding loan balances:

									December 31,
	September 30, 2014								2013
	Non-PCI			PCI		Total Loans			Non-PCI
	Loans			Loans		Receivable			Loans
	(dollars in thousands)
Real Estate Secured
Multi-family residential	$	76,821		$	-	$	76,821		$	31,140
Residential 1 to 4 family	120,500			561		121,061			88,904
Home equity lines of credit	37,886			81		37,967			31,178
Commercial	577,639			4,961		582,600			432,203
Farmland	92,292			1,673		93,965			50,414
Land	23,763			871		24,634			24,523
Construction	17,845			-		17,845			13,699
Total real estate secured	946,746			8,147		954,893			672,061
Commercial
Commercial and industrial	142,076			1,785		143,861			119,121
Agriculture	42,787			1,417		44,204			32,686
Other	20			-		20			38
Total commercial	184,883			3,202		188,085			151,845
Installment loans to individuals	8,198			-		8,198			3,246
Overdrafts	400			-		400			332
Total gross loans held for investment	1,140,227			11,349		1,151,576			827,484
Net deferred loan fees	(1,414		)	-		(1,414		)	(1,281		)
Allowance for loan and lease losses	(16,787		)	-		(16,787		)	(17,859		)
Total net loans held for investment	$	1,122,026		$	11,349	$	1,133,375		$	808,344
Loans held for sale	$	5,977		$	-	$	5,977		$	2,386

Total net loans in the table above include $280.3 million of loans acquired through the MISN acquisition at fair value on the acquisition date.  $267.5 million of these loans were acquired with no impairment while the remaining $12.8 million were determined to be PCI loans.  Loans held for sale are primarily single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this category are sold within thirty to sixty days.

Under a blanket lien to the Federal Home Loan Bank (“FHLB”), the Bank has pledged $816.6 million in loans to secure a credit facility totaling $417.8 million, of which $75.6 million is outstanding as of September 30, 2014.  Of this credit facility, $11.5 million is available as a line of credit and $340.9 million is available for potential future borrowings.  The Bank also has a collateralized borrowing line with the Federal Reserve Bank secured by $12.3 million of loans as of September 30, 2014.

Concentration of Credit Risk

The Company held loans that were collateralized by various forms of real estate totaling $954.9 million and $672.1 million at September 30, 2014 and December 31, 2013, respectively.  Such loans are generally made to borrowers located in the counties of San Luis Obispo, Santa Barbara and Ventura.  The Company attempts to reduce its concentration of credit risk by making loans which are diversified by product type.  While management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that deterioration in the California real estate market, or the impact of the current California drought on our real estate collateralized loans, would not expose the Company to significantly greater credit risk.

Loans Serviced for Others

Loans serviced for others are not included in the accompanying balance sheets.  The unpaid principal balance of loans serviced for others, exclusive of Small Business Administration (“SBA”) loans, was $46.9 million at September 30, 2014 and $22.6 million at December 31, 2013.

From time to time, the Company also originates SBA loans for sale for which it retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2014 and December 31, 2013, the unpaid principal balance of SBA loans serviced for others totaled $16.1 million and $6.6 million, respectively.  The Company recognized $16 thousand and $43 thousand in gains from the sale of SBA loans during the three and nine months ended September 30, 2014.  Gains on the sale of SBA loans during the three and nine months ended September 30, 2013 totaled $4 thousand and $0.4 million, respectively.

Impaired Loans

The following tables provide a summary of the Company’s recorded investment in non-PCI and PCI impaired loans as of and for the three and nine months ended September 30, 2014:

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	217	$	354	$	-	$	222	$	6	$	496	$	16
Home equity lines of credit	100		183		-		100		-		100		-
Commercial	2,014		4,423		-		2,269		6		1,862		19
Farmland	289		288		-		292		2		294		12
Construction	380		375		-		380		5		380		5
Land	460		1,152		-		935		2		1,170		32
Commercial
Commercial and industrial	2,316		3,480		-		3,152		51		3,616		111
Agriculture	722		761		-		724		2		741		2
Installment loans to individuals	117		205		-		118		1		145		3
Total	6,615		11,221		-		8,192		75		8,804		200
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-		-		-		-		-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	331		331		58		331		-		331		-
Farmland	-		-		-		-		-		-		-
Construction	-		-		-		-		-		-		-
Land	6,087		9,755		1,764		6,380		16		6,602		58
Commercial			-		-		-		-		-		-
Commercial and industrial	1,887		1,809		260		1,916		41		2,013		90
Agriculture	-		-		-		-		-		-		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	8,305		11,895		2,082		8,627		57		8,946		148
Total non-PCI impaired loans	$	14,920	$	23,116	$	2,082	$	16,819	$	132	$	17,750	$	348

(1) Recorded investment includes net deferred loan fees and costs attributable to these loans.

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	564	$	888	$	-	$	565	$	13	$	585	$	29
Home equity lines of credit	82		98		-		81		2		81		4
Commercial	4,981		6,903		-		4,993		130		5,160		327
Farmland	1,681		2,044		-		1,699		20		1,706		64
Land	874		1,019		-		923		21		943		47
Commercial
Commercial and industrial	1,790		2,322		-		2,081		185		2,236		263
Agriculture	1,425		1,492		-		1,301		34		1,291		62
Installment loans to individuals	-		-		-		-		-		-		-
Total	11,397		14,766		-		11,643		405		12,002		796
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-		-		-		-		-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	-		-		-		-		-		-		-
Farmland	-		-		-		-		-		-		-
Land	-		-		-		-		-		-		-
Commercial
Commercial and industrial	-		-		-		-		-		-		-
Agriculture	-		-		-		-		-		-		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	-		-		-		-		-		-		-
Total PCI loans	$	11,397	$	14,766	$	-	$	11,643	$	405	$	12,002	$	796

(1) Recorded investment includes accrued interest receivable for PCI impaired loans.

The following table provides a summary of the Company’s recorded investment in non-PCI impaired loans as of and for the three and nine months ended September 30, 2013.  The Company did not have any PCI loans during 2013.

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2013						September 30, 2013				September 30, 2013
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	703	$	735	$	-	$	-	$	-	$	269	$	-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	552		811		-		2		-		90		-
Land	1,013		1,367		-		852		-		724		-
Commercial
Commercial and industrial	1,208		1,546		-		1,041		-		1,314		-
Agriculture	745		779		-		1,022		-		937		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	4,221		5,238		-		2,917		-		3,334		-
With related allowance
Real Estate Secured
Residential 1 to 4 family	109		230		17		339		-		190		-
Commercial	642		1,114		91		26		-		21		-
Land	7,050		10,726		3,854		112		4		116		4
Commercial
Commercial and industrial	3,463		3,650		2,826		3,430		8		2,969		11
Agriculture	65		69		27		41		-		29		-
Installment loans to individuals	26		71		10		7,116		-		6,573		-
Total	11,355		15,860		6,825		11,064		12		9,898		15
Total non-PCI impaired loans	$	15,576	$	21,098	$	6,825	$	13,981	$	12	$	13,232	$	15

(1) Recorded investment includes net deferred loan fees and costs attributable to these loans.

The following table provides a summary of the Company’s recorded investment in non-PCI impaired loans as of December 31, 2013.  The Company did not have any PCI loans during 2013.

	December 31, 2013
			Unpaid		Specific
	Recorded		Principal		Allowance for
	Investment (1)		Balance		Impaired Loans
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	944	$	1,102	$	-
Home equity lines of credit	-		-		-
Commercial	901		1,646		-
Farmland	-		-		-
Land	1,221		1,948		-
Commercial
Commercial and industrial	1,857		2,241		-
Agriculture	789		824		-
Installment loans to individuals	118		190		-
Total	5,830		7,951		-
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-
Home equity lines of credit	-		-		-
Commercial	-		-		-
Farmland	-		-		-
Land	6,706		10,158		2,531
Commercial
Commercial and industrial	3,480		3,602		623
Agriculture	-		-		-
Installment loans to individuals	-		-		-
Total	10,186		13,760		3,154
Total non-PCI impaired loans	$	16,016	$	21,711	$	3,154

(1) Recorded investment includes net deferred loan fees and costs attributable to these loans.

