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, 2015.

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

 (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,	93446
Paso Robles, California	(Zip Code)
(Address of principal executive offices)

(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.

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 28, 2015 there were 34,356,179 shares of the registrant’s common stock outstanding.

Heritage Oaks Bancorp

and Subsidiaries

Table of Contents

			Page
Part I.		Financial Information
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	4
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and September 30, 2014	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and September 30, 2014	6
		Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2015 and September 30, 2014	7
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and September 30, 2014	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
	Item 4.	Controls and Procedures	71
Part II.		Other Information
	Item 1.	Legal Proceedings	71
	Item 1A.	Risk Factors	72
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
	Item 3.	Defaults Upon Senior Securities	72
	Item 4.	Mine Safety Disclosures	72
	Item 5.	Other Information	72
	Item 6.	Exhibits	73
		Signatures	74

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,
	2015		2014
	(dollars in thousands except per share data)
Assets
Cash and due from banks	$	22,469	$	12,548
Interest earning deposits in other banks	89,801		23,032
Total cash and cash equivalents	112,270		35,580
Investment securities available for sale, at fair value	432,750		355,580
Loans held for sale, at lower of cost or fair value	5,366		2,586
Gross loans held for investment	1,206,740		1,193,483
Net deferred loan fees	(1,056)		(1,445)
Allowance for loan and lease losses	(17,296)		(16,802)
Net loans held for investment	1,188,388		1,175,236
Premises and equipment, net	37,686		37,820
Premises held for sale	1,910		1,978
Bank-owned life insurance	25,191		24,711
Goodwill	24,885		24,885
Deferred tax assets, net	21,422		24,920
Federal Home Loan Bank stock	7,853		7,853
Other intangible assets	4,560		5,347
Other assets	11,644		13,631
Total assets	$	1,873,925	$	1,710,127
Liabilities
Non-interest bearing deposits	$	544,782	$	461,479
Interest bearing deposits	1,026,988		933,325
Total deposits	1,571,770		1,394,804
Short term FHLB borrowing	13,500		25,000
Long term FHLB borrowing	65,046		70,558
Junior subordinated debentures	10,389		13,233
Other liabilities	7,762		8,592
Total liabilities	1,668,467		1,512,187
Shareholders’ Equity
Preferred stock, 5,000,000 shares authorized:
Series C preferred stock, $3.25 per share stated value; issued and outstanding:
0 shares and 348,697 shares at September 30, 2015, and December 31, 2014, respectively.	-		1,056
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding:
34,352,445 shares and 33,905,060 shares at September 30, 2015 and December 31, 2014, respectively.	165,452		164,196
Additional paid in capital	7,964		6,984
Retained earnings	30,774		24,772
Accumulated other comprehensive income, net of tax of $920 and
$677 as of September 30, 2015 and December 31, 2014, respectively.	1,268		932
Total shareholders’ equity	205,458		197,940
Total liabilities and shareholders’ equity	$	1,873,925	$	1,710,127

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,
	2015		2014		2015		2014
	(dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	14,781	$	14,745	$	44,454	$	41,134
Investment securities	1,864		1,946		5,193		5,355
Other interest-earning assets	312		204		979		535
Total interest income	16,957		16,895		50,626		47,024
Interest Expense
Deposits	941		918		2,748		2,661
Other borrowings	620		406		1,742		1,158
Total interest expense	1,561		1,324		4,490		3,819
Net interest income before provision for loan losses	15,396		15,571		46,136		43,205
Provision for loan and lease losses	-		-		-		-
Net interest income after provision for loan and lease losses	15,396		15,571		46,136		43,205
Non-Interest Income
Fees and service charges	1,219		1,410		3,639		3,949
Gain on extinguishment of debt	552		-		552		-
Net gain on sale of mortgage loans	407		411		1,277		967
Gain on sale of investment securities	136		450		641		549
Other mortgage fee income	92		64		348		223
Other income	400		647		1,621		1,533
Total non-interest income	2,806		2,982		8,078		7,221
Non-Interest Expense
Salaries and employee benefits	5,598		6,164		17,643		18,121
Professional services	2,234		1,839		5,342		3,610
Occupancy and equipment	1,688		1,776		5,023		4,989
Information technology	611		756		1,753		2,403
Regulatory assessments	298		351		895		862
Amortization of intangible assets	263		297		787		760
Loan department expense	252		239		798		700
Sales and marketing	240		232		852		595
Communication costs	150		183		435		450
Merger, restructure and integration	(97)		748		(67)		8,785
Other expense	914		797		1,932		2,132
Total non-interest expense	12,151		13,382		35,393		43,407
Income before income taxes	6,051		5,171		18,821		7,019
Income tax expense	2,049		1,742		6,950		2,406
Net income	4,002		3,429		11,871		4,613
Dividends and accretion on preferred stock	-		-		70		-
Net income available to common shareholders	$	4,002	$	3,429	$	11,801	$	4,613
Earnings Per Common Share
Basic	$	0.12	$	0.10	$	0.35	$	0.14
Diluted	$	0.12	$	0.10	$	0.34	$	0.14
Dividends Declared Per Common Share	$	0.06	$	0.03	$	0.17	$	0.03

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 Ended,				For the Nine Months Ended,
	September 30,				September 30,
	2015		2014		2015		2014
	(dollars in thousands)
Net income	$	4,002	$	3,429	$	11,871	$	4,613
Other comprehensive income, net of tax:
Unrealized holding gains on securities arising during the period	1,963		983		1,220		6,206
Reclassification for net gains on investments included in net income	(136)		(450)		(641)		(549)
Other comprehensive income, before income tax expense	1,827		533		579		5,657
Income tax expense related to items of other comprehensive income	768		217		243		2,326
Other comprehensive income	1,059		316		336		3,331
Comprehensive income	$	5,061	$	3,745	$	12,207	$	7,944

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		(Loss) Income		Equity
	(dollars in thousands, except per share data)
Balance, December 31, 2013	$	3,604	25,397,780	$	101,511	$	6,020	$	18,717	$	(3,425)	$	126,427
Issuance of common stock in MISN Transaction			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						723						723
Tax benefit of share-based compensation						20						20
Net issuance of restricted share awards			98,882									-
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
Balance, December 31, 2014	$	1,056	33,905,060	$	164,196	$	6,984	$	24,772	$	932	$	197,940
Dividends declared ($0.17 per share)								(5,799)				(5,799)
Repurchases of common stock			(3,696)	(28)								(28)
Exercise of stock options			47,554	228								228
Conversion of Series C preferred stock	(1,056)		348,697	1,056		70		(70)				-
Share-based compensation						814						814
Tax benefit of share-based compensation						96						96
Net issuance of restricted share awards			54,830									-
Net income								11,871				11,871
Other comprehensive income										336		336
Balance, September 30, 2015	$	-	34,352,445	$	165,452	$	7,964	$	30,774	$	1,268	$	205,458

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,
	2015		2014
	(dollars in thousands)
Cash Flows from Operating Activities
Net income	$	11,871	$	4,613
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	1,538		1,394
Write-downs on premises and equipment held for sale	68		988
Amortization of premiums / discounts	4,999		3,646
Amortization of intangible assets	787		760
Accretion of discount on acquired and purchased loans, net	(1,524)		(1,791)
Share-based compensation expense	814		723
Gain on extinguishment of debt	(552)		-
Gain on sale of available for sale securities	(641)		(549)
Gain on sale of assets	(8)		-
Gain on sale of loans held for sale	(1,277)		(967)
Originations of loans held for sale	(104,656)		(62,385)
Proceeds from sale of loans held for sale	103,153		59,761
Net increase in bank owned life insurance	(480)		(460)
Decrease in deferred tax assets	3,255		3,269
Tax impact of share-based compensation	(96)		(20)
Increase in other assets and other liabilities, net	1,487		1,206
Net cash provided by operating activities	18,738		10,188
Cash Flows from Investing Activities
Net cash and cash equivalents acquired in MISN Transaction	-		28,891
Purchase of securities, available for sale	(173,560)		(155,956)
Sale of securities, available for sale	55,184		98,379
Proceeds from principal paydowns of securities, available for sale	37,690		30,799
Proceeds from sale of premises and equipment	9		3,594
Purchase of FHLB stock	-		(941)
Increase in loans, net	(12,820)		(44,855)
Recoveries on previously charged-off loans	776		705
Proceeds from sale of foreclosed collateral	91		(5,122)
Purchase of property, premises and equipment, net	(1,414)		1,628
Net cash used in investing activities	(94,044)		(42,878)
Cash Flows from Financing Activities
Increase in deposits, net	176,947		77,509
Proceeds from Federal Home Loan Bank borrowing	36,000		25,000
Repayments of Federal Home Loan Bank borrowing	(52,898)		(44,000)
Decrease in junior subordinated debentures	(2,550)		-
Proceeds from exercise of stock options, including tax benefits	324		178
Stock issuance costs	-		(381)
Dividends paid	(5,799)		(1,027)
Repurchases of common stock	(28)		-
Net cash provided by financing activities	151,996		57,279
Net increase in cash and cash equivalents	76,690		24,589
Cash and cash equivalents, beginning of period	35,580		26,238
Cash and cash equivalents, end of period	$	112,270	$	50,827
Supplemental Cash Flow Information
Cash Flow Information
Interest paid	$	4,479	$	3,631
Income taxes paid	$	1,390	$	600
Non-Cash Flow Information
Change in unrealized gain on available for sale securities	$	1,220	$	6,206
Loans transferred to foreclosed assets	$	416	$	1,564
Premises transferred to held for sale	$	-	$	1,730
Accretion on preferred stock	$	70	$	-
Common stock issued in MISN Transaction	$	-	$	60,255

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

Heritage Oaks Bancorp | - 8 -

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, which is the Company’s sole operating subsidiary, operates branches within San Luis Obispo and Santa Barbara Counties and has a loan production office in Ventura County.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as mortgage, commercial, and consumer loans to customers who are predominately small to medium-sized businesses and to individuals.  As such, the Company is subject to a concentration risk associated with its banking operations in San Luis Obispo and Santa Barbara Counties, and to a lesser degree Ventura County. No one customer accounts for more than 10% of revenue or assets in any period presented and 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.  Operating segments are aggregated into one as operating results for all segments are similar.  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 2014 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 6, 2015; file number 000-25020.

The condensed 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 are included in the Company’s results of operations beginning March 1, 2014.

Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Investment in Non-Consolidated Subsidiaries

The Company accounts for its investment in Heritage Oaks Capital Trust II, Mission Community Capital Trust I, and Santa Lucia Bancorp (CA) Capital Trust, as unconsolidated subsidiaries using the equity method of accounting, as the Company is not the primary beneficiary of the trust.  Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust were acquired as part of the acquisition of Mission Community Bancorp on February 28, 2014.  The sole purpose of each of these trusts is for the issuance of trust preferred securities.

Reclassifications

Certain 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.

Use of Estimates in the Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and general practices within the banking industry require management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Heritage Oaks Bancorp | - 9 -

Note 1.  Summary of Significant Accounting Policies – continued

Significant Accounting Policies Update

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s 2014 Annual Report filed on Form 10-K.  Changes to accounting policies during the nine months ended September 30, 2015 are discussed below:

During the third quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the allowance for loan and lease losses (“ALLL”).  This enhancement related specifically to the methodology used to calculate the loss rates for loan risk grades within each loan type in the determination of the general reserve component of the ALLL.  The enhanced methodology uses more granular loan level data to calculate loss rates for specific loan grades within each loan type, allowing for more detailed loan migration analysis, and the ability to determine more precise average loss rates for each loan risk grade.  Although the total general reserve component of the ALLL for each loan type and portfolio segment is still based on total average historical losses for their respective loan types, management believes the allocation of the ALLL to each loan risk grade, within each loan type and the evaluation of the loss emergence period has become more precise under this methodology enhancement.

The implementation of the ALLL model enhancements did not result in a required increase or decrease in the balance of the ALLL, or a material impact to the overall allocation of the ALLL.  The ALLL model enhancement has allowed the Company to apply more precision in determining loss rates for specific loan grades within each loan type.  The section of the accounting policy for the ALLL, which was updated for this methodology enhancement is illustrated below:

Allowance for Loan and Lease Losses

The Company manages credit risk not only through extensive risk analyses performed prior to a loan’s approval, but also through the ongoing monitoring of loans within the portfolio, and more specifically certain types of loans that generally involve a greater degree of risk, such as commercial real estate, commercial lines of credit, agriculture, and construction/land loans. The Company monitors loans in the portfolio through an exhaustive internal process, at least quarterly, as well as with the assistance of independent loan reviews. These reviews generally not only focus on problem loans, but also internally rated “pass” credits within certain pools of loans that may be expected to experience stress due to economic conditions. This process allows the Company to validate credit risk grade ratings, underwriting structure, and the Company’s estimated exposure in the current economic environment as well as enhance communications with borrowers where necessary in an effort to mitigate potential future losses. All significant problem loans are analyzed in detail at least quarterly, in order to properly estimate potential exposure to loss associated with these loans in a timely manner.

Each segment of loans in the portfolio possesses varying degrees of risk, based on, among other things, the type of loan, the purpose of the loan, the type of collateral securing the loan, and the sensitivity the borrower has to changes in certain external factors such as economic conditions. The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors management regularly considers when evaluating the adequacy of the ALLL:

•Real estate secured loans – consist primarily of loans secured by commercial real estate, multi-family, farmland, and 1 to 4 family residential properties. As the majority of this segment is comprised of commercial real estate loans, risks associated with this segment lie primarily within that loan type. Adverse economic conditions may result in a decline in business activity and increased vacancy rates for commercial properties. These factors, in conjunction with a decline in real estate prices, may expose the Company to the potential for losses if a borrower cannot continue to service the loan with operating revenues, and the value of the property has declined to a level such that it no longer fully covers the Company’s recorded investment in the loan.

•Construction and land – although construction and land loans generally possess a higher inherent risk of loss than other loans, improvements in the mix, collateral and nature of loans help to mitigate risks within this segment of the portfolio. Risk arises from the necessity to complete projects within specified cost and time limits. Trends in the construction industry may also impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of future construction projects.

Heritage Oaks Bancorp | - 10 -

Note 1.  Summary of Significant Accounting Policies – continued

•Commercial and industrial – consist primarily of commercial and industrial loans (business lines of credit), agriculture loans, and other commercial purpose loans. Repayment of commercial and industrial loans is generally provided from the cash flows of the related business to which the loan was made. Adverse changes in economic conditions may result in a decline in business activity, which can impact a borrower’s ability to continue to make scheduled payments. The risk of repayment of agriculture loans arises largely from factors beyond the control of the Company or the related borrower, such as commodity prices, general weather conditions, and drought.

•Consumer – the consumer loan portfolio is comprised primarily of a large number of small loans with scheduled amortization over a specific period. The majority of consumer loans include revolving credit plans, installment loans and credit card balances. Weakened economic conditions may result in an increased level of delinquencies within this segment, as economic pressures may impact the capacity of such borrowers to repay their obligations.

ALLL Model Methodology

The ALLL is maintained at a level which, in management’s judgment, is appropriate to absorb probable credit losses inherent in the loans within the loan portfolio as of the balance sheet date. The amount of the ALLL is based on management’s evaluation of the collectability of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, the level of certain classified balances and specific impaired loans, and economic conditions and the related impact on specific borrowers and industry groups. The ALLL is increased by provisions for loan and lease losses, which are charged to earnings and reduced (or potentially increased) by charge-offs, net of recoveries. Changes in the ALLL relating to impaired loans, including troubled debt restructurings (“TDRs”), are charged or credited to the provision for loan and lease losses. Because of uncertainties inherent in the estimation process, management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change.

The process in which management determines the appropriate level of the ALLL involves the exercise of considerable judgment and the use of estimates. While management utilizes its best judgment and all available information in determining the adequacy of the ALLL, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond the Company’s control, including but not limited to, the performance of the loan portfolio, changes in current and future economic conditions and the view of regulatory agencies regarding the level of classified assets. Weakness in economic conditions and any other factor that may adversely affect credit quality and or that may result in higher levels of: past due and non-accruing loans, loan defaults, and or increased loan charge-offs, may require additional provisions for loan and lease losses in future periods and a higher balance in the Company’s ALLL. The ALLL, as more fully described below, is comprised of three components: general reserves, specific loan reserves, and a reserve for purchased credit impaired (“PCI”) loans.

General Reserves – The general reserve component of the ALLL, which is not attributable to loans specifically identified as impaired, is determined through a two-step process. First a quantitative allocation is determined by pooling performing loans by collateral type and purpose. These pools of loans are then further segmented by an internal risk grading system that classifies loans as: pass, special mention, substandard and doubtful. The Company’s risk grade system allows management, among other things, to identify the risk associated with each loan, and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are generally assigned based on information concerning the borrower and the strength of the collateral. Risk grades are reviewed regularly by the Company’s credit committee and are scrutinized by independent loan reviews performed semi-annually, as well as by regulatory agencies during scheduled examinations. Once credit risk grades have been assigned, estimated loss rates are then applied to each segment according to risk grade to determine the amount of the general portfolio allocation.

Estimated loss rates are determined through a migration analysis of historical losses for each segment of the loan portfolio, based on the Company’s prior experience with such loans, and the use of detailed loan level data, encompassing historical losses and average balance information for each loan type and risk grade.  The following provides brief definitions for credit risk grade ratings assigned to loans in the portfolio:

Heritage Oaks Bancorp | - 11 -

Note 1.  Summary of Significant Accounting Policies – continued

•Pass – credits that have strong credit quality with adequate collateral or secondary source of repayment and little existing or known weaknesses. However, pass may include credits with exposure to certain potential factors that may adversely impact the credit, if they materialize, resulting in these credits being put on a watch list to monitor more closely than other pass rated credits. Such factors may be credit / relationship specific or general to an entire industry.

•Special Mention – credits that have potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit at some future date.

•Substandard – credits that have a defined weakness or weaknesses which may jeopardize the orderly liquidation of the loan through cash flows, making it likely that repayment may have to come from some other source, such as the liquidation of collateral. The Company is more likely to incur losses on substandard credits if the weakness or weaknesses identified in the credit are not corrected.

•Doubtful – credits that possess the characteristics of a substandard credit, but because of certain existing deficiencies related to the credit, full collection is highly questionable. The probability of incurring some loss on such credits is high, but because of certain important and reasonably specific pending factors which may work to the advantage of strengthening the credit, charge-off is deferred until such time as the Company becomes reasonably certain that certain pending factors related to the credit will no longer provide some form of benefit.

The second component of the general reserve allocation of the ALLL is the qualitative allocation, and is determined by estimates the Company makes in regard to certain internal and external factors that may have either a positive or negative impact on the overall losses inherent in the loan portfolio. Internal factors include trends in credit quality of the loan portfolio, the existence and the effects of concentrations, the composition and volume of the loan portfolio and the scope and frequency of the loan review process as well as any other factor determined by management to have an impact on the credit quality of the loan portfolio. External factors include local, state and national economic and business conditions, as well as the estimated impact that environmental factors may have on certain segments of the loan portfolio, such as drought. While management regularly reviews the estimated impact these internal and external factors are expected to have on the loan portfolio, there can be no assurance that an adverse change in any one or combination of these factors will not be in excess of management’s expectations.

Recent Accounting Standards Updates

Recent Accounting Guidance Adopted

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 interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

Heritage Oaks Bancorp | - 12 -

Note 1.  Summary of Significant Accounting Policies – continued

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors. This ASU provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure 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. The amendments in this ASU are effective for public business entities for interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination.  The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date.  The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued 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, 2018. 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.

Heritage Oaks Bancorp | - 13 -

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 (the “MISN Transaction”).  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 banking 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 operating results for MISN are included in the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2015, and from March 1, 2014 through September 30, 2014.  As of December 31, 2014, adjustments to the fair value of assets acquired and liabilities assumed in the MISN Transaction were complete.

The following table presents unaudited pro forma financial information for the three and nine months ended September 30, 2014, as if the MISN Transaction were reflected in the Company’s operating results beginning on January 1, 2013. 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.

	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
	(dollars in thousands, except per share data)
Net interest income	$	15,395	$	45,761
Provision for loan and lease losses	-		-
Non-interest income	2,982		7,835
Non-interest expense	13,384		46,844
Income before income taxes	4,993		6,752
Income tax expense	1,682		2,315
Net income	$	3,311	$	4,437
Earnings Per Common Share
Basic	$	0.10	$	0.13
Diluted	$	0.10	$	0.13

Heritage Oaks Bancorp | - 14 -

Note 3.  Fair Value of Assets and Liabilities

Recurring Basis

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

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	49,264	$	-	$	49,264	$	-
Mortgage backed securities:
U.S government sponsored entities and agencies	232,499		-		232,499		-
Non-agency	32,176		-		32,176		-
State and municipal securities	102,694		-		102,694		-
Asset backed securities	16,082		-		16,082		-
Other investments	35		35		-		-
Total assets measured on a recurring basis	$	432,750	$	35	$	432,715	$	-
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	$	19,664	$	-	$	19,664	$	-
Mortgage backed securities:
U.S government sponsored entities and agencies	215,398		-		215,398		-
Non-agency	11,901		-		11,901		-
State and municipal securities	82,592		-		82,592		-
Asset backed securities	26,025		-		26,025		-
Total assets measured on a recurring basis	$	355,580	$	-	$	355,580	$	-

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, and were measured at fair value which was below cost. Certain impaired loans measured at fair value at December 31, 2014 are no longer recorded at fair value due to the borrower payments reducing the carrying value of these loans to less than fair value, and due to other impaired loans being evaluated under the discounted cash flow method versus the collateral method. 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. The discounted cash flow approach is used to measure impairment for certain impaired loans, because of their significant payment history and the global cash flow analysis performed on each borrower.

Heritage Oaks Bancorp | - 15 -

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:

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	3,211	$	-	$	-	$	3,211	$	(178)
Total assets measured on a non-recurring basis	$	3,211	$	-	$	-	$	3,211	$	(178)
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	3,261		-		-		3,261		(946)
Total assets measured on a non-recurring basis	$	4,586	$	-	$	-	$	4,586	$	80

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 three or nine months ended September 30, 2015.

Heritage Oaks Bancorp | - 16 -

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:

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	112,270	$	112,270	$	-	$	-	$	112,270
Investment securities available for sale	432,750		35		432,715		-		432,750
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,205,684		-		-		1,232,158		1,232,158
Loans held for sale	5,366		-		5,366		-		5,366
Accrued interest receivable	5,911		-		2,242		3,669		5,911
Liabilities
Non-interest bearing deposits	544,782		544,782		-		-		544,782
Interest bearing deposits	1,026,988		-		1,028,358		-		1,028,358
Federal Home Loan Bank advances	78,546		-		79,986		-		79,986
Junior subordinated debentures	10,389		-		-		8,522		8,522
Accrued interest payable	412		-		412		-		412
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	$	35,580	$	35,580	$	-	$	-	$	35,580
Investment securities available for sale	355,580		-		355,580		-		355,580
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,192,038		-		-		1,196,997		1,196,997
Loans held for sale	2,586		-		2,586		-		2,586
Accrued interest receivable	5,659		-		2,038		3,621		5,659
Liabilities
Non-interest bearing deposits	461,479		461,479		-		-		461,479
Interest bearing deposits	933,325		-		936,151		-		936,151
Federal Home Loan Bank advances	95,558		-		96,679		-		96,679
Junior subordinated debentures	13,233		-		-		9,297		9,297
Accrued interest payable	401		-		401		-		401

Information on off-balance-sheet instruments follows:

	September 30, 2015				December 31, 2014
	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	$	282,984	$	2,830	$	253,275	$	2,533

Heritage Oaks Bancorp | - 17 -

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, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	49,238	$	346	$	(320)	$	49,264
Mortgage backed securities
U.S. government sponsored entities and agencies	231,779		1,633		(913)		232,499
Non-agency	32,283		40		(147)		32,176
State and municipal securities	100,704		2,321		(331)		102,694
Asset backed securities	16,458		-		(376)		16,082
Other investments	100		-		(65)		35
Total available for sale securities	$	430,562	$	4,340	$	(2,152)	$	432,750
	December 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	19,562	$	191	$	(89)	$	19,664
Mortgage backed securities
U.S. government sponsored entities and agencies	216,492		1,092		(2,186)		215,398
Non-agency	11,891		21		(11)		11,901
State and municipal securities	79,810		2,843		(61)		82,592
Asset backed securities	26,216		-		(191)		26,025
Total available for sale securities	$	353,971	$	4,147	$	(2,538)	$	355,580

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

	September 30, 2015
	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	$	32,115	$	(320)	$	-	$	-	$	32,115	$	(320)
Mortgage backed securities
U.S. government sponsored entities and agencies	45,582		(376)		32,365		(537)		77,947		(913)
Non-agency	17,219		(142)		1,581		(5)		18,800		(147)
State and municipal securities	25,333		(326)		963		(5)		26,296		(331)
Asset backed securities	-		-		16,082		(376)		16,082		(376)
Other investments	35		(65)		-		-		35		(65)
Total	$	120,284	$	(1,229)	$	50,991	$	(923)	$	171,275	$	(2,152)
	December 31, 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	$	2,795	$	(17)	$	2,607	$	(72)	$	5,402	$	(89)
Mortgage backed securities
U.S. government sponsored entities and agencies	50,583		(670)		58,753		(1,516)		109,336		(2,186)
Non-agency	3,000		(7)		507		(4)		3,507		(11)
State and municipal securities	5,899		(47)		2,245		(14)		8,144		(61)
Asset backed securities	-		-		17,153		(191)		17,153		(191)
Total	$	62,277	$	(741)	$	81,265	$	(1,797)	$	143,542	$	(2,538)

Heritage Oaks Bancorp | - 18 -

Note 4.  Investment Securities - continued

A total of 78 securities were in an unrealized loss position as of September 30, 2015, and 57 securities as of December 31, 2014.  As of September 30, 2015, the Company believes that unrealized losses in its investment securities portfolio 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, 2015, the Company does not believe unrealized losses related to any of its securities are other than temporary.

Sales of Available for Sale Securities

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

	For Three Months Ended				For Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
	(dollars in thousands)
Proceeds	$	8,656	$	19,991	$	55,184	$	98,379
Gross gains	136		457		815		814
Gross losses	-		(7)		(174)		(265)

Income tax expense on net realized gains from the sale of investment securities for the three months ended September 30, 2015 and 2014 was $57 thousand and $189 thousand. Income tax expense related to net realized gains on the sale of securities was $270 thousand and $231 thousand for the nine months ended September 30, 2015 and 2014, respectively.

Maturities of Available for Sale Securities

The amortized cost and fair value maturities of available for sale investment securities at September 30, 2015 are shown below. The table reflects the expected lives of mortgage backed securities, based on the Company’s historical prepayment experience, because borrowers who are party to loans underlying these securities may have the right to prepay obligations without prepayment penalties.  Therefore actual maturities may differ from contractual maturities. Contractual maturities are reflected for all other security types.

	September 30, 2015				December 31, 2014
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Due one year or less	$	46,219	$	46,291	$	38,674	$	38,587
Due after one year through five years	145,177		145,642		113,081		112,926
Due after five years through ten years	173,928		175,581		137,909		140,115
Due after ten years	65,238		65,236		64,307		63,952
Total	$	430,562	$	432,750	$	353,971	$	355,580

Securities having an amortized cost and a fair value of $141.5 million and $148.9 million, respectively, at September 30, 2015, and $67.3 million and $72.5 million, respectively, at December 31, 2014 were pledged to secure public deposits.  As of September 30, 2015 and December 31, 2014, 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.

Heritage Oaks Bancorp | - 19 -

Note 4.  Investment Securities - continued

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,
	2015		2014		2015		2014
	(dollars in thousands)
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	161	$	112	$	487	$	226
Mortgage backed securities	938		1,152		2,529		3,370
State and municipal securities	151		38		339		40
Corporate debt securities	-		-		-		6
Asset backed securities	33		99		113		261
Non-taxable earnings on investment securities
State and municipal securities	581		545		1,725		1,452
Total	$	1,864	$	1,946	$	5,193	$	5,355

Note 5.  Loans and Allowance for Loan and Lease Losses

The following table provides a summary of outstanding loan balances:

	September 30, 2015						December 31, 2014
	Non-PCI		PCI				Non-PCI		PCI
	Loans		Loans		Total		Loans		Loans		Total
	(dollars in thousands)
Real Estate Secured
Commercial	$	576,053	$	5,714	$	581,767	$	584,056	$	4,416	$	588,472
Residential 1 to 4 family	154,327		568		154,895		126,640		561		127,201
Farmland	107,376		-		107,376		96,708		1,665		98,373
Multi-family residential	75,774		-		75,774		78,645		-		78,645
Construction and land	41,772		799		42,571		43,809		851		44,660
Home equity lines of credit	31,609		-		31,609		38,252		-		38,252
Total real estate secured	986,911		7,081		993,992		968,110		7,493		975,603
Commercial
Commercial and industrial	158,106		906		159,012		153,403		1,384		154,787
Agriculture	45,798		1,446		47,244		53,678		1,423		55,101
Other	-		-		-		14		-		14
Total commercial	203,904		2,352		206,256		207,095		2,807		209,902
Consumer	6,492		-		6,492		7,978		-		7,978
Total gross loans held for investment	1,197,307		9,433		1,206,740		1,183,183		10,300		1,193,483
Net deferred loan fees	(1,056)		-		(1,056)		(1,445)		-		(1,445)
Allowance for loan and lease losses	(17,214)		(82)		(17,296)		(16,802)		-		(16,802)
Total net loans held for investment	$	1,179,037	$	9,351	$	1,188,388	$	1,164,936	$	10,300	$	1,175,236
Loans held for sale	$	5,366	$	-	$	5,366	$	2,586	$	-	$	2,586

At September 30, 2015, and December 31, 2014, the loan portfolio includes loans purchased with evidence of deterioration in credit quality since their origination, referred to as “PCI loans.” These loans are specifically accounted for under ASC 310-30, as more fully discussed in Note 1. Summary of Significant Accounting Policies of the consolidated financial statements in the Company’s 2014 annual report filed on Form 10-K.  These loans were acquired as part of the MISN Transaction.  All other loans, referred to as “non-PCI loans,” consist of originated loans, as well as acquired and purchased loans which have not exhibited evidence of deteriorated credit quality since their origination.  Non-PCI loans are not accounted for within the scope of ASC 310-30.

Heritage Oaks Bancorp | - 20 -

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

Gross loans include $195.8 million and $239.7 million of loans acquired in the MISN Transaction at September 30, 2015 and December 31, 2014, respectively.  These loans were recorded at fair value on the date of acquisition.  Of the loans acquired in the MISN transaction, $9.4 million and $10.3 million at September 30, 2015 and December 31, 2014, respectively, are considered 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 $601.4 million in loans to secure a credit facility totaling $400.1 million, of which $78.5 million is outstanding as of September 30, 2015.  Of this credit facility, $11.5 million is available as a line of credit, while the remainder is available for potential future borrowings.  The Bank also has a collateralized borrowing line with the Federal Reserve Bank secured by $6.9 million of loans as of September 30, 2015.

Concentration of Credit Risk

The Company held loans that were collateralized by various forms of real estate, including residential 1 to 4 family loans originated and held for sale, totaling $999.4 million and $978.2 million at September 30, 2015 and December 31, 2014, respectively.  These 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 $41.8 million at September 30, 2015 and $44.8 million at December 31, 2014.

From time to time, the Company also originates SBA loans for sale and retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2015 and December 31, 2014, the unpaid principal balance of SBA loans serviced for others totaled $9.0 million and $13.0 million, respectively.  No gains were recorded on the sale of SBA loans during the three or nine months ended September 30, 2015 and 2014.

Heritage Oaks Bancorp | - 21 -

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 September 30, 2015, and presents average balances and interest income recognized for non-PCI and PCI impaired loans for the three and nine months ended September 30, 2015.

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2015						September 30, 2015				September 30, 2015
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
Non-PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,212	$	5,676	$	-	$	4,247	$	36	$	4,158	$	110
Construction and land	1,263		4,517		-		1,556		24		1,798		71
Residential 1 to 4 family	788		964		-		748		10		602		12
Farmland	498		498		-		385		7		558		26
Home equity lines of credit	85		86		-		85		-		119		-
Commercial
Commercial and industrial	3,126		3,528		-		3,252		10		3,541		45
Agriculture	653		744		-		654		6		671		7
Consumer	163		227		-		160		1		149		4
Total	10,788		16,240		-		11,087		94		11,596		275
With Related Allowance
Real Estate Secured
Construction and land	4,000		5,152		789		4,084		-		4,147		-
Commercial	453		671		94		461		-		476		-
Commercial
Commercial and industrial	1,731		1,736		231		1,444		22		1,139		50
Total	6,184		7,559		1,114		5,989		22		5,762		50
Total Non-PCI impaired loans	$	16,972	$	23,799	$	1,114	$	17,076	$	116	$	17,358	$	325
							For the Three Months Ended				For the Nine Months Ended
	September 30, 2015						September 30, 2015				September 30, 2015
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	5,178	$	6,663	$	-	$	5,189	$	122	$	5,297	$	807
Residential 1 to 4 family	568		878		-		566		18		565		48
Construction and land	554		666		-		553		19		556		58
Commercial
Agriculture	1,446		1,500		-		1,440		30		1,437		87
Commercial and industrial	424		845		-		542		44		680		104
Total	8,170		10,552		-		8,290		233		8,535		1,104
With Related Allowance
Real Estate Secured
Commercial	536		547		41		537		10		536		38
Construction and land	245		248		6		254		5		272		15
Commercial
Commercial and industrial	482		483		35		490		10		500		33
Total	1,263		1,278		82		1,281		25		1,308		86
Total PCI loans	$	9,433	$	11,830	$	82	$	9,571	$	258	$	9,843	$	1,190

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 and PCI impaired loans as of December 31, 2014, and presents average balances and interest income recognized for non-PCI and PCI impaired loans for the three and nine months ended September 30, 2014.

							For the Three Months Ended				For the Nine Months Ended
	December 31, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
Non-PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,000	$	6,255	$	-	$	2,269	$	6	$	1,862	$	19
Construction and land	1,470		2,355		-		1,315		7		1,550		37
Farmland	283		282		-		292		2		294		12
Residential 1 to 4 family	260		383		-		222		6		496		16
Home equity lines of credit	258		340		-		100		-		100		-
Commercial
Commercial and industrial	2,875		3,967		-		3,152		51		3,616		111
Agriculture	720		760		-		724		2		741		2
Consumer	112		201		-		118		1		145		3
Total	9,978		14,543		-		8,192		75		8,804		200
With Related Allowance
Real Estate Secured
Construction and land	4,876		8,499		1,472		6,380		16		6,602		58
Commercial	498		688		148		331		-		331		-
Commercial
Commercial and industrial	1,043		1,054		151		1,916		41		2,013		90
Total	6,417		10,241		1,771		8,627		57		8,946		148
Total Non-PCI impaired loans	$	16,395	$	24,784	$	1,771	$	16,819	$	132	$	17,750	$	348
							For the Three Months Ended				For the Nine Months Ended
	December 31, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,432	$	6,109	$	-	$	4,993	$	130	$	5,160	$	327
Farmland	1,673		2,027		-		1,699		20		1,706		64
Construction and land	853		993		-		923		21		943		47
Residential 1 to 4 family	564		886		-		565		13		585		29
Home equity lines of credit	-		-		-		81		2		81		4
Commercial
Agriculture	1,431		1,492		-		1,301		34		1,291		62
Commercial and industrial	1,388		1,883		-		2,081		185		2,236		263
Total PCI loans	$	10,341	$	13,390	$	-	$	11,643	$	405	$	12,002	$	796

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, 2015 and 2014. Interest income recognized on impaired loans in the tables above represents interest on accruing troubled debt restructurings, and accretion on PCI loans. Valuation allowances for impaired loans have been determined on a loan-by-loan basis.

At September 30, 2015, there were no residential 1 to 4 family loans in process of foreclosure, or residential 1 to 4 family properties included in foreclosed assets.

Heritage Oaks Bancorp | - 23 -

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

Troubled Debt Restructurings (“TDR”)

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

	September 30, 2015						December 31, 2014
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	2,601	$	209	$	2,810	$	2,449	$	78	$	2,527
Construction and land	1,217		4,046		5,263		1,109		5,149		6,258
Residential 1 to 4 family	617		171		788		130		130		260
Farmland	498		-		498		283		-		283
Commercial
Commercial and industrial	1,425		2,740		4,165		2,177		1,593		3,770
Agriculture	653		-		653		34		-		34
Consumer	116		10		126		69		-		69
Total non-PCI loans	7,127		7,176		14,303		6,251		6,950		13,201
PCI Loans
Real Estate Secured
Commercial	928		53		981		223		-		223
Construction and land	51		-		51		-		-		-
Commercial
Commercial and industrial	516		76		592		37		107		144
Total PCI loans	1,495		129		1,624		260		107		367
Total TDRs	$	8,622	$	7,305	$	15,927	$	6,511	$	7,057	$	13,568

The majority of the Company’s TDRs resulted from granting concessions with respect to interest rates, payment structure and/or maturity.  Modifications for the three and nine months ended September 30, 2015, and 2014 relate substantially to 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, 2015, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.  During the three and nine months ended September 30, 2015, an ALLL of approximately $0.1 million was established for one loan at the time the loan was modified as a TDR.  The financial effects of modifications for the three and nine months ended September 30, 2014 were not material.