The Company did not record income from the receipt of cash payments related to non-accruing loans during the three and nine months ended September 30, 2014 and 2013. Interest income recognized on impaired loans in the tables above, if any, represents interest the Company recognized on accruing troubled debt restructurings. Because loans identified as impaired have unique risk characteristics, the Company has determined the related valuation allowances for such loans on a loan-by-loan basis.

Troubled Debt Restructurings (“TDR”)

The majority of the Bank’s TDRs were granted concessions regarding interest rates, payment structure and/or maturity.  Modifications for the three and nine months ended September 30, 2014, and 2013 include a combination of partial charge-offs of principal along with extensions of the maturity date at the loan’s original interest rate, which was lower than the current market rate for new debt with similar risk.  The maturity date extensions granted were for periods ranging from 6 months to 10 years.  As of September 30, 2014, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.

The following table provides a summary of loans that were classified as TDRs as of the dates indicated below:

	September 30, 2014						December 31, 2013
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Residential 1 to 4 family	$	128	$	89	$	217	$	499	$	109	$	608
Commercial	370		83		453		225		136		361
Farmland	289		-		289		-		-		-
Construction	380		-		380		-		-		-
Land	1,320		5,103		6,423		2,010		5,883		7,893
Commercial
Commercial and industrial	2,426		1,398		3,824		3,119		903		4,022
Agriculture	36		-		36		-		45		45
Installment loans to individuals	70		-		70		-		-		-
Total non-PCI loans	5,019		6,673		11,692		5,853		7,076		12,929
PCI loans (1)
Real estate secured
Commercial	226		-		226		-		-		-
Commercial
Commercial and industrial	-		118		118		-		-		-
Total PCI loans	226		118		344		-		-		-
Total TDRs	$	5,245	$	6,791	$	12,036	$	5,853	$	7,076	$	12,929

(1) The Company did not have any PCI loans at December 31, 2013.

The following tables summarize loan modifications which resulted in TDRs for non-PCI and PCI loans during the periods presented below:

	For the Three Months Ended September 30, 2014					For the Nine Months Ended September 30, 2014
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial real estate	-	$	-	$	-	1	$	166	$	166
Farmland
Land	1	168		168		3	444		444
Construction	1	367		367		1	367		367
Commercial
Commercial and industrial	4	377		377		14	1,604		1,604
Agriculture	-	-		-		1	662		662
Other
Installment loans to individuals	-	-		-		1	73		73
PCI Loans
Real Estate Secured
Commercial real estate	-	-		-		1	230		230
Commercial
Commercial and industrial	-	-		-		2	138		138
Total	6	$	912	$	912	24	$	3,684	$	3,684

	For the Three Months Ended September 30, 2013					For the Nine Months Ended September 30, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	1	$	227	$	227	1	$	227	$	227
Commercial
Commercial and industrial	-	-		-		3	91		91
Agriculture	1	49		49		2	67		67
Total	2	$	276	$	276	6	$	385	$	385

The following tables summarize loans that were modified as troubled debt restructurings within the twelve months prior to the balance sheet date, and for which there was a payment default during the periods presented below:

	For the Three Months Ended September 30, 2014			For the Nine Months Ended September 30, 2014
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	30
Total	-	$	-	1	$	30

	For the Three Months Ended September 30, 2013			For the Nine Months Ended September 30, 2013
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	-	$	-	1	$	97
Commercial
Commercial and industrial	-	-		3	843
Agriculture	1	18		1	18
Total	1	$	18	5	$	958

Credit Quality

The following tables stratify loans held for investment by the Company’s internal risk grading system:

	September 30, 2014
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	75,627	$	-	$	1,194	$	-	$	76,821
Residential 1 to 4 family	119,613		202		685		-		120,500
Home equity lines of credit	37,539		-		347		-		37,886
Commercial	549,595		11,890		16,154		-		577,639
Farmland	88,030		2,680		1,582		-		92,292
Land	17,197		-		6,566		-		23,763
Construction	17,467		378		-		-		17,845
Commercial
Commercial and industrial	133,940		995		6,984		157		142,076
Agriculture	41,609		456		722		-		42,787
Other	20		-		-		-		20
Installment loans to individuals	8,090		-		108		-		8,198
Overdrafts	400		-		-		-		400
Total non-PCI loans	1,089,127		16,601		34,342		157		1,140,227
PCI loans
Real estate secured
Multi-family residential	-		-		-		-		-
Residential 1 to 4 family	-		-		561		-		561
Home equity lines of credit	-		-		81		-		81
Commercial	127		-		4,834		-		4,961
Farmland	-		-		1,673		-		1,673
Land	310		-		561		-		871
Construction	-		-		-		-		-
Commercial
Commercial and industrial	41		102		1,546		96		1,785
Agriculture	-		-		1,417		-		1,417
Other	-		-		-		-		-
Installment loans to individuals	-		-		-		-		-
Total PCI loans	478		102		10,673		96		11,349
Total loans held for investment	$	1,089,605	$	16,703	$	45,015	$	253	$	1,151,576

	December 31, 2013
	Credit Risk Grades								Total
			Special						Non-PCI
	Pass		Mention		Substandard		Doubtful		Loans
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	30,560	$	-	$	580	$	-	$	31,140
Residential 1 to 4 family	87,350		490		1,064		-		88,904
Home equity lines of credit	31,021		-		157		-		31,178
Commercial	414,058		3,574		14,571		-		432,203
Farmland	47,988		975		1,451		-		50,414
Land	15,244		862		8,417		-		24,523
Construction	13,699		-		-		-		13,699
Commercial
Commercial and industrial	105,991		5,276		7,854		-		119,121
Agriculture	31,279		196		1,211		-		32,686
Other	38		-		-		-		38
Installment loans to individuals	3,050		10		186		-		3,246
Overdrafts	332		-		-		-		332
Total loans held for investment	$	780,610	$	11,383	$	35,491	$	-	$	827,484

The Company did not have any PCI loans as of December 31, 2013.

Aging of Loans Held for Investment

The following tables summarize the aging of loans held for investment as of the dates indicated below:

	September 30, 2014
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Multi-family residential	$	76,821	$	-	$	-	$	-	$	-	$	76,821
Residential 1 to 4 family	120,403		-		-		-		97		120,500
Home equity lines of credit	37,786		-		-		-		100		37,886
Commercial	575,701		-		-		-		1,938		577,639
Farmland	92,292		-		-		-		-		92,292
Land	18,537		-		-		-		5,226		23,763
Construction	17,845		-		-		-		-		17,845
Commercial
Commercial and industrial	140,254		36		-		-		1,786		142,076
Agriculture	42,102		-		-		-		685		42,787
Other	20		-		-		-		-		20
Installment loans to individuals	8,152		-		-		-		46		8,198
Overdrafts	400		-		-		-		-		400
Total non-PCI loans	1,130,313		36		-		-		9,878		1,140,227
PCI loans
Real estate secured
Multi-family residential	-		-		-		-		-		-
Residential 1 to 4 family	561		-		-		-		-		561
Home equity lines of credit	81		-		-		-		-		81
Commercial	4,961		-		-		-		-		4,961
Farmland	1,673		-		-		-		-		1,673
Land	871		-		-		-		-		871
Construction	-		-		-		-		-		-
Commercial
Commercial and industrial	1,389		-		-		-		396		1,785
Agriculture	1,417		-		-		-		-		1,417
Total PCI loans	10,953		-		-		-		396		11,349
Total loans held for investment	$	1,141,266	$	36	$	-	$	-	$	10,274	$	1,151,576
	December 31, 2013
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	31,140	$	-	$	-	$	-	$	-	$	31,140
Residential 1 to 4 family	88,455		-		-		-		449		88,904
Home equity lines of credit	31,178		-		-		-		-		31,178
Commercial	431,531		-		-		-		672		432,203
Farmland	50,414		-		-		-		-		50,414
Land	18,613		-		-		-		5,910		24,523
Construction	13,699		-		-		-		-		13,699
Commercial
Commercial and industrial	116,841		100		-		-		2,180		119,121
Agriculture	31,897		-		-		-		789		32,686
Other	38		-		-		-		-		38
Installment loans to individuals	3,127		-		2		-		117		3,246
Overdrafts	332		-		-		-		-		332
Total loans held for investment	$	817,265	$	100	$	2	$	-	$	10,117	$	827,484

The Company did not have any PCI loans as of December 31, 2013.

Purchased Credit Impaired Loans

As part of the merger described in Note 2. Business Combination, the Company acquired on February 28, 2014, a portfolio of loans, some of which have shown evidence of credit deterioration since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount and unpaid principal balance of those loans are as follows:

	September 30, 2014
	Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	$	888	$	561
Home equity lines of credit	98		81
Commercial	6,903		4,961
Farmland	2,044		1,673
Land	1,019		871
Total real estate secured	10,952		8,147
Commercial
Commercial and industrial	2,322		1,785
Agriculture	1,492		1,417
Total commercial	3,814		3,202
Total PCI loans	$	14,766	$	11,349

No ALLL was recorded on purchased credit impaired loans as of September 30, 2014.  Purchased credit impaired loans acquired during the nine months ended September 30, 2014 for which it was probable at acquisition that not all contractually required payments would be collected are as follows:

	February 28, 2014
	(dollars in thousands)
Contractually required payments including interest	$	19,827
Nonaccretable difference	(2,320		)
Cash flows expected to be collected	17,507
Accretable difference	(4,673		)
Fair value at acquisition	$	12,834

The following table summarizes the accretable yield, or income expected to be collected for PCI loans:

	Nine Months Ended
	September 30, 2014
	(dollars in thousands)
Balance at January 1, 2014	$	-
New loans purchased	4,673
Accretion of income	(796		)
Reclassifications from nonaccretable difference	619
Balance at September 30, 2014	$	4,496

Discount accretion on PCI loans was $392 thousand and $796 thousand for the three and nine months ended September 30, 2014, respectively.

Allowance for Loan and Lease Losses

The following table summarizes the activity in the allowance for loan and lease losses by portfolio segment for the periods presented below:

	For the Three Months Ended September 30, 2014
	Balance June 30, 2014		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2014
	(dollars in thousands)
Land	$	2,944	$	-		$	8		$	(727	)	$	2,225
Other real estate secured	8,857		(10		)	(19		)	808			9,636
Commercial	4,436		-			174			(296		)	4,314
Installment loans to individuals	73		(2		)	1			2			74
All other loans	27		-			-			8			35
Unallocated	298		-			-			205			503
Total	$	16,635	$	(12	)	$	164		$	-		$	16,787
	For the Nine Months Ended September 30, 2014
	Balance December 31, 2013		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2014
	(dollars in thousands)
Land	$	3,402	$	-		$	30		$	(1,207	)	$	2,225
Other real estate secured	9,283		(1,119		)	37			1,435			9,636
Commercial	4,781		(650		)	628			(445		)	4,314
Installment loans to individuals	99		(8		)	10			(27		)	74
All other loans	32		-			-			3			35
Unallocated	262		-			-			241			503
Total	$	17,859	$	(1,777	)	$	705		$	-		$	16,787
	For the Three Months Ended September 30, 2013
	Balance June 30, 2013		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2013
	(dollars in thousands)
Land	$	4,431	$	-		$	11		$	189		$	4,631
Other real estate secured	6,663		(41		)	20			(112		)	6,530
Commercial	6,584		(736		)	475			(197		)	6,126
Installment loans to individuals	100		(207		)	12			183			88
All other loans	31		-			-			1			32
Unallocated	125		-			-			(65		)	60
Total	$	17,934	$	(984	)	$	518		$	-		$	17,468
	For the Nine Months Ended September 30, 2013
	Balance December 31, 2012		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2013
	(dollars in thousands)
Land	$	4,670	$	(34	)	$	45		$	(50	)	$	4,631
Other real estate secured	7,192		(300		)	145			(507		)	6,530
Commercial	6,154		(1,137		)	947			162			6,126
Installment loans to individuals	64		(380		)	64			340			88
All other loans	38		-			-			(6		)	32
Unallocated	-		-			-			60			60
Total	$	18,118	$	(1,851	)	$	1,201		$	-		$	17,468

The following tables disaggregate the allowance for loan and lease losses and the recorded investment in loans by impairment methodology as of the dates presented below:

	September 30, 2014
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Land	$	1,764	$	461	$	-	$	6,547	$	17,213	$	874
Other real estate secured	58		9,578		-		3,331		919,620		7,308
Commercial	260		4,054		-		4,925		179,945		3,215
Installment loans to individuals	-		74		-		117		8,081		-
All other loans	-		35		-		-		400		-
Unallocated	-		503		-		-		-		-
Total	$	2,082	$	14,705	$	-	$	14,920	$	1,125,259	$	11,397
	December 31, 2013
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Land	$	2,532	$	870	$	-	$	7,696	$	16,827	$	-
Other real estate secured	-		9,283		-		1,462		646,076		-
Commercial	623		4,158		-		5,291		146,554		-
Installment loans to individuals	-		99		-		-		3,246		-
All other loans	-		32		-		-		332		-
Unallocated	-		262		-		-		-		-
Total	$	3,155	$	14,704	$	-	$	14,449	$	813,035	$	-

At September 30, 2014, total gross loans of $1.2 billion in the table above include $244.9 million of loans acquired through the MISN acquisition (at fair value on the acquisition date).  The loans acquired through the MISN acquisition carry no related ALLL at September 30, 2014, as the remaining un-accreted purchase discounts associated with these loans has been deemed sufficient to absorb probable credit losses associated within the acquired MISN portfolio.  At September 30, 2014, legacy Heritage Oaks loans totaled $906.6 million.  The ALLL as a percentage of legacy Heritage Oaks loans was 1.9% at September 30, 2014.

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Income Taxes

9 Months Ended

Sep. 30, 2014

Income Taxes

Income Taxes

Note 6.  Income Taxes

As of September 30, 2014, the Company’s deferred tax assets total approximately $27.9 million, of which $11.9 million was due to the MISN merger as described in Note 2. Business Combination.  As of December 31, 2013, the Company’s deferred tax assets totaled $21.6 million.  The Company is subject to income taxation by both federal and state taxing authorities.

Income tax returns for the years ended December 31, 2013, 2012, and 2011, are open to audit by federal and state taxing authorities, and 2010 remains open to audit by the California Franchise Tax Board.  The Company does not have any uncertain income tax positions and has not accrued for any interest or penalties as of September 30, 2014 and December 31, 2013.

Management assessed the impact of the MISN transaction for limitations under I.R.C. Section 382 and determined that, given the assumption that the Company generates sufficient future taxable income to utilize NOLs, no loss of NOL utilization would result from the estimated annual I.R.C. Section 382 base limitation resulting from the transaction. Furthermore, due to the fact that MISN was in a net unrealized built-in gain position (“NUBIG”) the Company’s annual I.R.C. section 382 limitation will likely increase over the next five years for realized built-in gains (“RBIG”).

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Share-Based Compensation Plans

9 Months Ended

Sep. 30, 2014

Share-Based Compensation Plans

Share-Based Compensation Plans

Note 8.  Share-Based Compensation Plans

As of September 30, 2014, the Company had two share-based employee compensation plans, which are more fully described in Note 14, Share-Based Compensation Plans, of the consolidated financial statements in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013.  These plans include the “1997 Stock Option Plan” and the “2005 Equity Based Compensation Plan.”

The following table provides a summary of the expenses the Company has recognized related to share-based compensation for the periods indicated below:

	For the Three Months Ended				For the Nine Months Ended
	September  30,				September  30,
	2014		2013		2014		2013
	(dollars in thousands)
Share-based compensation expense:
Stock options	$	109	$	68	$	370	$	183
Restricted stock	148		80		353		208
Total expense	$	257	$	148	$	723	$	391
Unrecognized compensation expense:
Stock options	$	1,156	$	762
Restricted stock	1,067		775
Total unrecognized expense	$	2,223	$	1,537

At September 30, 2014 unrecognized compensation expense related to non-vested stock options and restricted stock awards is expected to be recognized over weighted average periods of 2.9 years and 2.4 years, respectively.