Heritage Oaks Bancorp | - 24 -

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

The following tables summarize loan modifications which resulted in TDRs during the periods presented below:

	For the Three Months Ended					For the Nine Months Ended
	September 30, 2015					September 30, 2015
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of TDRs	Investment		Investment		of TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Residential 1 to 4 family	1	$	129	$	129	4	$	753	$	753
Farmland	1	232		232		2	730		730
Commercial	-	-		-		4	670		670
Construction and land	-	-		-		1	97		97
Commercial
Commercial and industrial	4	323		323		13	2,436		2,436
Agriculture	3	714		714		4	1,612		1,612
Consumer	1	11		11		2	68		68
PCI Loans
Real Estate Secured
Commercial	1	348		348		5	993		993
Construction and land	-	-		-		1	50		50
Commercial
Commercial and industrial	1	497		497		1	497		497
Total	12	$	2,254	$	2,254	37	$	7,906	$	7,906
	For the Three Months Ended					For the Nine Months Ended
	September 30, 2014					September 30, 2014
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of TDRs	Investment		Investment		of TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Construction and land	2	$	535	$	535	4	$	811	$	811
Commercial	-	-		-		1	166		166
Commercial
Commercial and industrial	4	377		377		14	1,604		1,604
Agriculture	-	-		-		1	662		662
Consumer	-	-		-		1	73		73
PCI Loans
Real Estate Secured
Commercial	-	-		-		1	230		230
Commercial
Commercial and industrial	-	-		-		2	138		138
Total	6	$	912	$	912	24	$	3,684	$	3,684

Heritage Oaks Bancorp | - 25 -

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

The following tables summarizes 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			For the Nine Months Ended
	September 30, 2015			September 30, 2015
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	18
Total	-	$	-	1	$	18
	For the Three Months Ended			For the Nine Months Ended
	September 30, 2014			September 30, 2014
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	30
Total	-	$	-	1	$	30

Credit Quality

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

	September 30, 2015
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	547,307	$	6,594	$	22,152	$	-	$	576,053
Residential 1 to 4 family	153,200		-		1,127		-		154,327
Farmland	105,540		232		1,604		-		107,376
Multi-family residential	67,147		8,627		-		-		75,774
Construction and land	36,477		969		4,326		-		41,772
Home equity lines of credit	31,088		-		521		-		31,609
Commercial
Commercial and industrial	146,176		5,664		6,266		-		158,106
Agriculture	44,778		120		900		-		45,798
Other	-		-		-		-		-
Consumer	6,391		-		101		-		6,492
Total non-PCI loans	1,138,104		22,206		36,997		-		1,197,307
PCI Loans
Real Estate Secured
Commercial	-		1,760		3,954		-		5,714
Construction and land	245		51		503		-		799
Residential 1 to 4 family	451		-		117		-		568
Commercial
Agriculture	-		-		1,446		-		1,446
Commercial and industrial	34		171		701		-		906
Total PCI loans	730		1,982		6,721		-		9,433
Total loans held for investment	$	1,138,834	$	24,188	$	43,718	$	-	$	1,206,740

Heritage Oaks Bancorp | - 26 -

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

	December 31, 2014
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	560,478	$	3,010	$	20,568	$	-	$	584,056
Residential 1 to 4 family	125,733		199		708		-		126,640
Farmland	92,481		2,665		1,562		-		96,708
Multi-family residential	78,023		-		622		-		78,645
Home equity lines of credit	37,638		-		614		-		38,252
Construction and land	37,422		-		6,387		-		43,809
Commercial
Commercial and industrial	138,202		2,943		12,104		154		153,403
Agriculture	52,678		280		720		-		53,678
Other	-		-		14		-		14
Consumer	7,873		-		105		-		7,978
Total non-PCI loans	1,130,528		9,097		43,404		154		1,183,183
PCI Loans
Real Estate Secured
Commercial	126		680		3,610		-		4,416
Farmland	-		-		1,665		-		1,665
Construction and land	294		-		557		-		851
Residential 1 to 4 family	-		-		561		-		561
Commercial
Agriculture	-		-		1,423		-		1,423
Commercial and industrial	36		97		1,175		76		1,384
Total PCI loans	456		777		8,991		76		10,300
Total loans held for investment	$	1,130,984	$	9,874	$	52,395	$	230	$	1,193,483

Heritage Oaks Bancorp | - 27 -

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, 2015
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	573,330	$	659	$	-	$	-	$	2,064	$	576,053
Residential 1 to 4 family	154,156		-		-		-		171		154,327
Farmland	107,291		85		-		-		-		107,376
Multi-family residential	75,774		-		-		-		-		75,774
Construction and land	37,726		-		-		-		4,046		41,772
Home equity lines of credit	31,524		-		-		-		85		31,609
Commercial					-
Commercial and industrial	154,625		50		-		-		3,431		158,106
Agriculture	45,798		-		-		-		-		45,798
Other	-		-		-		-		-		-
Consumer	6,444		-		-		-		48		6,492
Total non-PCI loans	1,186,668		794		-		-		9,845		1,197,307
PCI Loans
Real Estate Secured
Commercial	5,661		-		-		-		53		5,714
Land	799		-		-		-		-		799
Residential 1 to 4 family	568		-		-		-		-		568
Commercial
Agriculture	1,446		-		-		-		-		1,446
Commercial and industrial	788		-		-		-		118		906
Total PCI loans	9,262		-		-		-		171		9,433
Total loans held for investment	$	1,195,930	$	794	$	-	$	-	$	10,016	$	1,206,740

Heritage Oaks Bancorp | - 28 -

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

	December 31, 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
Commercial	$	581,971	$	-	$	-	$	-	$	2,085	$	584,056
Residential 1 to 4 family	126,516		-		-		-		124		126,640
Farmland	96,708		-		-		-		-		96,708
Multi-family residential	78,645		-		-		-		-		78,645
Construction and land	38,572		-		-		-		5,237		43,809
Home equity lines of credit	37,994		-		-		-		258		38,252
Commercial
Commercial and industrial	151,656		-		21		-		1,726		153,403
Agriculture	52,992		-		-		-		686		53,678
Other	14		-		-		-		-		14
Consumer	7,876		56		3		-		43		7,978
Total non-PCI loans	1,172,944		56		24		-		10,159		1,183,183
PCI Loans
Real Estate Secured
Commercial	4,416		-		-		-		-		4,416
Farmland	1,665		-		-		-		-		1,665
Construction and land	851		-		-		-		-		851
Residential 1 to 4 family	561		-		-		-		-		561
Commercial
Agriculture	1,423		-		-		-		-		1,423
Commercial and industrial	1,008		-		-		-		376		1,384
Total PCI loans	9,924		-		-		-		376		10,300
Total loans held for investment	$	1,182,868	$	56	$	24	$	-	$	10,535	$	1,193,483

Purchased Credit Impaired Loans

As part of the MISN Transaction, disclosed in Note 2. Business Combination, the Company acquired certain loans which have exhibited evidence of credit deterioration since their origination.  The carrying amount and unpaid principal balance of these loans are as follows:

	September 30, 2015				December 31, 2014
	Unpaid Principal Balance		Carrying Amount		Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Commercial	$	7,210	$	5,714	$	6,109	$	4,416
Construction and land	914		799		993		851
Residential 1 to 4 family	878		568		886		561
Farmland	-		-		2,027		1,665
Total real estate secured	9,002		7,081		10,015		7,493
Commercial
Commercial and industrial	1,328		906		1,883		1,384
Agriculture	1,500		1,446		1,492		1,423
Total commercial	2,828		2,352		3,375		2,807
Total PCI loans	$	11,830	$	9,433	$	13,390	$	10,300

Heritage Oaks Bancorp | - 29 -

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

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

	For the Nine Months Ended
	September 30, 2015
	(dollars in thousands)
Balance, December 31, 2014	$	4,374
Accretion of income	(1,190)
Reclassifications from nonaccretable difference (1)	861
Balance, September 30, 2015	$	4,045

(1)Reclassification from nonaccretable difference is attributable to positive changes in expected future cash flows on certain PCI loans.

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, 2015
	Balance June 30, 2015		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2015
	(dollars in thousands)
Other real estate secured	$	9,635	$	-	$	5	$	615	$	10,255
Commercial	4,993		(44)		327		209		5,485
Construction and land	1,940		-		24		(599)		1,365
Consumer	171		(1)		3		18		191
Unallocated	243						(243)		-
Total	$	16,982	$	(45)	$	359	$	-	$	17,296
	For the Nine Months Ended September 30, 2015
	Balance December 31, 2014		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2015
	(dollars in thousands)
Other real estate secured	$	9,129	$	(55)	$	81	$	1,100	$	10,255
Commercial	5,125		(187)		636		(89)		5,485
Construction and land	2,000		(34)		48		(649)		1,365
Consumer	202		(6)		11		(16)		191
Unallocated	346						(346)		-
Total	$	16,802	$	(282)	$	776	$	-	$	17,296
	For the Three Months Ended September 30, 2014
	Balance June 30, 2014		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2014
	(dollars in thousands)
Other real estate secured	$	8,747	$	(10)	$	(20)	$	802	$	9,519
Commercial	4,436		-		174		(296)		4,314
Construction and land	3,054		-		9		(721)		2,342
Consumer	100		(2)		1		10		109
Unallocated	298						205		503
Total	$	16,635	$	(12)	$	164	$	-	$	16,787

Heritage Oaks Bancorp | - 30 -

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

	For the Nine Months Ended September 30, 2014
	Balance December 31, 2013		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2014
	(dollars in thousands)
Other real estate secured	$	9,025	$	(1,119)	$	35	$	1,578	$	9,519
Commercial	4,781		(650)		628		(445)		4,314
Construction and land	3,660		-		32		(1,350)		2,342
Consumer	131		(8)		10		(24)		109
Unallocated	262						241		503
Total	$	17,859	$	(1,777)	$	705	$	-	$	16,787

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, 2015
	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)
Other real estate secured	$	94	$	10,120	$	41	$		6,036		$		939,103	$	6,282
Commercial	231		5,219		35		5,510				198,394			2,352
Construction and land	789		570		6		5,263				36,509			799
Consumer	-		191		-		163				6,329			-
Unallocated	-		-		-
Total	$	1,114	$	16,100	$	82	$		16,972		$		1,180,335	$	9,433
	December 31, 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)
Other real estate secured	$	148	$	8,981	$	-		$		5,299		$	918,975	$	6,669
Commercial	151		4,974		-			4,633				202,450		2,819
Construction and land	1,472		528		-			6,346				37,461		853
Consumer	-		202		-			112				7,866		-
Unallocated	-		346		-
Total	$	1,771	$	15,031	$	-		$		16,390		$	1,166,752	$	10,341

At September 30, 2015, total gross loans of $1.2 billion in the table above include $195.8 million of loans acquired through the MISN Transaction.  These loans were initially recorded at fair value, and had no related ALLL on the acquisition date.  The ALLL for acquired non-PCI loans at September 30, 2015 and December 31, 2014 was $0.4 million, and $1.0 million, respectively, and is the result of determining, through the Company’s ALLL methodology, that the existing discount for acquired non-PCI loans was no longer deemed sufficient to cover probable losses incurred in particular segments of the loan portfolio, specifically commercial and industrial, other real estate secured, and consumer loans. The incremental ALLL allocation for acquired non-PCI loans was not driven by deterioration in credit quality; rather due to the acceleration of accretion of purchase discounts related to loan pay-downs and payoffs of loans within these segments of the acquired loan portfolio.  The ALLL allocated to acquired non-PCI loans is included in the ALLL attributable to loans collectively evaluated for impairment in the tables above.  The ALLL for PCI loans was $82 thousand at September 30, 2015, and resulted from unfavorable changes in expected future cash flows on certain PCI loans.  There was no ALLL for PCI loans at December 31, 2014.

Heritage Oaks Bancorp | - 31 -

Note 6.  Income Taxes

Deferred tax assets relate to amounts that are expected to be realized through subsequent reversals of existing temporary differences over the period they are expected to reverse.  The ultimate realization of the Company’s deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are expected to reverse.  U.S. GAAP requires that companies assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence, both positive and negative, that can be objectively verified.  At September 30, 2015 and December 31, 2014 there was no valuation allowance for the Company’s deferred tax assets.  The Company’s deferred tax assets totaled $21.4 million at September 30, 2015, and $24.9 million at December 31, 2014.

The Company is subject to income taxation by both federal and state taxing authorities.  Income tax returns for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 are open to audit by federal and state taxing authorities.  The Company does not have any uncertain income tax positions and has not accrued for any interest or penalties as of September 30, 2015 and December 31, 2014.

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”).

Note 7.  Goodwill and Other Intangible Assets

At September 30, 2015 and December 31, 2014 the balance of goodwill was $24.9 million.  Other intangible assets consist of core deposit intangibles (“CDI”), which are attributable to the acquisition of core deposit balances, including those acquired in the MISN Transaction.  CDI assets are subject to amortization.  At September 30, 2015 and December 31, 2014 the balance of CDI was $4.6 million, and $5.3 million, respectively.  Amortization of CDI for the nine months ended September 30, 2015 and 2014 was approximately $0.8 million during both periods.

The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount of CDI as of September 30, 2015, and provides an estimate for future amortization for 2015 and the next five years:

	September 30, 2015
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(4,701)	$	4,560

	September 30, 2015
	Beginning Balance		Estimated Remaining Amortization		Projected Ending Balance
	(dollars in thousands)
Period
Year 2015	$	4,560	$	(262)	$	4,298
Year 2016	4,298		(944)		3,354
Year 2017	3,354		(588)		2,766
Year 2018	2,766		(549)		2,217
Year 2019	2,217		(522)		1,695
Year 2020	1,695		(441)		1,254

Heritage Oaks Bancorp | - 32 -

Note 8.  Share-Based Compensation Plans

As of September 30, 2015, the Company had one active share-based employee compensation plan, which was approved by the Company’s shareholders in May 2015.  This plan, referred to as the “2015 Equity Incentive Plan,” authorizes the Company to grant various types of share-based compensation awards to the Company’s employees and Board of Directors such as stock options, and restricted stock awards.  Under the 2015 Equity Incentive Plan a maximum of 2,500,000 shares of the Company’s common stock may be issued.  Shares issued under this plan, other than stock options and stock appreciation rights, are counted against the plan on a two shares for every one share actually issued basis.  Awards that are cancelled, expired, forfeited, fail to vest, or otherwise result in issued shares not being delivered to the grantee, are again made available for the issuance of future share-based compensation awards.  Additionally, under this plan, no one individual may be granted shares in aggregate that exceed more than 250,000 shares during any calendar year.  The Company’s Board of Directors may terminate the 2015 Equity Incentive Plan at any time, and for any reason before the plan expires on December 3, 2024.

The Company also has two non-active share-based compensation plans, which are more fully described in Note 12. Share-Based Compensation Plans, of the condensed consolidated financial statements in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2014.  These plans include the “1997 Stock Option Plan” and the “2005 Equity Based Compensation Plan.”  As of September 30, 2015 no further grants can be made from either of these plans.

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,
	2015		2014		2015		2014
	(dollars in thousands)
Share-based compensation expense:
Stock options	$	126	$	109	$	374	$	370
Restricted stock	153		148		440		353
Total expense	$	279	$	257	$	814	$	723
Unrecognized compensation expense:
Stock options	$	1,133	$	1,156
Restricted stock	982		1,067
Total unrecognized expense	$	2,115	$	2,223

At September 30, 2015 unrecognized compensation expense related to non-vested stock options and restricted stock awards is expected to be recognized over weighted average periods of 2.8 years and 1.9 years, respectively.

Restricted Stock Awards

The Company grants restricted stock periodically 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, 2014	206,443	$	6.65
Granted	84,951	7.87
Vested	(88,534)	6.49
Forfeited	(30,121)	7.10
Balance September 30, 2015	172,739	$	7.26

Included in the table above are performance-based grants of restricted stock totaling 23,408 shares as of September 30, 2015.

Heritage Oaks Bancorp | - 33 -

Note 8.  Share-Based Compensation Plans - continued

Stock Options

Stock options are granted periodically for the benefit of employees.  The fair value of each stock option award is determined on the date of grant using the Black-Scholes option valuation model, which uses assumptions outlined in the table above.  Expectations for volatility are based on the historical volatility of the Company’s common stock.  The Company estimates forfeiture rates based on historical employee option exercise and termination experience.  The Company recognizes share-based compensation costs on a straight line basis over the vesting period of the award, which is typically a period of three to five years.

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

	For the Nine Months Ended
	September 30,
	2015		2014
Expected volatility	36.38%		49.83%
Expected term (years)	5.00		5.66
Dividend yield	2.82%		0.59%
Risk free rate	1.54%		1.76%
Weighted-average grant date fair value	$	1.97	$	3.39

The following table provides a summary of activity related to options granted, exercised, and forfeited during the nine months ended September 30, 2015:

	Options Outstanding			Options
	Number	Weighted Average		Available for
	of Shares	Exercise Price		Grant (1)
Balance, December 31, 2014	742,557	$	6.83	2,003,176
Granted	375,429	7.70
Forfeited	(98,352)	6.94
Exercised	(47,554)	4.90
Expired	(11,812)	13.18
Balance,  September 30, 2015	960,268	$	7.18	2,235,402

(1)    Shares available for grant as of December 31, 2014 were from the 2005 Equity Based Compensation Plan, which expired in March 2015.  As of September 30, 2015, no further grants can be made from that plan.  Shares available for grant as of September 30, 2015 are from the 2015 Equity Incentive Plan, which was approved by the Company’s shareholders in May 2015.

The following table provides a summary of the aggregate intrinsic value of options vested and expected to vest and exercisable as of September 30, 2015:

	September 30, 2015
				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	908,273	$	7.16	7.92	$	1,028,678
Exercisable	350,160	$	6.81	6.09	$	705,664

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 $153 thousand for the nine months ended September 30, 2015.

Heritage Oaks Bancorp | - 34 -

Note 9.  Shareholders’ Equity

Regulatory Capital

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

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

·A new Common Equity Tier I (“CET I”) capital measure, with a minimum ratio requirement of 4.5% CET I to risk-weighted assets, and for Prompt Corrective Action purposes 6.5% or greater to generally be considered “well-capitalized.”

·A capital conservation buffer in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019.  The capital conservation buffer does not begin phasing-in until January 1, 2016.

·Changes to the calculation of risk-weighted assets from the current four categories (0%, 20%, 50% and 100%) to a much broader and risk-sensitive number of categories.

·The inclusion of certain changes in accumulated other comprehensive income (“AOCI”) in the determination of regulatory capital measures; however, “non-advanced approaches banking organizations,” including the Company and the Bank may make a one-time permanent election, as of January 1, 2015, to exclude these changes in AOCI from the determination of regulatory capital.  The Company, including the Bank, has made this election.

·An exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets, and intangible assets.

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

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

	Basel III			Pre-Basel III
	Regulatory			Regulatory
	Standard to be			Standard to be
	Well	September 30, 2015		Well	December 31, 2014		September 30, 2014
	Capitalized (1)	Company	Bank	Capitalized (1)	Company	Bank	Company	Bank
Ratio
Common Equity Tier I capital	6.50%	12.81%	12.52%	N/A	N/A	N/A	N/A	N/A
Leverage ratio	5.00%	9.96%	9.44%	5.00%	10.22%	9.83%	10.00%	9.77%
Tier I capital	8.00%	13.20%	12.52%	6.00%	13.13%	12.63%	12.87%	12.58%
Total risk-based capital	10.00%	14.46%	13.77%	10.00%	14.38%	13.88%	14.12%	13.83%

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

Heritage Oaks Bancorp | - 35 -

Note 9.  Shareholders’ Equity - continued

Preferred Stock

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

On June 4, 2015, the holder of the Company’s Series C Convertible Perpetual Preferred Stock (“Series C Preferred Stock”) completed the exchange of its remaining 348,697 shares of Series C Preferred Stock for shares of the Company’s common stock on a one-for-one exchange ratio basis.  As of September 30, 2015, there were no shares of the Company’s Series C Preferred Stock issued and outstanding.

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.  As a result, the Series C Preferred Stock was issued with a beneficial conversion feature associated with it.  In connection with the exchange of all remaining outstanding shares of the Series C Preferred Stock on June 4, 2015, the Company recorded the remaining beneficial conversion feature of $70 thousand during the second quarter of 2015 through a charge to retained earnings.

Cash Dividends

On March 2, 2015, the Company paid a cash dividend of $0.05 per share to holders of the Company’s common stock and Series C Preferred Stock as of February 16, 2015.

On June 1, 2015, the Company paid a cash dividend of $0.06 per share to holders of the Company’s common stock and Series C Preferred Stock as of May 15, 2015.

On August 31, 2015, the Company paid a cash dividend of $0.06 per share to holders of the Company’s common stock as of August 17, 2015.

As discussed in Note 13. Subsequent Events, of these condensed consolidated financial statements, on October 28, 2015, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2015, to shareholders of the Company’s common stock as of November 16, 2015.

During the three and nine months ended September 30, 2014, the Company paid a cash dividend of $0.03 per share to holders of the Company’s common stock and Series C Preferred Stock.

Stock Repurchase Program

In June 2015, the Company announced it had amended its previously announced plan for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18.  Repurchase program activity pursuant to the amended plan commenced on July 1, 2015 and will continue in effect until January 31, 2016 or expire earlier upon completion of the repurchase of $5.0 million of the Company’s common stock, as well as under certain other circumstances set forth in the repurchase plan agreement. The Company has no obligation to repurchase any shares under this program, and may suspend or discontinue it at any time.  All shares repurchased as part of the repurchase program will be cancelled, and therefore no longer available for reissuance.

As of September 30, 2015, the Company had repurchased 55,428 shares of its common stock under this plan at an average price of $7.47 per share.  Repurchases of common stock during the first nine months of 2015 totaled 3,696 shares, and were purchased at an average price of $7.52 per share.  There were no repurchases of common stock during the third quarter of 2015.

Heritage Oaks Bancorp | - 36 -

Note 10.  Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted-average number of common and participating preferred shares outstanding for the reporting period, including the Series C Preferred Stock.  Diluted earnings per common share are computed by dividing net income 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, and other share-based compensation.  The computation of diluted earnings per common share excludes the impact of the assumed exercise or issuance of securities that would have an anti-dilutive effect.

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

	For the Three Months Ended September 30,
	2015			2014
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands, except per share data)
Net income	$	4,002		$	3,429
Accretion on preferred stock	-			-
Net income available to common shareholders	$	4,002		$	3,429
Weighted average shares outstanding			34,158,081			33,992,465
Basic earnings per common share	$	0.12		$	0.10
Dilutive effect of share-based compensation awards			124,286			153,735
Weighted average diluted shares outstanding			34,282,367			34,146,200
Diluted earnings per common share	$	0.12		$	0.10

	For the Nine Months Ended September 30,
	2015			2014
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands, except per share data)
Net income	$	11,871		$	4,613
Accretion on preferred stock	70			-
Net income available to common shareholders	$	11,801		$	4,613
Weighted average shares outstanding			34,111,079			32,322,194
Basic earnings per common share	$	0.35		$	0.14
Dilutive effect of share-based compensation awards			147,285			197,324
Weighted average diluted shares outstanding			34,258,364			32,519,518
Diluted earnings per common share	$	0.34		$	0.14

For the three and nine months ended September 30, 2015 and 2014, common stock equivalents totaling approximately 126,000 shares and 160,000 shares and 35,000 shares and 114,000 shares respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.

Note 11.  Commitments and Contingencies

In the normal course of business, various claims and lawsuits are brought by and against the Company. At September 30, 2015, the Company does not believe the disposition of all pending or threatened proceedings will have a material effect on the Company’s condensed consolidated financial statements.

Heritage Oaks Bancorp | - 37 -

Note 11.  Commitments and Contingencies - continued

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 Company’s condensed consolidated financial statements.

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’s management evaluates each customer’s credit worthiness on a case-by-case basis, and determines the amount of collateral deemed adequate to secure the loan, if collateral security is determined to be necessary for the particular loan.  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 it does for loans reflected in the Company’s condensed consolidated financial statements.

As of September 30, 2015, and December 31, 2014, the Company had the following outstanding financial commitments:

	September 30,		December 31,
	2015		2014
	(dollars in thousands)
Commitments to extend credit	$	270,024	$	237,733
Standby letters of credit (1)	12,960		15,542
Total commitments and standby letters of credit	$	282,984	$	253,275

(1)Includes a standby letter of credit to one customer in the amount of $10.4 million at September 30, 2015 and December 31, 2014.

Commitments to extend credit and standby letters of credit are made at both fixed and variable rates of interest.  At September 30, 2015 and December 31, 2014, the Company had $26.3 million and $35.7 million in fixed rate commitments, and $256.7 million and $217.5 million in variable rate commitments.

Note 12. Regulatory Matters

BSA Consent Order

On November 5, 2014, the Bank entered into a Stipulation to the Issuance of a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Business Oversight (“DBO”), consenting to the issuance of a consent order (“the BSA 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 BSA Consent Order, the Bank must review, update and implement an enhanced Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) risk assessment process based on the 2010 Federal Financial Institutions Examination Council BSA/AML Examination Manual. Some of the areas highlighted in the BSA 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 BSA Consent Order remains outstanding.  The Company continues to make progress in addressing the issues identified in the BSA Consent Order that was entered into with its regulators in November of 2014.  However, the Company still has additional work to do in order to fully remediate the issues identified in the BSA Consent Order.  Compliance and resolution of the BSA Consent Order will ultimately be determined by the FDIC and DBO.

Note 13. Subsequent Events

Dividend Declaration

On October 28, 2015, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2015, to shareholders of the Company’s common stock as of November 16, 2015.

Heritage Oaks Bancorp | - 38 -

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: renewed softness in the economy, and the response of federal and state governments and our banking regulators thereto; the effect of the current low interest rate environment or changes in interest rates on our net interest margin; changes in the Company’s business strategy or development plans; our ability to attract and retain qualified employees; the threat and impact of cyber-attacks on our and our third party vendors information technology infrastructure; any compromise in the secured transmission of confidential information over public networks; 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 BSA Consent Order remains outstanding, and that we will be unable to comply with the requirements set forth in the BSA 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, 2014, filed by the Company with the U.S. Securities and Exchange Commission on March 6, 2015. 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.

Heritage Oaks Bancorp | - 39 -

Executive Overview

This overview of management’s discussion and analysis, highlights select 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 the Company’s financial condition, results of operations, trends, commitments, uncertainties, liquidity, capital resources, critical accounting policies and estimates, as well as risk factors you should carefully read this entire document.  Each of these items could have an impact on the Company’s condensed consolidated financial results.

Heritage Oaks Bancorp is a California corporation organized in 1994 to act as a holding company for Heritage Oaks Bank, which was founded in 1983, and serves San Luis Obispo, Santa Barbara and Ventura counties.  As of September 30, 2015, the Bank operated two branch offices each in Paso Robles, and San Luis Obispo; single branch offices in Atascadero, Templeton, Cambria, Morro Bay, Arroyo Grande, Santa Maria, Goleta and Santa Barbara; as well as a single loan production office in Ventura/Oxnard.

The principal business of the Bank consists of attracting deposits and investing these funds primarily in commercial real estate and commercial business loans, loans secured by first mortgages on one-to-four family residences, operating and real estate procurement loans for agricultural businesses, multi-family residential property loans and a variety of consumer loans.  The Bank also originates one-to-four family residential mortgages for sale in the secondary market.  The Bank received approval to sell home loans directly to Fannie Mae in 2014.  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 periodically accepts brokered deposits.

Other than holding the shares of the Bank, the Bancorp conducts no significant activities.  As a bank holding company, the 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, the Bancorp formed Heritage Oaks Capital Trust II.  This trust 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 the Bancorp, the sole purpose of which is to issue trust preferred securities.  In conjunction with our acquisition of Mission Community Bank (discussed below), the Bancorp assumed two additional trusts: Mission Community Capital Trust I, and Santa Lucia Bancorp (CA) Capital Trust, 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”, or the “MISN Transaction”).  The total value of the transaction was $69.0 million, which was comprised of cash of $8.7 million and 7,541,326 shares of the Bancorp’s common stock valued at $60.3 million, based on the $7.99 closing price of the Bancorp’s common stock on February 28, 2014.  The operating results of MISN beginning on March 1, 2014 are included in the Company’s condensed consolidated financial statements included in this Form 10-Q for the three and nine months ended September 30, 2015, and 2014, respectively.

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 the maturities within the loan portfolio, and to benefit from the low cost deposits associated with non-interest bearing demand accounts connected to 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.  We have more recently recruited bankers with experience and knowledge of commercial and industrial lending in the markets we serve, in order to promote growth in this segment of our loan portfolio.

·Enhance the residential lending product mix and loan sale alternatives. The Bank is currently able to originate and sell qualified loans directly to various investors.

Heritage Oaks Bancorp | - 40 -

·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.

The comparability of the Company’s operating results for the three and nine months ended September 30, 2015 and 2014 is significantly impacted by the Company’s acquisition of MISN on February 28, 2014.

Financial Highlights

The Company generated net income available to common shareholders of $4.0 million or $0.12 per diluted common share, and $11.8 million or $0.34 per diluted common share for the three and nine months ended September 30, 2015, respectively as compared to net income available to common shareholders of $3.4 million or $0.10 per diluted common share and $4.6 million or $0.14 per diluted common share for the same periods ended a year earlier.

Significant factors impacting the Company’s net income during the quarter ended September 30, 2015 are discussed below:

·Net interest income was $15.4 million, or 3.58% of average interest earning assets (“net interest margin” or “NIM”), for the third quarter of 2015 compared with net interest income of $15.6 million, and a 3.98% NIM, for the same period a year earlier.  Net interest income was $46.1 million, and our NIM was 3.72% for the year to date period through September 30, 2015, compared with $43.2 million, and a 3.98% NIM, for the same prior year period.  The decline in our NIM for the three and nine months ended September 30, 2015, as compared to the same periods in 2014, was primarily due to declining loan yields and a decline in the yield on investment securities, stemming from the prevailing low interest rate environment.  Although the decline in loan yields and the yield on investment securities negatively impacted our NIM, the impact on net interest income was partially offset by a $155.9 million increase in average earning assets, attributable primarily to a $88.2 million increase in average loans, and a $40.2 million increase in average investment securities, as compared to the third quarter of 2014.  The combined impact of the decline in loan and investment securities yields, and the increase in average earning assets resulted in a decline of $0.2 million in the level of net interest income for the third quarter of 2015 as compared to the third quarter of 2014.  The increase in net interest income for the nine months ended September 30, 2015 as compared to the same period a year ago is primarily due to the inclusion of MISN’s earning assets for nine full months in 2015 versus just seven months in 2014.  This was also the primary driver of a $208.3 million year over year increase in average earning assets.

·Non-interest expense declined by $1.2 million or 9.2%, and $8.0 million or 18.5% to $12.2 million, and $35.4 million for the three and nine months ended September 30, 2015, respectively, compared to $13.4 million, and $43.4 million for the three and nine months ended September 30, 2014, respectively.  The decrease in non-interest expense for the third quarter of 2015 as compared to the third quarter a year ago was largely the result of a $0.8 million decrease of merger, restructure, and integration costs related to the MISN Transaction, and a $0.6 million decrease of salaries and employee benefits costs attributable to the consolidation of our branch network in the latter part of 2014.  These decreases were partially offset by an increase in professional services costs of $0.4 million.  The decrease in non-interest expense for the first nine months of 2015 is primarily due to an $8.9 million decrease in merger, restructure, and integration costs, offset by a $1.7 million increase in professional services expense.

·No provisions for loan and lease losses were recorded for the three and nine months ended September 30, 2015 and 2014.  The Company has not required a loan and lease loss provision since 2012 due to stabilization in the level of classified loans, a continued overall improvement in the credit quality of the loan portfolio, and declining levels of specific reserves for impaired loans.  As of September 30, 2015, MISN legacy loans have $0.5 million or a 0.26%, allowance for loan and lease losses (“ALLL”) allocated to them.  Additionally, the un-accreted purchase discounts on these loans represents 3.00% of the remaining balance of loans acquired through the MISN Transaction.

·Non-interest income decreased by $0.2 million to $2.8 million for the third quarter of 2015, and increased by $0.9 million to $8.1 million for the first nine months of 2015, compared to $3.0 million, and $7.2 million for the same prior year periods, respectively.  The decrease in non-interest income for the current quarter, as compared to the third quarter of 2014, is primarily a result of lower gains on the sale of investment securities, lower fees and service charge income, and a decrease in other income attributable to fewer recoveries on fully charged-off MISN loans that had no value at the time of the MISN Transaction.  These decreases were partially offset by gains on the extinguishment of debt, primarily attributable to the redemption of junior subordinated debentures during the third quarter of 2015.  The increase in non-interest income for the first nine months of 2015 is primarily due to increases in gain on sale of mortgage loans and other mortgage fee income, gains recorded on the extinguishment of debt, and gains on the sale of investment securities.

Heritage Oaks Bancorp | - 41 -

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, 2014.

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.

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.

Allowance for Loan and Lease Losses

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

As also discussed in Note 1. Summary of Significant Accounting Policies, of the condensed consolidated financial statements during the third quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the allowance for loan and lease losses (“ALLL”).  This enhancement related specifically to the methodology used to calculate the loss rates for loan risk grades within each loan type in the determination of the general reserve component of the ALLL.  The enhanced methodology uses more granular loan level data to calculate loss rates for specific loan grades within each loan type, allowing for more detailed loan migration analysis, and the ability to determine more precise average loss rates for each loan risk grade.  Although the total general reserve component of the ALLL for each loan type and portfolio segment is still based on total average historical losses for their respective loan types, management believes the allocation of the ALLL to each loan risk grade, within each loan type and the evaluation of the loss emergence period has become more precise under this methodology enhancement.

The implementation of the ALLL model enhancements did not result in a required increase or decrease in the balance of the ALLL, or a material impact to the overall allocation of the ALLL.  The ALLL model enhancement has allowed the Company to apply more precision in determining loss rates for specific loan grades within each loan type.  Sections of the accounting policy for the ALLL, which have been updated to reflect the methodology enhancement, are provided in Note 1. Summary of Significant Accounting Policies, of the condensed consolidated financial statements, filed as part of this Form 10-Q.

The general portfolio component of the ALLL is determined by pooling 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 a migration analysis of historical loss rates for each segment of the loan portfolio, based on the Company’s prior experience with such loans.  In addition, adjustments are made to historical loss factors, based on the qualitative analysis of certain internal and external factors that may have either a positive or negative impact on the overall credit quality of the loan portfolio.

Loans and leases acquired through purchase or through a business combination, such as those acquired in the MISN Transaction, 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.  These loans include purchased credit impaired loans (“PCI loans”), which are accounted for under ASC 310-30, and all other loans acquired without impairment indicators, and not accounted for within the scope of ASC 310-30, (“non-PCI loans”).  Should the Company’s ALLL methodology indicate that the credit discount associated with acquired, non-PCI loans, is no longer sufficient to cover probable losses inherent in those loans, the Company establishes an ALLL for those loans through a charge to provision for loan and lease losses. 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 PCI loans, while all other acquired loans are classified as non-PCI loans.

Heritage Oaks Bancorp | - 42 -

The Company has elected to account for PCI loans at an individual loan level.  The Company estimates the amount and timing of expected cash flows for each loan.  The expected cash flow in excess of the loan’s carrying value, which is fair value on the date of acquisition, is referred to as the accretable yield, and is recorded as interest income over the remaining expected 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 condensed consolidated 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, other than due to decreases in interest rates and prepayment assumptions, an ALLL is recorded with a charge to current period earnings through a provision for loan and lease losses.  If there has been a probable and significant increase in expected future cash flows over that which was previously expected, the Company will first reduce any previously established ALLL, and then record an adjustment to interest income through a prospective increase in the accretable yield.

Because of all the variables that go into the determination of both the specific and general allocation components of the ALLL, it is reasonably possible that the ALLL 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 as part of this Form 10-Q.

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, U.S. 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 assets.  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.  As of December 31, 2014, adjustments to the fair value of assets acquired and liabilities assumed in the MISN Transaction were complete.  See also Note 2. Business Combination, of the condensed consolidated financial statements filed as part of 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 as part of 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 actively 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 as part of 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.

Heritage Oaks Bancorp | - 43 -

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
	9/30/2015		6/30/2015		3/31/2015		12/31/2014		9/30/2014
	(dollars in thousands, except per share data)
Consolidated Income Data
Interest income	$	16,957	$	16,741	$	16,928	$	17,064	$	16,895
Interest expense	1,561		1,499		1,430		1,338		1,324
Net interest income	15,396		15,242		15,498		15,726		15,571
Provision for loan and lease losses	-		-		-		-		-
Net interest income after provision for loan and lease losses	15,396		15,242		15,498		15,726		15,571
Non-interest income	2,806		2,271		3,001		2,354		2,982
Non-interest expense	12,151		11,429		11,813		11,385		13,382
Income before income tax expense	6,051		6,084		6,686		6,695		5,171
Income tax expense	2,049		2,284		2,617		2,343		1,742
Net income	4,002		3,800		4,069		4,352		3,429
Accretion on preferred stock	-		70		-		168		-
Net income available to common shareholders	$	4,002	$	3,730	$	4,069	$	4,184	$	3,429
Share and Per Share Data
Earnings per common share - basic	$	0.12	$	0.11	$	0.12	$	0.13	$	0.10
Earnings per common share - diluted	$	0.12	$	0.11	$	0.12	$	0.13	$	0.10
Dividends declared per common share	$	0.06	$	0.06	$	0.05	$	0.05	$	0.03
Divdend payout ratio	50.70%		54.16%		42.10%		39.40%		29.95%
Common book value per share	$	5.98	$	5.89	$	5.92	$	5.81	$	5.76
Tangible common book value per share	$	5.12	$	5.02	$	5.03	$	4.92	$	4.85
Actual shares outstanding at end of period	34,352,445		34,314,242		33,950,518		33,905,060		33,082,205
Weighted average shares outstanding - basic	34,158,081		34,105,192		34,107,168		33,301,966		33,992,465
Weighted average shares outstanding - diluted	34,282,367		34,249,591		34,266,482		33,433,813		34,146,200
Selected Consolidated Balance Sheet Data
Total cash and cash equivalents	$	112,270	$	129,013	$	75,478	$	35,580	$	50,827
Total investments and other securities	$	432,750	$	379,824	$	364,498	$	355,580	$	382,437
Total gross loans held for investment	$	1,206,740	$	1,191,153	$	1,207,319	$	1,193,483	$	1,151,576
Allowance for loan and lease losses	$	(17,296)	$	(16,982)	$	(16,913)	$	(16,802)	$	(16,787)
Total assets	$	1,873,925	$	1,828,379	$	1,776,594	$	1,710,127	$	1,716,224
Total deposits	$	1,571,770	$	1,511,639	$	1,460,268	$	1,394,804	$	1,422,934
Federal Home Loan Bank borrowings	$	78,546	$	93,550	$	93,554	$	95,558	$	75,562
Junior subordinated debt	$	10,389	$	13,338	$	13,286	$	13,233	$	13,179
Total shareholders’ equity	$	205,458	$	202,082	$	201,943	$	197,940	$	194,119
Average assets	$	1,844,742	$	1,796,615	$	1,740,486	$	1,712,605	$	1,691,508
Average earning assets	$	1,708,398	$	1,664,972	$	1,605,435	$	1,577,563	$	1,552,548
Average shareholders’ equity	$	204,063	$	202,481	$	199,807	$	196,238	$	193,061
Selected Financial Ratios
Return on average assets	0.86%		0.85%		0.95%		1.01%		0.80%
Return on average equity	7.78%		7.53%		8.26%		8.80%		7.05%
Return on average tangible common equity	9.10%		8.71%		9.79%		10.20%		8.55%
Net interest margin (1)	3.58%		3.67%		3.92%		3.95%		3.98%
Efficiency ratio (2)	67.81%		64.04%		64.13%		61.67%		71.90%
Non-interest expense to average assets	2.61%		2.55%		2.75%		2.64%		3.14%
Capital Ratios
Average equity to average assets	11.06%		11.27%		11.48%		11.46%		11.41%
Common Equity Tier 1 Capital ratio	12.81%		12.96%		12.50%		N/A		N/A
Leverage ratio	9.96%		10.22%		10.38%		10.22%		10.00%
Tier 1 Risk-Based Capital ratio	13.20%		13.55%		13.12%		13.13%		12.87%
Total Risk-Based Capital ratio	14.46%		14.80%		14.36%		14.38%		14.12%
Selected Asset Quality Ratios
Non-performing loans to total gross loans (3)	0.83%		0.97%		0.98%		0.88%		0.89%
Non-performing assets to total assets (4)	0.55%		0.65%		0.69%		0.62%		0.60%
Allowance for loan and lease losses to total gross loans	1.43%		1.43%		1.40%		1.41%		1.46%
Net recoveries to average loans	-0.11%		-0.02%		-0.04%		-0.01%		-0.06%

(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 percentage of the combined: net interest income, non-interest income, excluding gains and losses on the sale of securities, gains and losses on the sale of other real estate owned (“OREO”), write-downs on OREO, OREO related costs, gains and losses on the sale of fixed assets, and amortization of intangible assets.

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

(4)Non-performing assets are defined as all non-performing loans, and OREO assets.

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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 (“NIM”) 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.

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, 2015					September 30, 2014
			Yield/	Income/				Yield/	Income/
	Balance		Rate (4)	Expense		Balance		Rate (4)	Expense
	(dollars in thousands)
Interest Earning Assets
Interest earning deposits in other banks	$	99,812	0.23%	$	58	$	72,348	0.20%	$	36
Investment securities	414,519		1.78%	1,864		374,359		2.06%	1,946
Other investments	9,838		10.24%	254		9,839		6.77%	168
Loans (1) (2)	1,184,229		4.95%	14,781		1,096,002		5.34%	14,745
Total interest earning assets	1,708,398		3.94%	16,957		1,552,548		4.32%	16,895
Allowance for loan and lease losses	(17,216)					(16,696)
Other assets	153,560					155,656
Total assets	$	1,844,742				$	1,691,508
Interest Bearing Liabilities
Interest bearing demand	$	118,441	0.11%	$	32	$	106,382	0.11%	$	30
Savings	103,891		0.10%	26		104,757		0.10%	26
Money market	526,657		0.27%	355		438,824		0.29%	317
Time deposits	256,554		0.82%	528		289,886		0.75%	545
Total interest bearing deposits	1,005,543		0.37%	941		939,849		0.39%	918
Federal Home Loan Bank borrowing	86,157		2.25%	489		65,824		1.59%	264
Junior subordinated debentures	11,726		4.43%	131		13,145		4.29%	142
Total borrowed funds	97,883		2.51%	620		78,969		2.04%	406
Total interest bearing liabilities	1,103,426		0.56%	1,561		1,018,818		0.52%	1,324
Non interest bearing demand	528,354					467,868
Total funding	1,631,780		0.38%	1,561		1,486,686		0.35%	1,324
Other liabilities	8,899					11,761
Total liabilities	1,640,679					1,498,447
Shareholders’ Equity
Total shareholders’ equity	204,063					193,061
Total liabilities and shareholders’ equity	$	1,844,742				$	1,691,508
Net interest margin (3)			3.58%	$	15,396			3.98%	$	15,571
Interest rate spread			3.38%					3.80%
Cost of deposits			0.24%					0.26%

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

(2)Interest income includes fees on loans.

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

(4)Annualized using actual number days during the period presented.

Heritage Oaks Bancorp | - 45 -

	For the Nine Months Ended					For the Nine Months Ended
	September 30, 2015					September 30, 2014
			Yield/	Income/				Yield/	Income/
	Balance		Rate (4)	Expense		Balance		Rate (4)	Expense
	(dollars in thousands)
Interest Earning Assets
Interest earning deposits in other banks	$	73,197	0.20%	$	112	$	57,818	0.18%	$	77
Investment securities	379,228		1.83%	5,193		343,561		2.08%	5,355
Other investments	9,838		11.78%	867		8,920		6.86%	458
Loans (1) (2)	1,197,715		4.96%	44,454		1,041,358		5.28%	41,134
Total interest earning assets	1,659,978		4.08%	50,626		1,451,657		4.33%	47,024
Allowance for loan and lease losses	(17,040)					(17,559)
Other assets	151,391					140,930
Total assets	$	1,794,329				$	1,575,028
Interest Bearing Liabilities
Interest bearing demand	$	117,696	0.11%	$	97	$	101,677	0.11%	$	83
Savings	98,142		0.10%	73		92,013		0.10%	67
Money market	499,357		0.27%	1,027		407,086		0.31%	931
Time deposits	268,413		0.77%	1,551		276,912		0.76%	1,580
Total interest bearing deposits	983,608		0.37%	2,748		877,688		0.41%	2,661
Federal Home Loan Bank borrowing	93,197		1.91%	1,328		77,548		1.38%	801
Junior subordinated debentures	12,756		4.34%	414		12,061		3.96%	357
Total borrowed funds	105,953		2.20%	1,742		89,609		1.73%	1,158
Total interest bearing liabilities	1,089,561		0.55%	4,490		967,297		0.53%	3,819
Non interest bearing demand	493,447					419,949
Total funding	1,583,008		0.38%	4,490		1,387,246		0.37%	3,819
Other liabilities	9,188					10,331
Total liabilities	1,592,196					1,397,577
Shareholders’ Equity
Total shareholders’ equity	202,133					177,451
Total liabilities and shareholders’ equity	$	1,794,329				$	1,575,028
Net interest margin (3)			3.72%	$	46,136			3.98%	$	43,205
Interest rate spread			3.53%					3.80%
Cost of deposits			0.25%					0.27%

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

(2)Interest income includes fees on loans.

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

(4)Annualized using actual number days during the period presented.

Heritage Oaks Bancorp | - 46 -

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
	September 30, 2015
	Volume		Rate		Rate/Volume		Total
	(dollars in thousands)
Interest Income
Interest bearing deposits in other banks	$	14	$	5	$	3	$	22
Investment securities	209		(264)		(27)		(82)
Other investments	-		86		-		86
Loans	1,187		(1,077)		(74)		36
Net increase (decrease)	1,410		(1,250)		(98)		62
Interest Expense
Interest bearing demand	3		-		(1)		2
Savings	-		-		-		-
Money market	63		(22)		(3)		38
Time deposits	(63)		51		(5)		(17)
Federal Home Loan Bank borrowing	82		110		33		225
Long term borrowings	(15)		5		(1)		(11)
Net increase	70		144		23		237
Total net increase (decrease)	$	1,340	$	(1,394)	$	(121)	$	(175)

	For the Nine Months Ended
	September 30, 2015
	Volume		Rate		Rate/Volume		Total
	(dollars in thousands)
Interest Income
Interest bearing deposits in other banks	$	20	$	13	$	2	$	35
Investment securities	556		(642)		(76)		(162)
Other investments	47		328		34		409
Loans	6,176		(2,492)		(364)		3,320
Net increase (decrease)	6,799		(2,793)		(404)		3,602
Interest Expense
Interest bearing demand	13		-		1		14
Savings	4		-		2		6
Money market	211		(91)		(24)		96
Time deposits	(48)		21		(2)		(29)
Federal Home Loan Bank borrowing	162		302		63		527
Long term borrowings	21		34		2		57
Net increase	363		266		42		671
Total net increase (decrease)	$	6,436	$	(3,059)	$	(446)	$	2,931

Heritage Oaks Bancorp | - 47 -

Average loan yields declined by 39 basis points to 4.95%, and by 32 basis points to 4.96% for the three and nine months ended September 30, 2015, respectively, compared to the same prior year periods.  The historically low interest rate environment continued to have an adverse impact on yields of new and renewing loans during the first nine months of 2015.  Long-term interest rates have generally declined during 2015 as compared to 2014.  For example, the 10 year treasury yield was nearly 3.00% on January 1, 2014, and has declined to 2.06% at September 30, 2015. The result of a declining prevailing rate environment on our loan portfolio is that the loans that prepay have been at higher average yields than the yields generated from new loan originations, and renewals.  This trend continued during the first nine months of 2015 and is evidenced by the decline in the yield of newly originated loans, which averaged 4.05% for the first nine months of 2015 as compared to an average yield of 4.37% for the same period in 2014.  Loan prepayments also contributed to the decline of average loan yields for the first nine months of 2015 when compared to the same period a year earlier.  Loan prepayments were $110.0 million and yielded an average of 4.74% for the first nine months of 2015, compared to $95.8 million, yielding on average 5.28% for the same prior year period.  Offsetting the decline in loan yields in the third quarter of 2015 was an increase in prepayment penalty income, as well as interest recoveries on the payoff of non-performing loans, together totaling $0.4 million and positively impacting loan yields by approximately 14 basis points.

Loan yields and our NIM have benefitted from the discount accretion from the acquired MISN loan portfolio since March 1, 2014 and this discount accretion has muted the impact of the historically low interest rate environment on our loan yields for the three and nine month periods ended September 30, 2015, and the same periods ended a year earlier.  Total discount accretion from acquired loans was $0.5 million, and $0.9 million for the three months ended September 30, 2015 and 2014, respectively; and $1.9 million, and $2.2 million for the nine months ended September 30, 2015 and 2014, respectively.  Purchase discount accretion from acquired loans increased our loan yields by 16 basis points for the third quarter of 2015, and by 30 basis points for the same prior year period, and by 21 basis points for the first nine months of 2015 and by 25 basis points for the same period in 2014.  The primary reason for the decline in purchase discount accretion experienced in the third quarter of 2015, as compared to the third quarter of 2014, was a significant decline in accelerated discount accretion associated with acquired MISN loan prepayment activity.  We anticipate that the amount of purchase discount accretion from loans acquired through the MISN Transaction will continue to decline in future quarters, absent any unscheduled loan pay-offs, and due to the decline in the amount of scheduled discount accretion attributable to the maturity of acquired MISN loans.

Forgone interest on non-accrual and restructured loans continued to negatively impact interest income for the three and nine month periods ended September 30, 2015, and 2014.  Total forgone interest related to non-accrual and restructured 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 $0.6 million, during both the three and nine months ended September 30, 2015 and 2014, respectively.  Total forgone interest on non-accrual and restructured loans reduced the yield on the loan portfolio by 7 basis points for the three months ended September 30, 2015 and 2014, respectively.  For the first nine months of 2015 and 2014, total foregone interest on non-accrual and restructured loans reduced the yield on the portfolio by 7 basis points, and 8 basis points, respectively.

After adjusting for the impacts of purchase discount accretion and the impact of non-accrual and restructured loans, our loan yields would have been 4.85% for the three months ended September 30, 2015, and 5.11% for the same prior year period.  Adjusting for these same impacts, loan yields would have been 4.82%, and 5.04% for the nine months ended September 30, 2015 and 2014, respectively.

The low interest rate environment and relative flatness of interest yield curves during the last couple of years have had a compounding impact on securities’ yields as new investments are typically providing lower yields.  Additionally, during 2015 we reallocated a portion of the securities portfolio into bonds with lower regulatory capital risk weightings, which yield less than the higher risk weighted bonds they replaced.  This was done in an effort to achieve a more favorable risk weighting profile under the new Basel III regulatory capital guidelines.  These factors have resulted in a 28 basis point decrease when comparing our average securities yield of 1.78%, and 1.83%, respectively, for both the three and nine months ended September 30, 2015 to average yields of 2.06% and 2.08%, respectively, for the same prior year periods.

The yield on other investments was 10.24% and 11.78% for the three and nine months ended September 30, 2015, respectively.  This compares to 6.77% and 6.86% for three and nine months ended September 30, 2015 and 2014, respectively. The increase for the three months ended September 30, 2015 can be attributed to a higher dividend rate paid by the Federal Home Loan Bank of San Francisco (“FHLB”).  The increase for the nine months ended September 30, 2015 can also be attributed to the higher dividend rate, in conjunction with a special dividend of $0.3 million paid by the FHLB in June 2015.

Heritage Oaks Bancorp | - 48 -

Our earnings are influenced by changes in interest rates.  The Company is currently in a net asset sensitive position, and a large percentage of our interest sensitive assets and liabilities re-price with changes in interest rates.  A significant portion of the variable rate component of the Company’s loan portfolio has had their interest rates set to their respective contractual interest rate floors.  To the extent that interest rates rise, the Company will not experience the benefit of rising interest rates until such rates rise above contractual 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.

Average interest-earning assets for the three and nine months ended September 30, 2015 increased by $155.9 million, or 10.0%, and by $208.3 million, or 14.4%, respectively, compared to the corresponding periods in 2014.  The increase in average earning assets was primarily driven by growth in the loan portfolio, as well as an increase in the investments portfolio.  Growth in average earning assets for both the three and nine months ended September 30, 2015 was funded primarily through increased average deposit balances.

The average balance of interest-bearing liabilities was $84.6 million, or 8.3%, higher for the three months ended September 30, 2015 as compared to the corresponding period a year earlier.  Average interest-bearing liabilities increased by $122.3 million, or 12.6%, for the nine months ended September 30, 2015 as compared to the same prior year period.  Growth in average interest-bearing liabilities for the third quarter of 2015 was primarily the result of successful deposit gathering activities, while growth for the first nine months of 2015 was due both to the MISN Transaction and deposit gathering activities.

The rate paid on interest bearing deposits declined by 2 and 4 basis points, respectively, to 0.37% for both the three and nine months ended September 30, 2015 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 these 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 have also benefitted from the lower cost of the deposits acquired through the MISN Transaction in both the three and nine month periods ended September 30, 2015, and 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 $60.5 million, or 12.9% to $528.4 million, for the three months ended September 30, 2015 as compared to the same prior year period.  Non-interest bearing deposits increased at a greater rate than the 7.0% increase in our average interest bearing deposits, which also contributed to a more favorable composition of our funding base.  Non-interest bearing demand deposit balances have reduced our funding costs by 18 and 17 basis points for the quarters ended September 30, 2015 and 2014, respectively, and by 17 and 16 basis points for the nine months ended September 30, 2015, and 2014, respectively.  The total cost of funds for the three and nine month periods ended September 30, 2015 was 0.38% representing an increase of 3 basis points as compared to the third quarter of 2014, and an increase of 1 basis point as compared to the first nine months of 2014.  The increase in the cost of funds for the three and nine months ended September 30, 2015, as compared to the same periods in 2014, can be attributed in part to the call of higher cost brokered time deposits and the prepayment of certain higher cost FHLB borrowings during the third quarter of 2015.  These activities were in response to an increase in liquidity stemming from deposit gathering activities during the first nine months of 2015, and loan prepayments during the first half of 2015.  Although these activities are expected to contribute to a reduction in interest expense going forward, they resulted in a $0.2 million increase in interest expense for three and nine months ended September 30, 2015.  The impact of these activities to the cost of funds was approximately 4 basis points and 1 basis point for the three and nine months ended September 30, 2015, respectively.

For the three and nine months ended September 30, 2015, the average rate paid on interest bearing liabilities was 0.56%, and 0.55%, respectively.  The average rate paid on interest bearing liabilities was 0.52%, and 0.53% for the three and nine month periods ended September 30, 2014, respectively.  The benefits from the deposit portfolio rate reductions previously discussed were substantially offset by costs the Company incurred during the third quarter of 2015 to call certain higher cost brokered time deposits and prepay certain higher cost FHLB borrowings, as previously discussed above. The company expects the impact of these activities will contribute to a reduction in the overall cost of interest bearing liabilities going forward.  Additionally, the cost of interest bearing liabilities was impacted by, to a lesser extent, an increase in the cost of other long term borrowings attributable to the MISN junior subordinated debentures purchase discount amortization.

Provision for Loan and Lease Losses

The ALLL is maintained at a level considered by management to be appropriate to provide for probable credit losses inherent in the loan portfolio as of the balance sheet.  Management’s review of the appropriateness of the ALLL includes, among other things, an analysis of past loan loss experience and an evaluation of the loan portfolio under current economic conditions.  See also Note 1. Summary of Significant Accounting Policies, and Note 5. Loans and Allowance for Loan and Lease Losses, of the condensed consolidated financial statements filed as part of this Form 10-Q, for additional detail on the ALLL.

Heritage Oaks Bancorp | - 49 -

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 underlying collateral for such loans.

The Company did not record a provision for loan and lease losses during the three or nine months ended September 30, 2015 and 2014.  The lack of need for additional provisions for the year to date through September 30, 2015 was supported by net recoveries of $0.5 million during the first nine months of 2015.  During the first nine months of 2014 the Company recorded net charge-offs of $1.1 million, however, positive adjustments to the general reserve component of the ALLL driven by a reduction in our historical losses eliminated the need for additional ALLL and related provision expense.  The lack of provision for loan and lease losses is reflective of the continuing improvements in the overall credit quality of the loan portfolio, the improvement in historical losses 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, and qualitative factor adjustments.  As of September 30, 2015, the Company’s ALLL represented 1.43% 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.

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				Variance			Variance
	September 30,				September 30,				For the Three Months			For the Nine Months
	2015		2014		2015		2014		Dollar		Percent	Dollar		Percent
	(dollars in thousands)
Fees and service charges	$	1,219	$	1,410	$	3,639	$	3,949	$	(191)	-13.5%	$	(310)	-7.9%
Gain on extinguishment of debt	552		-		552		-		552		-	552		-
Net gain on sale of mortgage loans	407		411		1,277		967		(4)		-1.0%	310		32.1%
Gain on sale of investment securities	136		450		641		549		(314)		-69.8%	92		16.8%
Other mortgage fee income	92		64		348		223		28		43.8%	125		56.1%
Other income	400		647		1,621		1,533		(247)		-38.2%	88		5.7%
Total	$	2,806	$	2,982	$	8,078	$	7,221	$	(176)	-5.9%	$	857	11.9%

Non-interest income for the third quarter of 2015 decreased by $0.2 million, or 5.9%, as compared to the same period a year earlier.  The decrease in non-interest income for the third quarter of 2015 resulted from a $0.3 million decrease in gains on the sale of investment securities, a $0.2 million reduction in other income, and a $0.2 million decrease in fees and service charges. The decline in other income is attributable to a $0.3 million recovery of a fully charged-off former MISN loan, which was recognized in the third quarter of 2014.  This loan had no value at the time of the MISN Transaction.  The decrease in fees and service charges for the third quarter of 2015, as compared to the same quarter a year ago, was primarily due to the Company exiting certain customers in late 2014, because it was determined that they no longer fit the Company’s risk profile for depository customers.  These reductions were offset largely by a $0.6 million gain on the extinguishment of debt primarily associated with a $3.0 million redemption of junior subordinated debentures during the third quarter of 2015.

Non-interest income for the first nine months of 2015 increased $0.9 million, driven in large part by gain on extinguishment of debt which occurred during the third quarter of 2015 as discussed above, higher mortgage banking revenues, and higher gains on the sale of investment securities.  Higher mortgage banking revenues in the first nine months of 2015 can be attributed to increased mortgage loan production, due to refinance activity, stemming from a decline in long term interest rates over the last year.  Increased gains on the sale of investment securities resulted from the sale of bonds with more cash flow optionality, and therefore more extension risk.  The Company redeployed the cash from these sales into securities with more stable cash flow profiles, and less extension risk. These increases in non-interest income were partially offset by a reduction in fees and service charge income, resulting from the Company exiting certain customers in late 2014 after determining they no longer fit the Company’s risk profile for depository customers.

Heritage Oaks Bancorp | - 50 -

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				Variance			Variance
	September 30,				September 30,				For the Three Months			For the Nine Months
	2015		2014		2015		2014		Dollar		Percent	Dollar		Percent
	(dollars in thousands)
Salaries and employee benefits	$	5,598	$	6,164	$	17,643	$	18,121	$	(566)	-9.2%	$	(478)	-2.6%
Professional services	2,234		1,839		5,342		3,610		395		21.5%	1,732		48.0%
Occupancy and equipment	1,688		1,776		5,023		4,989		(88)		-5.0%	34		0.7%
Information technology	611		756		1,753		2,403		(145)		-19.2%	(650)		-27.0%
Regulatory assessments	298		351		895		862		(53)		-15.1%	33		3.8%
Amortization of intangible assets	263		297		787		760		(34)		-11.4%	27		3.6%
Loan department expense	252		239		798		700		13		5.4%	98		14.0%
Sales and marketing	240		232		852		595		8		3.4%	257		43.2%
Communication costs	150		183		435		450		(33)		-18.0%	(15)		-3.3%
Merger, restructure and integration	(97)		748		(67)		8,785		(845)		-113.0%	(8,852)		-100.8%
Other expense	914		797		1,932		2,132		117		14.7%	(200)		-9.4%
Total	$	12,151	$	13,382	$	35,393	$	43,407	$	(1,231)	-9.2%	$	(8,014)	-18.5%

The $1.2 million decrease in non-interest expense for the third quarter of 2015 as compared to the third quarter a year ago was largely the result of a $0.8 million decline in merger, restructure and integration costs related to the MISN Transaction, a $0.6 million decrease in salaries and employee benefits costs, a $0.1 million decrease in information technology costs, and a decline in occupancy and equipment cost of $0.1 million.  These decreases were offset by a $0.4 million increase in professional services, primarily related to ongoing BSA/AML Program remediation efforts as well as other consulting costs.

The $0.6 million decrease in salaries and benefits costs for the third quarter of 2015 was due in large part to the consolidation of the Bank’s branch network in the latter part of 2014, resulting in a decline in full time-equivalent employees (“FTE”) to 271 at September 30, 2015 as compared to 298 at September 30, 2014, and a reduction in salaries expense of $0.4 million.  Contributing further to the decline in salaries and benefits costs for the third quarter of 2015 were higher deferred loan origination costs, which increased $0.3 million from the third quarter of 2014, resulting from both higher loan production and an update to our deferred salary cost study which resulted in an increase in the “standard” cost deferral for each loan we originate.  These decreases were partially offset by an increase in commissions related to mortgage loan production, which were $0.1 million higher in the third quarter of 2015, as compared to the third quarter of 2014.

The $0.1 million decline in information technology expense for the third quarter of 2015 as compared to the same prior year period was primarily attributable to renegotiated pricing in the contract between the Company and its core operating platform vendor.

Occupancy and equipment costs declined $0.1 million in the third quarter of 2015, resulting from our efforts to consolidate the Bank’s branch network during 2014, reducing overall expenses within this category.

The increase in professional services for the third quarter of 2015 can be attributed in large part to an increase in temporary staff and consulting costs of approximately $0.3 million related to our BSA/AML Program remediation efforts, $0.2 million attributable to information technology services and consulting attributable to the transition of our information technology network management from employees of the Company to an outside firm, and to $0.1 million in increased audit and tax costs attributable to the transition to another outsourced internal audit vendor. Increases in these categories were partially offset by a reduction in legal costs of $0.3 million, which were higher in the third quarter of 2014 due to the successful settlement of certain ongoing litigation.

Heritage Oaks Bancorp | - 51 -

The table below provides a break-down of professional services costs for the periods indicated:

	For the Three Months Ended				For the Nine Months Ended				Variance			Variance
	September 30,				September 30,				For the Three Months			For the Nine Months
	2015		2014		2015		2014		Dollar		Percent	Dollar		Percent
	(dollars in thousands)
Professional Services
BSA/AML related costs	$	598	$	282	$	1,307	$	457	$	316	112.1%	$	850	186.0%
Information technology services and consulting	458		287		1,067		565		171		59.6%	502		88.8%
Audit and tax costs	367		256		888		617		111		43.4%	271		43.9%
Legal costs	319		597		738		574		(278)		-46.6%	164		28.6%
All other costs	492		417		1,342		1,397		75		18.0%	(55)		-3.9%
Total professional services	$	2,234	$	1,839	$	5,342	$	3,610	$	395	21.5%	$	1,732	48.0%

The $8.1 million decrease in non-interest expense for the first nine months of 2015 as compared to the first nine months of 2014 was primarily attributable to an $8.9 million decrease in merger, restructure and integration costs related to the MISN Transaction in 2014.  Other variances for the year to date period included a $1.7 million increase in other professional services, a $0.7 million decrease in information technology expenses, and a $0.5 million reduction in salaries and employee benefits costs.  The increase in professional services consisted of $0.9 million attributable primarily to temporary staff and consulting related to our BSA/AML Program remediation efforts, $0.5 million related to information technology services and consulting attributable in large part to the transition of our information technology network management from employees of the Company to an outside firm, an increase in audit and tax related costs of $0.3 million related to the transition to another outsourced internal audit vendor, and $0.2 million related to increased legal expenses resulting from various litigation during the first nine months of 2015.  The $0.7 million decline in information technology costs was primarily attributable to the elimination of duplicative data processing costs, which existed up until the July 2014 data systems integration of MISN’s bank processing systems with our own systems, as well as renegotiated pricing in the contract between the Company and its core operating platform vendor.

Provision for Income Taxes

For the three month and nine month periods ended September 30, 2015, the Company recorded an income tax expense of $2.0 million and $7.0 million, respectively.  This compares to income tax expense of $1.7 million and $2.4 million for the comparable periods in 2014.  Changes in the provision for income taxes for the three and nine months ended September 30, 2015, as compared to the corresponding periods in 2014, 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 MISN Transaction.  The Company’s effective tax rate was 33.9% and 36.9% for the three and nine months ended September 30, 2015, respectively.  The effective tax rates for the corresponding periods in 2014 were 33.7% and 34.3%, respectively.  Excluding the impact of merger, restructure and integration expenses in 2014, the effective tax rate would have been 34.8% and 39.1%, for the three and nine months ended September 30, 2014, respectively.  The tax rate for the three and nine months ended September 30, 2015, as compared to the same periods in 2014, was also impacted by an increase in tax exempt municipal bond interest income, as well as by California qualified investment income tax credits in 2015 for the origination of qualified loans.  Excluding the impact of these items, the effective tax rate would have been approximately 37.2% and 38.0% for the three and nine months ended September 30, 2015, respectively.

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 as part of this Form 10-Q for additional information concerning the Company’s deferred tax assets.

Heritage Oaks Bancorp | - 52 -

Financial Condition

Total assets were approximately $1.9 billion and $1.7 billion at September 30, 2015, and December 31, 2014, respectively.  Total assets increased $163.8 million during the first nine months of 2015, which can be attributed to growth in investments, interest earning cash balances, and loans, all of which were funded with an increase in core deposits.  Total deposits were approximately $1.6 billion and $1.4 billion at September 30, 2015, and December 31, 2014, respectively.  Deposits increased $177.0 million during the first nine months of 2015, driven by growth in non-interest bearing demand, interest bearing demand, savings, and money market accounts.  Deposit growth is reflective of the Bank’s continuing focus on new customer acquisition activities, as well as on expanding our existing customer relationships.

Total Cash and Cash Equivalents

Total cash and cash equivalents were $112.3 million and $35.6 million at September 30, 2015 and December 31, 2014, respectively.  The increase in cash and cash equivalents during the first nine months of 2015 was driven primarily by an increase in low cost core deposits.  This line item will vary depending on daily cash settlement activities and 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.

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 (“ALCO”) that develops 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 ALCO 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, 2015				December 31, 2014
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	49,238	$	49,264	$	19,562	$	19,664
Mortgage backed securities
U.S. government sponsored entities and agencies	231,779		232,499		216,492		215,398
Non-agency	32,283		32,176		11,891		11,901
State and municipal securities	100,704		102,694		79,810		82,592
Asset backed securities	16,458		16,082		26,216		26,025
Other investments	100		35		-		-
Total available for sale securities	$	430,562	$	432,750	$	353,971	$	355,580

Securities available for sale are carried at fair value, with related net unrealized gains or losses, net of deferred income taxes, recorded as an adjustment to accumulated other comprehensive income.  At September 30, 2015, the securities portfolio had net unrealized gains, net of taxes, of approximately $1.3 million, an increase of approximately $0.3 million from that reported at December 31, 2014. Fluctuations in the fair value of the investment portfolio can be attributed in large part to changes in interest rates during the first nine months of 2015.

All fixed and adjustable rate mortgage pools contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages, which prepayments are directly impacted by interest rate changes.  The Company uses simulation models to test the average life, duration, market volatility and yield volatility of adjustable rate mortgage pools under various interest rate assumptions to monitor volatility.  The majority of the Company’s mortgage 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 full faith and guarantee of the issuing agencies and the U.S. Federal Government.  At September 30, 2015, approximately $232.5 million or 87.8%, of the Company’s mortgage related securities were issued by government agencies and government sponsored entities, such as those listed above.

Heritage Oaks Bancorp | - 53 -

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, 2015
	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	$	5,095	$	14,939	$	22,185	$	7,045	$	49,264
Mortgage backed securities
U.S. government sponsored entities and agencies	30,522		88,347		63,027		50,603		232,499
Non-agency	8,931		14,183		9,062		-		32,176
State and municipal securities	1,743		18,416		77,922		4,613		102,694
Asset backed securities	-		9,757		3,385		2,940		16,082
Other investments	-		-		-		35		35
Total available for sale securities	$	46,291	$	145,642	$	175,581	$	65,236	$	432,750
Amortized cost	$	46,219	$	145,177	$	173,928	$	65,238	$	430,562
Weighted average yield	1.81%		1.99%		2.62%		3.23%		2.41%

We manage the investment portfolio to provide for liquidity and earnings within acceptable risk tolerances which are set and managed through our ALCO committee.  The aggregate effective duration target for the investment portfolio is 2.75 to 3.25 years.  At September 30, 2015 the total investment portfolio carried a weighted average effective duration of 3.21 years.

Federal Home Loan Bank (“FHLB”) Stock

As a member of FHLB of San Francisco, the Company is required to hold a specified amount of FHLB capital stock based on the asset size of the Bank and the level of outstanding borrowings with 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, 2015 and December 31, 2014, the Company’s investment in FHLB stock totaled $7.9 million.

Loans

Summary of Market Conditions

Total gross loans increased $13.3 million in the first nine months of 2015, with growth attributed to increases in residential 1 to 4 family, farmland, home equity lines of credit, and commercial and industrial loans.  Growth in these categories was offset by declines in construction and land, commercial real estate, agriculture, and multifamily loans, which declines were driven in part by the level of prepayments and payoffs exceeding loan production in these categories.  The Company continued to focus on organic loan growth in our region with originations of new loans during the first nine months of 2015 totaling approximately $174.3 million.  New loan production was slightly offset by loan prepayments and payoffs of $130.7 million in addition to normal portfolio amortization, and the pay downs of operating lines due to the cyclical nature associated with agriculture lines of credit. Prepayments and payoffs in 2015 can be attributed in part to the decline in long-term interest rates in conjunction with competition from non-banks for commercial real estate loans.

The Company continues to see improvement in the local economy, and loan demand in the markets we serve.  We believe that with the Bank’s expansion into Santa Barbara and Ventura counties, in conjunction with a focus on commercial and industrial lending, the Bank is well positioned for continued growth.

Although we continue to see signs of stabilization and improvement 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 the values of real estate within our market footprint.  As such, management continues to closely monitor credit trends and leading indicators for renewed signs of economic deterioration. The Bank employs stringent lending standards, and seeks to originate loans to borrowers who have strong credit profiles, adequate debt service ability, and ample collateral support for secondary sources of loan repayment.  Additionally, purchased loans are evaluated under the same standards as originated loans. Management seeks to continually monitor the credit profiles of borrowers in order to take proactive steps, when and if necessary, to mitigate any material adverse impacts on the Company.

Heritage Oaks Bancorp | - 54 -

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 as part of this Form 10-Q for additional information concerning credit quality.

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 days of funding the mortgage. At September 30, 2015, loans held for sale totaled $5.4 million compared to $2.6 million at December 31, 2014.

Summary of Loan Portfolio

The following table provides a breakdown of total gross loans:

	September 30,			December 31,
	2015			2014			Variance
	Balance		Percent	Balance		Percent	Dollar		Percent
	(dollars in thousands)
Real Estate Secured
Commercial	$	581,767	48.2%	$	588,472	49.2%	$	(6,705)	-1.1%
Residential 1 to 4 family	154,895		12.9%	127,201		10.7%	27,694		21.8%
Farmland	107,376		8.9%	98,373		8.2%	9,003		9.2%
Multi-family residential	75,774		6.3%	78,645		6.6%	(2,871)		-3.7%
Construction and land	42,571		3.5%	44,660		3.8%	(2,089)		-4.7%
Home equity line of credit	31,609		2.6%	38,252		3.2%	(6,643)		-17.4%
Total real estate secured	993,992		82.4%	975,603		81.7%	18,389		1.9%
Commercial
Commercial and industrial	159,012		13.2%	154,787		13.0%	4,225		2.7%
Agriculture	47,244		3.9%	55,101		4.6%	(7,857)		-14.3%
Other	-		0.0%	14		0.0%	(14)		-100.0%
Total commercial	206,256		17.1%	209,902		17.6%	(3,646)		-1.7%
Consumer	6,492		0.5%	7,978		0.7%	(1,486)		-18.6%
Total gross loans	1,206,740		100.0%	1,193,483		100.0%	13,257		1.1%
Deferred loan fees	(1,056)			(1,445)			389		-26.9%
Allowance for loan and lease losses	(17,296)			(16,802)			(494)		2.9%
Total net loans	$	1,188,388		$	1,175,236		$	13,152	1.1%
Loans held for sale	$	5,366		$	2,586		$	2,780	107.5%

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Real Estate Secured Loans

Other Real Estate Secured Loans

The following table provides a break-down of the other real estate secured segment of the loan portfolio as of September 30, 2015, exclusive of the land and construction portfolios, which are discussed in greater detail following this table:

	September 30, 2015							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)
All Other Real Estate Secured
Residential 1 to 4 family	$	154,895	$	426	$	155,321	15.7%	82.6%	339	$	4,500	$	115,418
Commercial	141,009		260		141,269		14.2%	75.3%	175	9,250		64,728
Hospitality	138,029		2,703		140,732		14.2%	75.0%	55	15,000		5,951
Farmland	107,376		4,637		112,013		11.3%	59.7%	66	17,647		67,137
Professional	101,799		253		102,052		10.3%	54.4%	127	11,500		26,480
Retail	94,628		61		94,689		9.5%	50.5%	112	9,000		40,024
Multi-family	75,774		500		76,274		7.7%	40.6%	55	9,000		-
Healthcare / medical	33,820		-		33,820		3.4%	18.0%	46	5,600		19,172
Home equity lines of credit	31,609		31,312		62,921		6.3%	33.5%	448	1,200		31,081
Restaurants / hospitality	27,565		350		27,915		2.8%	14.9%	26	13,713		9,054
Other	44,917		419		45,336		4.6%	24.2%	51	6,054		35,849
Total	$	951,421	$	40,921	$	992,342	100.0%	528.7%	1,500	$	17,647	$	414,894

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2015.

As of September 30, 2015, other real estate secured portfolios represented $951.4 million or 78.8% of total gross loans.  When compared to the amount reported at December 31, 2014, this represents an increase of approximately $20.5 million, or 2.2%.  This increase can be attributed to new production in the residential 1 to 4 family and farmland loans, slightly offset by a decrease in commercial real estate loans and home equity lines of credit.

As of September 30, 2015, a total of $46.7 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 $34.5 million.  This compares to $36.5 million of the other real estate secured balance, and $27.9 million of which was commercial real estate loans, being risk graded special mention, substandard or doubtful as of December 31, 2014.  The increase in total other real estate secured special mention, substandard and doubtful balance during 2015 can be attributed in large part to one loan in the multi-family category which was downgraded during the first half of 2015.  Management continues to monitor this credit closely.  At September 30, 2015 and December 31, 2014, other real estate secured balances, including undisbursed commitments, represented 529% and 536%, respectively, of total risk-based capital.  At September 30, 2015, approximately $414.9 million, or 43.6%, of the other real estate secured segment of the loan portfolio was considered owner occupied.

Construction and Land Loans

The following table provides a break-down of the land portfolio by property type as of September 30, 2015:

	September 30, 2015							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 and Land
Commercial	$	24,161	$	18,687	$	42,848	64.0%	22.9%	31	$	10,000
Tract	8,265		2,302		10,567		15.8%	5.6%	7	10,673
Multi-family	6,260		1,672		7,932		11.8%	4.2%	7	3,100
Single family residential	2,436		1,555		3,991		6.0%	2.1%	21	800
Single family residential - Spec.	1,319		175		1,494		2.2%	0.8%	5	1,000
Hospitality	130		-		130		0.2%	0.1%	1	560
Total	$	42,571	$	24,391	$	66,962	100.0%	35.7%	72	$	10,673

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2015.

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At September 30, 2015, the construction and land portfolio represented approximately $42.6 million, or 3.5%, of total gross loan balances, as compared to $44.7 million or 3.2% of total gross loans at December 31, 2014.  The ratio of total construction and land loans, including undisbursed commitments, to risk-based capital was 36% at September 30, 2015 and December 31, 2014.  As of September 30, 2015, a total of $5.8 million of the construction and land portfolio was risk graded special mention, substandard or doubtful, compared to $6.9 million of the land portfolio being risk graded special mention, substandard or doubtful as of December 31, 2014.

Commercial Loans

The following table provides a break-down of the commercial and industrial segment of the commercial loan portfolio as of September 30, 2015:

	September 30, 2015							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
Professional services	$	26,819	$	18,675	$	45,494	16.9%	24.1%	195	$	5,000
Real estate / rental and leasing	21,912		13,314		35,226		13.1%	18.8%	123	6,522
Healthcare / medical	20,877		12,387		33,264		12.3%	17.7%	115	10,410
Manufacturing	19,000		8,901		27,901		10.4%	14.9%	113	2,484
Wholesale and retail	14,067		9,503		23,570		8.7%	12.6%	139	2,500
Construction	13,814		27,620		41,434		15.4%	22.1%	160	5,000
Restaurants / hospitality	8,741		5,936		14,677		5.4%	7.8%	89	2,629
Media and information services	7,028		2,389		9,417		3.5%	5.0%	22	5,000
Agriculture	6,145		2,594		8,739		3.2%	4.7%	33	2,000
Transportation and warehousing	5,863		1,018		6,881		2.6%	3.7%	68	596
Financial services	4,887		3,397		8,284		3.1%	4.4%	34	3,000
Oil gas and utilities	1,130		1,104		2,234		0.8%	1.2%	6	688
All other	8,729		3,672		12,401		4.6%	6.6%	233	1,593
Total	$	159,012	$	110,510	$	269,522	100.0%	143.6%	1,330	$	10,410

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2015.

At September 30, 2015, commercial and industrial loans represented approximately $159.0 million or 13.2% of total gross loan balances, compared to $154.8 million or 13.0% at December 31, 2014.  The ratio of total commercial and industrial loan balances, including undisbursed commitments, to risk-based capital was 144% at September 30, 2015 and December 31, 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, 2015, a total of $12.8 million of the commercial and industrial portfolio was risk graded as special mention, substandard or doubtful, compared to $16.5 million at December 31, 2014.

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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 as of September 30, 2015:

	September 30, 2015							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
Fruit and nut tree farming	$	17,483	$	31,042	$	48,525	47.5%	25.8%	36	$	7,700
Food, beverage and tobacco	8,703		2,774		11,477		11.2%	6.1%	27	2,000
Vegetable and mellon farming	8,433		6,326		14,759		14.5%	7.9%	18	4,000
Wholesale merchants	3,734		917		4,651		4.5%	2.5%	9	2,000
Animal production	3,507		4,410		7,917		7.7%	4.2%	47	1,500
Support activities for agriculture	2,741		5,965		8,706		8.5%	4.6%	26	1,800
Other crop farming	718		3,395		4,113		4.0%	2.2%	6	2,353
Transportation and warehousing	34		-		34		0.0%	0.0%	2	25
All other	1,891		300		2,191		2.1%	1.2%	10	1,600
Total	$	47,244	$	55,129	$	102,373	100.0%	54.5%	181	$	7,700

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2015.

At September 30, 2015, the agriculture portfolio totaled approximately $47.2 million, or 3.9% of total gross loan balances, compared to $55.1 million at December 31, 2014.  At September 30, 2015 the agriculture portfolio, including undisbursed commitments represented 55% of the Bank’s total risk-based capital, as compared to 51% at December 31, 2014.  As of September 30, 2015, a total of $2.5 million of the agriculture portfolio was risk graded special mention, substandard or doubtful, compared to $2.4 million at December 31, 2014.

Consumer Loans

At September 30, 2015, the consumer loan portfolio totaled $6.5 million, compared to the $8.0 million reported at December 31, 2014.  Consumer loans include revolving credit plans, installment 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:

	September 30, 2015
	Due Less Than 3 Months		Due 3 To 12 Months		Due Over 12 Months Through 3 Years		Due Over 3 Years Through 5 Years		Due Over 5 Years Through 15 Years		Due Over 15 Years		Total
	(dollars in thousands)
Real Estate Secured
Commercial	$	38,384	$	21,775	$	176,251	$	133,835	$	211,522	$	-	$	581,767
Residential 1 to 4 family	3,489		3,536		24,361		32,883		87,595		3,031		154,895
Farmland	28,438		1,205		15,557		6,611		55,565		-		107,376
Multi-family residential	4,313		5,545		6,790		41,911		17,215		-		75,774
Construction and land	30,140		6,173		2,674		516		3,068		-		42,571
Home equity lines of credit	31,353		250		-		-		-		6		31,609
Commercial
Commercial and industrial	75,283		12,802		14,410		31,444		24,902		171		159,012
Agriculture	40,337		735		759		4,396		391		626		47,244
Other	-		-		-		-		-		-		-
Consumer	1,011		126		400		535		3,340		1,080		6,492
Total loans held for investment	$	252,748	$	52,147	$	241,202	$	252,131	$	403,598	$	4,914	$	1,206,740
Variable rate loans (1)	$	237,716	$	33,644	$	180,917	$	184,417	$	163,674	$	-	$	800,368
Fixed rate loans	15,032		18,503		60,285		67,714		239,924		4,914		406,372
Total loans held for investment	$	252,748	$	52,147	$	241,202	$	252,131	$	403,598	$	4,914	$	1,206,740

(1)Variable rate loans include $557.3 million of loans that are at or below their contractual floor rates.  To the extent that interest rates rise, the Company will not experience the benefit of rising interest rates until rates rise above their floors.