The following table provides a summary of activity related to options granted, exercised, and forfeited:

	Options Outstanding				Options
	Number		Weighted Average		Available for
	of Shares		Exercise Price		Grant
Balance, December 31, 2013	562,257		$	6.34	1,593,616
Granted	312,582		7.41
Forfeited	(68,082	)	8.03
Expired	(2,604	)	10.12
Exercised	(44,217	)	3.60
Balance, September 30, 2014	759,936		$	6.78	2,021,355

The Company grants restricted stock periodically as a part of the 2005 Equity Based Compensation Plan for the benefit of employees.  Restricted stock issued typically vests ratably over a period of three to five years depending on the specific terms of the grant.  Restricted stock grants may be subject to the achievement of certain performance goals.  Compensation costs related to restricted stock awards are charged to earnings (included in salaries and employee benefits) over the vesting period of those awards.  The fair value of performance-based grants is initially based on the assumption that performance goals will be achieved.  If such performance conditions are not met, no compensation cost is recognized and previously-recognized compensation cost is reversed. The following table provides a summary of activity related to restricted stock granted, vested and forfeited:

	Number of		Average Grant
	Shares		Date Fair Value
Balance December 31, 2013	195,048		$	4.87
Granted	124,744		7.37
Vested	(32,005	)	6.41
Forfeited	(25,862	)	5.80
Balance September 30, 2014	261,925		$	5.78

Included in the table above are performance-based grants of restricted stock totaling 21,241 shares as of September 30, 2014.

The following table provides a summary of the aggregate intrinsic value of options vested and expected to vest and exercisable:

	September 30, 2014
				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	721,414	$	6.77	7.78	$	731,352
Exercisable at September 30, 2014	310,873	$	6.64	6.00	$	576,739

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, which is subject to change based on the fair market value of the Company’s stock.  The aggregate intrinsic value of options exercised was $174 thousand for the nine months ended September 30, 2014.

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted:

	For the Nine Months Ended
	September  30,
	2014		2013
Expected volatility	49.83%		55.32%
Expected term (years)	5.66		6.00
Dividend yield	0.59%		0.00%
Risk free rate	1.76%		1.55%
Weighted-average grant date fair value	$	3.39	$	3.31

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Business Combination (Details) (USD $)			0 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Feb. 28, 2014 MISN	Feb. 28, 2014 MISN Core Deposits
Business combination
Percentage acquired of outstanding common shares			100.00%
Common stock issued (in shares)			7,541,326
Aggregate cash consideration			$ 8,700,000
Transaction value			69,000,000
Closing price (in dollars per share)			$ 7.99
Assets acquired
Cash and due from banks			3,212,000
Interest-bearing deposits in other banks			34,386,000
Securities available for sale			76,159,000
Loans held for sale			338,000
Loans and leases receivable			280,316,000
Premises and equipment			15,922,000
Deferred tax assets, net	11,900,000		11,885,000
Goodwill	24,536,000	11,237,000	13,299,000
Core deposit intangible asset				5,060,000
Bank owned life insurance			8,263,000
Other assets			4,895,000
Total assets acquired			453,735,000
Liabilities assumed
Deposits			371,501,000
Advances from Federal Home Loan Bank			6,071,000
Junior subordinated debentures			4,804,000
Other liabilities			2,397,000
Total liabilities assumed			384,773,000
Total consideration paid			68,962,000
Non-impaired loans and leases			267,300,000
Gross contractual payments receivable			328,200,000
Total contractual cash flows not expected to be collected on non-impaired loans and lease			5,400,000
Credit risk component of purchase discount on gross outstanding principal balances (as a percent)			2.00%
Loans and leases receivable			280,700,000
Premises and equipment held for sale	$ 2,070,000		$ 3,500,000

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Income Taxes (Details) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Income Taxes
Deferred tax assets	$ 27,914,000	$ 21,624,000
Deferred tax assets due to the MISN merger	$ 11,900,000

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Subsequent Events

9 Months Ended

Sep. 30, 2014

Subsequent Events

Subsequent Events

Note 13. Subsequent Events

Consent Order

On October 29, 2014, the Bank entered into a Stipulation to the Issuance of a Consent Order with its bank regulatory agencies, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Business Oversight (“CDBO”), consenting to the issuance of a consent order (“the Consent Order”)  relating to identified deficiencies in the Bank’s centralized Bank Secrecy Act and anti-money laundering compliance program, which is designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the “BSA/AML Requirements”). Per the Consent Order, the Bank must review, update and implement an enhanced risk assessment process based on the 2010 Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) Examination Manual. Some of the areas highlighted in the Consent Order include the requirements to: i) enhance customer due-diligence procedures; ii) improve the enhanced due diligence analysis for high-risk customers; iii) ensure the proper identification and reporting of suspicious activity; iv) address and correct the noted violations of law; v) ensure that there is sufficient and qualified staff; and vi) ensure that all staff are properly trained to carry out the BSA/AML programs. Certain activities, including expansionary activities, that otherwise require regulatory approval will likely be impeded while the Consent Order remains outstanding. Management and the Board have been working diligently to comply with the Consent Order and believe they have allocated sufficient resources to address the corrective actions required by the FDIC and CDBO. Compliance and resolution of the Consent Order will ultimately be determined by the FDIC and CDBO.

CEO Employment Agreement

On October 29, 2014, the Company and the Bank entered into an employment agreement with its President and Chief Executive Officer, Simone Lagomarsino.  The employment agreement was approved by the Board of Directors of the Company and the Bank as it was determined that it was advisable and in the best interest of the Company, the Bank and the Company’s shareholders that Ms. Lagomarsino be provided with an employment agreement that aligns her interests with the interests of the Company and incentivizes her to remain in the employ of the Company. The employment agreement provides that Ms. Lagomarsino shall serve on the Board of Directors of the Company and the Bank.  The term of Ms. Lagomarsino’s employment agreement shall continue until terminated in accordance with its terms.  Pursuant to the terms and conditions of the employment agreement, Ms. Lagomarsino will receive an annual base salary, is eligible to earn an annual cash bonus award, and is entitled to receive certain other benefits that the Bank extends to all of its executive employees, such as life insurance, disability insurance, health, dental, vision and other insurance benefits, 401(k) plan participation and certain fringe benefits and perquisites.  Under the employment agreement, the Company may grant from time to time to Ms. Lagomarsino equity awards under and subject to the terms and conditions of the equity incentive plan that the Company is then regularly granting equity awards to its executive officers under.

The employment agreement provides that if Ms. Lagomarsino terminates her employment for “Good Reason” or is terminated without “Cause,” as those terms are defined in the employment agreement, she is entitled to certain severance payments detailed in the employment agreement.  The employment agreement also provides for a “double-trigger” change in control payment in the event Ms. Lagomarsino terminates her employment for “Good Reason” or is terminated without “Cause” within twelve months of a “Change in Control” as that term is defined in the employment agreement.  Finally, the employment agreement provides for certain benefits in the event of the “Disability,” as that term is defined in the employment agreement, or death of Ms. Lagomarsino. As a condition to the receipt of any of the foregoing payments and benefits (except in the case of termination of employment due to death), Ms. Lagomarsino is required to provide the Company and the Bank with a general release from any and all claims, known and unknown, that Ms. Lagomarsino may have against the Company and/or the Bank.

The employment agreement contains standard confidentiality and other business protection covenants, including covenants not to solicit or disparage.  Generally speaking, Ms. Lagomarsino agrees not to induce any employees to leave or otherwise interfere with or disrupt the relationships between the Bank and its employees, or divert or attempt to divert from the Bank any of its customers, during the term of her employment and for a period of one year following her separation from the Bank.  The employment agreement also contains a standard indemnification provision.

Exchange Agreement

As more fully described in Note 9. Shareholders’ Equity, on October 29, 2014 the Company and Castle Creek entered into the Exchange Agreement, pursuant to which, among other things, the parties agree, subject to certain conditions to closing, to the exchange of the outstanding shares of Series C Preferred Stock for shares of the Company’s common stock on a one-for-one basis.

Dividend Declaration

On October 29, 2014, the Company’s Board of Directors declared a cash dividend of $0.05 per share, payable on December 1, 2014, to shareholders of the Company’s common stock as of November 17, 2014.  Holders of the Company’s Series C Preferred Stock are also entitled to a per share dividend equivalent to the common dividend declared for which each share of Series C Preferred Stock is convertible into common stock.