At September 30, 2015, loans held for investment were scheduled to mature or re-price in the following dollar and percentage amounts of total loans held for investment: $304.9 million, or 25.2%, in one year or less; $493.3 million, or 40.9%, in one to five years; and $408.5 million, or 33.9%, over five years. Of the $408.5 million of loans scheduled to mature or re-price over five years, $260.9 million, or 63.9%, were scheduled to mature or re-price over five through eight years; $116.6 million or 28.5%, were scheduled to mature or re-price over eight years through ten years; and $31.0 million, or 7.6%, are scheduled to mature or re-price over ten years.

Heritage Oaks Bancorp | - 59 -

Allowance for Loan and Lease Losses

The Company maintains an ALLL deemed by management to be appropriate to absorb probable losses inherent in the loan and lease portfolio as of the balance sheet date.  The ALLL is based on ongoing evaluations of the loan and lease portfolio, which is a process that involves subjective as well as complex judgments.  This evaluation includes an assessment of credit quality which considers various measures such as: the trend in the level of net charge-offs, the level of past due and non-accrual loans, and the level of and trends in substandard and doubtful loans.  The Company’s ongoing evaluation of the ALLL also includes assessments of: estimated collateral values and or guarantees where appropriate, the seasoning of loans in the portfolio, qualitative factors associated with identified potential external and internal risks attributable to each loan category, the estimated exposure to specific loans identified as impaired, and trends in the Company’s historical loss experience for each loan category.

The ALLL is comprised of (i) a general reserve, (ii) specific reserve for impaired loans, (iii) a qualitative reserve, which is determined by estimates the Company makes concerning the impact that identified potential external and internal risks may have on overall losses inherent in the loan portfolio, and (iv) a reserve for PCI loans, which is determined based on estimates of future cash flows from PCI loans.

As also discussed in Note 1. Summary of Significant Accounting Policies of the condensed consolidated financial statements, during the third quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the ALLL.  This enhancement related specifically to the methodology used to calculate the loss rates for loan risk grades within each loan type in the determination of the general reserve component of the ALLL.  The enhanced methodology uses more granular loan level data to calculate loss rates for specific loan grades within each loan type, allowing for more detailed loan migration analysis, and the ability to determine more precise average loss rates for each loan risk grade.  Although the total general reserve component of the ALLL for each loan type and portfolio segment is still based on total average historical losses for their respective loan types, management believes the allocation of the ALLL to each loan risk grade, within each loan type and the evaluation of the loss emergence period has become more precise under this methodology enhancement.

The implementation of the ALLL model enhancements did not result in a required increase or decrease in the balance of the ALLL, or a material impact to the overall allocation of the ALLL.  The ALLL model enhancement has allowed the Company to apply more precision in determining loss rates for specific loan grades within each loan type.  Sections of the accounting policy for the ALLL, which have been updated to reflect the methodology enhancement are provided in Note 1. Summary of Significant Accounting Policies, of the condensed consolidated financial statements filed as part of this Form 10-Q.

The ALLL is increased by provisions for loan and lease losses charged to earnings, and decreased (or possibly increased) by charge-offs, net of recoveries on previously charged-off loans. Please see Note 1. Significant Accounting Policies Update, of the condensed consolidated financial statements, filed as part of this Form 10-Q for additional information concerning the Company’s methodology for determining an adequate ALLL.

Heritage Oaks Bancorp | - 60 -

The following table provides a summary of the ALLL and its allocation to each segment and class within the loan portfolio:

	September 30,						December 31,
	2015			2014			2014
			Percent			Percent			Percent
	ALLL		of Loans to	ALLL		of Loans to	ALLL		of Loans to
	Allocation		Total Loans	Allocation		Total Loans	Allocation		Total Loans
	(dollars in thousands)
Real Estate Secured
Commercial	$	5,672	48.2%	$	6,048	50.6%	$	5,721	49.2%
Residential 1 to 4 family	1,961		12.9%	1,354		10.5%	1,423		10.7%
Farmland	1,840		8.9%	1,564		8.2%	1,476		8.2%
Construction and land	1,365		3.5%	2,342		3.6%	2,000		3.8%
Multi-family residential	627		6.3%	441		6.7%	347		6.6%
Home equity line of credit	155		2.6%	112		3.3%	162		3.2%
Commercial
Commercial and industrial	3,366		13.2%	3,291		12.5%	3,627		13.0%
Agriculture	2,119		3.9%	1,023		3.8%	1,497		4.6%
Other	-		0.0%	-		0.0%	1		0.0%
Consumer	191		0.5%	109		0.8%	202		0.7%
Unallocated	-			503			346
Total	$	17,296	100.0%	$	16,787	100.0%	$	16,802	100.0%

Allocation of the Allowance for Loan and Lease Losses

The Company continued to experience an overall favorable trend in credit quality in the non-PCI loan portfolio during the nine months ended September 30, 2015 when compared to historical periods.  The balance of the ALLL increased by $0.5 million during the first nine months of 2015, and when compared to the balance at September 30, 2014, due to net recoveries on previously charged-off loans.  At September 30, 2015, special mention, substandard and doubtful non-PCI loans totaled $59.2 million compared to $52.7 million at December 31, 2014.  The increase in special mention, substandard, and doubtful non-PCI loans can be attributed in large part to the downgrade of one multi-family loan to special mention during the first half of 2015.  However, the Company experienced a decline in substandard graded non-PCI loans, as improving credit trends associated with certain borrowers resulted in positive credit risk grade changes.

The change in the allocation of the ALLL as of September 30, 2015, as compared to December 31, 2014 and September 30, 2014, can be attributed to growth in certain segments of the loan portfolio, such as residential 1 to 4 family, farmland, and commercial loans.  The allocation of the ALLL has also been impacted by changes in the level of specific reserves for impaired loans, as well as the estimated impact that external qualitative factors, such as the ongoing California drought, may have on certain of the Company’s borrowers.

Changes in risk grades also have an impact on the allocation of the ALLL.  The increase in special mention, substandard, and doubtful balances is attributable to increases in special mention balances, driven by the downgrade of certain commercial real estate and commercial and industrial loans, and one large multi-family loan.  Non-PCI, non-accrual loans totaled $9.8 million at September 30, 2015, compared to $10.2 million at December 31, 2014.  Loans 30-89 days past due in the non-PCI loan portfolio totaled $0.8 million at September 30, 2015, compared to $0.1 million at December 31, 2014.  Although the Company has seen an increases in special mention loans, and a slight increase in past due balances, these negative credit trends are balanced by the net recoveries the Company continued to experience during the first nine months of 2015.  For the nine months ended September 30, 2015, net recoveries represented 0.06% of average loans.

The ALLL as a percentage of total gross loans was 1.43% at September 30, 2015, compared to 1.41% at December 31, 2014.  Excluding loans acquired in the MISN Transaction, the ALLL attributable to the legacy Heritage portfolio was $16.6 million or 1.64% of legacy Heritage loans and leases at September 30, 2015, compared to $15.8 million or 1.76% of legacy Heritage loans and leases at December 31, 2014.  At September 30, 2015 the ALLL attributable to acquired non-PCI loans was $0.4 million or 0.23% of acquired non-PCI loans, compared to $1.0 million or 0.44% at December 31, 2014.  As of September 30, 2015, the remaining unaccreted discount on acquired non-PCI loans was $3.7 million, compared to $4.5 million at December 31, 2014.

The ALLL for PCI loans was $0.1 million at September 30, 2015.  There was no ALLL for PCI loans at December 31, 2014.  The increase in the ALLL for PCI loans during the first nine months of 2015 resulted from unfavorable changes in expected future cash flows on certain PCI loans.  At September 30, 2015 the remaining unaccreted discount on PCI loans was $2.3 million, compared to $3.1 million at December 31, 2014.

Heritage Oaks Bancorp | - 61 -

The ALLL attributable to loans collectively evaluated for impairment on the legacy Heritage portfolio at September 30, 2015 was approximately $15.7 million, compared to $14.0 million at December 31, 2014.  Approximately $6.4 million of the ALLL attributable to loans collectively evaluated for impairment is attributed to qualitative adjustments at September 30, 2015, compared to $4.9 million at December 31, 2014.

The qualitative component of the ALLL increased during the nine months ended September 30, 2015, primarily due to the potential impacts resulting from the prolonged California drought on various segments of our loan portfolio, including agriculture, farmland, and commercial and industrial loans. The qualitative component of the ALLL has increased, resulting from concerns associated with the impact of the California drought on our customer’s businesses, and due to concerns about the impact directly to agriculture, and indirectly to other businesses such as hospitality and tourism.  Evidence of the drought’s impact on agricultural businesses have been noted in recent studies indicating that the current 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, the State of California, as well as certain municipalities within California, have 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, have led the Company to increase the qualitative factors within the ALLL for the impact of the drought on our loan portfolio.  If the drought in California continues, the related allocation of the ALLL for the drought may increase significantly.

The ALLL associated with loans specifically evaluated for impairment totaled $1.1 million at September 30, 2015, compared to $1.8 million at December 31, 2014.  As of September 30, 2015, the Company believes that the ALLL was appropriate to cover probable incurred credit losses inherent in the Company’s loan and lease portfolio.

The Company recorded no provision for loan and lease losses for the three and nine months ended September 30, 2015 and 2014. For a discussion of component provisions and provision recaptures attributable to the various components of the ALLL, please see “Provision for Loan and Lease Losses” of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

	For The Nine Months Ended September 30,
	2015		2014
	(dollars in thousands)
Balance, beginning of period	$	16,802	$	17,859
Charge-offs
Real Estate Secured
Home equity lines of credit	55		-
Construction and land	34		-
Commercial	-		1,027
Residential 1 to 4 family	-		92
Commercial
Commercial and industrial	186		650
Agriculture	1		-
Consumer	6		8
Total charge-offs	282		1,777
Recoveries
Real Estate Secured
Home equity lines of credit	76		10
Construction and land	48		32
Residential 1 to 4 family	5		-
Commercial	-		25
Commercial
Commercial and industrial	457		582
Agriculture	179		46
Consumer	11		10
Total recoveries	776		705
Net (recoveries) charge-offs	(494)		1,072
Provisions for loan and lease losses	-		-
Balance, end of period	$	17,296	$	16,787
Gross loans, end of period	$	1,206,740	$	1,151,576
ALLL to total gross loans	1.43%		1.46%
Net (recoveries) charge-offs to average loans	-0.06%		0.14%

Heritage Oaks Bancorp | - 62 -

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 as part of this Form 10-Q for additional discussion concerning non-performing loans, as well as a discussion concerning credit quality.  At September 30, 2015, the balance of non-accruing loans was $10.0 million, or $0.5 million lower than that reported at December 31, 2014.

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

	September 30,		December 31,
	2015		2014
	(dollars in thousands)
Non-performing Loans
Construction and land	$	4,046	$	5,237
Commercial and industrial	3,549		2,102
Commercial real estate	2,117		2,085
Residential 1 to 4 family	171		124
Home equity lines of credit	85		258
Consumer	48		43
Agriculture	-		686
Total non-performing loans	10,016		10,535
Other real estate owned	328		-
Total non-performing assets	$	10,344	$	10,535
TDRs
Accruing	$	8,622	$	6,511
Included in non-performing loans	7,305		7,057
Total TDRs	$	15,927	$	13,568
Ratio of allowance for loan and lease losses to total gross loans	1.43%		1.41%
Ratio of non-performing loans to total gross loans	0.83%		0.88%
Ratio of non-performing assets to total assets	0.55%		0.62%

The following tables reconcile the change in total non-accruing balances for the nine months ended September 30, 2015:

	Balance						Transfers		Returns to				Balance
	December 31,				Net		to Foreclosed		Accrual				September 30,
	2014		Additions		Paydowns		Collateral		Status		Charge-offs		2015
	(dollars in thousands)
Real Estate Secured
Construction and land	$	5,237	$	-	$	(978)	$	(44)	$	(135)	$	(34)	$	4,046
Commercial	2,085		140		(108)		-		-		-		2,117
Residential 1 to 4 family	124		624		(64)		-		(513)		-		171
Home equity lines of credit	258		40		(113)		(61)		-		(39)		85
Commercial
Commercial and industrial	2,102		2,761		(831)		-		(296)		(187)		3,549
Agriculture	686		-		(59)		-		(626)		(1)		-
Consumer	43		34		(24)		-		-		(5)		48
Totals	$	10,535	$	3,599	$	(2,177)	$	(105)	$	(1,570)	$	(266)	$	10,016

Heritage Oaks Bancorp | - 63 -

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
	2015		2014		Dollar		Percent
	(dollars in thousands)
Non-interest bearing deposits	$	544,782	$	461,479	$	83,303	18.05%
Interest bearing deposits:
NOW accounts	120,266		108,757		11,509		10.58%
Other savings deposits	104,130		95,619		8,511		8.90%
Money market deposit accounts	551,815		449,110		102,705		22.87%
Time deposits	250,777		279,839		(29,062)		-10.39%
Total deposits	$	1,571,770	$	1,394,804	$	176,966	12.69%

As of September 30, 2015 deposits totaled $1.6 billion, compared to $1.4 billion at December 31, 2014.  Deposits increased $177.0 million or 12.7%, during the first nine months of 2015, as the Company continued its focus on gathering and retaining core relationships.  At September 30, 2015, core deposits, which are defined as total deposits exclusive of time deposits over $100,000, represented 88.5% of total deposits, up from the 85.4% reported at December 31, 2014, due to growth in non-interest bearing demand, NOW accounts, savings, and money market balances during the first nine months of 2015.  Non-interest bearing demand deposits comprise 34.7%, and 33.1% of total deposits at September 30, 2015, and December 31, 2014, respectively.

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, 2015, FHLB borrowings were $78.5 million, compared to $95.6 million at December 31, 2014.  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 2015 can be attributed to a reduction of longer-term borrowings previously obtained, due to the increase in liquidity from deposit gathering activities during the first nine months of 2015 and loan prepayments during the first half of 2015.  As a result the bank prepaid certain FHLB advances in an effort to reduce overall funding costs going forward.  Certain of these FHLB advances had prepayment incentive fees associated with them, resulting in a gain on the extinguishment of debt of approximately $0.1 million during the third quarter of 2015, while others had prepayment penalties, resulting in additional interest expense of approximately $0.1 million.

At September 30, 2015, the Company had $10.4 million in Junior Subordinated Deferrable Interest Debentures (the “debt securities”) issued and outstanding, compared to $13.2 million at December 31, 2014.  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		$	5,248	$	5,248	2.05%	27-Oct-06	Aug-37	Variable 3-month LIBOR + 1.72%
Mission Community Capital Trust I		$	3,093	$	2,952	3.24%	14-Oct-03	Oct-33	Variable 3-month LIBOR + 2.95%
Santa Lucia Bancorp (CA) Capital Trust		$	5,155	$	2,189	1.77%	28-Apr-06	Jul-36	Variable 3-month LIBOR + 1.48%

These three issuances of debt securities are callable by the Company at par.  At September 30, 2015, the Company included $10.0 million of the debt securities in its Tier I Capital for regulatory reporting purposes, as permitted under the Basel III Capital Rules.  For a more detailed discussion regarding junior subordinated debt securities, see Note 10, Borrowings, in the Company’s consolidated financial statements under Item 8 of Part II of the Company’s 2014 Annual Report on Form 10-K.

During the third quarter of 2015, the Company redeemed $3.0 million of the original $8.2 million issuance of junior subordinated debentures associated with Heritage Oaks Capital Trust II.  In connection with this redemption, the Company recorded a pretax gain on the extinguishment of debt of approximately $0.5 million.

Heritage Oaks Bancorp | - 64 -

Capital

At September 30, 2015, the balance of shareholders’ equity was $205.5 million, compared to $197.9 million at December 31, 2014.  The increase in shareholders’ equity for the first nine months of 2015 can be attributed substantially to net earnings of $11.9 million, offset by dividends paid of $5.8 million.  Additionally, activity related to share-based compensation, such as the exercise of stock option, and share-based compensation expense, increased shareholders’ equity by approximately $1.1 million during the first nine months of 2015.

Dividends

On March 2, 2015, the Company paid a cash dividend of $0.05 per share to holders of the Company’s common and Series C Preferred stock as of February 16, 2015.

On June 1, 2015, the Company paid a cash dividend of $0.06 per share to holders of the Company’s common and Series C Preferred stock as of May 15, 2015.

On July 22, 2015, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on August 31, 2015, to shareholders of the Company’s common stock as of August 17, 2015.

During the first nine months of 2014, the Company paid dividends totaling $0.03 per share to shareholders of the Company’s common stock and Series C Preferred Stock.

Stock Repurchase Program

In June 2015, the Company announced that it had amended its previously announced agreement for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18 with repurchase program activity pursuant to the amended plan to potentially recommence on July 1, 2015 and will continue in effect until January 31, 2016 or expire earlier upon completion of the repurchase of $5.0 million of the Company’s common stock, as well as under certain other circumstances set forth in the repurchase plan agreement. The Company has no obligation to repurchase any shares under this program, and may suspend or discontinue it at any time.  All shares as part of the repurchase program will be cancelled, and therefore no longer available for reissuance.

As of September 30, 2015, the Company had repurchased 55,428 shares of its common stock under this plan at an average price of $7.47 per share.  Repurchases of common stock during the first nine months of 2015 totaled 3,696 shares, and were purchased at an average price of $7.52 per share.  There were no repurchases of common stock during the third quarter of 2015.

Regulatory Capital

The Bancorp and the Bank seek to maintain strong levels of capital in order to generally be considered “well-capitalized” under the Prompt Corrective Action framework as determined by regulatory agencies.  The Bancorp’s potential sources of capital include retained earnings and the issuance of equity.  In 2013, the Board of Governors of the Federal Reserve System (“FRB”), the FDIC, and the Office of the Comptroller of the Currency (“OCC”) issued final rules under Basel III (the “Basel III Capital Rules”), establishing a new comprehensive framework for regulatory capital for U.S. banking organizations.  These rules implement the Basel Committee’s December 2010 proposed framework, certain provisions of the Dodd-Frank Act, and revise the risk-based capital requirements applicable to bank-holding companies, and depository institutions, including the Bancorp and the Bank.  These rules became effective for the Bancorp and the Bank on January 1, 2015, and are subject to phase-in periods for certain of their components.

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

·A new Common Equity Tier I (“CET I”) capital measure, with a minimum ratio requirement of 4.5% CET I to risk-weighted assets, and for Prompt Corrective Action purposes 6.5% or greater to generally be considered “well capitalized.”

·A capital conservation buffer in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019.  The capital conservation buffer does not begin phasing-in until January 1, 2016.

·Changes to the calculation of risk-weighted assets from the current four categories (0%, 20%, 50% and 100%) to a much broader and risk-sensitive number of categories.

·The inclusion of certain changes in accumulated other comprehensive income (“AOCI”) in the determination of regulatory capital measures; however, “non-advanced approaches banking organizations,” including Bancorp and the Bank may make a one-time permanent election, as of January 1, 2015, to exclude these changes in AOCI from the determination of regulatory capital.  The Bancorp and Bank have made this election.

·An exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets, and intangible assets.

Heritage Oaks Bancorp | - 65 -

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

The following table provides a summary of the general capital ratio requirements for the Bancorp and the Bank before and after the implementation of Basel III on January 1, 2015:

	Basel III			Pre-Basel III
			Well			Well
	Minimum (1)		Capitalized (2)	Minimum		Capitalized (2)
	Bank	Company	Bank	Bank	Company	Bank
Ratio
Common Equity Tier I capital	4.50%	4.50%	6.50%	N/A	N/A	N/A
Leverage ratio	4.00%	4.00%	5.00%	4.00%	4.00%	5.00%
Tier I capital	6.00%	6.00%	8.00%	4.00%	4.00%	6.00%
Total risk-based capital	8.00%	8.00%	10.00%	8.00%	8.00%	10.00%

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

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

The following table provides the general minimum regulatory capital ratios that are required for the Bank to be considered “well capitalized,” and a summary of Bancorp and Bank regulatory capital ratios, which are reflective of the January 1, 2015 implementation of Basel III:

	Basel III			Pre-Basel III
	Regulatory Standard to be Well	September 30, 2015		Regulatory Standard to be Well	December 31, 2014		September 30, 2014
	Capitalized (1)	Company	Bank	Capitalized (1)	Company	Bank	Company	Bank
Ratio
Common Equity Tier I capital	6.50%	12.81%	12.52%	N/A	N/A	N/A	N/A	N/A
Leverage ratio	5.00%	9.96%	9.44%	5.00%	10.22%	9.83%	10.00%	9.77%
Tier I capital	8.00%	13.20%	12.52%	6.00%	13.13%	12.63%	12.87%	12.58%
Total risk-based capital	10.00%	14.46%	13.77%	10.00%	14.38%	13.88%	14.12%	13.83%

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

The Bancorp’s Leverage Ratio was 9.96% at September 30, 2015 compared to 10.22% at December 31, 2014. The decline in the leverage ratio can be attributed to growth in average assets during 2015 outpacing growth in capital.  All other regulatory capital ratios did not significantly change during 2015, as the increase in capital was offset by growth in the level of risk weighted assets.  During the third quarter of 2015, the Company redeemed $3.0 million of junior subordinated debentures, which had previously been included as part of the Company’s Tier I and total risk-based capital.  The impact of this redemption was a reduction in the Company’s leverage ratio of 16 basis points, and a reduction of 22 basis points in both the Tier I capital ratio and total risk-based capital ratio for the Company as of September 30, 2015.  The impact of the January 1, 2015 implementation of Basel III resulted in a nominal increases in our regulatory capital ratios.

The Common Equity Tier One Capital Ratio for both the Company and the Bank were 12.81% and 12.52%, as of September 30, 2015, respectively, above the current 6.5% level to generally be considered a “well capitalized” financial institution for regulatory purposes.

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.

Heritage Oaks Bancorp | - 66 -

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 condensed consolidated financial statements when they are funded or related fees are incurred or received. In the ordinary course of business, the Company is also a party to various operating leases, primarily for several of the Bank’s branch locations.

The Company is contingently liable for letters of credit made to its customers in the ordinary course of business totaling $13.0 million at September 30, 2015, compared to the $15.5 million at December 31, 2014. Included in these letter of credit commitments is a single standby letter of credit, which was issued in September 2004, for $11.7 million to guarantee the payment of taxable variable rate demand bonds that has since been reduced to $10.4 million. It is collateralized by a blanket lien with the FHLB that includes all qualifying loans on the Bank’s balance sheet. The primary purpose of the bond issue was to refinance existing debt and provide funds for capital improvements and expansion of an assisted living facility. The letter of credit was renewed and will expire in September 2016.  The letter of credit was undrawn as of September 30, 2015. Additionally at September 30, 2015 and December 31, 2014, the Company had undisbursed loan commitments, totaling $270.0 million and $237.7 million, respectively.

	September 30,		December 31,
	2015		2014
	(dollars in thousands)
Commitments to Extend Credit
Commercial and industrial	$	101,502	$	102,201
Agriculture	64,028		37,302
Secured by real estate	38,235		23,692
Not secured by real estate	13,316		10,856
Home equity lines of credit	31,312		28,915
Other unused commitments	20,159		33,145
Credit card lines	1,472		1,622
Standby letters of credit (1)	12,960		15,542
Total commitments and standby letters of credit	$	282,984	$	253,275

(1)Includes a standby letter of credit to one customer in the amount of $10.4 million at September 30, 2015 and December 31, 2014.

At September 30, 2015, and December 31, 2014, the Company’s allowance for unfunded loan commitments was $0.6 million, and $0.5 million, respectively.

The following table presents the Company’s significant fixed and determinable contractual obligations within the categories presented below:

	Less Than		One to Three		Three to Five		More than		September 30,		December 31,
	One Year		Years		Years		Five Years		2015		2014
	(dollars in thousands)
Deposits (1)	$	1,336,274	$	200,205	$	30,755	$	4,514	$	1,571,748	$	1,394,764
FHLB Advances and other borrowings	13,500		16,000		21,000		28,000		78,500		95,500
Operating lease obligations	1,491		1,872		1,478		2,647		7,488		8,152
Salary continuation payments	289		524		524		3,336		4,673		4,959
Junior subordinated debentures	-		-		-		13,496		13,496		16,496
Total obligations	$	1,351,554	$	218,601	$	53,757	$	51,993	$	1,675,905	$	1,519,871

(1)As of September 30, 2015, deposits with no stated maturity of $1.3 billion have been included in amounts due less than one year.

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

In connection with the $13.5 million outstanding contractual balance of debt securities issued to Heritage Oaks Capital Trust II, Mission Community Capital Trust I, and Santa Lucia Bancorp (CA) Capital Trust, the Company is the full and unconditional guarantor of distributions of the issuing trusts. There are no Special Purpose Entity (“SPE”) trusts, corporations, or other legal entities established by the Company which reside off-balance sheet. There are no other off-balance sheet items other than the aforementioned items related to letter of credit accommodations and undisbursed loan commitments. 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.

Heritage Oaks Bancorp | - 67 -

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 and securities 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, including but not limited to maintaining sufficient liquidity and diversity of funding sources to allow the Bank to meet expected and unexpected obligations in both stable and adverse conditions. ALCO meets regularly to assess projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual customer funding needs. Deposits generated from the Bank’s customers serve as the primary source of liquidity. The Bank has credit arrangements with correspondent banks that serve as a secondary liquidity source. At September 30, 2015 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, 2015, the borrowing availability related to this facility was $5.0 million. At September 30, 2015, 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 $310.2 million at September 30, 2015, in addition to the $78.5 million currently outstanding. Additionally the Company has a $10.0 million unsecured line of credit available with a correspondent bank as a secondary liquidity source for the holding company.

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, 2015, the Company believes investments in the portfolio can be pledged or 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 to deposits and other liabilities was 27.2% at September 30, 2015, compared to 23.4% at December 31, 2014.

The ratio of gross loans to deposits, another key liquidity ratio, decreased to 76.8% at September 30, 2015 compared to 85.6% at December 31, 2014 due to year to date deposit growth through September 30, 2015 outpacing the level of loan growth year to date.

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.

Regulatory Matters

BSA Consent Order

The Company believes it continues to make progress in addressing the issues identified in the BSA Consent Order that we entered into with our regulators in November of 2014.  However, the Company still has additional work to do in order to fully remediate the issues identified in the BSA Consent Order.  Please also see Note 12. Regulatory Matters, of the condensed consolidated financial statements, filed with this Form 10-Q, for a more detailed discussion concerning the BSA Consent Order.

Subsequent Events

Dividend Declaration

On October 28, 2015, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2015, to shareholders of the Company’s common stock as of November 16, 2015.

Heritage Oaks Bancorp | - 68 -

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 $13.5 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 the risk 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 moderately asset sensitive over the longer term as of September 30, 2015.  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 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, 2015 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.

Heritage Oaks Bancorp | - 69 -

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, 2015
	-100bp		Base		+100bp		+200bp
	(dollars in thousands)
Net interest income	$	60,026	$	61,459	$	62,149	$	63,281
$ Change from base	$	(1,433)	$	-	$	690	$	1,822
% Change from base	-2.33%		0.00%		1.12%		2.96%

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 preceding factors. Factors that vary significantly from the assumptions and estimates may have a 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 how the loan portfolio is segregated between variable-daily, variable other than daily and fixed rate loans:

	September 30, 2015
			Percent of
	Balance		Total
	(dollars in thousands)
Rate Type
Variable - daily	$	166,507	13.8%
Variable other than daily	633,861		52.5%
Fixed rate	406,372		33.7%
Total loans held for investment	$	1,206,740	100.0%

The table above identifies approximately 13.8% of the loan portfolio that will re-price immediately in a changing rate environment.  At September 30, 2015, approximately $800.4 million or 66.3% of the Company’s loan portfolio is considered variable.

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, 2015
	Move in Index Rate (bps)
	+100		+150		+200		+250		+300		+350
	(dollars in thousands)
Cumulative variable daily	$	94,426	$	108,867	$	117,057	$	120,314	$	122,109	$	129,341
Cumulative variable other than daily	391,246		462,094		491,509		515,741		523,343		546,408
Cumulative total variable at floor	$	485,672	$	570,961	$	608,566	$	636,055	$	645,452	$	675,749

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 100 basis points before the majority of variable rate loans in the portfolio that contain a minimum floor rate 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, which is evidenced by the percentage increase in net interest income at risk in the +200 basis point scenario.  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 re-priced, through maturities and refinancing, the average floor rate has come down to remain competitive in the current interest rate environment contributing to compression in the net interest margin.  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.

Heritage Oaks Bancorp | - 70 -

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, and the Principal Financial 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.

Management, with the participation of the Principal Executive Officer and the Principal Financial 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 and the Principal Financial 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 and the Principal Financial 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, 2015 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

In addition to routine litigation incidental to the business of the Company and/or the Bank, the Company is party to the following litigation.

In re Ennis Commercial Properties, LLC (Debtor) / Ennis Commercial Properties LLC et al. (Plaintiffs) v. Heritage Oaks Bancorp, United States Bankruptcy Court, Eastern District of California – Fresno Division.  Case No. 10-12709-A-11.  In January 2015, the Plan of Liquidation Administrator (“Administrator” or “Plaintiff”) appointed by the Bankruptcy Court regarding the bankruptcy of Ennis Commercial Properties, LLC (“Ennis Commercial”) filed a complaint against Heritage Oaks Bancorp (“the Company”).  The complaint generally involves actions taken in 2008 by parties not related to the Company in connection with the transfer by Ennis Commercial of deeds of trust on a property (“Transfers”) in connection with a loan and loan modification to entities affiliated with Ennis Commercial.  One of the deeds of trust was granted by Ennis Commercial in connection with a loan between an unrelated third-party bank and an entity affiliated with Ennis Commercial.  In 2006, prior to the events in 2008, one of the Company’s predecessors had entered into a Loan Participation Agreement with the unrelated third-party bank in connection with that loan.  Subsequent to the Transfers, Ennis Commercial and various affiliated/related entities filed for bankruptcy protection.  On or about June 27, 2013, the Bankruptcy Court entered an order confirming Ennis Commercial’s Plan of Liquidation, with an effective date of July 12, 2013.  The secured loans at issue were originated and modified by unaffiliated third party banks.  According to the complaint, the Administrator named the Company as a defendant because it was assigned a third-party bank’s claim based on the secured debt against Ennis Commercial’s estate on March 14, 2014.

Plaintiff seeks to undo the Transfers as fraudulent transfers, and seeks $2.7 million in damages, prejudgment interest and attorneys’ fees.  On March 25, 2015, the Company filed a motion to dismiss the complaint providing a number of reasons:  the Company withdrew the claim against the estate and thus removed itself from the equity jurisdiction of the court, the statute of limitations bars the complaint, the delayed discovery rule does not apply to constructive fraudulent transfer, creditors who assigned claims to the Administrator lack standing, and plaintiff failed to prove that Ennis Commercial did not receive reasonably equivalent value.   On June 17, 2015, the court granted the Company’s motion in part (creditors that assigned their claims lacked standing to set aside the transfers under common law) and denied it in part (other standing issues and the applicability of the statute of limitations).  On July 29, 2015, the Company filed its Answer to Complaint / Separate Defenses / Jury Demand.  On August 24, 2015, the Company filed a motion for determination of core/non-core status (seeking to move the matter from the bankruptcy court jurisdiction).  The matter has been set for mediation on November 30, 2015 and the discovery and motion practice (and the attendant expenses) are stayed until the mediation concludes.

Heritage Oaks Bancorp | - 71 -

The Company continues to evaluate the matter, intends to vigorously defend the matter and does not expect the litigation to have a material impact on the long-term financial condition of the Company.

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. 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.

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, 2014, 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.

Management is not aware of any 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, 2014.

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

Unregistered Sales of Equity Securities

None.

Purchases of Equity Securities

None.

Item 3.  Defaults upon Senior Securities

(a)None.

(b)None.

Item 4.   Mine Safety Disclosures

None.

Item 5.  Other Information

None.

Heritage Oaks Bancorp | - 72 -

Item 6.  Exhibits

(a) Exhibits:

Exhibit 10.1 Executive Salary Protection Agreement by and among Jason C. Castle and Heritage Oaks Bancorp and Heritage Oaks Bank, dated August 17, 2015.* **

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 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 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014 (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014 (unaudited), (iv) Condensed Consolidated Statements of Shareholders’ Equity, for the nine months ended September 30, 2015 and 2014 (unaudited), (v) Condensed Consolidated Statements of Cash Flows, for the nine months ended September 30, 2015 and 2014 (unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (unaudited).

* Filed herewith.

** Management contract.

Heritage Oaks Bancorp | - 73 -

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 30, 2015

/s/ Simone F. Lagomarsino	/s/ Jason C. Castle
Simone F. Lagomarsino	Jason C. Castle
President and Chief Executive Officer	Executive Vice President, Chief Financial Officer
(Principal Executive Officer)	(Principal Financial Officer)

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EX-10.1

EXHIBIT 10.1

Executive Salary Protection Agreement

This Executive Salary Protection Agreement (“Agreement”) is made this 18th day of August, 2015, by and between Jason C. Castle (“Executive”) and Heritage Oaks Bank (“Bank”) with respect to the following:

Recitals

WHEREAS, Executive currently serves as the Bank’s Executive Vice President / Chief Financial Officer without benefit of an employment contract;

WHEREAS, The Board of Directors of the Bank has deemed it appropriate for Executive to be granted certain protections in the event of job loss related to a merger or acquisition of the Bank and/or its holding company, Heritage Oaks Bancorp (“the Company”);

NOW, THEREFORE, Bank and Executive agree as follows:

Agreement

1.For good and valuable consideration, receipt of which is hereby acknowledged, Bank undertakes to provide Executive with the salary protection benefits (“the Benefit”) set forth herein, upon the terms and conditions also set forth below.

2.Upon satisfaction of the conditions set forth herein, Executive shall be entitled to a Benefit in the following aggregate amount, to be paid in a lump sum on the forty-fifth (45th) day following the Termination Date, subject to the Waiver and Release Agreement having become effective as described in Paragraph 8 hereof: one and one-half times, (a) Executive’s base annual salary at the rate in effect for Executive immediately prior to the occurrence of the applicable event set forth in Paragraph 7 hereof, plus (b) Executive’s cash bonus earned for the calendar year ended immediately prior to the occurrence of such event.

3.The Benefit shall be earned, and payment made, if and only if, Executive’s employment with the Bank and the Company terminates for one or more of the reasons set forth in Paragraph 5 hereof within three (3) months prior to, or within twelve (12) months following, a change in control event as defined in this Agreement. The first day of the first month following Executive’s termination of employment for such reason or reasons is referred to herein as the “Termination Date.”

4.If the Executive is entitled to the Benefit and timely and properly elects continuation coverage under the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”), in addition to the Benefit, the Bank shall reimburse the Executive for the difference between the monthly COBRA premium paid by the Executive for himself and his dependents and the monthly premium amount paid by similarly situated active executives. Such reimbursement shall be paid to the Executive on the fifteenth (15th) day of the month immediately following the month in which the Executive timely remits the premium payment and submits proof thereof in any form reasonably requested by the Bank. The Executive shall be eligible to receive such reimbursement until the earliest of: (i) the twelve-month anniversary of the Termination Date; (ii) the date the Executive is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which the Executive becomes eligible to receive substantially similar coverage from another employer.

5.For purposes of this Agreement, “termination” means the termination of Executive’s employment with the Bank and the Company as a result of the occurrence of any one or more of the following without Executive’s written consent, but specifically excludes any termination for Cause, as defined below:

a.The termination of Executive’s employment by the Bank without Cause;

b.a reduction of more than 15% in the Executive’s base salary other than a general reduction in base salary that affects all similarly situated employees in substantially the same proportions;

c.a reduction of more than 15% in the Executive’s annual bonus opportunity other than a general reduction in annual bonus that affects all similarly situated employees in substantially the same proportions;

1

d.a relocation of the Executive’s principal place of employment which increases the Executive’s commute to work by more than thirty-five (35) miles, except for required travel on Bank business to an extent substantially consistent with the Executive’s business travel obligations as of the date of relocation;

e.the Bank’s failure to obtain an agreement from any successor to the Bank to assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform if no succession had taken place, except where such assumption occurs by operation of law;

f.material adverse change in the duties assigned to Employee.

6.For purposes of this Agreement, “Cause” shall mean:

a.the Executive’s willful failure to perform his duties (other than any such failure resulting from incapacity due to physical or mental illness);

b.the Executive’s engagement in dishonesty, illegal conduct or gross misconduct;

c.Embezzlement, misappropriation or fraud by the Executive, whether or not related to the Executive’s employment with the Bank;

d.the Executive’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes a misdemeanor involving moral turpitude;

e.the Executive’s violation of a material policy of the Bank or the Company;

f.the Executive’s willful unauthorized disclosure of Confidential Information;

g.any failure by the Executive to comply with the Bank’s or Company’s written policies or rules.

7.For purposes of this Agreement, “change in control event” means the occurrence of any of the following:

a.one person (or more than one person acting as a group) acquires ownership of stock of the Bank or the Company that, together with the stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation; provided that, a Change in Control shall not occur if any person (or more than one person acting as a group) owns more than 50% of the total fair market value or total voting power of the Company’s stock and acquires additional stock;

b.one person (or more than one person acting as a group) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition) ownership of the Bank or the Company’s stock possessing 30% or more of the total voting power of the stock of such corporation;

c.a majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of appointment or election; or

d.the sale of all or substantially all of the Bank’s or Company’s assets.

Notwithstanding the foregoing, such an occurrence shall constitute a “change in control event” only if the occurrence is a “change in ownership,” a “change in effective control” or a “change in the ownership of a substantial portion of the assets” (as such terms are defined for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”)) of the Bank or the Company.

8.A pre-condition to Executive’s right to receive the Benefit shall be Executive’s execution, delivery and non-revocation, and expiration of any revocation period, of a Waiver and Release Agreement in the form attached hereto as Exhibit “A” to the Bank, or its successor-in-interest, all occurring within 30 days of the date of Executive’s termination.  Additionally, if Executive breaches this Agreement at any time that Bank, or Bank’s successor in interest, is making payments to Executive pursuant to Sections 2, 3 or 4, then, in addition to any other rights Bank, or its successor in interest, may have at law or equity, the obligation to make any further payments to Executive will be terminated effective as of the date of Executive’s breach.

2

9.As partial consideration for this Agreement, Executive agrees to refrain, for a period of twelve months following the date of termination of employment, from disclosure of confidential or proprietary information of the Bank, Company, or any customer of the Bank to any person who is not expressly authorized to receive such information.

For purposes of this Agreement, “Confidential Information” is agreed to include, but is not limited to, all information not generally known to the public, in spoken, printed, electronic or any other form or medium, relating directly or indirectly to: business processes, practices, methods, policies, plans, documents, operations, services, strategies, agreements, contracts, terms of agreements, transactions, potential transactions, negotiations, trade secrets, policy  manuals, records, vendor information, financial information, results, accounting records, legal information, marketing information, pricing information, credit information, payroll information, staffing information, personnel information, employee lists, supplier lists, vendor lists, reports, internal controls, security procedures, market studies, sales information, revenue, costs, notes, communications, product plans, ideas, customer information, customer lists,  of the Bank or any existing or prospective customer, supplier, investor or other associated third party, or of any other person or entity that has entrusted information to the Bank in confidence.