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Loans and Allowance for Loan and Lease Losses (Tables)

9 Months Ended

Sep. 30, 2014

Outstanding loan balances

Summary of outstanding loan balances

									December 31,
	September 30, 2014								2013
	Non-PCI			PCI		Total Loans			Non-PCI
	Loans			Loans		Receivable			Loans
	(dollars in thousands)
Real Estate Secured
Multi-family residential	$	76,821		$	-	$	76,821		$	31,140
Residential 1 to 4 family	120,500			561		121,061			88,904
Home equity lines of credit	37,886			81		37,967			31,178
Commercial	577,639			4,961		582,600			432,203
Farmland	92,292			1,673		93,965			50,414
Land	23,763			871		24,634			24,523
Construction	17,845			-		17,845			13,699
Total real estate secured	946,746			8,147		954,893			672,061
Commercial
Commercial and industrial	142,076			1,785		143,861			119,121
Agriculture	42,787			1,417		44,204			32,686
Other	20			-		20			38
Total commercial	184,883			3,202		188,085			151,845
Installment loans to individuals	8,198			-		8,198			3,246
Overdrafts	400			-		400			332
Total gross loans held for investment	1,140,227			11,349		1,151,576			827,484
Net deferred loan fees	(1,414		)	-		(1,414		)	(1,281		)
Allowance for loan and lease losses	(16,787		)	-		(16,787		)	(17,859		)
Total net loans held for investment	$	1,122,026		$	11,349	$	1,133,375		$	808,344
Loans held for sale	$	5,977		$	-	$	5,977		$	2,386

Summary of the recorded investment in non-PCI and PCI impaired loans

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	564	$	888	$	-	$	565	$	13	$	585	$	29
Home equity lines of credit	82		98		-		81		2		81		4
Commercial	4,981		6,903		-		4,993		130		5,160		327
Farmland	1,681		2,044		-		1,699		20		1,706		64
Land	874		1,019		-		923		21		943		47
Commercial
Commercial and industrial	1,790		2,322		-		2,081		185		2,236		263
Agriculture	1,425		1,492		-		1,301		34		1,291		62
Installment loans to individuals	-		-		-		-		-		-		-
Total	11,397		14,766		-		11,643		405		12,002		796
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-		-		-		-		-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	-		-		-		-		-		-		-
Farmland	-		-		-		-		-		-		-
Land	-		-		-		-		-		-		-
Commercial
Commercial and industrial	-		-		-		-		-		-		-
Agriculture	-		-		-		-		-		-		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	-		-		-		-		-		-		-
Total PCI loans	$	11,397	$	14,766	$	-	$	11,643	$	405	$	12,002	$	796

(1) Recorded investment includes accrued interest receivable for PCI impaired loans.

Summary of loans classified as TDRs

	September 30, 2014						December 31, 2013
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Residential 1 to 4 family	$	128	$	89	$	217	$	499	$	109	$	608
Commercial	370		83		453		225		136		361
Farmland	289		-		289		-		-		-
Construction	380		-		380		-		-		-
Land	1,320		5,103		6,423		2,010		5,883		7,893
Commercial
Commercial and industrial	2,426		1,398		3,824		3,119		903		4,022
Agriculture	36		-		36		-		45		45
Installment loans to individuals	70		-		70		-		-		-
Total non-PCI loans	5,019		6,673		11,692		5,853		7,076		12,929
PCI loans (1)
Real estate secured
Commercial	226		-		226		-		-		-
Commercial
Commercial and industrial	-		118		118		-		-		-
Total PCI loans	226		118		344		-		-		-
Total TDRs	$	5,245	$	6,791	$	12,036	$	5,853	$	7,076	$	12,929

(1) The Company did not have any PCI loans at December 31, 2013.

Schedule of loan modifications resulted in TDRs for non-PCI and PCI loans

	For the Three Months Ended September 30, 2014					For the Nine Months Ended September 30, 2014
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial real estate	-	$	-	$	-	1	$	166	$	166
Farmland
Land	1	168		168		3	444		444
Construction	1	367		367		1	367		367
Commercial
Commercial and industrial	4	377		377		14	1,604		1,604
Agriculture	-	-		-		1	662		662
Other
Installment loans to individuals	-	-		-		1	73		73
PCI Loans
Real Estate Secured
Commercial real estate	-	-		-		1	230		230
Commercial
Commercial and industrial	-	-		-		2	138		138
Total	6	$	912	$	912	24	$	3,684	$	3,684

	For the Three Months Ended September 30, 2013					For the Nine Months Ended September 30, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	1	$	227	$	227	1	$	227	$	227
Commercial
Commercial and industrial	-	-		-		3	91		91
Agriculture	1	49		49		2	67		67
Total	2	$	276	$	276	6	$	385	$	385

Schedule of loans that were modified as troubled debt restructurings within the twelve months prior to the balance sheet date indicated for which there was a payment default

	For the Three Months Ended September 30, 2014			For the Nine Months Ended September 30, 2014
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	30
Total	-	$	-	1	$	30

	For the Three Months Ended September 30, 2013			For the Nine Months Ended September 30, 2013
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	-	$	-	1	$	97
Commercial
Commercial and industrial	-	-		3	843
Agriculture	1	18		1	18
Total	1	$	18	5	$	958

Schedule of loan portfolio by the Company's internal risk grading system

	September 30, 2014
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	75,627	$	-	$	1,194	$	-	$	76,821
Residential 1 to 4 family	119,613		202		685		-		120,500
Home equity lines of credit	37,539		-		347		-		37,886
Commercial	549,595		11,890		16,154		-		577,639
Farmland	88,030		2,680		1,582		-		92,292
Land	17,197		-		6,566		-		23,763
Construction	17,467		378		-		-		17,845
Commercial
Commercial and industrial	133,940		995		6,984		157		142,076
Agriculture	41,609		456		722		-		42,787
Other	20		-		-		-		20
Installment loans to individuals	8,090		-		108		-		8,198
Overdrafts	400		-		-		-		400
Total non-PCI loans	1,089,127		16,601		34,342		157		1,140,227
PCI loans
Real estate secured
Multi-family residential	-		-		-		-		-
Residential 1 to 4 family	-		-		561		-		561
Home equity lines of credit	-		-		81		-		81
Commercial	127		-		4,834		-		4,961
Farmland	-		-		1,673		-		1,673
Land	310		-		561		-		871
Construction	-		-		-		-		-
Commercial
Commercial and industrial	41		102		1,546		96		1,785
Agriculture	-		-		1,417		-		1,417
Other	-		-		-		-		-
Installment loans to individuals	-		-		-		-		-
Total PCI loans	478		102		10,673		96		11,349
Total loans held for investment	$	1,089,605	$	16,703	$	45,015	$	253	$	1,151,576

	December 31, 2013
	Credit Risk Grades								Total
			Special						Non-PCI
	Pass		Mention		Substandard		Doubtful		Loans
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	30,560	$	-	$	580	$	-	$	31,140
Residential 1 to 4 family	87,350		490		1,064		-		88,904
Home equity lines of credit	31,021		-		157		-		31,178
Commercial	414,058		3,574		14,571		-		432,203
Farmland	47,988		975		1,451		-		50,414
Land	15,244		862		8,417		-		24,523
Construction	13,699		-		-		-		13,699
Commercial
Commercial and industrial	105,991		5,276		7,854		-		119,121
Agriculture	31,279		196		1,211		-		32,686
Other	38		-		-		-		38
Installment loans to individuals	3,050		10		186		-		3,246
Overdrafts	332		-		-		-		332
Total loans held for investment	$	780,610	$	11,383	$	35,491	$	-	$	827,484

Summary of the aging of loans held for investment

	September 30, 2014
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Multi-family residential	$	76,821	$	-	$	-	$	-	$	-	$	76,821
Residential 1 to 4 family	120,403		-		-		-		97		120,500
Home equity lines of credit	37,786		-		-		-		100		37,886
Commercial	575,701		-		-		-		1,938		577,639
Farmland	92,292		-		-		-		-		92,292
Land	18,537		-		-		-		5,226		23,763
Construction	17,845		-		-		-		-		17,845
Commercial
Commercial and industrial	140,254		36		-		-		1,786		142,076
Agriculture	42,102		-		-		-		685		42,787
Other	20		-		-		-		-		20
Installment loans to individuals	8,152		-		-		-		46		8,198
Overdrafts	400		-		-		-		-		400
Total non-PCI loans	1,130,313		36		-		-		9,878		1,140,227
PCI loans
Real estate secured
Multi-family residential	-		-		-		-		-		-
Residential 1 to 4 family	561		-		-		-		-		561
Home equity lines of credit	81		-		-		-		-		81
Commercial	4,961		-		-		-		-		4,961
Farmland	1,673		-		-		-		-		1,673
Land	871		-		-		-		-		871
Construction	-		-		-		-		-		-
Commercial
Commercial and industrial	1,389		-		-		-		396		1,785
Agriculture	1,417		-		-		-		-		1,417
Total PCI loans	10,953		-		-		-		396		11,349
Total loans held for investment	$	1,141,266	$	36	$	-	$	-	$	10,274	$	1,151,576
	December 31, 2013
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Multi-family residential	$	31,140	$	-	$	-	$	-	$	-	$	31,140
Residential 1 to 4 family	88,455		-		-		-		449		88,904
Home equity lines of credit	31,178		-		-		-		-		31,178
Commercial	431,531		-		-		-		672		432,203
Farmland	50,414		-		-		-		-		50,414
Land	18,613		-		-		-		5,910		24,523
Construction	13,699		-		-		-		-		13,699
Commercial
Commercial and industrial	116,841		100		-		-		2,180		119,121
Agriculture	31,897		-		-		-		789		32,686
Other	38		-		-		-		-		38
Installment loans to individuals	3,127		-		2		-		117		3,246
Overdrafts	332		-		-		-		-		332
Total loans held for investment	$	817,265	$	100	$	2	$	-	$	10,117	$	827,484

Schedule of carrying amount and unpaid principal balance of purchased credit impaired loans

	September 30, 2014
	Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Residential 1 to 4 family	$	888	$	561
Home equity lines of credit	98		81
Commercial	6,903		4,961
Farmland	2,044		1,673
Land	1,019		871
Total real estate secured	10,952		8,147
Commercial
Commercial and industrial	2,322		1,785
Agriculture	1,492		1,417
Total commercial	3,814		3,202
Total PCI loans	$	14,766	$	11,349

Schedule of purchased credit impaired loans with probability at acquisition that not all contractually required payments would be collected

	February 28, 2014
	(dollars in thousands)
Contractually required payments including interest	$	19,827
Nonaccretable difference	(2,320		)
Cash flows expected to be collected	17,507
Accretable difference	(4,673		)
Fair value at acquisition	$	12,834

Schedule of accretable yield, or income expected to be collected

	Nine Months Ended
	September 30, 2014
	(dollars in thousands)
Balance at January 1, 2014	$	-
New loans purchased	4,673
Accretion of income	(796		)
Reclassifications from nonaccretable difference	619
Balance at September 30, 2014	$	4,496

Summary of the activity in the allowance for loan and lease losses by portfolio segment

	For the Three Months Ended September 30, 2014
	Balance June 30, 2014		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2014
	(dollars in thousands)
Land	$	2,944	$	-		$	8		$	(727	)	$	2,225
Other real estate secured	8,857		(10		)	(19		)	808			9,636
Commercial	4,436		-			174			(296		)	4,314
Installment loans to individuals	73		(2		)	1			2			74
All other loans	27		-			-			8			35
Unallocated	298		-			-			205			503
Total	$	16,635	$	(12	)	$	164		$	-		$	16,787
	For the Nine Months Ended September 30, 2014
	Balance December 31, 2013		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2014
	(dollars in thousands)
Land	$	3,402	$	-		$	30		$	(1,207	)	$	2,225
Other real estate secured	9,283		(1,119		)	37			1,435			9,636
Commercial	4,781		(650		)	628			(445		)	4,314
Installment loans to individuals	99		(8		)	10			(27		)	74
All other loans	32		-			-			3			35
Unallocated	262		-			-			241			503
Total	$	17,859	$	(1,777	)	$	705		$	-		$	16,787
	For the Three Months Ended September 30, 2013
	Balance June 30, 2013		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2013
	(dollars in thousands)
Land	$	4,431	$	-		$	11		$	189		$	4,631
Other real estate secured	6,663		(41		)	20			(112		)	6,530
Commercial	6,584		(736		)	475			(197		)	6,126
Installment loans to individuals	100		(207		)	12			183			88
All other loans	31		-			-			1			32
Unallocated	125		-			-			(65		)	60
Total	$	17,934	$	(984	)	$	518		$	-		$	17,468
	For the Nine Months Ended September 30, 2013
	Balance December 31, 2012		Charge-offs			Recoveries			Provision for loan losses			Balance September 30, 2013
	(dollars in thousands)
Land	$	4,670	$	(34	)	$	45		$	(50	)	$	4,631
Other real estate secured	7,192		(300		)	145			(507		)	6,530
Commercial	6,154		(1,137		)	947			162			6,126
Installment loans to individuals	64		(380		)	64			340			88
All other loans	38		-			-			(6		)	32
Unallocated	-		-			-			60			60
Total	$	18,118	$	(1,851	)	$	1,201		$	-		$	17,468

Schedule of allowance for loan and lease losses and the recorded investment in loans by impairment methodology

	September 30, 2014
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Land	$	1,764	$	461	$	-	$	6,547	$	17,213	$	874
Other real estate secured	58		9,578		-		3,331		919,620		7,308
Commercial	260		4,054		-		4,925		179,945		3,215
Installment loans to individuals	-		74		-		117		8,081		-
All other loans	-		35		-		-		400		-
Unallocated	-		503		-		-		-		-
Total	$	2,082	$	14,705	$	-	$	14,920	$	1,125,259	$	11,397
	December 31, 2013
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Land	$	2,532	$	870	$	-	$	7,696	$	16,827	$	-
Other real estate secured	-		9,283		-		1,462		646,076		-
Commercial	623		4,158		-		5,291		146,554		-
Installment loans to individuals	-		99		-		-		3,246		-
All other loans	-		32		-		-		332		-
Unallocated	-		262		-		-		-		-
Total	$	3,155	$	14,704	$	-	$	14,449	$	813,035	$	-

Non-PCI Loans

Outstanding loan balances

Summary of the recorded investment in non-PCI and PCI impaired loans

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	217	$	354	$	-	$	222	$	6	$	496	$	16
Home equity lines of credit	100		183		-		100		-		100		-
Commercial	2,014		4,423		-		2,269		6		1,862		19
Farmland	289		288		-		292		2		294		12
Construction	380		375		-		380		5		380		5
Land	460		1,152		-		935		2		1,170		32
Commercial
Commercial and industrial	2,316		3,480		-		3,152		51		3,616		111
Agriculture	722		761		-		724		2		741		2
Installment loans to individuals	117		205		-		118		1		145		3
Total	6,615		11,221		-		8,192		75		8,804		200
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-		-		-		-		-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	331		331		58		331		-		331		-
Farmland	-		-		-		-		-		-		-
Construction	-		-		-		-		-		-		-
Land	6,087		9,755		1,764		6,380		16		6,602		58
Commercial			-		-		-		-		-		-
Commercial and industrial	1,887		1,809		260		1,916		41		2,013		90
Agriculture	-		-		-		-		-		-		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	8,305		11,895		2,082		8,627		57		8,946		148
Total non-PCI impaired loans	$	14,920	$	23,116	$	2,082	$	16,819	$	132	$	17,750	$	348

(1) Recorded investment includes net deferred loan fees and costs attributable to these loans.

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2013						September 30, 2013				September 30, 2013
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment (1)		Balance		Impaired Loans		Investment (1)		Recognized		Investment (1)		Recognized
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	703	$	735	$	-	$	-	$	-	$	269	$	-
Home equity lines of credit	-		-		-		-		-		-		-
Commercial	552		811		-		2		-		90		-
Land	1,013		1,367		-		852		-		724		-
Commercial
Commercial and industrial	1,208		1,546		-		1,041		-		1,314		-
Agriculture	745		779		-		1,022		-		937		-
Installment loans to individuals	-		-		-		-		-		-		-
Total	4,221		5,238		-		2,917		-		3,334		-
With related allowance
Real Estate Secured
Residential 1 to 4 family	109		230		17		339		-		190		-
Commercial	642		1,114		91		26		-		21		-
Land	7,050		10,726		3,854		112		4		116		4
Commercial
Commercial and industrial	3,463		3,650		2,826		3,430		8		2,969		11
Agriculture	65		69		27		41		-		29		-
Installment loans to individuals	26		71		10		7,116		-		6,573		-
Total	11,355		15,860		6,825		11,064		12		9,898		15
Total non-PCI impaired loans	$	15,576	$	21,098	$	6,825	$	13,981	$	12	$	13,232	$	15

(1) Recorded investment includes net deferred loan fees and costs attributable to these loans.