10.Restrictive Covenants.

a.Non-solicitation of Employees. The Executive agrees and covenants not to directly or indirectly solicit, recruit, attempt to recruit, or induce the termination of employment of any employee of the Bank or Company, for twelve (12) months beginning on the Termination Date.

b.Non-solicitation of Customers. The Executive understands and acknowledges that because of the Executive’s experience with and relationship to the Bank, he will have access to and learn about much or all of the Bank’s customer information. “Customer Information” includes, but is not limited to, names, phone numbers, addresses, e-mail addresses, account history, preferences, chain of command, pricing information and other information identifying facts and circumstances specific to the customer and relevant to services desirable to the customer.

The Executive understands and acknowledges that loss of this customer relationship and/or goodwill will cause significant and irreparable harm.

The Executive agrees and covenants, for twelve (12) months beginning on the Termination Date, not to directly or indirectly solicit  the Company’s current, former or prospective customers for purposes of offering or accepting goods or services similar to or competitive with those offered by the Bank.

This restriction shall only apply to customers about whom the Executive has information that is not available publicly.

11.Non-disparagement. The Executive agrees and covenants that he will not at any time make, publish or communicate to any person or entity or in any public forum any defamatory or disparaging remarks, comments or statements concerning the Bank or Company or its businesses, or any of its directors, employees, officers, existing and prospective customers, vendors, investors and other associated third parties.

This Section 11 does not, in any way, restrict or impede the Executive from exercising protected rights to the extent that such rights cannot be waived by agreement or from complying with any applicable law or regulation or a valid order of a court of competent jurisdiction or an authorized government agency, provided that such compliance does not exceed that required by the law, regulation or order. The Executive shall promptly provide written notice of any such order to the Company’s Chief Legal Officer.

12.Notwithstanding anything to the contrary contained herein, the obligation to make payment of any severance benefits as provided herein (including, without limitation, any payment contemplated under Section 2), is conditioned upon (i) the Bank obtaining any necessary approval from the Federal Deposit Insurance Corporation, and (ii) compliance with applicable law, including 12 C.F.R. Part 359.  In addition, the Executive covenants and agrees that the Company and its successors and assigns shall have the right to demand the return of any “golden parachute payments” (as defined in 12 C.F.R. Part 359) in the event that any of them obtain information indicating that the Executive committed, is substantially responsible for, or has violated, the respective acts or omissions, conditions, or offenses contained in 12 C.F.R. § 359.4(a)(4), and the Executive shall promptly return any such “golden parachute payment” upon such demand.

3

13.This Agreement, for all purposes, shall be construed in accordance with the laws of California without regard to conflicts of law principles. Any action or proceeding by either of the parties to enforce this Agreement shall be brought only in a state or federal court located in the state of California, county of San Luis Obispo. The parties hereby irrevocably submit to the exclusive jurisdiction of such courts and waive the defense of inconvenient forum to the maintenance of any such action or proceeding in such venue.

14.Unless specifically provided herein, this Agreement contains all of the understandings and representations between the Executive and the Company pertaining to the subject matter hereof and supersedes all prior and contemporaneous understandings, agreements, representations and warranties, both written and oral, with respect to such subject matter. The parties mutually agree that the Agreement can be specifically enforced in court and can be cited as evidence in legal proceedings alleging breach of the Agreement.

15.No provision of this Agreement may be amended or modified unless such amendment or modification is agreed to in writing and signed by the Executive and by the Chief Executive Officer of the Bank. No waiver by either of the parties of any breach by the other party hereto of any condition or provision of this Agreement to be performed by the other party hereto shall be deemed a waiver of any similar or dissimilar provision or condition at the same or any prior or subsequent time, nor shall the failure of or delay by either of the parties in exercising any right, power or privilege hereunder operate as a waiver thereof to preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.

16.Should any provision of this Agreement be held by a court of competent jurisdiction to be enforceable only if modified, or if any portion of this Agreement shall be held as unenforceable and thus stricken, such holding shall not affect the validity of the remainder of this Agreement, the balance of which shall continue to be binding upon the parties with any such modification to become a part hereof and treated as though originally set forth in this Agreement.

17.If, at the time any sums would otherwise be payable under this Agreement, the Bank is deemed to be in troubled condition or under any regulatory order which would result in the payment of such sums being deemed as prohibited “Golden Parachute” payments; or if payment of such sums would violate any law or regulation then applicable to the Bank, this Agreement shall be null and void and no sum shall be due to Executive hereunder.

18.Section 409A. This Agreement is intended to comply with Section 409A or an exemption thereunder and shall be construed and administered in accordance with Section 409A. Notwithstanding any other provision of this Agreement, payments provided under this Agreement may only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a separate payment. For purposes of determining the timing of any payments to be made under this Agreement by reference to Executive’s termination of employment, “termination” and “termination of employment” shall refer to Executive’s “separation from service” as defined for purposes of Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Executive on account of non-compliance with Section 409A.

Notwithstanding any other provision of this Agreement, if any payment or benefit provided to the Executive in connection with his termination of employment is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the Executive is determined to be a “specified employee” as defined in Section 409A(a)(2)(b)(i), then such payment or benefit shall be paid on the first payroll date to occur following the six-month anniversary of the Termination Date (the “Specified Employee Payment Date”). The aggregate of any payments that would otherwise have been paid before the Specified Employee Payment Date shall be paid to the Executive in a lump sum on the Specified Employee Payment Date and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule.

IN WITNESS WHEREOF, this Agreement has been executed as of the date set forth on page 1.

Heritage Oaks Bank	Executive
By: /s/ Simone F. Lagomarsino	/s/ Jason C. Castle
Simone F. Lagomarsino	Jason C. Castle
Chief Executive Officer	EVP/Chief Financial Officer

4

Exhibit A

Form of Waiver and Release Agreement

WAIVER AND RELEASE AGREEMENT

This Waiver and Release Agreement (“Agreement”) is made as of the date last written below, by and between Heritage Oaks Bank (“Employer”) and [*] (“Employee”).  This Agreement is made with specific reference to the following facts:

RECITALS

A.Employer and Employee have entered into an Executive Salary Protection Agreement dated [xx/xx/20xx].

B.A condition precedent to Employer’s obligations under the Executive Salary Protection Agreement is the Employee’s execution of this Agreement upon termination of Employee’s employment.

C.As an at-will employee, Employee is not entitled to receive severance pay or any additional termination benefits from Employer, other than as set forth in the Executive Salary Protection Agreement.

Waiver and Release

NOW, THEREFORE, for and in consideration of the foregoing Recitals, and the mutual covenants, agreements and considerations set forth below, the sufficiency of which are hereby agreed, the parties, intending to be legally bound, agree as follows:

1.In consideration of this Agreement and the consideration extended to Employee under the Executive Salary Protection Agreement which is conditioned upon Employee’s execution of this Agreement, Employee does hereby for himself, his administrators, agents, successors-in-interest and assigns, fully and forever release and discharge Employer, its shareholders, directors, officers, employees, attorneys and agents, and each of them, of and from any and all promises, agreements, claims, demands, actions, causes of action, losses and expenses of every nature whatsoever known or unknown, suspected or unsuspected, filed or unfiled, against them by reason of any occurrences or any damages or injuries in any way sustained by Employee at any time prior to and including the date of this Agreement, including, but not limited to, any and all claims or causes of action arising from his employment by Employer or the termination of his employment with Employer.

1.1.Employee expressly acknowledges and agrees that this Agreement releases claims that include, but are not limited to: breach of contract (express or implied); intentional infliction of emotional harm; wrongful discharge; defamation or other tort claims; attorneys’ fees or court costs; claims arising out of:  Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 2000(e) et seq. (Title VII); the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. Section 621 et seq. (“ADEA”); the Older Workers Benefit Protection Act (“OWBPA”); the California Fair Employment and Housing Act, Part 2.8 Division 3, Title 2 of the Government Code, Section 12900-12996 (FEHA); the Rehabilitation Act of 1973, as amended, Section 1981 of Title 42 of the United States Code; Labor Code Section 1102.1; or any other federal, state, or municipal statute, ordinance or common-law theory relating to wrongful employment termination, breach of contract, breach of fiduciary duty, discrimination in employment or unfair employment practices.

1.2.Employee hereby releases Employer from any unknown or unanticipated damages arising from the matters set forth in this Agreement.  Employee acknowledges that she is familiar with, and hereby waives, all rights recognized by the provisions of Section 1542 of the California Civil Code, which provides as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

Being thus familiar and aware, Employee expressly waives the effects of Civil Code Section 1542, as well as any analogous state or federal statute or regulation.  Thus, notwithstanding the provisions of Civil Code Section 1542, and for the purpose of effecting a full and complete release, Employee expressly acknowledges that this Agreement is intended to include in its effect, without limitation, any and all claims or causes of action which Employee may now have or did have, including claims or causes of action she does not know of or suspect to exist in his favor as of the Effective Date of this Agreement, and that this Agreement contemplates that all such claims and causes of action will be extinguished.  The parties hereby acknowledge and agree that this release does not waive any future claims the Employee may have.

A-1

2.This Agreement shall become effective on the 8th calendar day after the date of execution by Employee (the “Effective Date”).  In all events, however, this Agreement must have been executed by Employee and delivered to Employer no later than 5:00 p.m. on [expiration date].  Thereafter, this Agreement shall be deemed withdrawn by Employer and shall no longer be capable of acceptance or execution by Employee.

2.1.In express consideration for Employee’s voluntary execution and delivery of this Agreement, Employer shall pay to Employee those benefits set forth in the Executive Salary Protection Agreement.

3.Employee acknowledges that, but for this Agreement, she would not be entitled to the benefits set forth in the Employment Agreement.

4.Employee is advised to review this Agreement and its terms with an attorney and any other advisors of his choice.  Employee represents that she understands all terms and conditions of this Agreement completely and executes this Agreement voluntarily, without any inducements, promises, or representations made by Employer or any person purporting to represent or serve Employer, except as stated in this Agreement.

5.The following miscellaneous provisions shall apply to this Agreement:

5.1.This Agreement and any other documents referred to herein shall in all respects be interpreted, enforced and governed by and under the laws of the State of California.  The language of this Agreement shall be construed as a whole according to its fair meaning, and not strictly for or against any of the parties.

5.2.This Agreement contains all of the understandings and agreements of whatsoever kind and nature existing between the parties with respect to the matters addressed herein.  This Agreement may only be amended by a written agreement signed by the parties hereto.

5.3.This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same agreement.

5.4.Each party executing this Agreement has full authority, mental capacity and power to do so, and no further actions are otherwise necessary to bind him to it.

5.5.If any provision of this Agreement or the application of such provision to any person or circumstance shall be held invalid by a court of competent jurisdiction, the remainder of this Agreement or the application of such provision to persons or circumstances other than those to which this Agreement is held invalid shall not be affected thereby.  The parties hereto agree that each provision of this Agreement is a material provision and that failure of any party to perform any one provision hereof shall be the basis of the voiding of the entire Agreement at the option of the other party, or for pursuing an action at law for such breach.  Any party may waive or excuse the failure of any other party to perform any provision of this Agreement; provided, however, that any such waiver shall not preclude the enforcement of this Agreement upon any subsequent breach.  The parties further agree that in the event a court of competent jurisdiction finds any of the provisions of this Agreement to be unenforceable, it is the parties’ intent that such provisions be reduced in scope by the court, but only to the extent being necessary by the court to render the provision reasonable and enforceable.

5.6.Each of the parties agrees to execute any and all further agreements or documents necessary to effectuate the intent and purposes of this Agreement.

5.7.All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person, persons or entities may require.

5.8.The provisions of this Agreement shall be deemed to obligate, extend to and inure to the benefit of the successors, assigns, transferees, grantees and indemnities of the parties.

A-2

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date designated below their signatures.

“EMPLOYEE”	“EMPLOYER”
	HERITAGE OAKS BANK
	By:
Name:	Title:
Dated:	Dated:	*

* No sooner than seven calendar (7) days after the Employee’s signature

A-3

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Simone F. 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 30, 2015
	/s/ Simone F. Lagomarsino
	Simone F. Lagomarsino
	President and Chief Executive Officer
	(Principal Executive Officer)

Heritage Oaks Bancorp

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Jason C. 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 30, 2015

/s/ Jason C. Castle

Jason C. Castle

Executive Vice President and Chief Financial Officer

(Principal Financial 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, 2015

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, 2015, 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 30, 2015	/s/ Simone F. Lagomarsino
	Simone F. 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, 2015

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, 2015, 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 30, 2015	/s/ Jason C. Castle
	Jason C. Castle
	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

XML

Investment Securities (Details 3) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Proceeds from the sales and calls of securities and the associated gains and losses
Proceeds	$ 8,656	$ 19,991	$ 55,184	$ 98,379
Gross gains	136	457	815	814
Gross losses		(7)	(174)	(265)
Income tax expense (benefit) related to net realized gains (losses) on sale of securities	$ 57	$ 189	$ 270	$ 231

XML

Commitments and Contingencies (Details) - Heritage Oaks Bank - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Commitments and Contingencies
Total commitments and standby letters of credit	$ 282,984	$ 253,275
Outstanding financial fixed rate commitments	26,300	35,700
Outstanding financial variable rate commitments	256,700	217,500
Commitments to extend credit
Commitments and Contingencies
Total commitments and standby letters of credit	270,024	237,733
Standby letters of credit
Commitments and Contingencies
Total commitments and standby letters of credit	12,960	15,542
Standby letters of credit | One customer
Commitments and Contingencies
Total commitments and standby letters of credit	$ 10,400	$ 10,400

XML

Income Taxes (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Income Taxes
Deferred tax valuation allowance	$ 0	$ 0
Deferred tax assets	21,422	$ 24,920
Loss of NOL utilization	$ 0

XML

Subsequent Events (Details) - $ / shares		3 Months Ended		9 Months Ended
	Oct. 28, 2015	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Subsequent events
Cash dividend declared (in dollars per share)		$ 0.06	$ 0.03	$ 0.17	$ 0.03
Subsequent Event
Subsequent events
Cash dividend declared (in dollars per share)	$ 0.06

XML

Loans and Allowance for Loan and Lease Losses (Details 5) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Aging of loans held for investment
Current	$ 1,195,930	$ 1,182,868
30-59	794	56
60-89		24
Non-Accruing	10,016	10,535
Total	1,206,740	1,193,483
Accretable yield, or income expected to be collected
Balance at the beginning of the period	4,374
Accretion of income	(1,190)
Reclassifications from nonaccretable difference	861
Balance at the end of the period	4,045	4,374
Non-PCI Loans
Aging of loans held for investment
Current	1,186,668	1,172,944
30-59	794	56
60-89		24
Non-Accruing	9,845	10,159
Total	1,197,307	1,183,183
Contractually required payments receivable of loans purchased during the period
Allowance for loan losses	400	1,000
Non-PCI Loans | Real Estate Secured | Commercial real estate
Aging of loans held for investment
Current	573,330	581,971
30-59	659
Non-Accruing	2,064	2,085
Total	576,053	584,056
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Aging of loans held for investment
Current	154,156	126,516
Non-Accruing	171	124
Total	154,327	126,640
Non-PCI Loans | Real Estate Secured | Farmland
Aging of loans held for investment
Current	107,291	96,708
30-59	85
Total	107,376	96,708
Non-PCI Loans | Real Estate Secured | Multi-family residential
Aging of loans held for investment
Current	75,774	78,645
Total	75,774	78,645
Non-PCI Loans | Real Estate Secured | Construction and land
Aging of loans held for investment
Current	37,726	38,572
Non-Accruing	4,046	5,237
Total	41,772	43,809
Non-PCI Loans | Real Estate Secured | Home equity lines of credit
Aging of loans held for investment
Current	31,524	37,994
Non-Accruing	85	258
Total	31,609	38,252
Non-PCI Loans | Commercial | Commercial and industrial
Aging of loans held for investment
Current	154,625	151,656
30-59	50
60-89		21
Non-Accruing	3,431	1,726
Total	158,106	153,403
Non-PCI Loans | Commercial | Agriculture
Aging of loans held for investment
Current	45,798	52,992
Non-Accruing		686
Total	45,798	53,678
Non-PCI Loans | Commercial | Other
Aging of loans held for investment
Current		14
Total		14
Non-PCI Loans | Consumer
Aging of loans held for investment
Current	6,444	7,876
30-59		56
60-89		3
Non-Accruing	48	43
Total	6,492	7,978
PCI loans
Aging of loans held for investment
Current	9,262	9,924
Non-Accruing	171	376
Total	9,433	10,300
Unpaid Principal Balance	11,830	13,390
Carrying Amount	9,433	10,300
Contractually required payments receivable of loans purchased during the period
Allowance for loan losses	82	0
PCI loans | Real Estate Secured
Aging of loans held for investment
Unpaid Principal Balance	9,002	10,015
Carrying Amount	7,081	7,493
PCI loans | Real Estate Secured | Commercial real estate
Aging of loans held for investment
Current	5,661	4,416
Non-Accruing	53
Total	5,714	4,416
Unpaid Principal Balance	7,210	6,109
Carrying Amount	5,714	4,416
PCI loans | Real Estate Secured | Residential 1 to 4 family
Aging of loans held for investment
Current	568	561
Total	568	561
Unpaid Principal Balance	878	886
Carrying Amount	568	561
PCI loans | Real Estate Secured | Land
Aging of loans held for investment
Current	799
Total	799
PCI loans | Real Estate Secured | Farmland
Aging of loans held for investment
Current		1,665
Total		1,665
Unpaid Principal Balance		2,027
Carrying Amount		1,665
PCI loans | Real Estate Secured | Construction and land
Aging of loans held for investment
Current		851
Total		851
Unpaid Principal Balance	914	993
Carrying Amount	799	851
PCI loans | Commercial
Aging of loans held for investment
Unpaid Principal Balance	2,828	3,375
Carrying Amount	2,352	2,807
PCI loans | Commercial | Commercial and industrial
Aging of loans held for investment
Current	788	1,008
Non-Accruing	118	376
Total	906	1,384
Unpaid Principal Balance	1,328	1,883
Carrying Amount	906	1,384
PCI loans | Commercial | Agriculture
Aging of loans held for investment
Current	1,446	1,423
Total	1,446	1,423
Unpaid Principal Balance	1,500	1,492
Carrying Amount	$ 1,446	$ 1,423

XML

Business Combination (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended	9 Months Ended
	Feb. 28, 2014	Sep. 30, 2014	Sep. 30, 2014
Pro Forma Financial Information
Net interest Income		$ 15,395	$ 45,761
Non-interest income		2,982	7,835
Non-interest expense		13,384	46,844
Income before income tax expense		4,993	6,752
Income tax expense		1,682	2,315
Net income		$ 3,311	$ 4,437
Loss Per Common Share
Basic (in dollars per share)		$ 0.10	$ 0.13
Diluted (in dollars per share)		$ 0.10	$ 0.13
MISN
Business combination
Percentage acquired of outstanding common shares	100.00%
Common stock issued (in shares)	7,541,326
Aggregate cash consideration	$ 8,700
Transaction value	$ 69,000
Closing price (in dollars per share)	$ 7.99

XML

Investment Securities (Tables)

9 Months Ended

Sep. 30, 2015

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, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	49,238	$	346	$	(320)	$	49,264
Mortgage backed securities
U.S. government sponsored entities and agencies	231,779		1,633		(913)		232,499
Non-agency	32,283		40		(147)		32,176
State and municipal securities	100,704		2,321		(331)		102,694
Asset backed securities	16,458		-		(376)		16,082
Other investments	100		-		(65)		35
Total available for sale securities	$	430,562	$	4,340	$	(2,152)	$	432,750
	December 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	19,562	$	191	$	(89)	$	19,664
Mortgage backed securities
U.S. government sponsored entities and agencies	216,492		1,092		(2,186)		215,398
Non-agency	11,891		21		(11)		11,901
State and municipal securities	79,810		2,843		(61)		82,592
Asset backed securities	26,216		-		(191)		26,025
Total available for sale securities	$	353,971	$	4,147	$	(2,538)	$	355,580

Summary of investment securities in an unrealized loss position

	September 30, 2015
	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	$	32,115	$	(320)	$	-	$	-	$	32,115	$	(320)
Mortgage backed securities
U.S. government sponsored entities and agencies	45,582		(376)		32,365		(537)		77,947		(913)
Non-agency	17,219		(142)		1,581		(5)		18,800		(147)
State and municipal securities	25,333		(326)		963		(5)		26,296		(331)
Asset backed securities	-		-		16,082		(376)		16,082		(376)
Other investments	35		(65)		-		-		35		(65)
Total	$	120,284	$	(1,229)	$	50,991	$	(923)	$	171,275	$	(2,152)
	December 31, 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	$	2,795	$	(17)	$	2,607	$	(72)	$	5,402	$	(89)
Mortgage backed securities
U.S. government sponsored entities and agencies	50,583		(670)		58,753		(1,516)		109,336		(2,186)
Non-agency	3,000		(7)		507		(4)		3,507		(11)
State and municipal securities	5,899		(47)		2,245		(14)		8,144		(61)
Asset backed securities	-		-		17,153		(191)		17,153		(191)
Total	$	62,277	$	(741)	$	81,265	$	(1,797)	$	143,542	$	(2,538)

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

	For Three Months Ended				For Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
	(dollars in thousands)
Proceeds	$	8,656	$	19,991	$	55,184	$	98,379
Gross gains	136		457		815		814
Gross losses	-		(7)		(174)		(265)

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

	September 30, 2015				December 31, 2014
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Due one year or less	$	46,219	$	46,291	$	38,674	$	38,587
Due after one year through five years	145,177		145,642		113,081		112,926
Due after five years through ten years	173,928		175,581		137,909		140,115
Due after ten years	65,238		65,236		64,307		63,952
Total	$	430,562	$	432,750	$	353,971	$	355,580

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,
	2015		2014		2015		2014
	(dollars in thousands)
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	161	$	112	$	487	$	226
Mortgage backed securities	938		1,152		2,529		3,370
State and municipal securities	151		38		339		40
Corporate debt securities	-		-		-		6
Asset backed securities	33		99		113		261
Non-taxable earnings on investment securities
State and municipal securities	581		545		1,725		1,452
Total	$	1,864	$	1,946	$	5,193	$	5,355

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Share-based Compensation Plans (Details) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) plan $ / shares shares	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($) plan $ / shares shares	Sep. 30, 2014 USD ($) $ / shares	Dec. 31, 2014 plan shares
Summary of the expenses the Company has recognized related to share-based compensation
Aggregate number of shares that may be granted during any calendar year per individual			250,000
Share-based compensation expense | $	$ 279	$ 257	$ 814	$ 723
Unrecognized compensation expense | $	$ 2,115	2,223	$ 2,115	2,223
Number of shares
Expired (in shares)			(11,812)
Weighted Average Exercise Price
Expired (in dollars per share) | $ / shares			$ 13.18
2015 Equity Incentive Plan
Summary of the expenses the Company has recognized related to share-based compensation
Number of share-based employee compensation plans | plan	1		1
1997 Stock Option Plan and 2005 Equity Based Compensation Plan
Summary of the expenses the Company has recognized related to share-based compensation
Number of share-based employee compensation plans | plan					2
Number of Shares
Granted (in shares)			0
Maximum | 2015 Equity Incentive Plan
Summary of the expenses the Company has recognized related to share-based compensation
Maximum number of shares that may be issued	2,500,000		2,500,000
Stock options
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense | $	$ 126	109	$ 374	370
Unrecognized compensation expense | $	$ 1,133	1,156	$ 1,133	$ 1,156
Weighted-average period over which expense is expected to be recognized			2 years 9 months 18 days
Assumptions used in the calculation of the weighted average fair value of options granted
Expected volatility (as a percent)			36.38%	49.83%
Expected term			5 years	5 years 7 months 28 days
Dividend yield (as a percent)			2.82%	0.59%
Risk free rate (as a percent)			1.54%	1.76%
Weighted-average grant date fair value (in dollars per share) | $ / shares			$ 1.97	$ 3.39
Number of shares
Options Available for Grant (in shares)	2,235,402		2,235,402		2,003,176
Options outstanding, at the beginning of the period (in shares)			742,557
Granted (in shares)			375,429
Forfeited (in shares)			(98,352)
Exercised (in shares)			(47,554)
Options outstanding, at the end of the period (in shares)	960,268		960,268
Weighted Average Exercise Price
Options outstanding, at the beginning of the period (in dollars per share) | $ / shares			$ 6.83
Granted (in dollars per share) | $ / shares			7.70
Forfeited (in dollars per share) | $ / shares			6.94
Exercised (in dollars per share) | $ / shares			4.90
Options outstanding, at the end of the period (in dollars per share) | $ / shares	$ 7.18		$ 7.18
Options vested or expected to vest
Shares	908,273		908,273
Weighted Average Exercise Price (in dollars per share) | $ / shares	$ 7.16		$ 7.16
Weighted Average Remaining Contractual Life			7 years 11 months 1 day
Aggregate Intrinsic Value | $	$ 1,028,678		$ 1,028,678
Options exercisable
Shares	350,160		350,160
Weighted Average Exercise Price (in dollars per share) | $ / shares	$ 6.81		$ 6.81
Weighted Average Remaining Contractual Life			6 years 1 month 2 days
Aggregate Intrinsic Value | $	$ 705,664		$ 705,664
Aggregate intrinsic value of options exercised
Aggregate intrinsic value of options exercised | $			$ 153
Stock options | Minimum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting period			3 years
Stock options | Maximum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting period			5 years
Restricted stock
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense | $	153	148	$ 440	$ 353
Unrecognized compensation expense | $	$ 982	$ 1,067	$ 982	$ 1,067
Weighted-average period over which expense is expected to be recognized			1 year 10 months 24 days
Number of Shares
Balance at the beginning of the period (in shares)			206,443
Granted (in shares)			84,951
Vested (in shares)			(88,534)
Forfeited (in shares)			(30,121)
Balance at the end of the period (in shares)	172,739		172,739
Average Grant Date fair Value
Balance at the beginning of the period (in dollars per share) | $ / shares			$ 6.65
Granted (in dollars per share) | $ / shares			7.87
Vested (in dollars per share) | $ / shares			6.49
Forfeited (in dollars per share) | $ / shares			7.10
Balance at the end of the period (in dollars per share) | $ / shares	$ 7.26		$ 7.26
Restricted stock | Minimum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting period			3 years
Restricted stock | Maximum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting period			5 years
Performance-based
Average Grant Date fair Value
Performance based grant (in shares)			23,408

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Loans and Allowance for Loan and Lease Losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Jun. 30, 2015	Dec. 31, 2014	Jun. 30, 2014	Dec. 31, 2013
Outstanding loan balances
Total gross loans held for investment	$ 1,206,740		$ 1,206,740			$ 1,193,483
Net deferred loan fees	(1,056)		(1,056)			(1,445)
Allowance for loan and lease losses	(17,296)	$ (16,787)	(17,296)	$ (16,787)	$ (16,982)	(16,802)	$ (16,635)	$ (17,859)
Net loans held for investment	1,188,388		1,188,388			1,175,236
Loans held for sale	5,366		5,366			2,586
Concentration of Credit Risk
Loan portfolio collateralized by various forms of real estate	999,400		999,400			978,200
Loans Serviced for Others
Unpaid principal balance of loans serviced for others, exclusive of SBA loans	41,800		41,800			44,800
Unpaid principal balance of SBA loans serviced for others	9,000		9,000			13,000
Recognized gains from the sale of SBA loans	0	0	0	0
Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	1,197,307		1,197,307			1,183,183
Net deferred loan fees	(1,056)		(1,056)			(1,445)
Allowance for loan and lease losses	(17,214)		(17,214)			(16,802)
Net loans held for investment	1,179,037		1,179,037			1,164,936
Loans held for sale	5,366		5,366			2,586
PCI loans
Outstanding loan balances
Total gross loans held for investment	9,433		9,433			10,300
Allowance for loan and lease losses	(82)		(82)
Net loans held for investment	9,351		9,351			10,300
Federal Reserve Bank
Outstanding loan balances
Loans pledged as collateral	601,400		601,400
FHLB secured credit facility	400,100		400,100
FHLB secured borrowings	78,500		78,500
FHLB secured line of credit	11,500		11,500
Reserve maintained for the exercise of repurchase option by buyer	6,900		6,900
MISN
Outstanding loan balances
Total gross loans held for investment	195,800		195,800			239,700
MISN | PCI loans
Outstanding loan balances
Total gross loans held for investment	9,400		$ 9,400			10,300
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
Real Estate Secured
Outstanding loan balances
Total gross loans held for investment	993,992		$ 993,992			975,603
Real Estate Secured | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	986,911		986,911			968,110
Real Estate Secured | PCI loans
Outstanding loan balances
Total gross loans held for investment	7,081		7,081			7,493
Real Estate Secured | Commercial real estate
Outstanding loan balances
Total gross loans held for investment	581,767		581,767			588,472
Real Estate Secured | Commercial real estate | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	576,053		576,053			584,056
Real Estate Secured | Commercial real estate | PCI loans
Outstanding loan balances
Total gross loans held for investment	5,714		5,714			4,416
Real Estate Secured | Residential 1 to 4 family
Outstanding loan balances
Total gross loans held for investment	154,895		154,895			127,201
Real Estate Secured | Residential 1 to 4 family | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	154,327		154,327			126,640
Real Estate Secured | Residential 1 to 4 family | PCI loans
Outstanding loan balances
Total gross loans held for investment	568		568			561
Real Estate Secured | Farmland
Outstanding loan balances
Total gross loans held for investment	107,376		107,376			98,373
Real Estate Secured | Farmland | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	107,376		107,376			96,708
Real Estate Secured | Farmland | PCI loans
Outstanding loan balances
Total gross loans held for investment						1,665
Real Estate Secured | Multi-family residential
Outstanding loan balances
Total gross loans held for investment	75,774		75,774			78,645
Real Estate Secured | Multi-family residential | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	75,774		75,774			78,645
Real Estate Secured | Construction and land
Outstanding loan balances
Total gross loans held for investment	42,571		42,571			44,660
Real Estate Secured | Construction and land | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	41,772		41,772			43,809
Real Estate Secured | Construction and land | PCI loans
Outstanding loan balances
Total gross loans held for investment	799		799			851
Real Estate Secured | Home equity lines of credit
Outstanding loan balances
Total gross loans held for investment	31,609		31,609			38,252
Real Estate Secured | Home equity lines of credit | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	31,609		31,609			38,252
Commercial
Outstanding loan balances
Total gross loans held for investment	206,256		206,256			209,902
Allowance for loan and lease losses	(5,485)	(4,314)	(5,485)	(4,314)	(4,993)	(5,125)	(4,436)	(4,781)
Commercial | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	203,904		203,904			207,095
Commercial | PCI loans
Outstanding loan balances
Total gross loans held for investment	2,352		2,352			2,807
Commercial | Commercial and industrial
Outstanding loan balances
Total gross loans held for investment	159,012		159,012			154,787
Commercial | Commercial and industrial | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	158,106		158,106			153,403
Commercial | Commercial and industrial | PCI loans
Outstanding loan balances
Total gross loans held for investment	906		906			1,384
Commercial | Agriculture
Outstanding loan balances
Total gross loans held for investment	47,244		47,244			55,101
Commercial | Agriculture | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	45,798		45,798			53,678
Commercial | Agriculture | PCI loans
Outstanding loan balances
Total gross loans held for investment	1,446		1,446			1,423
Commercial | Other
Outstanding loan balances
Total gross loans held for investment						14
Commercial | Other | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment						14
Consumer
Outstanding loan balances
Total gross loans held for investment	6,492		6,492			7,978
Allowance for loan and lease losses	(191)	$ (109)	(191)	$ (109)	$ (171)	(202)	$ (100)	$ (131)
Consumer | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	$ 6,492		$ 6,492			$ 7,978

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Investment Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	$ 430,562	$ 353,971
Gross Unrealized Gains	4,340	4,147
Gross Unrealized Losses	(2,152)	(2,538)
Fair Value	432,750	355,580
Obligations of U.S. government agencies
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	49,238	19,562
Gross Unrealized Gains	346	191
Gross Unrealized Losses	(320)	(89)
Fair Value	49,264	19,664
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	231,779	216,492
Gross Unrealized Gains	1,633	1,092
Gross Unrealized Losses	(913)	(2,186)
Fair Value	232,499	215,398
Mortgage-backed securities - Non-agency
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	32,283	11,891
Gross Unrealized Gains	40	21
Gross Unrealized Losses	(147)	(11)
Fair Value	32,176	11,901
State and municipal securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	100,704	79,810
Gross Unrealized Gains	2,321	2,843
Gross Unrealized Losses	(331)	(61)
Fair Value	102,694	82,592
Asset backed securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	16,458	26,216
Gross Unrealized Losses	(376)	(191)
Fair Value	16,082	$ 26,025
Other investments
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	100
Gross Unrealized Losses	(65)
Fair Value	$ 35

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Shareholders' Equity (Details 2) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended			9 Months Ended		12 Months Ended
	Oct. 28, 2015	Aug. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Jun. 01, 2015	Mar. 02, 2015	Dec. 31, 2014
Preferred Stock
Preferred stock, shares authorized			5,000,000			5,000,000		5,000,000			5,000,000
Cash dividend paid on common and preferred stock (in dollars per share)			$ 0.03			$ 0.03		$ 0.03	$ 0.06	$ 0.05
Cash dividend paid on common stock (in dollars per share)		$ 0.06
Cash dividend declared (in dollars per share)			$ 0.06		$ 0.03	$ 0.17	$ 0.03
Shares repurchased			0			3,696		55,428
Average price per share stock repurchase						$ 7.52		$ 7.47
Maximum
Preferred Stock
Repurchase of shares amount authorized				$ 5,000
Subsequent Event
Preferred Stock
Cash dividend declared (in dollars per share)	$ 0.06
Series C preferred stock
Preferred Stock
Issuance of stock (in shares)						348,697
Conversion price (in dollars per share)							$ 3.25
Remaining beneficial conversion feature				$ 70
Preferred stock, shares issued			0			0		0			348,697
Preferred stock, shares outstanding			0			0		0			348,697

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Loans and Allowance for Loan and Lease Losses (Details 6) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended		12 Months Ended
	Feb. 28, 2014	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period		$ 16,982	$ 16,635	$ 16,802	$ 17,859	$ 17,859
Charge-offs		(45)	(12)	(282)	(1,777)
Recoveries		359	164	776	705
Balance, at the end of the period		17,296	16,787	17,296	16,787	16,802
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment		1,114		1,114		1,771
Allowance for loan and lease losses collectively evaluated for impairment		16,100		16,100		15,031
Allowance for Loans acquired with deteriorated credit quality		82		82
Recorded investment in loan individually evaluated for impairment		16,972		16,972		16,390
Recorded investment in loan collectively evaluated for impairment		1,180,335		1,180,335		1,166,752
Recorded investment in loans acquired with deteriorated credit quality		9,433		9,433		10,341
Total gross loans held for investment		1,206,740		1,206,740		1,193,483
Non-PCI Loans
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period				16,802
Balance, at the end of the period		17,214		17,214		16,802
Amount of allowance attributed to:
Total gross loans held for investment		1,197,307		1,197,307		1,183,183
Allowance for loan and lease losses				400		1,000
PCI loans
Allocation of the allowance to various segments in the loan portfolio
Balance, at the end of the period		82		82
Amount of allowance attributed to:
Total gross loans held for investment		9,433		9,433		10,300
Allowance for loan and lease losses				82		0
MISN
Amount of allowance attributed to:
Total gross loans held for investment		195,800		195,800		239,700
Allowance for loan and lease losses	$ 0
MISN | PCI loans
Amount of allowance attributed to:
Total gross loans held for investment		9,400		9,400		10,300
Commercial
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period		4,993	4,436	5,125	4,781	4,781
Charge-offs		(44)		(187)	(650)
Recoveries		327	174	636	628
Provision for loan and lease losses		209	(296)	(89)	(445)
Balance, at the end of the period		5,485	4,314	5,485	4,314	5,125
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment		231		231		151
Allowance for loan and lease losses collectively evaluated for impairment		5,219		5,219		4,974
Allowance for Loans acquired with deteriorated credit quality		35		35
Recorded investment in loan individually evaluated for impairment		5,510		5,510		4,633
Recorded investment in loan collectively evaluated for impairment		198,394		198,394		202,450
Recorded investment in loans acquired with deteriorated credit quality		2,352		2,352		2,819
Total gross loans held for investment		206,256		206,256		209,902
Commercial | Non-PCI Loans
Amount of allowance attributed to:
Total gross loans held for investment		203,904		203,904		207,095
Commercial | PCI loans
Amount of allowance attributed to:
Total gross loans held for investment		2,352		2,352		2,807
Construction and land
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period		1,940	3,054	2,000	3,660	3,660
Charge-offs				(34)
Recoveries		24	9	48	32
Provision for loan and lease losses		(599)	(721)	(649)	(1,350)
Balance, at the end of the period		1,365	2,342	1,365	2,342	2,000
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment						1,472
Allowance for loan and lease losses collectively evaluated for impairment						528
Recorded investment in loan individually evaluated for impairment						6,346
Recorded investment in loan collectively evaluated for impairment						37,461
Recorded investment in loans acquired with deteriorated credit quality						853
Consumer
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period		171	100	202	131	131
Charge-offs		(1)	(2)	(6)	(8)
Recoveries		3	1	11	10
Provision for loan and lease losses		18	10	(16)	(24)
Balance, at the end of the period		191	109	191	109	202
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment		191		191		202
Recorded investment in loan individually evaluated for impairment		163		163		112
Recorded investment in loan collectively evaluated for impairment		6,329		6,329		7,866
Total gross loans held for investment		6,492		6,492		7,978
Consumer | Non-PCI Loans
Amount of allowance attributed to:
Total gross loans held for investment		6,492		6,492		7,978
Unallocated
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period		243	298	346	262	262
Provision for loan and lease losses		(243)	205	(346)	241
Balance, at the end of the period			503		503	346
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment						346
Other real estate secured
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period		9,635	8,747	9,129	9,025	9,025
Charge-offs			(10)	(55)	(1,119)
Recoveries		5		81	35
Adjustments			(20)
Provision for loan and lease losses		615	802	1,100	1,578
Balance, at the end of the period		10,255	9,519	10,255	$ 9,519	9,129
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment		94		94		148
Allowance for loan and lease losses collectively evaluated for impairment		10,120		10,120		8,981
Allowance for Loans acquired with deteriorated credit quality		41		41
Recorded investment in loan individually evaluated for impairment		6,036		6,036		5,299
Recorded investment in loan collectively evaluated for impairment		939,103		939,103		918,975
Recorded investment in loans acquired with deteriorated credit quality		6,282		6,282		$ 6,669
Provision for loan losses, transfer from C&I to Land related to the re-characterization of a loan as part of a TDR			$ (20)
Land | Construction and land
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment		789		789
Allowance for loan and lease losses collectively evaluated for impairment		570		570
Allowance for Loans acquired with deteriorated credit quality		6		6
Recorded investment in loan individually evaluated for impairment		5,263		5,263
Recorded investment in loan collectively evaluated for impairment		36,509		36,509
Recorded investment in loans acquired with deteriorated credit quality		$ 799		$ 799

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2015

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, which is the Company’s sole operating subsidiary, operates branches within San Luis Obispo and Santa Barbara Counties and has a loan production office in Ventura County.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as mortgage, commercial, and consumer loans to customers who are predominately small to medium-sized businesses and to individuals.  As such, the Company is subject to a concentration risk associated with its banking operations in San Luis Obispo and Santa Barbara Counties, and to a lesser degree Ventura County. No one customer accounts for more than 10% of revenue or assets in any period presented and 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.  Operating segments are aggregated into one as operating results for all segments are similar.  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 2014 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 6, 2015; file number 000-25020.

The condensed 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 are included in the Company’s results of operations beginning March 1, 2014.

Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Investment in Non-Consolidated Subsidiaries

The Company accounts for its investment in Heritage Oaks Capital Trust II, Mission Community Capital Trust I, and Santa Lucia Bancorp (CA) Capital Trust, as unconsolidated subsidiaries using the equity method of accounting, as the Company is not the primary beneficiary of the trust.  Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust were acquired as part of the acquisition of Mission Community Bancorp on February 28, 2014.  The sole purpose of each of these trusts is for the issuance of trust preferred securities.

Reclassifications

Certain 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.

Use of Estimates in the Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and general practices within the banking industry require management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Significant Accounting Policies Update

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s 2014 Annual Report filed on Form 10-K.  Changes to accounting policies during the nine months ended September 30, 2015 are discussed below:

During the third quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the allowance for loan and lease losses (“ALLL”).  This enhancement related specifically to the methodology used to calculate the loss rates for loan risk grades within each loan type in the determination of the general reserve component of the ALLL.  The enhanced methodology uses more granular loan level data to calculate loss rates for specific loan grades within each loan type, allowing for more detailed loan migration analysis, and the ability to determine more precise average loss rates for each loan risk grade.  Although the total general reserve component of the ALLL for each loan type and portfolio segment is still based on total average historical losses for their respective loan types, management believes the allocation of the ALLL to each loan risk grade, within each loan type and the evaluation of the loss emergence period has become more precise under this methodology enhancement.

The implementation of the ALLL model enhancements did not result in a required increase or decrease in the balance of the ALLL, or a material impact to the overall allocation of the ALLL.  The ALLL model enhancement has allowed the Company to apply more precision in determining loss rates for specific loan grades within each loan type.  The section of the accounting policy for the ALLL, which was updated for this methodology enhancement is illustrated below:

Allowance for Loan and Lease Losses

The Company manages credit risk not only through extensive risk analyses performed prior to a loan’s approval, but also through the ongoing monitoring of loans within the portfolio, and more specifically certain types of loans that generally involve a greater degree of risk, such as commercial real estate, commercial lines of credit, agriculture, and construction/land loans. The Company monitors loans in the portfolio through an exhaustive internal process, at least quarterly, as well as with the assistance of independent loan reviews. These reviews generally not only focus on problem loans, but also internally rated “pass” credits within certain pools of loans that may be expected to experience stress due to economic conditions. This process allows the Company to validate credit risk grade ratings, underwriting structure, and the Company’s estimated exposure in the current economic environment as well as enhance communications with borrowers where necessary in an effort to mitigate potential future losses. All significant problem loans are analyzed in detail at least quarterly, in order to properly estimate potential exposure to loss associated with these loans in a timely manner.

Each segment of loans in the portfolio possesses varying degrees of risk, based on, among other things, the type of loan, the purpose of the loan, the type of collateral securing the loan, and the sensitivity the borrower has to changes in certain external factors such as economic conditions. The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors management regularly considers when evaluating the adequacy of the ALLL:

· Real estate secured loans – consist primarily of loans secured by commercial real estate, multi-family, farmland, and 1 to 4 family residential properties. As the majority of this segment is comprised of commercial real estate loans, risks associated with this segment lie primarily within that loan type. Adverse economic conditions may result in a decline in business activity and increased vacancy rates for commercial properties. These factors, in conjunction with a decline in real estate prices, may expose the Company to the potential for losses if a borrower cannot continue to service the loan with operating revenues, and the value of the property has declined to a level such that it no longer fully covers the Company’s recorded investment in the loan.

· Construction and land – although construction and land loans generally possess a higher inherent risk of loss than other loans, improvements in the mix, collateral and nature of loans help to mitigate risks within this segment of the portfolio. Risk arises from the necessity to complete projects within specified cost and time limits. Trends in the construction industry may also impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of future construction projects.

· Commercial and industrial – consist primarily of commercial and industrial loans (business lines of credit), agriculture loans, and other commercial purpose loans. Repayment of commercial and industrial loans is generally provided from the cash flows of the related business to which the loan was made. Adverse changes in economic conditions may result in a decline in business activity, which can impact a borrower’s ability to continue to make scheduled payments. The risk of repayment of agriculture loans arises largely from factors beyond the control of the Company or the related borrower, such as commodity prices, general weather conditions, and drought.

· Consumer – the consumer loan portfolio is comprised primarily of a large number of small loans with scheduled amortization over a specific period. The majority of consumer loans include revolving credit plans, installment loans and credit card balances. Weakened economic conditions may result in an increased level of delinquencies within this segment, as economic pressures may impact the capacity of such borrowers to repay their obligations.

ALLL Model Methodology

The ALLL is maintained at a level which, in management’s judgment, is appropriate to absorb probable credit losses inherent in the loans within the loan portfolio as of the balance sheet date. The amount of the ALLL is based on management’s evaluation of the collectability of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, the level of certain classified balances and specific impaired loans, and economic conditions and the related impact on specific borrowers and industry groups. The ALLL is increased by provisions for loan and lease losses, which are charged to earnings and reduced (or potentially increased) by charge-offs, net of recoveries. Changes in the ALLL relating to impaired loans, including troubled debt restructurings (“TDRs”), are charged or credited to the provision for loan and lease losses. Because of uncertainties inherent in the estimation process, management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change.

The process in which management determines the appropriate level of the ALLL involves the exercise of considerable judgment and the use of estimates. While management utilizes its best judgment and all available information in determining the adequacy of the ALLL, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond the Company’s control, including but not limited to, the performance of the loan portfolio, changes in current and future economic conditions and the view of regulatory agencies regarding the level of classified assets. Weakness in economic conditions and any other factor that may adversely affect credit quality and or that may result in higher levels of: past due and non-accruing loans, loan defaults, and or increased loan charge-offs, may require additional provisions for loan and lease losses in future periods and a higher balance in the Company’s ALLL. The ALLL, as more fully described below, is comprised of three components: general reserves, specific loan reserves, and a reserve for purchased credit impaired (“PCI”) loans.

General Reserves – The general reserve component of the ALLL, which is not attributable to loans specifically identified as impaired, is determined through a two-step process. First a quantitative allocation is determined by pooling performing loans by collateral type and purpose. These pools of loans are then further segmented by an internal risk grading system that classifies loans as: pass, special mention, substandard and doubtful. The Company’s risk grade system allows management, among other things, to identify the risk associated with each loan, and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are generally assigned based on information concerning the borrower and the strength of the collateral. Risk grades are reviewed regularly by the Company’s credit committee and are scrutinized by independent loan reviews performed semi-annually, as well as by regulatory agencies during scheduled examinations. Once credit risk grades have been assigned, estimated loss rates are then applied to each segment according to risk grade to determine the amount of the general portfolio allocation.

Estimated loss rates are determined through a migration analysis of historical losses for each segment of the loan portfolio, based on the Company’s prior experience with such loans, and the use of detailed loan level data, encompassing historical losses and average balance information for each loan type and risk grade.  The following provides brief definitions for credit risk grade ratings assigned to loans in the portfolio:

· Pass – credits that have strong credit quality with adequate collateral or secondary source of repayment and little existing or known weaknesses. However, pass may include credits with exposure to certain potential factors that may adversely impact the credit, if they materialize, resulting in these credits being put on a watch list to monitor more closely than other pass rated credits. Such factors may be credit / relationship specific or general to an entire industry.

· Special Mention – credits that have potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit at some future date.

· Substandard – credits that have a defined weakness or weaknesses which may jeopardize the orderly liquidation of the loan through cash flows, making it likely that repayment may have to come from some other source, such as the liquidation of collateral. The Company is more likely to incur losses on substandard credits if the weakness or weaknesses identified in the credit are not corrected.

· Doubtful – credits that possess the characteristics of a substandard credit, but because of certain existing deficiencies related to the credit, full collection is highly questionable. The probability of incurring some loss on such credits is high, but because of certain important and reasonably specific pending factors which may work to the advantage of strengthening the credit, charge-off is deferred until such time as the Company becomes reasonably certain that certain pending factors related to the credit will no longer provide some form of benefit.

The second component of the general reserve allocation of the ALLL is the qualitative allocation, and is determined by estimates the Company makes in regard to certain internal and external factors that may have either a positive or negative impact on the overall losses inherent in the loan portfolio. Internal factors include trends in credit quality of the loan portfolio, the existence and the effects of concentrations, the composition and volume of the loan portfolio and the scope and frequency of the loan review process as well as any other factor determined by management to have an impact on the credit quality of the loan portfolio. External factors include local, state and national economic and business conditions, as well as the estimated impact that environmental factors may have on certain segments of the loan portfolio, such as drought. While management regularly reviews the estimated impact these internal and external factors are expected to have on the loan portfolio, there can be no assurance that an adverse change in any one or combination of these factors will not be in excess of management’s expectations.

Recent Accounting Standards Updates

Recent Accounting Guidance Adopted

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 interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors. This ASU provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure 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. The amendments in this ASU are effective for public business entities for interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination.  The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date.  The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued 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, 2018. 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.

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Loans and Allowance for Loan and Lease Losses (Details 2) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) loan	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($) loan	Sep. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	$ 10,788		$ 10,788		$ 9,978
Recorded investment with related allowance	6,184		6,184		6,417
Unpaid principal balance without related allowance	16,240		16,240		14,543
Unpaid principal balance with related allowance	7,559		7,559		10,241
Specific Allowance for Impaired Loans	1,114		1,114		1,771
Average recorded investment without related allowance	11,087	$ 8,192	11,596	$ 8,804
Average recorded investment with related allowance	5,989	8,627	5,762	8,946
Interest income recognized without related allowance	94	75	275	200
Interest income recognized with related allowance	22	57	50	148
Recorded Investment	16,972		16,972		16,395
Unpaid Principal Balance	23,799		23,799		24,784
Average Recorded Investment	17,076	16,819	17,358	17,750
Interest Income Recognized	116	132	325	348
PCI loans
Investment in impaired loans
Recorded investment without related allowance	8,170		8,170		10,341
Recorded investment with related allowance	1,263		1,263
Unpaid principal balance without related allowance	10,552		10,552		13,390
Unpaid principal balance with related allowance	1,278		1,278
Specific Allowance for Impaired Loans	82		82
Average recorded investment without related allowance	8,290	11,643	8,535	12,002
Average recorded investment with related allowance	1,281		1,308
Interest income recognized without related allowance	233	405	1,104	796
Interest income recognized with related allowance	25		86
Recorded Investment	9,433		9,433
Unpaid Principal Balance	11,830		11,830
Average Recorded Investment	9,571		9,843
Interest Income Recognized	$ 258		$ 1,190
Residential 1 to 4 family
Foreclosures
Number of foreclosures | loan	0		0
Foreclosed assets	$ 0		$ 0
Real Estate Secured | Commercial real estate | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	4,212		4,212		4,000
Recorded investment with related allowance	453		453		498
Unpaid principal balance without related allowance	5,676		5,676		6,255
Unpaid principal balance with related allowance	671		671		688
Specific Allowance for Impaired Loans	94		94		148
Average recorded investment without related allowance	4,247	2,269	4,158	1,862
Average recorded investment with related allowance	461	331	476	331
Interest income recognized without related allowance	36	6	110	19
Real Estate Secured | Commercial real estate | PCI loans
Investment in impaired loans
Recorded investment without related allowance	5,178		5,178		4,432
Recorded investment with related allowance	536		536
Unpaid principal balance without related allowance	6,663		6,663		6,109
Unpaid principal balance with related allowance	547		547
Specific Allowance for Impaired Loans	41		41
Average recorded investment without related allowance	5,189	4,993	5,297	5,160
Average recorded investment with related allowance	537		536
Interest income recognized without related allowance	122	130	807	327
Interest income recognized with related allowance	10		38
Real Estate Secured | Construction and land | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	1,263		1,263		1,470
Recorded investment with related allowance	4,000		4,000		4,876
Unpaid principal balance without related allowance	4,517		4,517		2,355
Unpaid principal balance with related allowance	5,152		5,152		8,499
Specific Allowance for Impaired Loans	789		789		1,472
Average recorded investment without related allowance	1,556	1,315	1,798	1,550
Average recorded investment with related allowance	4,084	6,380	4,147	6,602
Interest income recognized without related allowance	24	7	71	37
Interest income recognized with related allowance		16		58
Real Estate Secured | Construction and land | PCI loans
Investment in impaired loans
Recorded investment without related allowance	554		554		853
Recorded investment with related allowance	245		245
Unpaid principal balance without related allowance	666		666		993
Unpaid principal balance with related allowance	248		248
Specific Allowance for Impaired Loans	6		6
Average recorded investment without related allowance	553	923	556	943
Average recorded investment with related allowance	254		272
Interest income recognized without related allowance	19	21	58	47
Interest income recognized with related allowance	5		15
Real Estate Secured | Residential 1 to 4 family | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	788		788		260
Unpaid principal balance without related allowance	964		964		383
Average recorded investment without related allowance	748	222	602	496
Interest income recognized without related allowance	10	6	12	16
Real Estate Secured | Residential 1 to 4 family | PCI loans
Investment in impaired loans
Recorded investment without related allowance	568		568		564
Unpaid principal balance without related allowance	878		878		886
Average recorded investment without related allowance	566	565	565	585
Interest income recognized without related allowance	18	13	48	29
Real Estate Secured | Farmland | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	498		498		283
Unpaid principal balance without related allowance	498		498		282
Average recorded investment without related allowance	385	292	558	294
Interest income recognized without related allowance	7	2	26	12
Real Estate Secured | Farmland | PCI loans
Investment in impaired loans
Recorded investment without related allowance					1,673
Unpaid principal balance without related allowance					2,027
Average recorded investment without related allowance		1,699		1,706
Interest income recognized without related allowance		20		64
Real Estate Secured | Home equity lines of credit | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	85		85		258
Unpaid principal balance without related allowance	86		86		340
Average recorded investment without related allowance	85	100	119	100
Real Estate Secured | Home equity lines of credit | PCI loans
Investment in impaired loans
Average recorded investment without related allowance		81		81
Interest income recognized without related allowance		2		4
Commercial | Commercial and industrial | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	3,126		3,126		2,875
Recorded investment with related allowance	1,731		1,731		1,043
Unpaid principal balance without related allowance	3,528		3,528		3,967
Unpaid principal balance with related allowance	1,736		1,736		1,054
Specific Allowance for Impaired Loans	231		231		151
Average recorded investment without related allowance	3,252	3,152	3,541	3,616
Average recorded investment with related allowance	1,444	1,916	1,139	2,013
Interest income recognized without related allowance	10	51	45	111
Interest income recognized with related allowance	22	41	50	90
Commercial | Commercial and industrial | PCI loans
Investment in impaired loans
Recorded investment without related allowance	424		424		1,388
Recorded investment with related allowance	482		482
Unpaid principal balance without related allowance	845		845		1,883
Unpaid principal balance with related allowance	483		483
Specific Allowance for Impaired Loans	35		35
Average recorded investment without related allowance	542	2,081	680	2,236
Average recorded investment with related allowance	490		500
Interest income recognized without related allowance	44	185	104	263
Interest income recognized with related allowance	10		33
Commercial | Agriculture | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	653		653		720
Unpaid principal balance without related allowance	744		744		760
Average recorded investment without related allowance	654	724	671	741
Interest income recognized without related allowance	6	2	7	2
Commercial | Agriculture | PCI loans
Investment in impaired loans
Recorded investment without related allowance	1,446		1,446		1,431
Unpaid principal balance without related allowance	1,500		1,500		1,492
Average recorded investment without related allowance	1,440	1,301	1,437	1,291
Interest income recognized without related allowance	30	34	87	62
Consumer | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	163		163		112
Unpaid principal balance without related allowance	227		227		$ 201
Average recorded investment without related allowance	160	118	149	145
Interest income recognized without related allowance	$ 1	$ 1	$ 4	$ 3

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Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2015

Shareholders' Equity

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

	Basel III			Pre-Basel III
	Regulatory			Regulatory
	Standard to be			Standard to be
	Well	September 30, 2015		Well	December 31, 2014		September 30, 2014
	Capitalized (1)	Company	Bank	Capitalized (1)	Company	Bank	Company	Bank
Ratio
Common Equity Tier I capital	6.50%	12.81%	12.52%	N/A	N/A	N/A	N/A	N/A
Leverage ratio	5.00%	9.96%	9.44%	5.00%	10.22%	9.83%	10.00%	9.77%
Tier I capital	8.00%	13.20%	12.52%	6.00%	13.13%	12.63%	12.87%	12.58%
Total risk-based capital	10.00%	14.46%	13.77%	10.00%	14.38%	13.88%	14.12%	13.83%

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

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Share-based Compensation Plans (Tables)

9 Months Ended

Sep. 30, 2015

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,
	2015		2014		2015		2014
	(dollars in thousands)
Share-based compensation expense:
Stock options	$	126	$	109	$	374	$	370
Restricted stock	153		148		440		353
Total expense	$	279	$	257	$	814	$	723
Unrecognized compensation expense:
Stock options	$	1,133	$	1,156
Restricted stock	982		1,067
Total unrecognized expense	$	2,115	$	2,223

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

	Number of	Average Grant
	Shares	Date Fair Value
Balance December 31, 2014	206,443	$	6.65
Granted	84,951	7.87
Vested	(88,534)	6.49
Forfeited	(30,121)	7.10
Balance September 30, 2015	172,739	$	7.26

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

	For the Nine Months Ended
	September 30,
	2015		2014
Expected volatility	36.38%		49.83%
Expected term (years)	5.00		5.66
Dividend yield	2.82%		0.59%
Risk free rate	1.54%		1.76%
Weighted-average grant date fair value	$	1.97	$	3.39

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

	Options Outstanding			Options
	Number	Weighted Average		Available for
	of Shares	Exercise Price		Grant (1)
Balance, December 31, 2014	742,557	$	6.83	2,003,176
Granted	375,429	7.70
Forfeited	(98,352)	6.94
Exercised	(47,554)	4.90
Expired	(11,812)	13.18
Balance,  September 30, 2015	960,268	$	7.18	2,235,402

(1)    Shares available for grant as of December 31, 2014 were from the 2005 Equity Based Compensation Plan, which expired in March 2015.  As of September 30, 2015, no further grants can be made from that plan.  Shares available for grant as of September 30, 2015 are from the 2015 Equity Incentive Plan, which was approved by the Company’s shareholders in May 2015.

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

	September 30, 2015
				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	908,273	$	7.16	7.92	$	1,028,678
Exercisable	350,160	$	6.81	6.09	$	705,664

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Loans and Allowance for Loan and Lease Losses (Details 3) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) loan	Sep. 30, 2014 USD ($) item	Sep. 30, 2015 USD ($) item loan	Sep. 30, 2014 USD ($) item loan	Dec. 31, 2014 USD ($)
Troubled debt restructurings
Accruing loans that were classified as TDRs	$ 8,622		$ 8,622		$ 6,511
Non-Accruing loans that were classified as TDRs	7,305		7,305		7,057
Total loans classified as TDRs	15,927		15,927		13,568
Loans modified as a TDRs	$ 100		$ 100
Number of loans modified as a TDRs | loan	1		1
Number of TDRs	12	6	37	24
Pre-Modification Outstanding Recorded Investment	$ 2,254	$ 912	$ 7,906	$ 3,684
Post-Modification Outstanding Recorded Investment	2,254	$ 912	$ 7,906	$ 3,684
Minimum
Troubled debt restructurings
Period of maturity date extensions granted			6 years
Maximum
Troubled debt restructurings
Period of maturity date extensions granted			10 years
Non-PCI Loans
Troubled debt restructurings
Accruing loans that were classified as TDRs	7,127		$ 7,127		6,251
Non-Accruing loans that were classified as TDRs	7,176		7,176		6,950
Total loans classified as TDRs	14,303		$ 14,303		13,201
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs | item			1	1
Recorded Investment			$ 18	$ 30
Non-PCI Loans | Real Estate Secured | Commercial real estate
Troubled debt restructurings
Accruing loans that were classified as TDRs	2,601		2,601		2,449
Non-Accruing loans that were classified as TDRs	209		209		78
Total loans classified as TDRs	2,810		$ 2,810		2,527
Number of TDRs | loan			4	1
Pre-Modification Outstanding Recorded Investment			$ 670	$ 166
Post-Modification Outstanding Recorded Investment			670	$ 166
Non-PCI Loans | Real Estate Secured | Construction and land
Troubled debt restructurings
Accruing loans that were classified as TDRs	1,217		1,217		1,109
Non-Accruing loans that were classified as TDRs	4,046		4,046		5,149
Total loans classified as TDRs	5,263		$ 5,263		6,258
Number of TDRs		2	1	4
Pre-Modification Outstanding Recorded Investment		$ 535	$ 97	$ 811
Post-Modification Outstanding Recorded Investment		$ 535	97	$ 811
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Troubled debt restructurings
Accruing loans that were classified as TDRs	617		617		130
Non-Accruing loans that were classified as TDRs	171		171		130
Total loans classified as TDRs	$ 788		$ 788		260
Number of TDRs | loan	1		4
Pre-Modification Outstanding Recorded Investment	$ 129		$ 753
Post-Modification Outstanding Recorded Investment	129		753
Non-PCI Loans | Real Estate Secured | Farmland
Troubled debt restructurings
Accruing loans that were classified as TDRs	498		498		283
Total loans classified as TDRs	$ 498		$ 498		283
Number of TDRs | loan	1		2
Pre-Modification Outstanding Recorded Investment	$ 232		$ 730
Post-Modification Outstanding Recorded Investment	232		730
Non-PCI Loans | Commercial | Commercial and industrial
Troubled debt restructurings
Accruing loans that were classified as TDRs	1,425		1,425		2,177
Non-Accruing loans that were classified as TDRs	2,740		2,740		1,593
Total loans classified as TDRs	$ 4,165		$ 4,165		3,770
Number of TDRs	4	4	13	14
Pre-Modification Outstanding Recorded Investment	$ 323	$ 377	$ 2,436	$ 1,604
Post-Modification Outstanding Recorded Investment	323	$ 377	$ 2,436	$ 1,604
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs | item			1	1
Recorded Investment			$ 18	$ 30
Non-PCI Loans | Commercial | Agriculture
Troubled debt restructurings
Accruing loans that were classified as TDRs	653		653		34
Total loans classified as TDRs	$ 653		$ 653		34
Number of TDRs | loan	3		4	1
Pre-Modification Outstanding Recorded Investment	$ 714		$ 1,612	$ 662
Post-Modification Outstanding Recorded Investment	714		1,612	$ 662
Non-PCI Loans | Consumer
Troubled debt restructurings
Accruing loans that were classified as TDRs	116		116		69
Non-Accruing loans that were classified as TDRs	10		10
Total loans classified as TDRs	$ 126		$ 126		69
Number of TDRs | loan	1		2	1
Pre-Modification Outstanding Recorded Investment	$ 11		$ 68	$ 73
Post-Modification Outstanding Recorded Investment	11		68	$ 73
PCI loans
Troubled debt restructurings
Accruing loans that were classified as TDRs	1,495		1,495		260
Non-Accruing loans that were classified as TDRs	129		129		107
Total loans classified as TDRs	1,624		1,624		367
PCI loans | Real Estate Secured | Commercial real estate
Troubled debt restructurings
Accruing loans that were classified as TDRs	928		928		223
Non-Accruing loans that were classified as TDRs	53		53
Total loans classified as TDRs	$ 981		$ 981		223
Number of TDRs | loan	1		5	1
Pre-Modification Outstanding Recorded Investment	$ 348		$ 993	$ 230
Post-Modification Outstanding Recorded Investment	348		993	$ 230
PCI loans | Real Estate Secured | Construction and land
Troubled debt restructurings
Accruing loans that were classified as TDRs	51		51
Total loans classified as TDRs	$ 51		$ 51
Number of TDRs | loan			1
Pre-Modification Outstanding Recorded Investment			$ 50
Post-Modification Outstanding Recorded Investment			$ 50
PCI loans | Real Estate Secured | Commercial and industrial
Troubled debt restructurings
Number of TDRs | loan	1		1	2
Pre-Modification Outstanding Recorded Investment	$ 497		$ 497	$ 138
Post-Modification Outstanding Recorded Investment	497		497	$ 138
PCI loans | Commercial | Commercial and industrial
Troubled debt restructurings
Accruing loans that were classified as TDRs	516		516		37
Non-Accruing loans that were classified as TDRs	76		76		107
Total loans classified as TDRs	$ 592		$ 592		$ 144

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2015

Earnings Per Share

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

	For the Three Months Ended September 30,
	2015			2014
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands, except per share data)
Net income	$	4,002		$	3,429
Accretion on preferred stock	-			-
Net income available to common shareholders	$	4,002		$	3,429
Weighted average shares outstanding			34,158,081			33,992,465
Basic earnings per common share	$	0.12		$	0.10
Dilutive effect of share-based compensation awards			124,286			153,735
Weighted average diluted shares outstanding			34,282,367			34,146,200
Diluted earnings per common share	$	0.12		$	0.10

	For the Nine Months Ended September 30,
	2015			2014
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands, except per share data)
Net income	$	11,871		$	4,613
Accretion on preferred stock	70			-
Net income available to common shareholders	$	11,801		$	4,613
Weighted average shares outstanding			34,111,079			32,322,194
Basic earnings per common share	$	0.35		$	0.14
Dilutive effect of share-based compensation awards			147,285			197,324
Weighted average diluted shares outstanding			34,258,364			32,519,518
Diluted earnings per common share	$	0.34		$	0.14

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies.

Schedule of outstanding financial commitments

	September 30,		December 31,
	2015		2014
	(dollars in thousands)
Commitments to extend credit	$	270,024	$	237,733
Standby letters of credit (1)	12,960		15,542
Total commitments and standby letters of credit	$	282,984	$	253,275

(1)Includes a standby letter of credit to one customer in the amount of $10.4 million at September 30, 2015 and December 31, 2014.

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Condensed Consolidated Statements of Cash Flows $ in Thousands	9 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)
Cash Flows from Operating Activities
Net income	$ 11,871	$ 4,613
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	1,538	1,394
Write-downs on premises and equipment held for sale	68	988
Amortization of premiums / discounts	4,999	3,646
Amortization of intangible assets	787	760
Accretion of discount on acquired and purchased loans, net	(1,524)	(1,791)
Share-based compensation expense	814	723
Gain on extinguishment of debt	(552)
Gain on sale of available for sale securities	(641)	(549)
Gain on sale of assets	(8)
Gain on sale of loans held for sale	(1,277)	(967)
Originations of loans held for sale	(104,656)	(62,385)
Proceeds from sale of loans held for sale	103,153	59,761
Net increase in bank owned life insurance	(480)	(460)
Decrease in deferred tax assets	3,255	3,269
Tax impact of share-based compensation	(96)	(20)
Increase in other assets and other liabilities, net	1,487	1,206
Net cash provided by operating activities	18,738	10,188
Cash Flows from Investing Activities
Net cash and cash equivalents acquired in MISN Transaction		28,891
Purchase of securities, available for sale	(173,560)	(155,956)
Sale of securities, available for sale	55,184	98,379
Proceeds from principal paydowns of securities, available for sale	37,690	30,799
Proceeds from sale of premises and equipment	9	3,594
Purchase of FHLB stock		(941)
Increase in loans, net	(12,820)	(44,855)
Recoveries on previously charged-off loans	776	705
Proceeds from sale of foreclosed collateral	91	(5,122)
Purchase of property, premises and equipment, net	(1,414)
Proceeds from property, premises and equipment, net		1,628
Net cash used in investing activities	(94,044)	(42,878)
Cash Flows from Financing Activities
Increase in deposits, net	176,947	77,509
Proceeds from Federal Home Loan Bank borrowing	36,000	25,000
Repayments of Federal Home Loan Bank borrowing	(52,898)	(44,000)
Decrease in junior subordinated debentures	(2,550)
Proceeds from exercise of stock options, including tax benefits	324	178
Stock issuance costs		(381)
Dividends paid	(5,799)	(1,027)
Repurchases of common stock	(28)
Net cash provided by financing activities	151,996	57,279
Net increase in cash and cash equivalents	76,690	24,589
Cash and cash equivalents, beginning of period	35,580	26,238
Cash and cash equivalents, end of period	112,270	50,827
Cash Flow Information
Interest paid	4,479	3,631
Income taxes paid	1,390	600
Non-Cash Flow Information
Change in unrealized gain on available for sale securities	1,220	6,206
Loans transferred to foreclosed assets	416	1,564
Premises transferred to held for sale		1,730
Accretion of preferred stock	$ 70
Common stock issued in MISN Transaction		$ 60,255

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Summary of Significant Accounting Policies (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2015 USD ($) segment	Dec. 31, 2014 USD ($)	Feb. 28, 2014
Assets the Company measures at fair value on a recurring basis
Total assets	$ 1,873,925	$ 1,710,127
Nature of Operations
Number of business segments | segment	1
MISN
Assets the Company measures at fair value on a recurring basis
Percentage acquired of outstanding common shares			100.00%
All Non-United States countries
Assets the Company measures at fair value on a recurring basis
Total assets	$ 0
Revenue	$ 0

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Investment Securities (Details 4) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Available for sale securities, Amortized cost
Due one year or less	$ 46,219	$ 38,674
Due after one year through five years	145,177	113,081
Due after five years through ten years	173,928	137,909
Due after ten years	65,238	64,307
Total	430,562	353,971
Available for sale securities, Fair Value
Due one year or less	46,291	38,587
Due after one year through five years	145,642	112,926
Due after five years through ten years	175,581	140,115
Due after ten years	65,236	63,952
Total	432,750	355,580
Securities pledged to secure public deposits
Available for sale securities, Amortized cost
Total	141,500	67,300
Available for sale securities, Fair Value
Total	$ 148,900	$ 72,500

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Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Calculation of both basic and diluted earnings (loss) per common share
Net income	$ 4,002	$ 3,429	$ 11,871	$ 4,613
Accretion on preferred stock			70
Net income available to common shareholders	$ 4,002	$ 3,429	$ 11,801	$ 4,613
Weighted average shares outstanding	34,158,081	33,992,465	34,111,079	32,322,194
Basic earnings per common share (in dollars per share)	$ 0.12	$ 0.10	$ 0.35	$ 0.14
Dilutive effect of share-based compensation awards (in shares)	124,286	153,735	147,285	197,324
Weighted average diluted shares outstanding	34,282,367	34,146,200	34,258,364	32,519,518
Diluted earnings per common share (in dollars per share)	$ 0.12	$ 0.10	$ 0.34	$ 0.14
Stock options
Shares excluded from the calculation of diluted earnings per share
Shares excluded from the calculation of diluted earnings per share	126,000	160,000	35,000	114,000

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Assets
Cash and due from banks	$ 22,469	$ 12,548
Interest earning deposits in other banks	89,801	23,032
Total cash and cash equivalents	112,270	35,580
Investment securities available for sale, at fair value	432,750	355,580
Loans held for sale, at lower of cost or fair value	5,366	2,586
Gross loans held for investment	1,206,740	1,193,483
Net deferred loan fees	(1,056)	(1,445)
Allowance for loan and lease losses	(17,296)	(16,802)
Net loans held for investment	1,188,388	1,175,236
Premises and equipment, net	37,686	37,820
Premises held for sale	1,910	1,978
Bank-owned life insurance	25,191	24,711
Goodwill	24,885	24,885
Deferred tax assets, net	21,422	24,920
Federal Home Loan Bank stock	7,853	7,853
Other intangible assets	4,560	5,347
Other assets	11,644	13,631
Total assets	1,873,925	1,710,127
Liabilities
Non-interest bearing deposits	544,782	461,479
Interest bearing deposits	1,026,988	933,325
Total deposits	1,571,770	1,394,804
Short term FHLB borrowing	13,500	25,000
Long term FHLB borrowing	65,046	70,558
Junior subordinated debentures	10,389	13,233
Other liabilities	7,762	8,592
Total liabilities	1,668,467	1,512,187
Shareholders' Equity
Preferred stock, 5,000,000 shares authorized: Series C preferred stock, $3.25 per share stated value; issued and outstanding: 0 shares and 348,697 shares at September 30, 2015, and December 31, 2014, respectively.		1,056
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 34,352,445 shares and 33,905,060 shares at September 30, 2015 and December 31, 2014, respectively.	165,452	164,196
Additional paid in capital	7,964	6,984
Retained earnings	30,774	24,772
Accumulated other comprehensive income, net of tax of $920 and $677 as of September 30, 2015 and December 31, 2014, respectively.	1,268	932
Total shareholders' equity	205,458	197,940
Total liabilities and shareholders' equity	$ 1,873,925	$ 1,710,127

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Loans and Allowance for Loan and Lease Losses (Details 4) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Non-PCI loans by the internal risk grading system
Total Gross loans	$ 1,206,740	$ 1,193,483
Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	1,138,834	1,130,984
Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	24,188	9,874
Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	43,718	52,395
Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans		230
Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	993,992	975,603
Real Estate Secured | Commercial real estate
Non-PCI loans by the internal risk grading system
Total Gross loans	581,767	588,472
Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	154,895	127,201
Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans	107,376	98,373
Real Estate Secured | Multi-family residential
Non-PCI loans by the internal risk grading system
Total Gross loans	75,774	78,645
Real Estate Secured | Construction and land
Non-PCI loans by the internal risk grading system
Total Gross loans	42,571	44,660
Real Estate Secured | Home equity lines of credit
Non-PCI loans by the internal risk grading system
Total Gross loans	31,609	38,252
Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	206,256	209,902
Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	159,012	154,787
Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	47,244	55,101
Commercial | Other
Non-PCI loans by the internal risk grading system
Total Gross loans		14
Consumer
Non-PCI loans by the internal risk grading system
Total Gross loans	6,492	7,978
Non-PCI Loans
Non-PCI loans by the internal risk grading system
Total Gross loans	1,197,307	1,183,183
Non-PCI Loans | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	1,138,104	1,130,528
Non-PCI Loans | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	22,206	9,097
Non-PCI Loans | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	36,997	43,404
Non-PCI Loans | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans		154
Non-PCI Loans | Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	986,911	968,110
Non-PCI Loans | Real Estate Secured | Commercial real estate
Non-PCI loans by the internal risk grading system
Total Gross loans	576,053	584,056
Non-PCI Loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	547,307	560,478
Non-PCI Loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	6,594	3,010
Non-PCI Loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	22,152	20,568
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	154,327	126,640
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	153,200	125,733
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		199
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	1,127	708
Non-PCI Loans | Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans	107,376	96,708
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	105,540	92,481
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	232	2,665
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	1,604	1,562
Non-PCI Loans | Real Estate Secured | Multi-family residential
Non-PCI loans by the internal risk grading system
Total Gross loans	75,774	78,645
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	67,147	78,023
Non-PCI Loans | Real Estate Secured | Multi-family residential | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	8,627
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		622
Non-PCI Loans | Real Estate Secured | Construction and land
Non-PCI loans by the internal risk grading system
Total Gross loans	41,772	43,809
Non-PCI Loans | Real Estate Secured | Construction and land | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	36,477	37,422
Non-PCI Loans | Real Estate Secured | Construction and land | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	969
Non-PCI Loans | Real Estate Secured | Construction and land | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	4,326	6,387
Non-PCI Loans | Real Estate Secured | Home equity lines of credit
Non-PCI loans by the internal risk grading system
Total Gross loans	31,609	38,252
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	31,088	37,638
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	521	614
Non-PCI Loans | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	203,904	207,095
Non-PCI Loans | Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	158,106	153,403
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	146,176	138,202
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	5,664	2,943
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	6,266	12,104
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans		154
Non-PCI Loans | Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	45,798	53,678
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	44,778	52,678
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	120	280
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	900	720
Non-PCI Loans | Commercial | Other
Non-PCI loans by the internal risk grading system
Total Gross loans		14
Non-PCI Loans | Commercial | Other | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans		14
Non-PCI Loans | Consumer
Non-PCI loans by the internal risk grading system
Total Gross loans	6,492	7,978
Non-PCI Loans | Consumer | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	6,391	7,873
Non-PCI Loans | Consumer | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	101	105
PCI loans
Non-PCI loans by the internal risk grading system
Total Gross loans	9,433	10,300
PCI loans | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	730	456
PCI loans | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	1,982	777
PCI loans | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	6,721	8,991
PCI loans | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans		76
PCI loans | Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	7,081	7,493
PCI loans | Real Estate Secured | Commercial real estate
Non-PCI loans by the internal risk grading system
Total Gross loans	5,714	4,416
PCI loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans		126
PCI loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	1,760	680
PCI loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	3,954	3,610
PCI loans | Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	568	561
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	451
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	117	561
PCI loans | Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans		1,665
PCI loans | Real Estate Secured | Farmland | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans		1,665
PCI loans | Real Estate Secured | Construction and land
Non-PCI loans by the internal risk grading system
Total Gross loans	799	851
PCI loans | Real Estate Secured | Construction and land | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	245	294
PCI loans | Real Estate Secured | Construction and land | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	51
PCI loans | Real Estate Secured | Construction and land | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	503	557
PCI loans | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	2,352	2,807
PCI loans | Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	906	1,384
PCI loans | Commercial | Commercial and industrial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	34	36
PCI loans | Commercial | Commercial and industrial | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	171	97
PCI loans | Commercial | Commercial and industrial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	701	1,175
PCI loans | Commercial | Commercial and industrial | Credit Risk Grades, Doubtful
Non-PCI loans by the internal risk grading system
Total Gross loans		76
PCI loans | Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	1,446	1,423
PCI loans | Commercial | Agriculture | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	$ 1,446	$ 1,423

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Condensed Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Preferred Stock	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive (Loss) Income	Total
Balance at Dec. 31, 2013	$ 3,604	$ 101,511	$ 6,020	$ 18,717	$ (3,425)	$ 126,427
Balance (in shares) at Dec. 31, 2013		25,397,780
Increase (Decrease) in Stockholders' Equity
Issuance of common stock in MISN Transaction		$ 60,255				60,255
Issuance of common stock in MISN Transaction (in shares)		7,541,326
Stock issuance costs			(381)			(381)
Dividends declared ($0.17 and $0.03 per share for period ended September 30, 2015 and 2014 respectively)				(1,027)		(1,027)
Exercise of stock options		$ 158				158
Exercise of stock options (in shares)		44,217
Share-based compensation			723			723
Tax benefit of share-based compensation			20			20
Net issuance of restricted share awards (in shares)		98,882
Net income				4,613		4,613
Other comprehensive income					3,331	3,331
Balance at Sep. 30, 2014	3,604	$ 161,924	6,382	22,303	(94)	$ 194,119
Balance (in shares) at Sep. 30, 2014		33,082,205
Increase (Decrease) in Stockholders' Equity
Repurchases of common stock (in shares)						(55,428)
Balance at Sep. 30, 2015		$ 165,452	7,964	30,774	1,268	$ 205,458
Balance (in shares) at Sep. 30, 2015		34,352,445
Balance at Dec. 31, 2014	1,056	$ 164,196	6,984	24,772	932	197,940
Balance (in shares) at Dec. 31, 2014		33,905,060
Increase (Decrease) in Stockholders' Equity
Dividends declared ($0.17 and $0.03 per share for period ended September 30, 2015 and 2014 respectively)				(5,799)		(5,799)
Repurchases of common stock		$ (28)				$ (28)
Repurchases of common stock (in shares)		(3,696)				(3,696)
Exercise of stock options		$ 228				$ 228
Exercise of stock options (in shares)		47,554
Partial conversion of Series C preferred stock	$ (1,056)	$ 1,056	70	(70)
Partial conversion of Series C preferred stock (in shares)		348,697
Share-based compensation			814			814
Tax benefit of share-based compensation			96			96
Net issuance of restricted share awards (in shares)		54,830
Net income				11,871		11,871
Other comprehensive income					336	336
Balance at Sep. 30, 2015		$ 165,452	$ 7,964	$ 30,774	$ 1,268	$ 205,458
Balance (in shares) at Sep. 30, 2015		34,352,445

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Fair Value of Assets and Liabilities (Details 2) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Land
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date Losses/(Recoveries) on impaired loans	$ (178)
Recurring basis
Transfers between level 1 and level 2
Assets transfer from Level 1 to level 2	0
Assets transfer from Level 2 to level 1	0
Non-recurring basis
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date Losses/(Recoveries)	(178)	$ 80
Transfers between level 1 and level 2
Assets transfer from Level 1 to level 2	0
Assets transfer from Level 2 to level 1	0
Non-recurring basis | Commercial real estate
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date Losses/(Recoveries)		1,026
Non-recurring basis | Land
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date Losses/(Recoveries) on impaired loans		(946)
Non-recurring basis | Significant Unobservable Inputs (Level 3)
Assets
Total assets measured on a non-recurring basis	3,211	4,586
Non-recurring basis | Significant Unobservable Inputs (Level 3) | Commercial real estate
Assets
Impaired loans		1,325
Non-recurring basis | Significant Unobservable Inputs (Level 3) | Land
Assets
Impaired loans	3,211	3,261
Non-recurring basis | Assets At Fair Value
Assets
Total assets measured on a non-recurring basis	3,211	4,586
Non-recurring basis | Assets At Fair Value | Commercial real estate
Assets
Impaired loans		1,325
Non-recurring basis | Assets At Fair Value | Land
Assets
Impaired loans	$ 3,211	$ 3,261

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2015

Summary of Significant Accounting Policies

Investment in Non-Consolidated Subsidiaries

Investment in Non-Consolidated Subsidiaries

The Company accounts for its investment in Heritage Oaks Capital Trust II, Mission Community Capital Trust I, and Santa Lucia Bancorp (CA) Capital Trust, as unconsolidated subsidiaries using the equity method of accounting, as the Company is not the primary beneficiary of the trust.  Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust were acquired as part of the acquisition of Mission Community Bancorp on February 28, 2014.  The sole purpose of each of these trusts is for the issuance of trust preferred securities.