	December 31, 2013
			Unpaid		Specific
	Recorded		Principal		Allowance for
	Investment (1)		Balance		Impaired Loans
	(dollars in thousands)
Non-PCI loans
Without related allowance
Real Estate Secured
Residential 1 to 4 family	$	944	$	1,102	$	-
Home equity lines of credit	-		-		-
Commercial	901		1,646		-
Farmland	-		-		-
Land	1,221		1,948		-
Commercial
Commercial and industrial	1,857		2,241		-
Agriculture	789		824		-
Installment loans to individuals	118		190		-
Total	5,830		7,951		-
With related allowance
Real Estate Secured
Residential 1 to 4 family	-		-		-
Home equity lines of credit	-		-		-
Commercial	-		-		-
Farmland	-		-		-
Land	6,706		10,158		2,531
Commercial
Commercial and industrial	3,480		3,602		623
Agriculture	-		-		-
Installment loans to individuals	-		-		-
Total	10,186		13,760		3,154
Total non-PCI impaired loans	$	16,016	$	21,711	$	3,154

(1) Recorded investment includes net deferred loan fees and costs attributable to these loans.

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Loans and Allowance for Loan and Lease Losses (Details 5) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Feb. 28, 2014	Dec. 31, 2013	Sep. 30, 2014 Non-PCI Loans	Dec. 31, 2013 Non-PCI Loans	Sep. 30, 2013 Non-PCI Loans	Sep. 30, 2014 Non-PCI Loans Real Estate Secured Multi-family residential	Dec. 31, 2013 Non-PCI Loans Real Estate Secured Multi-family residential	Sep. 30, 2014 Non-PCI Loans Real Estate Secured Residential 1 to 4 family	Dec. 31, 2013 Non-PCI Loans Real Estate Secured Residential 1 to 4 family	Sep. 30, 2013 Non-PCI Loans Real Estate Secured Residential 1 to 4 family	Sep. 30, 2014 Non-PCI Loans Real Estate Secured Home equity lines of credit	Dec. 31, 2013 Non-PCI Loans Real Estate Secured Home equity lines of credit	Sep. 30, 2014 Non-PCI Loans Real Estate Secured Commercial	Dec. 31, 2013 Non-PCI Loans Real Estate Secured Commercial	Sep. 30, 2013 Non-PCI Loans Real Estate Secured Commercial	Sep. 30, 2014 Non-PCI Loans Real Estate Secured Farmland	Dec. 31, 2013 Non-PCI Loans Real Estate Secured Farmland	Sep. 30, 2014 Non-PCI Loans Real Estate Secured Land	Dec. 31, 2013 Non-PCI Loans Real Estate Secured Land	Sep. 30, 2013 Non-PCI Loans Real Estate Secured Land	Sep. 30, 2014 Non-PCI Loans Real Estate Secured Construction	Dec. 31, 2013 Non-PCI Loans Real Estate Secured Construction	Sep. 30, 2014 Non-PCI Loans Commercial Commercial and industrial	Dec. 31, 2013 Non-PCI Loans Commercial Commercial and industrial	Sep. 30, 2013 Non-PCI Loans Commercial Commercial and industrial	Sep. 30, 2014 Non-PCI Loans Commercial Agriculture	Dec. 31, 2013 Non-PCI Loans Commercial Agriculture	Sep. 30, 2013 Non-PCI Loans Commercial Agriculture	Sep. 30, 2014 Non-PCI Loans Commercial Other	Dec. 31, 2013 Non-PCI Loans Commercial Other	Sep. 30, 2014 Non-PCI Loans Installment loans to individuals	Dec. 31, 2013 Non-PCI Loans Installment loans to individuals	Sep. 30, 2013 Non-PCI Loans Installment loans to individuals	Sep. 30, 2014 Non-PCI Loans Overdrafts	Dec. 31, 2013 Non-PCI Loans Overdrafts	Sep. 30, 2014 PCI Loans	Sep. 30, 2014 PCI Loans Commercial and industrial	Sep. 30, 2014 PCI Loans Real Estate Secured	Sep. 30, 2014 PCI Loans Real Estate Secured Residential 1 to 4 family	Sep. 30, 2014 PCI Loans Real Estate Secured Home equity lines of credit	Sep. 30, 2014 PCI Loans Real Estate Secured Commercial	Sep. 30, 2014 PCI Loans Real Estate Secured Farmland	Sep. 30, 2014 PCI Loans Real Estate Secured Land	Sep. 30, 2014 PCI Loans Commercial Commercial and industrial	Sep. 30, 2014 PCI Loans Commercial Agriculture
Aging of loans held for investment
Current	$ 1,141,266			$ 1,130,313	$ 817,265		$ 76,821	$ 31,140	$ 120,403	$ 88,455		$ 37,786	$ 31,178	$ 575,701	$ 431,531		$ 92,292	$ 50,414	$ 18,537	$ 18,613		$ 17,845	$ 13,699	$ 140,254	$ 116,841		$ 42,102	$ 31,897		$ 20	$ 38	$ 8,152	$ 3,127		$ 400	$ 332	$ 10,953			$ 561	$ 81	$ 4,961	$ 1,673	$ 871	$ 1,389	$ 1,417
30-59	36			36	100																			36	100
60-89					2																												2
Non-Accruing	10,274		7,076	9,878	10,117				97	449		100		1,938	672				5,226	5,910				1,786	2,180		685	789				46	117				396								396
Total	1,151,576			1,140,227	827,484		76,821	31,140	120,500	88,904		37,886	31,178	577,639	432,203		92,292	50,414	23,763	24,523		17,845	13,699	142,076	119,121		42,787	32,686		20	38	8,198	3,246		400	332	11,349			561	81	4,961	1,673	871	1,785	1,417
Unpaid Principal Balance				23,116	21,711	21,098																															14,766	3,814	10,952	888	98	6,903	2,044	1,019	2,322	1,492
Carrying Amount				2,082	3,154	6,825					17			58		91			1,764	2,531	3,854			260	623	2,826			27					10			11,349	3,202	8,147	561	81	4,961	1,673	871	1,785	1,417
Contractually required payments receivable of loans purchased during the period
Contractually required payments including interest		19,827
Nonaccretable difference		(2,320)
Cash flows expected to be collected		17,507
Accretable difference		(4,673)
Fair value at acquisition		12,834
Accretable yield, or income expected to be collected
New loans purchased	4,673
Accretion of income	(796)
Reclassifications from nonaccretable difference	619
Balance at the end of the period	$ 4,496

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Investment Securities (Details 3)	Sep. 30, 2014 Item	Mar. 31, 2013 Private labeled mortgage backed securities investment
Other than Temporary Impairment
Number of investment securities in which other than temporary impairment losses were recognized	0	2

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Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Condensed Consolidated Statements of Comprehensive Income
Net income	$ 3,429	$ 2,761	$ 4,613	$ 9,207
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities arising during the period	983	(1,959)	6,206	(7,685)
Reclassification for net (gains) on investments included in net income	(450)	(344)	(549)	(3,935)
Other comprehensive income (loss), before income tax expense (benefit)	533	(2,303)	5,657	(11,620)
Income tax expense (benefit) related to items of other comprehensive income	217	(947)	2,326	(4,782)
Other comprehensive income (loss)	316	(1,356)	3,331	(6,838)
Comprehensive income	$ 3,745	$ 1,405	$ 7,944	$ 2,369

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Business Combination

9 Months Ended

Sep. 30, 2014

Business Combination

Business Combination

Note 2.  Business Combination

On February 28, 2014, the Company acquired 100% of the outstanding common shares of Mission Community Bancorp (“MISN”) and all unexercised warrants and options to purchase MISN common stock were cancelled, in exchange for 7,541,326 shares of the Company’s common stock and $8.7 million in cash.  In conjunction with the merger, MISN’s wholly-owned bank subsidiary, Mission Community Bank, was merged with and into Heritage Oaks Bank.  The transaction was valued at $69.0 million, based on the Company’s closing stock price of $7.99 on February 28, 2014.  With the acquisition, the Company believes it has created a more valuable community bank franchise, with a low-cost core deposit base, strong capital ratios, attractive net interest margins, lower operating costs, and better overall returns for the shareholders of the combined company.  The Company also believes it now has a banking platform that is well positioned for future growth, both organically and through acquisitions.