Reclassifications

Reclassifications

Certain 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.

Use of Estimates in the Preparation of Condensed Consolidated Financial Statements

Use of Estimates in the Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and general practices within the banking industry require management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Allowance for Loan and Lease Losses

Significant Accounting Policies Update

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s 2014 Annual Report filed on Form 10-K.  Changes to accounting policies during the nine months ended September 30, 2015 are discussed below:

During the third quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the allowance for loan and lease losses (“ALLL”).  This enhancement related specifically to the methodology used to calculate the loss rates for loan risk grades within each loan type in the determination of the general reserve component of the ALLL.  The enhanced methodology uses more granular loan level data to calculate loss rates for specific loan grades within each loan type, allowing for more detailed loan migration analysis, and the ability to determine more precise average loss rates for each loan risk grade.  Although the total general reserve component of the ALLL for each loan type and portfolio segment is still based on total average historical losses for their respective loan types, management believes the allocation of the ALLL to each loan risk grade, within each loan type and the evaluation of the loss emergence period has become more precise under this methodology enhancement.

The implementation of the ALLL model enhancements did not result in a required increase or decrease in the balance of the ALLL, or a material impact to the overall allocation of the ALLL.  The ALLL model enhancement has allowed the Company to apply more precision in determining loss rates for specific loan grades within each loan type.  The section of the accounting policy for the ALLL, which was updated for this methodology enhancement is illustrated below:

Allowance for Loan and Lease Losses

The Company manages credit risk not only through extensive risk analyses performed prior to a loan’s approval, but also through the ongoing monitoring of loans within the portfolio, and more specifically certain types of loans that generally involve a greater degree of risk, such as commercial real estate, commercial lines of credit, agriculture, and construction/land loans. The Company monitors loans in the portfolio through an exhaustive internal process, at least quarterly, as well as with the assistance of independent loan reviews. These reviews generally not only focus on problem loans, but also internally rated “pass” credits within certain pools of loans that may be expected to experience stress due to economic conditions. This process allows the Company to validate credit risk grade ratings, underwriting structure, and the Company’s estimated exposure in the current economic environment as well as enhance communications with borrowers where necessary in an effort to mitigate potential future losses. All significant problem loans are analyzed in detail at least quarterly, in order to properly estimate potential exposure to loss associated with these loans in a timely manner.

Each segment of loans in the portfolio possesses varying degrees of risk, based on, among other things, the type of loan, the purpose of the loan, the type of collateral securing the loan, and the sensitivity the borrower has to changes in certain external factors such as economic conditions. The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors management regularly considers when evaluating the adequacy of the ALLL:

" Real estate secured loans – consist primarily of loans secured by commercial real estate, multi-family, farmland, and 1 to 4 family residential properties. As the majority of this segment is comprised of commercial real estate loans, risks associated with this segment lie primarily within that loan type. Adverse economic conditions may result in a decline in business activity and increased vacancy rates for commercial properties. These factors, in conjunction with a decline in real estate prices, may expose the Company to the potential for losses if a borrower cannot continue to service the loan with operating revenues, and the value of the property has declined to a level such that it no longer fully covers the Company’s recorded investment in the loan.

" Construction and land – although construction and land loans generally possess a higher inherent risk of loss than other loans, improvements in the mix, collateral and nature of loans help to mitigate risks within this segment of the portfolio. Risk arises from the necessity to complete projects within specified cost and time limits. Trends in the construction industry may also impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of future construction projects.

" Commercial and industrial – consist primarily of commercial and industrial loans (business lines of credit), agriculture loans, and other commercial purpose loans. Repayment of commercial and industrial loans is generally provided from the cash flows of the related business to which the loan was made. Adverse changes in economic conditions may result in a decline in business activity, which can impact a borrower’s ability to continue to make scheduled payments. The risk of repayment of agriculture loans arises largely from factors beyond the control of the Company or the related borrower, such as commodity prices, general weather conditions, and drought.

" Consumer – the consumer loan portfolio is comprised primarily of a large number of small loans with scheduled amortization over a specific period. The majority of consumer loans include revolving credit plans, installment loans and credit card balances. Weakened economic conditions may result in an increased level of delinquencies within this segment, as economic pressures may impact the capacity of such borrowers to repay their obligations.

ALLL Model Methodology

The ALLL is maintained at a level which, in management’s judgment, is appropriate to absorb probable credit losses inherent in the loans within the loan portfolio as of the balance sheet date. The amount of the ALLL is based on management’s evaluation of the collectability of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, the level of certain classified balances and specific impaired loans, and economic conditions and the related impact on specific borrowers and industry groups. The ALLL is increased by provisions for loan and lease losses, which are charged to earnings and reduced (or potentially increased) by charge-offs, net of recoveries. Changes in the ALLL relating to impaired loans, including troubled debt restructurings (“TDRs”), are charged or credited to the provision for loan and lease losses. Because of uncertainties inherent in the estimation process, management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change.

The process in which management determines the appropriate level of the ALLL involves the exercise of considerable judgment and the use of estimates. While management utilizes its best judgment and all available information in determining the adequacy of the ALLL, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond the Company’s control, including but not limited to, the performance of the loan portfolio, changes in current and future economic conditions and the view of regulatory agencies regarding the level of classified assets. Weakness in economic conditions and any other factor that may adversely affect credit quality and or that may result in higher levels of: past due and non-accruing loans, loan defaults, and or increased loan charge-offs, may require additional provisions for loan and lease losses in future periods and a higher balance in the Company’s ALLL. The ALLL, as more fully described below, is comprised of three components: general reserves, specific loan reserves, and a reserve for purchased credit impaired (“PCI”) loans.

General Reserves – The general reserve component of the ALLL, which is not attributable to loans specifically identified as impaired, is determined through a two-step process. First a quantitative allocation is determined by pooling performing loans by collateral type and purpose. These pools of loans are then further segmented by an internal risk grading system that classifies loans as: pass, special mention, substandard and doubtful. The Company’s risk grade system allows management, among other things, to identify the risk associated with each loan, and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are generally assigned based on information concerning the borrower and the strength of the collateral. Risk grades are reviewed regularly by the Company’s credit committee and are scrutinized by independent loan reviews performed semi-annually, as well as by regulatory agencies during scheduled examinations. Once credit risk grades have been assigned, estimated loss rates are then applied to each segment according to risk grade to determine the amount of the general portfolio allocation.

Estimated loss rates are determined through a migration analysis of historical losses for each segment of the loan portfolio, based on the Company’s prior experience with such loans, and the use of detailed loan level data, encompassing historical losses and average balance information for each loan type and risk grade.  The following provides brief definitions for credit risk grade ratings assigned to loans in the portfolio:

" Pass – credits that have strong credit quality with adequate collateral or secondary source of repayment and little existing or known weaknesses. However, pass may include credits with exposure to certain potential factors that may adversely impact the credit, if they materialize, resulting in these credits being put on a watch list to monitor more closely than other pass rated credits. Such factors may be credit / relationship specific or general to an entire industry.

" Special Mention – credits that have potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit at some future date.

" Substandard – credits that have a defined weakness or weaknesses which may jeopardize the orderly liquidation of the loan through cash flows, making it likely that repayment may have to come from some other source, such as the liquidation of collateral. The Company is more likely to incur losses on substandard credits if the weakness or weaknesses identified in the credit are not corrected.

" Doubtful – credits that possess the characteristics of a substandard credit, but because of certain existing deficiencies related to the credit, full collection is highly questionable. The probability of incurring some loss on such credits is high, but because of certain important and reasonably specific pending factors which may work to the advantage of strengthening the credit, charge-off is deferred until such time as the Company becomes reasonably certain that certain pending factors related to the credit will no longer provide some form of benefit.

The second component of the general reserve allocation of the ALLL is the qualitative allocation, and is determined by estimates the Company makes in regard to certain internal and external factors that may have either a positive or negative impact on the overall losses inherent in the loan portfolio. Internal factors include trends in credit quality of the loan portfolio, the existence and the effects of concentrations, the composition and volume of the loan portfolio and the scope and frequency of the loan review process as well as any other factor determined by management to have an impact on the credit quality of the loan portfolio. External factors include local, state and national economic and business conditions, as well as the estimated impact that environmental factors may have on certain segments of the loan portfolio, such as drought. While management regularly reviews the estimated impact these internal and external factors are expected to have on the loan portfolio, there can be no assurance that an adverse change in any one or combination of these factors will not be in excess of management’s expectations.

Recent Accounting Guidance Adopted

Recent Accounting Guidance Adopted

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 interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors. This ASU provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure 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. The amendments in this ASU are effective for public business entities for interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

Recent Accounting Guidance Not Yet Effective

In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination.  The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date.  The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued 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, 2018. 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.

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Fair Value of Assets and Liabilities (Details 3) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Summary of the estimated fair value of financial instruments
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Notional Amount	$ 282,984	$ 253,275
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Cost to Cede or Assume	2,830	2,533
Assets
Investment securities available for sale, at fair value	432,750	355,580
Liabilities
Non-interest bearing deposits	544,782	461,479
Junior subordinated debentures	10,389	13,233
Carrying Amount
Assets
Cash and cash equivalents	112,270	35,580
Investment securities available for sale, at fair value	432,750	355,580
Federal Home Loan Bank stock	7,853	7,853
Loans receivable, net of deferred fees and costs	1,205,684	1,192,038
Loans held for sale	5,366	2,586
Accrued interest receivable	5,911	5,659
Liabilities
Non-interest bearing deposits	544,782	461,479
Interest bearing deposits	1,026,988	933,325
Federal Home Loan Bank advances	78,546	95,558
Junior subordinated debentures	10,389	13,233
Accrued interest payable	412	401
Assets At Fair Value
Assets
Cash and cash equivalents	112,270	35,580
Investment securities available for sale, at fair value	432,750	355,580
Loans receivable, net of deferred fees and costs	1,232,158	1,196,997
Loans held for sale	5,366	2,586
Accrued interest receivable	5,911	5,659
Liabilities
Non-interest bearing deposits	544,782	461,479
Interest bearing deposits	1,028,358	936,151
Federal Home Loan Bank advances	79,986	96,679
Junior subordinated debentures	8,522	9,297
Accrued interest payable	412	401
Assets At Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Cash and cash equivalents	112,270	35,580
Investment securities available for sale, at fair value	35
Liabilities
Non-interest bearing deposits	544,782	461,479
Assets At Fair Value | Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	432,715	355,580
Loans held for sale	5,366	2,586
Accrued interest receivable	2,242	2,038
Liabilities
Interest bearing deposits	1,028,358	936,151
Federal Home Loan Bank advances	79,986	96,679
Accrued interest payable	412	401
Assets At Fair Value | Significant Unobservable Inputs (Level 3)
Assets
Loans receivable, net of deferred fees and costs	1,232,158	1,196,997
Accrued interest receivable	3,669	3,621
Liabilities
Junior subordinated debentures	$ 8,522	$ 9,297

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Fair Value of Assets and Liabilities (Tables)

9 Months Ended

Sep. 30, 2015

Fair Value of Assets and Liabilities

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

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	49,264	$	-	$	49,264	$	-
Mortgage backed securities:
U.S government sponsored entities and agencies	232,499		-		232,499		-
Non-agency	32,176		-		32,176		-
State and municipal securities	102,694		-		102,694		-
Asset backed securities	16,082		-		16,082		-
Other investments	35		35		-		-
Total assets measured on a recurring basis	$	432,750	$	35	$	432,715	$	-
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	$	19,664	$	-	$	19,664	$	-
Mortgage backed securities:
U.S government sponsored entities and agencies	215,398		-		215,398		-
Non-agency	11,901		-		11,901		-
State and municipal securities	82,592		-		82,592		-
Asset backed securities	26,025		-		26,025		-
Total assets measured on a recurring basis	$	355,580	$	-	$	355,580	$	-

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

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	3,211	$	-	$	-	$	3,211	$	(178)
Total assets measured on a non-recurring basis	$	3,211	$	-	$	-	$	3,211	$	(178)
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	3,261		-		-		3,261		(946)
Total assets measured on a non-recurring basis	$	4,586	$	-	$	-	$	4,586	$	80

Summary of the estimated fair value of financial instruments

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	112,270	$	112,270	$	-	$	-	$	112,270
Investment securities available for sale	432,750		35		432,715		-		432,750
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,205,684		-		-		1,232,158		1,232,158
Loans held for sale	5,366		-		5,366		-		5,366
Accrued interest receivable	5,911		-		2,242		3,669		5,911
Liabilities
Non-interest bearing deposits	544,782		544,782		-		-		544,782
Interest bearing deposits	1,026,988		-		1,028,358		-		1,028,358
Federal Home Loan Bank advances	78,546		-		79,986		-		79,986
Junior subordinated debentures	10,389		-		-		8,522		8,522
Accrued interest payable	412		-		412		-		412
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	$	35,580	$	35,580	$	-	$	-	$	35,580
Investment securities available for sale	355,580		-		355,580		-		355,580
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,192,038		-		-		1,196,997		1,196,997
Loans held for sale	2,586		-		2,586		-		2,586
Accrued interest receivable	5,659		-		2,038		3,621		5,659
Liabilities
Non-interest bearing deposits	461,479		461,479		-		-		461,479
Interest bearing deposits	933,325		-		936,151		-		936,151
Federal Home Loan Bank advances	95,558		-		96,679		-		96,679
Junior subordinated debentures	13,233		-		-		9,297		9,297
Accrued interest payable	401		-		401		-		401

Summary of off-balance sheet instruments

	September 30, 2015				December 31, 2014
	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	$	282,984	$	2,830	$	253,275	$	2,533

XML

Condensed Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Condensed Consolidated Statements of Shareholders' Equity
Dividends Declared Per Common Share (in dollars per share)	$ 0.06	$ 0.03	$ 0.17	$ 0.03

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Preferred stock
Preferred stock, shares authorized	5,000,000	5,000,000
Common stock
Common stock, no par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	34,352,445	33,905,060
Common stock, shares outstanding	34,352,445	33,905,060
Accumulated other comprehensive loss, tax expense (in dollars)	$ 920	$ 677
Series C preferred stock
Preferred stock
Preferred stock, per share stated value (in dollars per share)	$ 3.25	$ 3.25
Preferred stock, shares issued	0	348,697
Preferred stock, shares outstanding	0	348,697

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Shareholders' Equity

9 Months Ended

Sep. 30, 2015

Shareholders' Equity

Shareholders' Equity

Note 9.  Shareholders’ Equity

Regulatory Capital

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

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

· A new Common Equity Tier I (“CET I”) capital measure, with a minimum ratio requirement of 4.5% CET I to risk-weighted assets, and for Prompt Corrective Action purposes 6.5% or greater to generally be considered “well-capitalized.”

· A capital conservation buffer in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019.  The capital conservation buffer does not begin phasing-in until January 1, 2016.

· Changes to the calculation of risk-weighted assets from the current four categories (0%, 20%, 50% and 100%) to a much broader and risk-sensitive number of categories.

· The inclusion of certain changes in accumulated other comprehensive income (“AOCI”) in the determination of regulatory capital measures; however, “non-advanced approaches banking organizations,” including the Company and the Bank may make a one-time permanent election, as of January 1, 2015, to exclude these changes in AOCI from the determination of regulatory capital.  The Company, including the Bank, has made this election.

· An exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets, and intangible assets.

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

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

	Basel III			Pre-Basel III
	Regulatory			Regulatory
	Standard to be			Standard to be
	Well	September 30, 2015		Well	December 31, 2014		September 30, 2014
	Capitalized (1)	Company	Bank	Capitalized (1)	Company	Bank	Company	Bank
Ratio
Common Equity Tier I capital	6.50%	12.81%	12.52%	N/A	N/A	N/A	N/A	N/A
Leverage ratio	5.00%	9.96%	9.44%	5.00%	10.22%	9.83%	10.00%	9.77%
Tier I capital	8.00%	13.20%	12.52%	6.00%	13.13%	12.63%	12.87%	12.58%
Total risk-based capital	10.00%	14.46%	13.77%	10.00%	14.38%	13.88%	14.12%	13.83%

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

Preferred Stock

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

On June 4, 2015, the holder of the Company’s Series C Convertible Perpetual Preferred Stock (“Series C Preferred Stock”) completed the exchange of its remaining 348,697 shares of Series C Preferred Stock for shares of the Company’s common stock on a one-for-one exchange ratio basis.  As of September 30, 2015, there were no shares of the Company’s Series C Preferred Stock issued and outstanding.

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.  As a result, the Series C Preferred Stock was issued with a beneficial conversion feature associated with it.  In connection with the exchange of all remaining outstanding shares of the Series C Preferred Stock on June 4, 2015, the Company recorded the remaining beneficial conversion feature of $70 thousand during the second quarter of 2015 through a charge to retained earnings.

Cash Dividends

On March 2, 2015, the Company paid a cash dividend of $0.05 per share to holders of the Company’s common stock and Series C Preferred Stock as of February 16, 2015.

On June 1, 2015, the Company paid a cash dividend of $0.06 per share to holders of the Company’s common stock and Series C Preferred Stock as of May 15, 2015.

On August 31, 2015, the Company paid a cash dividend of $0.06 per share to holders of the Company’s common stock as of August 17, 2015.

As discussed in Note 13. Subsequent Events, of these condensed consolidated financial statements, on October 28, 2015, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2015, to shareholders of the Company’s common stock as of November 16, 2015.

During the three and nine months ended September 30, 2014, the Company paid a cash dividend of $0.03 per share to holders of the Company’s common stock and Series C Preferred Stock.

Stock Repurchase Program

In June 2015, the Company announced it had amended its previously announced plan for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18.  Repurchase program activity pursuant to the amended plan commenced on July 1, 2015 and will continue in effect until January 31, 2016 or expire earlier upon completion of the repurchase of $5.0 million of the Company’s common stock, as well as under certain other circumstances set forth in the repurchase plan agreement. The Company has no obligation to repurchase any shares under this program, and may suspend or discontinue it at any time.  All shares repurchased as part of the repurchase program will be cancelled, and therefore no longer available for reissuance.

As of September 30, 2015, the Company had repurchased 55,428 shares of its common stock under this plan at an average price of $7.47 per share.  Repurchases of common stock during the first nine months of 2015 totaled 3,696 shares, and were purchased at an average price of $7.52 per share.  There were no repurchases of common stock during the third quarter of 2015.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Oct. 28, 2015
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, 2015
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		34,356,179
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3

XML

Earnings Per Share

9 Months Ended

Sep. 30, 2015

Earnings Per Share

Earnings Per Share

Note 10.  Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted-average number of common and participating preferred shares outstanding for the reporting period, including the Series C Preferred Stock.  Diluted earnings per common share are computed by dividing net income 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, and other share-based compensation.  The computation of diluted earnings per common share excludes the impact of the assumed exercise or issuance of securities that would have an anti-dilutive effect.

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

	For the Three Months Ended September 30,
	2015			2014
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands, except per share data)
Net income	$	4,002		$	3,429
Accretion on preferred stock	-			-
Net income available to common shareholders	$	4,002		$	3,429
Weighted average shares outstanding			34,158,081			33,992,465
Basic earnings per common share	$	0.12		$	0.10
Dilutive effect of share-based compensation awards			124,286			153,735
Weighted average diluted shares outstanding			34,282,367			34,146,200
Diluted earnings per common share	$	0.12		$	0.10

	For the Nine Months Ended September 30,
	2015			2014
	Net			Net
	Income		Shares	Income		Shares
	(dollars in thousands, except per share data)
Net income	$	11,871		$	4,613
Accretion on preferred stock	70			-
Net income available to common shareholders	$	11,801		$	4,613
Weighted average shares outstanding			34,111,079			32,322,194
Basic earnings per common share	$	0.35		$	0.14
Dilutive effect of share-based compensation awards			147,285			197,324
Weighted average diluted shares outstanding			34,258,364			32,519,518
Diluted earnings per common share	$	0.34		$	0.14

For the three and nine months ended September 30, 2015 and 2014, common stock equivalents totaling approximately 126,000 shares and 160,000 shares and 35,000 shares and 114,000 shares respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.

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Condensed Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Interest Income
Loans, including fees	$ 14,781	$ 14,745	$ 44,454	$ 41,134
Investment securities	1,864	1,946	5,193	5,355
Other interest-earning assets	312	204	979	535
Total interest income	16,957	16,895	50,626	47,024
Interest Expense
Deposits	941	918	2,748	2,661
Other borrowings	620	406	1,742	1,158
Total interest expense	1,561	1,324	4,490	3,819
Net interest income before provision for loan losses	15,396	15,571	46,136	43,205
Net interest income after provision for loan and lease losses	15,396	15,571	46,136	43,205
Non-Interest Income
Fees and service charges	1,219	1,410	3,639	3,949
Gain on extinguishment of debt	552		552
Net gain on sale of mortgage loans	407	411	1,277	967
Gain on sale of investment securities	136	450	641	549
Other mortgage fee income	92	64	348	223
Other income	400	647	1,621	1,533
Total non-interest income	2,806	2,982	8,078	7,221
Non-Interest Expense
Salaries and employee benefits	5,598	6,164	17,643	18,121
Professional services	1,688	1,776	5,023	4,989
Occupancy and equipment	2,234	1,839	5,342	3,610
Information technology	611	756	1,753	2,403
Regulatory assessments	298	351	895	862
Amortization of intangible assets	263	297	787	760
Loan department expense	252	239	798	700
Sales and marketing	240	232	852	595
Communication costs	150	183	435	450
Merger, restructure and integration	(97)	748	(67)	8,785
Other expense	914	797	1,932	2,132
Total non-interest expense	12,151	13,382	35,393	43,407
Income before income taxes	6,051	5,171	18,821	7,019
Income tax expense	2,049	1,742	6,950	2,406
Net income	4,002	3,429	11,871	4,613
Dividends and accretion on preferred stock			70
Net income available to common shareholders	$ 4,002	$ 3,429	$ 11,801	$ 4,613
Earnings Per Common Share
Basic (in dollars per share)	$ 0.12	$ 0.10	$ 0.35	$ 0.14
Diluted (in dollars per share)	0.12	0.10	0.34	0.14
Dividends Declared Per Common Share (in dollars per share)	$ 0.06	$ 0.03	$ 0.17	$ 0.03

XML

Investment Securities

9 Months Ended

Sep. 30, 2015

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, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	49,238	$	346	$	(320)	$	49,264
Mortgage backed securities
U.S. government sponsored entities and agencies	231,779		1,633		(913)		232,499
Non-agency	32,283		40		(147)		32,176
State and municipal securities	100,704		2,321		(331)		102,694
Asset backed securities	16,458		-		(376)		16,082
Other investments	100		-		(65)		35
Total available for sale securities	$	430,562	$	4,340	$	(2,152)	$	432,750
	December 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	19,562	$	191	$	(89)	$	19,664
Mortgage backed securities
U.S. government sponsored entities and agencies	216,492		1,092		(2,186)		215,398
Non-agency	11,891		21		(11)		11,901
State and municipal securities	79,810		2,843		(61)		82,592
Asset backed securities	26,216		-		(191)		26,025
Total available for sale securities	$	353,971	$	4,147	$	(2,538)	$	355,580

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

	September 30, 2015
	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	$	32,115	$	(320)	$	-	$	-	$	32,115	$	(320)
Mortgage backed securities
U.S. government sponsored entities and agencies	45,582		(376)		32,365		(537)		77,947		(913)
Non-agency	17,219		(142)		1,581		(5)		18,800		(147)
State and municipal securities	25,333		(326)		963		(5)		26,296		(331)
Asset backed securities	-		-		16,082		(376)		16,082		(376)
Other investments	35		(65)		-		-		35		(65)
Total	$	120,284	$	(1,229)	$	50,991	$	(923)	$	171,275	$	(2,152)
	December 31, 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	$	2,795	$	(17)	$	2,607	$	(72)	$	5,402	$	(89)
Mortgage backed securities
U.S. government sponsored entities and agencies	50,583		(670)		58,753		(1,516)		109,336		(2,186)
Non-agency	3,000		(7)		507		(4)		3,507		(11)
State and municipal securities	5,899		(47)		2,245		(14)		8,144		(61)
Asset backed securities	-		-		17,153		(191)		17,153		(191)
Total	$	62,277	$	(741)	$	81,265	$	(1,797)	$	143,542	$	(2,538)

A total of 78 securities were in an unrealized loss position as of September 30, 2015, and 57 securities as of December 31, 2014.  As of September 30, 2015, the Company believes that unrealized losses in its investment securities portfolio 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, 2015, the Company does not believe unrealized losses related to any of its securities are other than temporary.

Sales of Available for Sale Securities

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

	For Three Months Ended				For Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
	(dollars in thousands)
Proceeds	$	8,656	$	19,991	$	55,184	$	98,379
Gross gains	136		457		815		814
Gross losses	-		(7)		(174)		(265)

Income tax expense on net realized gains from the sale of investment securities for the three months ended September 30, 2015 and 2014 was $57 thousand and $189 thousand. Income tax expense related to net realized gains on the sale of securities was $270 thousand and $231 thousand for the nine months ended September 30, 2015 and 2014, respectively.

Maturities of Available for Sale Securities

The amortized cost and fair value maturities of available for sale investment securities at September 30, 2015 are shown below. The table reflects the expected lives of mortgage backed securities, based on the Company’s historical prepayment experience, because borrowers who are party to loans underlying these securities may have the right to prepay obligations without prepayment penalties.  Therefore actual maturities may differ from contractual maturities. Contractual maturities are reflected for all other security types.

	September 30, 2015				December 31, 2014
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Due one year or less	$	46,219	$	46,291	$	38,674	$	38,587
Due after one year through five years	145,177		145,642		113,081		112,926
Due after five years through ten years	173,928		175,581		137,909		140,115
Due after ten years	65,238		65,236		64,307		63,952
Total	$	430,562	$	432,750	$	353,971	$	355,580

Securities having an amortized cost and a fair value of $141.5 million and $148.9 million, respectively, at September 30, 2015, and $67.3 million and $72.5 million, respectively, at December 31, 2014 were pledged to secure public deposits.  As of September 30, 2015 and December 31, 2014, 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,
	2015		2014		2015		2014
	(dollars in thousands)
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	161	$	112	$	487	$	226
Mortgage backed securities	938		1,152		2,529		3,370
State and municipal securities	151		38		339		40
Corporate debt securities	-		-		-		6
Asset backed securities	33		99		113		261
Non-taxable earnings on investment securities
State and municipal securities	581		545		1,725		1,452
Total	$	1,864	$	1,946	$	5,193	$	5,355

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Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2015

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 assets the Company measures at fair value on a recurring basis:

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	49,264	$	-	$	49,264	$	-
Mortgage backed securities:
U.S government sponsored entities and agencies	232,499		-		232,499		-
Non-agency	32,176		-		32,176		-
State and municipal securities	102,694		-		102,694		-
Asset backed securities	16,082		-		16,082		-
Other investments	35		35		-		-
Total assets measured on a recurring basis	$	432,750	$	35	$	432,715	$	-
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	$	19,664	$	-	$	19,664	$	-
Mortgage backed securities:
U.S government sponsored entities and agencies	215,398		-		215,398		-
Non-agency	11,901		-		11,901		-
State and municipal securities	82,592		-		82,592		-
Asset backed securities	26,025		-		26,025		-
Total assets measured on a recurring basis	$	355,580	$	-	$	355,580	$	-

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, and were measured at fair value which was below cost. Certain impaired loans measured at fair value at December 31, 2014 are no longer recorded at fair value due to the borrower payments reducing the carrying value of these loans to less than fair value, and due to other impaired loans being evaluated under the discounted cash flow method versus the collateral method. 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. The discounted cash flow approach is used to measure impairment for certain impaired loans, because of their significant payment history and the global cash flow analysis performed on each borrower.

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

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	3,211	$	-	$	-	$	3,211	$	(178)
Total assets measured on a non-recurring basis	$	3,211	$	-	$	-	$	3,211	$	(178)
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	3,261		-		-		3,261		(946)
Total assets measured on a non-recurring basis	$	4,586	$	-	$	-	$	4,586	$	80

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 three or nine months ended September 30, 2015.

Fair Value of Financial Instruments

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

			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	September 30, 2015		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	$	112,270	$	112,270	$	-	$	-	$	112,270
Investment securities available for sale	432,750		35		432,715		-		432,750
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,205,684		-		-		1,232,158		1,232,158
Loans held for sale	5,366		-		5,366		-		5,366
Accrued interest receivable	5,911		-		2,242		3,669		5,911
Liabilities
Non-interest bearing deposits	544,782		544,782		-		-		544,782
Interest bearing deposits	1,026,988		-		1,028,358		-		1,028,358
Federal Home Loan Bank advances	78,546		-		79,986		-		79,986
Junior subordinated debentures	10,389		-		-		8,522		8,522
Accrued interest payable	412		-		412		-		412
			Fair Value Measurements at the End of the Reporting Period Using
	As of		Quoted Prices in		Significant Other		Significant
	December 31, 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	$	35,580	$	35,580	$	-	$	-	$	35,580
Investment securities available for sale	355,580		-		355,580		-		355,580
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net of deferred fees and costs	1,192,038		-		-		1,196,997		1,196,997
Loans held for sale	2,586		-		2,586		-		2,586
Accrued interest receivable	5,659		-		2,038		3,621		5,659
Liabilities
Non-interest bearing deposits	461,479		461,479		-		-		461,479
Interest bearing deposits	933,325		-		936,151		-		936,151
Federal Home Loan Bank advances	95,558		-		96,679		-		96,679
Junior subordinated debentures	13,233		-		-		9,297		9,297
Accrued interest payable	401		-		401		-		401

Information on off-balance-sheet instruments follows:

	September 30, 2015				December 31, 2014
	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	$	282,984	$	2,830	$	253,275	$	2,533

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Business Combination (Table)

9 Months Ended

Sep. 30, 2015

Business Combination

Schedule of unaudited pro forma financial information

	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
	(dollars in thousands, except per share data)
Net interest income	$	15,395	$	45,761
Provision for loan and lease losses	-		-
Non-interest income	2,982		7,835
Non-interest expense	13,384		46,844
Income before income taxes	4,993		6,752
Income tax expense	1,682		2,315
Net income	$	3,311	$	4,437
Earnings Per Common Share
Basic	$	0.10	$	0.13
Diluted	$	0.10	$	0.13

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies.

Commitments and Contingencies

Note 11.  Commitments and Contingencies

In the normal course of business, various claims and lawsuits are brought by and against the Company. At September 30, 2015, the Company does not believe the disposition of all pending or threatened proceedings will have a material effect on the Company’s condensed 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 Company’s condensed consolidated financial statements.

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’s management evaluates each customer’s credit worthiness on a case-by-case basis, and determines the amount of collateral deemed adequate to secure the loan, if collateral security is determined to be necessary for the particular loan.  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 it does for loans reflected in the Company’s condensed consolidated financial statements.

As of September 30, 2015, and December 31, 2014, the Company had the following outstanding financial commitments:

	September 30,		December 31,
	2015		2014
	(dollars in thousands)
Commitments to extend credit	$	270,024	$	237,733
Standby letters of credit (1)	12,960		15,542
Total commitments and standby letters of credit	$	282,984	$	253,275

(1)Includes a standby letter of credit to one customer in the amount of $10.4 million at September 30, 2015 and December 31, 2014.

Commitments to extend credit and standby letters of credit are made at both fixed and variable rates of interest.  At September 30, 2015 and December 31, 2014, the Company had $26.3 million and $35.7 million in fixed rate commitments, and $256.7 million and $217.5 million in variable rate commitments.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2015

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Note 7.  Goodwill and Other Intangible Assets

At September 30, 2015 and December 31, 2014 the balance of goodwill was $24.9 million.  Other intangible assets consist of core deposit intangibles (“CDI”), which are attributable to the acquisition of core deposit balances, including those acquired in the MISN Transaction.  CDI assets are subject to amortization.  At September 30, 2015 and December 31, 2014 the balance of CDI was $4.6 million, and $5.3 million, respectively.  Amortization of CDI for the nine months ended September 30, 2015 and 2014 was approximately $0.8 million during both periods.

The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount of CDI as of September 30, 2015, and provides an estimate for future amortization for 2015 and the next five years:

	September 30, 2015
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(4,701)	$	4,560

	September 30, 2015
	Beginning Balance		Estimated Remaining Amortization		Projected Ending Balance
	(dollars in thousands)
Period
Year 2015	$	4,560	$	(262)	$	4,298
Year 2016	4,298		(944)		3,354
Year 2017	3,354		(588)		2,766
Year 2018	2,766		(549)		2,217
Year 2019	2,217		(522)		1,695
Year 2020	1,695		(441)		1,254

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Loans and Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2015

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:

	September 30, 2015						December 31, 2014
	Non-PCI		PCI				Non-PCI		PCI
	Loans		Loans		Total		Loans		Loans		Total
	(dollars in thousands)
Real Estate Secured
Commercial	$	576,053	$	5,714	$	581,767	$	584,056	$	4,416	$	588,472
Residential 1 to 4 family	154,327		568		154,895		126,640		561		127,201
Farmland	107,376		-		107,376		96,708		1,665		98,373
Multi-family residential	75,774		-		75,774		78,645		-		78,645
Construction and land	41,772		799		42,571		43,809		851		44,660
Home equity lines of credit	31,609		-		31,609		38,252		-		38,252
Total real estate secured	986,911		7,081		993,992		968,110		7,493		975,603
Commercial
Commercial and industrial	158,106		906		159,012		153,403		1,384		154,787
Agriculture	45,798		1,446		47,244		53,678		1,423		55,101
Other	-		-		-		14		-		14
Total commercial	203,904		2,352		206,256		207,095		2,807		209,902
Consumer	6,492		-		6,492		7,978		-		7,978
Total gross loans held for investment	1,197,307		9,433		1,206,740		1,183,183		10,300		1,193,483
Net deferred loan fees	(1,056)		-		(1,056)		(1,445)		-		(1,445)
Allowance for loan and lease losses	(17,214)		(82)		(17,296)		(16,802)		-		(16,802)
Total net loans held for investment	$	1,179,037	$	9,351	$	1,188,388	$	1,164,936	$	10,300	$	1,175,236
Loans held for sale	$	5,366	$	-	$	5,366	$	2,586	$	-	$	2,586

At September 30, 2015, and December 31, 2014, the loan portfolio includes loans purchased with evidence of deterioration in credit quality since their origination, referred to as “PCI loans.” These loans are specifically accounted for under ASC 310-30, as more fully discussed in Note 1. Summary of Significant Accounting Policies of the consolidated financial statements in the Company’s 2014 annual report filed on Form 10-K.  These loans were acquired as part of the MISN Transaction.  All other loans, referred to as “non-PCI loans,” consist of originated loans, as well as acquired and purchased loans which have not exhibited evidence of deteriorated credit quality since their origination.  Non-PCI loans are not accounted for within the scope of ASC 310-30.

Gross loans include $195.8 million and $239.7 million of loans acquired in the MISN Transaction at September 30, 2015 and December 31, 2014, respectively.  These loans were recorded at fair value on the date of acquisition.  Of the loans acquired in the MISN transaction, $9.4 million and $10.3 million at September 30, 2015 and December 31, 2014, respectively, are considered 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 $601.4 million in loans to secure a credit facility totaling $400.1 million, of which $78.5 million is outstanding as of September 30, 2015.  Of this credit facility, $11.5 million is available as a line of credit, while the remainder is available for potential future borrowings.  The Bank also has a collateralized borrowing line with the Federal Reserve Bank secured by $6.9 million of loans as of September 30, 2015.

Concentration of Credit Risk

The Company held loans that were collateralized by various forms of real estate, including residential 1 to 4 family loans originated and held for sale, totaling $999.4 million and $978.2 million at September 30, 2015 and December 31, 2014, respectively.  These 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 $41.8 million at September 30, 2015 and $44.8 million at December 31, 2014.

From time to time, the Company also originates SBA loans for sale and retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2015 and December 31, 2014, the unpaid principal balance of SBA loans serviced for others totaled $9.0 million and $13.0 million, respectively.  No gains were recorded on the sale of SBA loans during the three or nine months ended September 30, 2015 and 2014.

Impaired Loans

The following tables provide a summary of the Company’s recorded investment in non-PCI and PCI impaired loans as of September 30, 2015, and presents average balances and interest income recognized for non-PCI and PCI impaired loans for the three and nine months ended September 30, 2015.

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2015						September 30, 2015				September 30, 2015
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
Non-PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,212	$	5,676	$	-	$	4,247	$	36	$	4,158	$	110
Construction and land	1,263		4,517		-		1,556		24		1,798		71
Residential 1 to 4 family	788		964		-		748		10		602		12
Farmland	498		498		-		385		7		558		26
Home equity lines of credit	85		86		-		85		-		119		-
Commercial
Commercial and industrial	3,126		3,528		-		3,252		10		3,541		45
Agriculture	653		744		-		654		6		671		7
Consumer	163		227		-		160		1		149		4
Total	10,788		16,240		-		11,087		94		11,596		275
With Related Allowance
Real Estate Secured
Construction and land	4,000		5,152		789		4,084		-		4,147		-
Commercial	453		671		94		461		-		476		-
Commercial
Commercial and industrial	1,731		1,736		231		1,444		22		1,139		50
Total	6,184		7,559		1,114		5,989		22		5,762		50
Total Non-PCI impaired loans	$	16,972	$	23,799	$	1,114	$	17,076	$	116	$	17,358	$	325
							For the Three Months Ended				For the Nine Months Ended
	September 30, 2015						September 30, 2015				September 30, 2015
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	5,178	$	6,663	$	-	$	5,189	$	122	$	5,297	$	807
Residential 1 to 4 family	568		878		-		566		18		565		48
Construction and land	554		666		-		553		19		556		58
Commercial
Agriculture	1,446		1,500		-		1,440		30		1,437		87
Commercial and industrial	424		845		-		542		44		680		104
Total	8,170		10,552		-		8,290		233		8,535		1,104
With Related Allowance
Real Estate Secured
Commercial	536		547		41		537		10		536		38
Construction and land	245		248		6		254		5		272		15
Commercial
Commercial and industrial	482		483		35		490		10		500		33
Total	1,263		1,278		82		1,281		25		1,308		86
Total PCI loans	$	9,433	$	11,830	$	82	$	9,571	$	258	$	9,843	$	1,190

The following table provides a summary of the Company’s recorded investment in non-PCI and PCI impaired loans as of December 31, 2014, and presents average balances and interest income recognized for non-PCI and PCI impaired loans for the three and nine months ended September 30, 2014.