The acquired assets and liabilities assumed have been recorded at fair value at the date of acquisition in these financial statements.  The following table presents a summary of acquired assets and liabilities assumed:

	February 28, 2014
	(dollars in thousands)
Assets acquired
Cash and due from banks	$	3,212
Interest earning deposits in other banks	34,386
Securities available for sale	76,159
Loans held for sale	338
Loans and leases receivable	280,316
Premises and equipment	15,922
Deferred tax assets, net	11,885
Goodwill	13,299
Core deposit intangible asset	5,060
Bank owned life insurance	8,263
Other assets	4,895
Total assets acquired	$	453,735
Liabilities assumed
Deposits	$	371,501
Advances from Federal Home Loan Bank	6,071
Junior subordinated debentures	4,804
Other liabilities	2,397
Total liabilities assumed	$	384,773
Total consideration paid	$	68,962

The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired as of the acquisition date, since they have not exhibited evidence of deterioration in credit quality since origination, and have been classified as non-PCI loans. The fair value adjustments were determined using discounted contractual cash flows, adjusted for expected losses and prepayments, where appropriate. Non-PCI loans acquired as of the acquisition date had a fair value and gross contractual payments receivable of $267.3 million and $328.2 million, respectively.  As of the acquisition date, contractual cash flows not expected to be collected on these non-PCI loans totaled $5.4 million, which has been recorded as the credit risk component of the purchase discount, and which represented 2.0% of their gross outstanding principal balances.

Goodwill of $13.3 million arising from the acquisition is largely attributable to synergies and cost savings resulting from combining the operations of the companies.  As this transaction was structured as a tax-free exchange, the goodwill will not be deductible for tax purposes.

The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate more accurate or appropriate values for the assets acquired and liabilities assumed, which may be reflective of conditions or events that existed at the acquisition date.  The fair value of $280.7 million of loans and leases receivable, $15.9 million of premises and equipment (including $3.5 million of premises and equipment held for sale), $11.9 million of income tax attributes related to the purchase accounting adjustments and MISN’s legacy deferred tax assets are subject to change pending receipt of the final valuations and analyses.  The fair value of premises and equipment held for sale may be adjusted upon final sale or revised appraised values.  Deferred tax assets may be adjusted for purchase accounting adjustments on open areas such as loans and leases or premises and equipment held for sale,(See also Note 6. Income Taxes).  The closing equity balance for MISN is also subject to adjustments for invoices received after the close of the transaction that were attributable to MISN’s operations through February 28, 2014.  Such adjustments would be reflected as additional liabilities as of the acquisition date, with a corresponding increase to goodwill.

The following table summarizes the consideration paid for MISN:

	February 28, 2014
	(dollars in thousands)
Consideration paid
Cash payments for MISN shares outstanding	$	2,554
Cash payments for MISN warrants	5,766
Cash payments for MISN options	387
Shares issued, @ $7.99 per share	60,255
Total consideration	$	68,962

The following table presents unaudited pro forma information as if the MISN acquisition had occurred on January 1, 2013, which includes the pre-acquisition period for MISN.  The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits and borrowings acquired, and the related income tax effects.  The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(dollars in thousands except per share data)
Net interest income	$	15,395	$	14,989	$	45,761	$	44,198
Provision for loan and lease losses	-		210		-		310
Noninterest income	2,982		2,295		7,835		12,499
Noninterest expense	13,384		12,898		46,844		40,127
Income before income taxes	4,993		4,176		6,752		16,260
Income tax expense	1,682		1,528		2,315		6,210
Net income	$	3,311	$	2,648	$	4,437	$	10,050
Earnings Per Common Share
Basic	$	0.10	$	0.10	$	0.13	$	0.30
Diluted	$	0.10	$	0.10	$	0.13	$	0.29

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Commitments and Contingencies (Details) (Heritage Oaks Bank, USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Outstanding financial commitments whose contractual amount represents credit risk
Total commitments and standby letters of credit	$ 244,894,000	$ 198,481,000
Outstanding financial fixed rate commitments	39,600,000	31,600,000
Outstanding financial variable rate commitments	205,300,000	166,900,000
Commitments to extend credit
Outstanding financial commitments whose contractual amount represents credit risk
Total commitments and standby letters of credit	229,464,000	181,445,000
Standby letters of credit
Outstanding financial commitments whose contractual amount represents credit risk
Total commitments and standby letters of credit	$ 15,430,000	$ 17,036,000

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2014

Goodwill and Other Intangible Assets

Summary of the gross carrying amount, accumulated amortization and net carrying amount of CDI

	September 30, 2014
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(3,617)	$	5,644

Summary of an estimate for future amortization expense

	September 30, 2014
	Beginning		Acquired		Estimated			Projected Ending
	Balance		CDI’s		Amortization			Balance
	(dollars in thousands)
Period
Year 2014	$	1,344	$	5,060	$	(1,056	)	$	5,348
Year 2015	5,348				(1,049		)	4,299
Year 2016	4,299				(944		)	3,355
Year 2017	3,355				(588		)	2,767
Year 2018	2,767				(549		)	2,218
Year 2019	2,218				(522		)	1,696

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Fair Value of Assets and Liabilities (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Assets
Investment securities available for sale, at fair value	$ 382,437	$ 276,795
Liabilities
Non-interest bearing deposits	469,435	291,856
Junior subordinated debentures	13,179	8,248
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Notional Amount	254,590	198,481
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Cost to Cede or Assume	2,546	1,985
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Cash and cash equivalents	50,827	26,238
Liabilities
Non-interest bearing deposits	469,435	291,856
Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	382,437	276,795
Loans held for sale	5,977	2,386
Accrued interest receivable	1,735	1,397
Liabilities
Interest bearing deposits	956,269	684,345
Federal Home Loan Bank advances	75,586	86,990
Accrued interest payable	426	239
Significant Unobservable Inputs (Level 3)
Assets
Loans receivable, net of deferred fees and costs	1,155,003	827,105
Accrued interest receivable	3,641	2,630
Liabilities
Junior subordinated debentures	9,867	7,595
Carrying Amount
Assets
Cash and cash equivalents	50,827	26,238
Investment securities available for sale, at fair value	382,437	276,795
Federal Home Loan Bank stock	7,853	4,739
Loans receivable, net of deferred fees and costs	1,150,162	826,203
Loans held for sale	5,977	2,386
Accrued interest receivable	5,376	4,027
Liabilities
Non-interest bearing deposits	469,435	291,856
Interest bearing deposits	953,499	682,039
Federal Home Loan Bank advances	75,562	88,500
Junior subordinated debentures	13,179	8,248
Accrued interest payable	426	239
Fair Value
Assets
Cash and cash equivalents	50,827	26,238
Investment securities available for sale, at fair value	382,437	276,795
Loans receivable, net of deferred fees and costs	1,155,003	827,105
Loans held for sale	5,977	2,386
Accrued interest receivable	5,376	4,027
Liabilities
Non-interest bearing deposits	469,435	291,856
Interest bearing deposits	956,269	684,345
Federal Home Loan Bank advances	75,586	86,990
Junior subordinated debentures	9,867	7,595
Accrued interest payable	$ 426	$ 239

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies.

Commitments and Contingencies

Note 12.  Commitments and Contingencies

In the normal course of business, various claims and lawsuits are brought by and against the Company.  In the opinion of management and the Company’s general counsel, the disposition of all pending or threatened proceedings will not have a material effect on the Company’s consolidated financial statements.

Commitments to Extend Credit

In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers.  These financial commitments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the statement of financial position.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to a third party.  Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis and the amount of collateral obtained, if deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

The Bank’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments as is done for loans reflected in the Company’s consolidated financial statements.

As of September 30, 2014 and December 31, 2013, the Company had the following outstanding financial commitments, which contractual amounts represent credit risk:

	September 30,		December 31,
	2014		2013
	(dollars in thousands)
Commitments to extend credit	$	229,464	$	181,445
Standby letters of credit	15,430		17,036
Total commitments and standby letters of credit	$	244,894	$	198,481

Commitments to extend credit and standby letters of credit are made at both fixed and variable rates of interest.  At September 30, 2014 and December 31, 2013, the Company had $39.6 million and $31.6 million in fixed rate commitments, and $205.3 million and $166.9 million in variable rate commitments.