							For the Three Months Ended				For the Nine Months Ended
	December 31, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
Non-PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,000	$	6,255	$	-	$	2,269	$	6	$	1,862	$	19
Construction and land	1,470		2,355		-		1,315		7		1,550		37
Farmland	283		282		-		292		2		294		12
Residential 1 to 4 family	260		383		-		222		6		496		16
Home equity lines of credit	258		340		-		100		-		100		-
Commercial
Commercial and industrial	2,875		3,967		-		3,152		51		3,616		111
Agriculture	720		760		-		724		2		741		2
Consumer	112		201		-		118		1		145		3
Total	9,978		14,543		-		8,192		75		8,804		200
With Related Allowance
Real Estate Secured
Construction and land	4,876		8,499		1,472		6,380		16		6,602		58
Commercial	498		688		148		331		-		331		-
Commercial
Commercial and industrial	1,043		1,054		151		1,916		41		2,013		90
Total	6,417		10,241		1,771		8,627		57		8,946		148
Total Non-PCI impaired loans	$	16,395	$	24,784	$	1,771	$	16,819	$	132	$	17,750	$	348
							For the Three Months Ended				For the Nine Months Ended
	December 31, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,432	$	6,109	$	-	$	4,993	$	130	$	5,160	$	327
Farmland	1,673		2,027		-		1,699		20		1,706		64
Construction and land	853		993		-		923		21		943		47
Residential 1 to 4 family	564		886		-		565		13		585		29
Home equity lines of credit	-		-		-		81		2		81		4
Commercial
Agriculture	1,431		1,492		-		1,301		34		1,291		62
Commercial and industrial	1,388		1,883		-		2,081		185		2,236		263
Total PCI loans	$	10,341	$	13,390	$	-	$	11,643	$	405	$	12,002	$	796

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, 2015 and 2014. Interest income recognized on impaired loans in the tables above represents interest on accruing troubled debt restructurings, and accretion on PCI loans. Valuation allowances for impaired loans have been determined on a loan-by-loan basis.

At September 30, 2015, there were no residential 1 to 4 family loans in process of foreclosure, or residential 1 to 4 family properties included in foreclosed assets.

Troubled Debt Restructurings (“TDR”)

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

	September 30, 2015						December 31, 2014
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	2,601	$	209	$	2,810	$	2,449	$	78	$	2,527
Construction and land	1,217		4,046		5,263		1,109		5,149		6,258
Residential 1 to 4 family	617		171		788		130		130		260
Farmland	498		-		498		283		-		283
Commercial
Commercial and industrial	1,425		2,740		4,165		2,177		1,593		3,770
Agriculture	653		-		653		34		-		34
Consumer	116		10		126		69		-		69
Total non-PCI loans	7,127		7,176		14,303		6,251		6,950		13,201
PCI Loans
Real Estate Secured
Commercial	928		53		981		223		-		223
Construction and land	51		-		51		-		-		-
Commercial
Commercial and industrial	516		76		592		37		107		144
Total PCI loans	1,495		129		1,624		260		107		367
Total TDRs	$	8,622	$	7,305	$	15,927	$	6,511	$	7,057	$	13,568

The majority of the Company’s TDRs resulted from granting concessions with respect to interest rates, payment structure and/or maturity.  Modifications for the three and nine months ended September 30, 2015, and 2014 relate substantially to 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, 2015, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.  During the three and nine months ended September 30, 2015, an ALLL of approximately $0.1 million was established for one loan at the time the loan was modified as a TDR.  The financial effects of modifications for the three and nine months ended September 30, 2014 were not material.

The following tables summarize loan modifications which resulted in TDRs during the periods presented below:

	For the Three Months Ended					For the Nine Months Ended
	September 30, 2015					September 30, 2015
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of TDRs	Investment		Investment		of TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Residential 1 to 4 family	1	$	129	$	129	4	$	753	$	753
Farmland	1	232		232		2	730		730
Commercial	-	-		-		4	670		670
Construction and land	-	-		-		1	97		97
Commercial
Commercial and industrial	4	323		323		13	2,436		2,436
Agriculture	3	714		714		4	1,612		1,612
Consumer	1	11		11		2	68		68
PCI Loans
Real Estate Secured
Commercial	1	348		348		5	993		993
Construction and land	-	-		-		1	50		50
Commercial
Commercial and industrial	1	497		497		1	497		497
Total	12	$	2,254	$	2,254	37	$	7,906	$	7,906
	For the Three Months Ended					For the Nine Months Ended
	September 30, 2014					September 30, 2014
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of TDRs	Investment		Investment		of TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Construction and land	2	$	535	$	535	4	$	811	$	811
Commercial	-	-		-		1	166		166
Commercial
Commercial and industrial	4	377		377		14	1,604		1,604
Agriculture	-	-		-		1	662		662
Consumer	-	-		-		1	73		73
PCI Loans
Real Estate Secured
Commercial	-	-		-		1	230		230
Commercial
Commercial and industrial	-	-		-		2	138		138
Total	6	$	912	$	912	24	$	3,684	$	3,684

The following tables summarizes 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			For the Nine Months Ended
	September 30, 2015			September 30, 2015
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	18
Total	-	$	-	1	$	18
	For the Three Months Ended			For the Nine Months Ended
	September 30, 2014			September 30, 2014
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	30
Total	-	$	-	1	$	30

Credit Quality

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

	September 30, 2015
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	547,307	$	6,594	$	22,152	$	-	$	576,053
Residential 1 to 4 family	153,200		-		1,127		-		154,327
Farmland	105,540		232		1,604		-		107,376
Multi-family residential	67,147		8,627		-		-		75,774
Construction and land	36,477		969		4,326		-		41,772
Home equity lines of credit	31,088		-		521		-		31,609
Commercial
Commercial and industrial	146,176		5,664		6,266		-		158,106
Agriculture	44,778		120		900		-		45,798
Other	-		-		-		-		-
Consumer	6,391		-		101		-		6,492
Total non-PCI loans	1,138,104		22,206		36,997		-		1,197,307
PCI Loans
Real Estate Secured
Commercial	-		1,760		3,954		-		5,714
Construction and land	245		51		503		-		799
Residential 1 to 4 family	451		-		117		-		568
Commercial
Agriculture	-		-		1,446		-		1,446
Commercial and industrial	34		171		701		-		906
Total PCI loans	730		1,982		6,721		-		9,433
Total loans held for investment	$	1,138,834	$	24,188	$	43,718	$	-	$	1,206,740

	December 31, 2014
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	560,478	$	3,010	$	20,568	$	-	$	584,056
Residential 1 to 4 family	125,733		199		708		-		126,640
Farmland	92,481		2,665		1,562		-		96,708
Multi-family residential	78,023		-		622		-		78,645
Home equity lines of credit	37,638		-		614		-		38,252
Construction and land	37,422		-		6,387		-		43,809
Commercial
Commercial and industrial	138,202		2,943		12,104		154		153,403
Agriculture	52,678		280		720		-		53,678
Other	-		-		14		-		14
Consumer	7,873		-		105		-		7,978
Total non-PCI loans	1,130,528		9,097		43,404		154		1,183,183
PCI Loans
Real Estate Secured
Commercial	126		680		3,610		-		4,416
Farmland	-		-		1,665		-		1,665
Construction and land	294		-		557		-		851
Residential 1 to 4 family	-		-		561		-		561
Commercial
Agriculture	-		-		1,423		-		1,423
Commercial and industrial	36		97		1,175		76		1,384
Total PCI loans	456		777		8,991		76		10,300
Total loans held for investment	$	1,130,984	$	9,874	$	52,395	$	230	$	1,193,483

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, 2015
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	573,330	$	659	$	-	$	-	$	2,064	$	576,053
Residential 1 to 4 family	154,156		-		-		-		171		154,327
Farmland	107,291		85		-		-		-		107,376
Multi-family residential	75,774		-		-		-		-		75,774
Construction and land	37,726		-		-		-		4,046		41,772
Home equity lines of credit	31,524		-		-		-		85		31,609
Commercial					-
Commercial and industrial	154,625		50		-		-		3,431		158,106
Agriculture	45,798		-		-		-		-		45,798
Other	-		-		-		-		-		-
Consumer	6,444		-		-		-		48		6,492
Total non-PCI loans	1,186,668		794		-		-		9,845		1,197,307
PCI Loans
Real Estate Secured
Commercial	5,661		-		-		-		53		5,714
Land	799		-		-		-		-		799
Residential 1 to 4 family	568		-		-		-		-		568
Commercial
Agriculture	1,446		-		-		-		-		1,446
Commercial and industrial	788		-		-		-		118		906
Total PCI loans	9,262		-		-		-		171		9,433
Total loans held for investment	$	1,195,930	$	794	$	-	$	-	$	10,016	$	1,206,740

	December 31, 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
Commercial	$	581,971	$	-	$	-	$	-	$	2,085	$	584,056
Residential 1 to 4 family	126,516		-		-		-		124		126,640
Farmland	96,708		-		-		-		-		96,708
Multi-family residential	78,645		-		-		-		-		78,645
Construction and land	38,572		-		-		-		5,237		43,809
Home equity lines of credit	37,994		-		-		-		258		38,252
Commercial
Commercial and industrial	151,656		-		21		-		1,726		153,403
Agriculture	52,992		-		-		-		686		53,678
Other	14		-		-		-		-		14
Consumer	7,876		56		3		-		43		7,978
Total non-PCI loans	1,172,944		56		24		-		10,159		1,183,183
PCI Loans
Real Estate Secured
Commercial	4,416		-		-		-		-		4,416
Farmland	1,665		-		-		-		-		1,665
Construction and land	851		-		-		-		-		851
Residential 1 to 4 family	561		-		-		-		-		561
Commercial
Agriculture	1,423		-		-		-		-		1,423
Commercial and industrial	1,008		-		-		-		376		1,384
Total PCI loans	9,924		-		-		-		376		10,300
Total loans held for investment	$	1,182,868	$	56	$	24	$	-	$	10,535	$	1,193,483

Purchased Credit Impaired Loans

As part of the MISN Transaction, disclosed in Note 2. Business Combination, the Company acquired certain loans which have exhibited evidence of credit deterioration since their origination.  The carrying amount and unpaid principal balance of these loans are as follows:

	September 30, 2015				December 31, 2014
	Unpaid Principal Balance		Carrying Amount		Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Commercial	$	7,210	$	5,714	$	6,109	$	4,416
Construction and land	914		799		993		851
Residential 1 to 4 family	878		568		886		561
Farmland	-		-		2,027		1,665
Total real estate secured	9,002		7,081		10,015		7,493
Commercial
Commercial and industrial	1,328		906		1,883		1,384
Agriculture	1,500		1,446		1,492		1,423
Total commercial	2,828		2,352		3,375		2,807
Total PCI loans	$	11,830	$	9,433	$	13,390	$	10,300

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

	For the Nine Months Ended
	September 30, 2015
	(dollars in thousands)
Balance, December 31, 2014	$	4,374
Accretion of income	(1,190)
Reclassifications from nonaccretable difference (1)	861
Balance, September 30, 2015	$	4,045

(1)Reclassification from nonaccretable difference is attributable to positive changes in expected future cash flows on certain PCI loans.

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, 2015
	Balance June 30, 2015		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2015
	(dollars in thousands)
Other real estate secured	$	9,635	$	-	$	5	$	615	$	10,255
Commercial	4,993		(44)		327		209		5,485
Construction and land	1,940		-		24		(599)		1,365
Consumer	171		(1)		3		18		191
Unallocated	243						(243)		-
Total	$	16,982	$	(45)	$	359	$	-	$	17,296
	For the Nine Months Ended September 30, 2015
	Balance December 31, 2014		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2015
	(dollars in thousands)
Other real estate secured	$	9,129	$	(55)	$	81	$	1,100	$	10,255
Commercial	5,125		(187)		636		(89)		5,485
Construction and land	2,000		(34)		48		(649)		1,365
Consumer	202		(6)		11		(16)		191
Unallocated	346						(346)		-
Total	$	16,802	$	(282)	$	776	$	-	$	17,296
	For the Three Months Ended September 30, 2014
	Balance June 30, 2014		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2014
	(dollars in thousands)
Other real estate secured	$	8,747	$	(10)	$	(20)	$	802	$	9,519
Commercial	4,436		-		174		(296)		4,314
Construction and land	3,054		-		9		(721)		2,342
Consumer	100		(2)		1		10		109
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 and Lease Losses		Balance September 30, 2014
	(dollars in thousands)
Other real estate secured	$	9,025	$	(1,119)	$	35	$	1,578	$	9,519
Commercial	4,781		(650)		628		(445)		4,314
Construction and land	3,660		-		32		(1,350)		2,342
Consumer	131		(8)		10		(24)		109
Unallocated	262						241		503
Total	$	17,859	$	(1,777)	$	705	$	-	$	16,787

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, 2015
	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)
Other real estate secured	$	94	$	10,120	$	41	$	6,036		$	939,103	$	6,282
Commercial	231		5,219		35		5,510			198,394		2,352
Construction and land	789		570		6		5,263			36,509		799
Consumer	-		191		-		163			6,329		-
Unallocated	-		-		-
Total	$	1,114	$	16,100	$	82	$	16,972		$	1,180,335	$	9,433
	December 31, 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)
Other real estate secured	$	148	$	8,981	$	-	$		5,299	$	918,975	$	6,669
Commercial	151		4,974		-		4,633			202,450		2,819
Construction and land	1,472		528		-		6,346			37,461		853
Consumer	-		202		-		112			7,866		-
Unallocated	-		346		-
Total	$	1,771	$	15,031	$	-	$		16,390	$	1,166,752	$	10,341

At September 30, 2015, total gross loans of $1.2 billion in the table above include $195.8 million of loans acquired through the MISN Transaction.  These loans were initially recorded at fair value, and had no related ALLL on the acquisition date.  The ALLL for acquired non-PCI loans at September 30, 2015 and December 31, 2014 was $0.4 million, and $1.0 million, respectively, and is the result of determining, through the Company’s ALLL methodology, that the existing discount for acquired non-PCI loans was no longer deemed sufficient to cover probable losses incurred in particular segments of the loan portfolio, specifically commercial and industrial, other real estate secured, and consumer loans. The incremental ALLL allocation for acquired non-PCI loans was not driven by deterioration in credit quality; rather due to the acceleration of accretion of purchase discounts related to loan pay-downs and payoffs of loans within these segments of the acquired loan portfolio.  The ALLL allocated to acquired non-PCI loans is included in the ALLL attributable to loans collectively evaluated for impairment in the tables above.  The ALLL for PCI loans was $82 thousand at September 30, 2015, and resulted from unfavorable changes in expected future cash flows on certain PCI loans.  There was no ALLL for PCI loans at December 31, 2014.

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Income Taxes

9 Months Ended

Sep. 30, 2015

Income Taxes

Income Taxes

Note 6.  Income Taxes

Deferred tax assets relate to amounts that are expected to be realized through subsequent reversals of existing temporary differences over the period they are expected to reverse.  The ultimate realization of the Company’s deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are expected to reverse.  U.S. GAAP requires that companies assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence, both positive and negative, that can be objectively verified.  At September 30, 2015 and December 31, 2014 there was no valuation allowance for the Company’s deferred tax assets.  The Company’s deferred tax assets totaled $21.4 million at September 30, 2015, and $24.9 million at December 31, 2014.

The Company is subject to income taxation by both federal and state taxing authorities.  Income tax returns for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 are open to audit by federal and state taxing authorities.  The Company does not have any uncertain income tax positions and has not accrued for any interest or penalties as of September 30, 2015 and December 31, 2014.

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, 2015

Share-based Compensation Plans

Share-based Compensation Plans

Note 8.  Share-Based Compensation Plans

As of September 30, 2015, the Company had one active share-based employee compensation plan, which was approved by the Company’s shareholders in May 2015.  This plan, referred to as the “2015 Equity Incentive Plan,” authorizes the Company to grant various types of share-based compensation awards to the Company’s employees and Board of Directors such as stock options, and restricted stock awards.  Under the 2015 Equity Incentive Plan a maximum of 2,500,000 shares of the Company’s common stock may be issued.  Shares issued under this plan, other than stock options and stock appreciation rights, are counted against the plan on a two shares for every one share actually issued basis.  Awards that are cancelled, expired, forfeited, fail to vest, or otherwise result in issued shares not being delivered to the grantee, are again made available for the issuance of future share-based compensation awards.  Additionally, under this plan, no one individual may be granted shares in aggregate that exceed more than 250,000 shares during any calendar year.  The Company’s Board of Directors may terminate the 2015 Equity Incentive Plan at any time, and for any reason before the plan expires on December 3, 2024.

The Company also has two non-active share-based compensation plans, which are more fully described in Note 12. Share-Based Compensation Plans, of the condensed consolidated financial statements in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2014.  These plans include the “1997 Stock Option Plan” and the “2005 Equity Based Compensation Plan.”  As of September 30, 2015 no further grants can be made from either of these plans.

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,
	2015		2014		2015		2014
	(dollars in thousands)
Share-based compensation expense:
Stock options	$	126	$	109	$	374	$	370
Restricted stock	153		148		440		353
Total expense	$	279	$	257	$	814	$	723
Unrecognized compensation expense:
Stock options	$	1,133	$	1,156
Restricted stock	982		1,067
Total unrecognized expense	$	2,115	$	2,223

At September 30, 2015 unrecognized compensation expense related to non-vested stock options and restricted stock awards is expected to be recognized over weighted average periods of 2.8 years and 1.9 years, respectively.

Restricted Stock Awards

The Company grants restricted stock periodically 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, 2014	206,443	$	6.65
Granted	84,951	7.87
Vested	(88,534)	6.49
Forfeited	(30,121)	7.10
Balance September 30, 2015	172,739	$	7.26

Included in the table above are performance-based grants of restricted stock totaling 23,408 shares as of September 30, 2015.

Stock Options

Stock options are granted periodically for the benefit of employees.  The fair value of each stock option award is determined on the date of grant using the Black-Scholes option valuation model, which uses assumptions outlined in the table above.  Expectations for volatility are based on the historical volatility of the Company’s common stock.  The Company estimates forfeiture rates based on historical employee option exercise and termination experience.  The Company recognizes share-based compensation costs on a straight line basis over the vesting period of the award, which is typically a period of three to five years.

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

	For the Nine Months Ended
	September 30,
	2015		2014
Expected volatility	36.38%		49.83%
Expected term (years)	5.00		5.66
Dividend yield	2.82%		0.59%
Risk free rate	1.54%		1.76%
Weighted-average grant date fair value	$	1.97	$	3.39

The following table provides a summary of activity related to options granted, exercised, and forfeited during the nine months ended September 30, 2015:

	Options Outstanding			Options
	Number	Weighted Average		Available for
	of Shares	Exercise Price		Grant (1)
Balance, December 31, 2014	742,557	$	6.83	2,003,176
Granted	375,429	7.70
Forfeited	(98,352)	6.94
Exercised	(47,554)	4.90
Expired	(11,812)	13.18
Balance,  September 30, 2015	960,268	$	7.18	2,235,402

(1)    Shares available for grant as of December 31, 2014 were from the 2005 Equity Based Compensation Plan, which expired in March 2015.  As of September 30, 2015, no further grants can be made from that plan.  Shares available for grant as of September 30, 2015 are from the 2015 Equity Incentive Plan, which was approved by the Company’s shareholders in May 2015.

The following table provides a summary of the aggregate intrinsic value of options vested and expected to vest and exercisable as of September 30, 2015:

	September 30, 2015
				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	908,273	$	7.16	7.92	$	1,028,678
Exercisable	350,160	$	6.81	6.09	$	705,664

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 $153 thousand for the nine months ended September 30, 2015.

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Fair Value of Assets and Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	$ 432,750	$ 355,580
Obligations of U.S. government agencies
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	49,264	19,664
Mortgage-backed securities - U.S. government sponsored entities and agencies
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	232,499	215,398
Mortgage-backed securities - Non-agency
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	32,176	11,901
State and municipal securities
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	102,694	82,592
Asset backed securities
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	16,082	26,025
Other investments
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	35
Assets At Fair Value
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	432,750	355,580
Assets At Fair Value | Significant Other Observable Inputs (Level 2)
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	432,715	355,580
Assets At Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	35
Recurring basis | Significant Other Observable Inputs (Level 2)
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	432,715	355,580
Recurring basis | Significant Other Observable Inputs (Level 2) | Obligations of U.S. government agencies
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	49,264	19,664
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - U.S. government sponsored entities and agencies
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	232,499	215,398
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - Non-agency
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	32,176	11,901
Recurring basis | Significant Other Observable Inputs (Level 2) | State and municipal securities
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	102,694	82,592
Recurring basis | Significant Other Observable Inputs (Level 2) | Asset backed securities
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	16,082	26,025
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	35
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other investments
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	35
Recurring basis | Assets At Fair Value
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	432,750	355,580
Recurring basis | Assets At Fair Value | Obligations of U.S. government agencies
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	49,264	19,664
Recurring basis | Assets At Fair Value | Mortgage-backed securities - U.S. government sponsored entities and agencies
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	232,499	215,398
Recurring basis | Assets At Fair Value | Mortgage-backed securities - Non-agency
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	32,176	11,901
Recurring basis | Assets At Fair Value | State and municipal securities
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	102,694	82,592
Recurring basis | Assets At Fair Value | Asset backed securities
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	16,082	$ 26,025
Recurring basis | Assets At Fair Value | Other investments
Assets the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	$ 35

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Shareholders' Equity (Details)	Sep. 30, 2015	Dec. 31, 2014	Sep. 30, 2014
Shareholders' Equity
Capital conservation buffer (as a percent)	2.50%
Capital conservation buffer for 2016 (as a percent)	0.625%
Capital conservation buffer for 2017 (as a percent)	1.25%
Capital conservation buffer for 2018 (as a percent)	1.875%
Capital conservation buffer for 2019 (as a percent)	2.50%
Common equity Tier I Capital
Regulatory Standard, Common equity Tier I Capital Well Capitalized Ratio (as a percent)	6.50%
Leverage ratio
Regulatory Standard, Leverage ratio Well Capitalized Ratio (as a percent)	5.00%	5.00%
Tier I capital to risk weighted assets
Regulatory Standard, Well Capitalized Ratio (as a percent)	8.00%	6.00%
Total risk based capital to risk weighted assets
Regulatory Standard, Total risk based capital Well Capitalized Ratio (as a percent)	10.00%	10.00%
Minimum
Shareholders' Equity
CET I to risk-weighted assets	4.50%
Total risk based capital to risk weighted assets
Regulatory Standard, Total risk based capital Well Capitalized Ratio (as a percent)	6.50%
Calculation of Risk-Weighted Assets Category One
Shareholders' Equity
Ratio risk-weighted assets (as a percent)	0.00%
Calculation of Risk-Weighted Assets Category Two
Shareholders' Equity
Ratio risk-weighted assets (as a percent)	20.00%
Calculation of Risk-Weighted Assets Category Three
Shareholders' Equity
Ratio risk-weighted assets (as a percent)	50.00%
Calculation of Risk-Weighted Assets Category Four
Shareholders' Equity
Ratio risk-weighted assets (as a percent)	100.00%
Heritage Oaks Bancorp
Common equity Tier I Capital
Actual regulatory, Common equity Tier I Capital Ratio (as a percent	12.81%
Leverage ratio
Actual regulatory, Leverage ratio (as a percent)	9.96%	10.22%	10.00%
Tier I capital to risk weighted assets
Actual regulatory, Tier I capital (as a percent)	13.20%	13.13%	12.87%
Total risk based capital to risk weighted assets
Actual regulatory, Total risk based capital (as a percent)	14.46%	14.38%	14.12%
Heritage Oaks Bank
Common equity Tier I Capital
Actual regulatory, Common equity Tier I Capital Ratio (as a percent	12.52%
Leverage ratio
Actual regulatory, Leverage ratio (as a percent)	9.44%	9.83%	9.77%
Tier I capital to risk weighted assets
Actual regulatory, Tier I capital (as a percent)	12.52%	12.63%	12.58%
Total risk based capital to risk weighted assets
Actual regulatory, Total risk based capital (as a percent)	13.77%	13.88%	13.83%

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Subsequent Events

9 Months Ended

Sep. 30, 2015

Subsequent Events

Subsequent Events

Note 13. Subsequent Events

Dividend Declaration

On October 28, 2015, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2015, to shareholders of the Company’s common stock as of November 16, 2015.

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Loans and Allowance for Loan and Lease Losses (Tables)

9 Months Ended

Sep. 30, 2015

Loans and Allowance for Loan and Lease Losses

Summary of outstanding loan balances

	September 30, 2015						December 31, 2014
	Non-PCI		PCI				Non-PCI		PCI
	Loans		Loans		Total		Loans		Loans		Total
	(dollars in thousands)
Real Estate Secured
Commercial	$	576,053	$	5,714	$	581,767	$	584,056	$	4,416	$	588,472
Residential 1 to 4 family	154,327		568		154,895		126,640		561		127,201
Farmland	107,376		-		107,376		96,708		1,665		98,373
Multi-family residential	75,774		-		75,774		78,645		-		78,645
Construction and land	41,772		799		42,571		43,809		851		44,660
Home equity lines of credit	31,609		-		31,609		38,252		-		38,252
Total real estate secured	986,911		7,081		993,992		968,110		7,493		975,603
Commercial
Commercial and industrial	158,106		906		159,012		153,403		1,384		154,787
Agriculture	45,798		1,446		47,244		53,678		1,423		55,101
Other	-		-		-		14		-		14
Total commercial	203,904		2,352		206,256		207,095		2,807		209,902
Consumer	6,492		-		6,492		7,978		-		7,978
Total gross loans held for investment	1,197,307		9,433		1,206,740		1,183,183		10,300		1,193,483
Net deferred loan fees	(1,056)		-		(1,056)		(1,445)		-		(1,445)
Allowance for loan and lease losses	(17,214)		(82)		(17,296)		(16,802)		-		(16,802)
Total net loans held for investment	$	1,179,037	$	9,351	$	1,188,388	$	1,164,936	$	10,300	$	1,175,236
Loans held for sale	$	5,366	$	-	$	5,366	$	2,586	$	-	$	2,586

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

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2015						September 30, 2015				September 30, 2015
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
Non-PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,212	$	5,676	$	-	$	4,247	$	36	$	4,158	$	110
Construction and land	1,263		4,517		-		1,556		24		1,798		71
Residential 1 to 4 family	788		964		-		748		10		602		12
Farmland	498		498		-		385		7		558		26
Home equity lines of credit	85		86		-		85		-		119		-
Commercial
Commercial and industrial	3,126		3,528		-		3,252		10		3,541		45
Agriculture	653		744		-		654		6		671		7
Consumer	163		227		-		160		1		149		4
Total	10,788		16,240		-		11,087		94		11,596		275
With Related Allowance
Real Estate Secured
Construction and land	4,000		5,152		789		4,084		-		4,147		-
Commercial	453		671		94		461		-		476		-
Commercial
Commercial and industrial	1,731		1,736		231		1,444		22		1,139		50
Total	6,184		7,559		1,114		5,989		22		5,762		50
Total Non-PCI impaired loans	$	16,972	$	23,799	$	1,114	$	17,076	$	116	$	17,358	$	325
							For the Three Months Ended				For the Nine Months Ended
	September 30, 2015						September 30, 2015				September 30, 2015
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	5,178	$	6,663	$	-	$	5,189	$	122	$	5,297	$	807
Residential 1 to 4 family	568		878		-		566		18		565		48
Construction and land	554		666		-		553		19		556		58
Commercial
Agriculture	1,446		1,500		-		1,440		30		1,437		87
Commercial and industrial	424		845		-		542		44		680		104
Total	8,170		10,552		-		8,290		233		8,535		1,104
With Related Allowance
Real Estate Secured
Commercial	536		547		41		537		10		536		38
Construction and land	245		248		6		254		5		272		15
Commercial
Commercial and industrial	482		483		35		490		10		500		33
Total	1,263		1,278		82		1,281		25		1,308		86
Total PCI loans	$	9,433	$	11,830	$	82	$	9,571	$	258	$	9,843	$	1,190

							For the Three Months Ended				For the Nine Months Ended
	December 31, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
Non-PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,000	$	6,255	$	-	$	2,269	$	6	$	1,862	$	19
Construction and land	1,470		2,355		-		1,315		7		1,550		37
Farmland	283		282		-		292		2		294		12
Residential 1 to 4 family	260		383		-		222		6		496		16
Home equity lines of credit	258		340		-		100		-		100		-
Commercial
Commercial and industrial	2,875		3,967		-		3,152		51		3,616		111
Agriculture	720		760		-		724		2		741		2
Consumer	112		201		-		118		1		145		3
Total	9,978		14,543		-		8,192		75		8,804		200
With Related Allowance
Real Estate Secured
Construction and land	4,876		8,499		1,472		6,380		16		6,602		58
Commercial	498		688		148		331		-		331		-
Commercial
Commercial and industrial	1,043		1,054		151		1,916		41		2,013		90
Total	6,417		10,241		1,771		8,627		57		8,946		148
Total Non-PCI impaired loans	$	16,395	$	24,784	$	1,771	$	16,819	$	132	$	17,750	$	348
							For the Three Months Ended				For the Nine Months Ended
	December 31, 2014						September 30, 2014				September 30, 2014
			Unpaid		Specific		Average		Interest		Average		Interest
	Recorded		Principal		Allowance for		Recorded		Income		Recorded		Income
	Investment		Balance		Impaired Loans		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
PCI Loans
Without Related Allowance
Real Estate Secured
Commercial	$	4,432	$	6,109	$	-	$	4,993	$	130	$	5,160	$	327
Farmland	1,673		2,027		-		1,699		20		1,706		64
Construction and land	853		993		-		923		21		943		47
Residential 1 to 4 family	564		886		-		565		13		585		29
Home equity lines of credit	-		-		-		81		2		81		4
Commercial
Agriculture	1,431		1,492		-		1,301		34		1,291		62
Commercial and industrial	1,388		1,883		-		2,081		185		2,236		263
Total PCI loans	$	10,341	$	13,390	$	-	$	11,643	$	405	$	12,002	$	796

Summary of loans classified as TDRs

	September 30, 2015						December 31, 2014
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	2,601	$	209	$	2,810	$	2,449	$	78	$	2,527
Construction and land	1,217		4,046		5,263		1,109		5,149		6,258
Residential 1 to 4 family	617		171		788		130		130		260
Farmland	498		-		498		283		-		283
Commercial
Commercial and industrial	1,425		2,740		4,165		2,177		1,593		3,770
Agriculture	653		-		653		34		-		34
Consumer	116		10		126		69		-		69
Total non-PCI loans	7,127		7,176		14,303		6,251		6,950		13,201
PCI Loans
Real Estate Secured
Commercial	928		53		981		223		-		223
Construction and land	51		-		51		-		-		-
Commercial
Commercial and industrial	516		76		592		37		107		144
Total PCI loans	1,495		129		1,624		260		107		367
Total TDRs	$	8,622	$	7,305	$	15,927	$	6,511	$	7,057	$	13,568

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

	For the Three Months Ended					For the Nine Months Ended
	September 30, 2015					September 30, 2015
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of TDRs	Investment		Investment		of TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Residential 1 to 4 family	1	$	129	$	129	4	$	753	$	753
Farmland	1	232		232		2	730		730
Commercial	-	-		-		4	670		670
Construction and land	-	-		-		1	97		97
Commercial
Commercial and industrial	4	323		323		13	2,436		2,436
Agriculture	3	714		714		4	1,612		1,612
Consumer	1	11		11		2	68		68
PCI Loans
Real Estate Secured
Commercial	1	348		348		5	993		993
Construction and land	-	-		-		1	50		50
Commercial
Commercial and industrial	1	497		497		1	497		497
Total	12	$	2,254	$	2,254	37	$	7,906	$	7,906
	For the Three Months Ended					For the Nine Months Ended
	September 30, 2014					September 30, 2014
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of TDRs	Investment		Investment		of TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Construction and land	2	$	535	$	535	4	$	811	$	811
Commercial	-	-		-		1	166		166
Commercial
Commercial and industrial	4	377		377		14	1,604		1,604
Agriculture	-	-		-		1	662		662
Consumer	-	-		-		1	73		73
PCI Loans
Real Estate Secured
Commercial	-	-		-		1	230		230
Commercial
Commercial and industrial	-	-		-		2	138		138
Total	6	$	912	$	912	24	$	3,684	$	3,684

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			For the Nine Months Ended
	September 30, 2015			September 30, 2015
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	18
Total	-	$	-	1	$	18
	For the Three Months Ended			For the Nine Months Ended
	September 30, 2014			September 30, 2014
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Commercial
Commercial and industrial	-	$	-	1	$	30
Total	-	$	-	1	$	30

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

	September 30, 2015
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	547,307	$	6,594	$	22,152	$	-	$	576,053
Residential 1 to 4 family	153,200		-		1,127		-		154,327
Farmland	105,540		232		1,604		-		107,376
Multi-family residential	67,147		8,627		-		-		75,774
Construction and land	36,477		969		4,326		-		41,772
Home equity lines of credit	31,088		-		521		-		31,609
Commercial
Commercial and industrial	146,176		5,664		6,266		-		158,106
Agriculture	44,778		120		900		-		45,798
Other	-		-		-		-		-
Consumer	6,391		-		101		-		6,492
Total non-PCI loans	1,138,104		22,206		36,997		-		1,197,307
PCI Loans
Real Estate Secured
Commercial	-		1,760		3,954		-		5,714
Construction and land	245		51		503		-		799
Residential 1 to 4 family	451		-		117		-		568
Commercial
Agriculture	-		-		1,446		-		1,446
Commercial and industrial	34		171		701		-		906
Total PCI loans	730		1,982		6,721		-		9,433
Total loans held for investment	$	1,138,834	$	24,188	$	43,718	$	-	$	1,206,740

	December 31, 2014
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	560,478	$	3,010	$	20,568	$	-	$	584,056
Residential 1 to 4 family	125,733		199		708		-		126,640
Farmland	92,481		2,665		1,562		-		96,708
Multi-family residential	78,023		-		622		-		78,645
Home equity lines of credit	37,638		-		614		-		38,252
Construction and land	37,422		-		6,387		-		43,809
Commercial
Commercial and industrial	138,202		2,943		12,104		154		153,403
Agriculture	52,678		280		720		-		53,678
Other	-		-		14		-		14
Consumer	7,873		-		105		-		7,978
Total non-PCI loans	1,130,528		9,097		43,404		154		1,183,183
PCI Loans
Real Estate Secured
Commercial	126		680		3,610		-		4,416
Farmland	-		-		1,665		-		1,665
Construction and land	294		-		557		-		851
Residential 1 to 4 family	-		-		561		-		561
Commercial
Agriculture	-		-		1,423		-		1,423
Commercial and industrial	36		97		1,175		76		1,384
Total PCI loans	456		777		8,991		76		10,300
Total loans held for investment	$	1,130,984	$	9,874	$	52,395	$	230	$	1,193,483

Summary of the aging of loans held for investment

	September 30, 2015
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing		Total
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Commercial	$	573,330	$	659	$	-	$	-	$	2,064	$	576,053
Residential 1 to 4 family	154,156		-		-		-		171		154,327
Farmland	107,291		85		-		-		-		107,376
Multi-family residential	75,774		-		-		-		-		75,774
Construction and land	37,726		-		-		-		4,046		41,772
Home equity lines of credit	31,524		-		-		-		85		31,609
Commercial					-
Commercial and industrial	154,625		50		-		-		3,431		158,106
Agriculture	45,798		-		-		-		-		45,798
Other	-		-		-		-		-		-
Consumer	6,444		-		-		-		48		6,492
Total non-PCI loans	1,186,668		794		-		-		9,845		1,197,307
PCI Loans
Real Estate Secured
Commercial	5,661		-		-		-		53		5,714
Land	799		-		-		-		-		799
Residential 1 to 4 family	568		-		-		-		-		568
Commercial
Agriculture	1,446		-		-		-		-		1,446
Commercial and industrial	788		-		-		-		118		906
Total PCI loans	9,262		-		-		-		171		9,433
Total loans held for investment	$	1,195,930	$	794	$	-	$	-	$	10,016	$	1,206,740

	December 31, 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
Commercial	$	581,971	$	-	$	-	$	-	$	2,085	$	584,056
Residential 1 to 4 family	126,516		-		-		-		124		126,640
Farmland	96,708		-		-		-		-		96,708
Multi-family residential	78,645		-		-		-		-		78,645
Construction and land	38,572		-		-		-		5,237		43,809
Home equity lines of credit	37,994		-		-		-		258		38,252
Commercial
Commercial and industrial	151,656		-		21		-		1,726		153,403
Agriculture	52,992		-		-		-		686		53,678
Other	14		-		-		-		-		14
Consumer	7,876		56		3		-		43		7,978
Total non-PCI loans	1,172,944		56		24		-		10,159		1,183,183
PCI Loans
Real Estate Secured
Commercial	4,416		-		-		-		-		4,416
Farmland	1,665		-		-		-		-		1,665
Construction and land	851		-		-		-		-		851
Residential 1 to 4 family	561		-		-		-		-		561
Commercial
Agriculture	1,423		-		-		-		-		1,423
Commercial and industrial	1,008		-		-		-		376		1,384
Total PCI loans	9,924		-		-		-		376		10,300
Total loans held for investment	$	1,182,868	$	56	$	24	$	-	$	10,535	$	1,193,483

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

	September 30, 2015				December 31, 2014
	Unpaid Principal Balance		Carrying Amount		Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Commercial	$	7,210	$	5,714	$	6,109	$	4,416
Construction and land	914		799		993		851
Residential 1 to 4 family	878		568		886		561
Farmland	-		-		2,027		1,665
Total real estate secured	9,002		7,081		10,015		7,493
Commercial
Commercial and industrial	1,328		906		1,883		1,384
Agriculture	1,500		1,446		1,492		1,423
Total commercial	2,828		2,352		3,375		2,807
Total PCI loans	$	11,830	$	9,433	$	13,390	$	10,300

Schedule of accretable yield, or income expected to be collected

	For the Nine Months Ended
	September 30, 2015
	(dollars in thousands)
Balance, December 31, 2014	$	4,374
Accretion of income	(1,190)
Reclassifications from nonaccretable difference (1)	861
Balance, September 30, 2015	$	4,045

(1)Reclassification from nonaccretable difference is attributable to positive changes in expected future cash flows on certain PCI loans.

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

	For the Three Months Ended September 30, 2015
	Balance June 30, 2015		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2015
	(dollars in thousands)
Other real estate secured	$	9,635	$	-	$	5	$	615	$	10,255
Commercial	4,993		(44)		327		209		5,485
Construction and land	1,940		-		24		(599)		1,365
Consumer	171		(1)		3		18		191
Unallocated	243						(243)		-
Total	$	16,982	$	(45)	$	359	$	-	$	17,296
	For the Nine Months Ended September 30, 2015
	Balance December 31, 2014		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2015
	(dollars in thousands)
Other real estate secured	$	9,129	$	(55)	$	81	$	1,100	$	10,255
Commercial	5,125		(187)		636		(89)		5,485
Construction and land	2,000		(34)		48		(649)		1,365
Consumer	202		(6)		11		(16)		191
Unallocated	346						(346)		-
Total	$	16,802	$	(282)	$	776	$	-	$	17,296
	For the Three Months Ended September 30, 2014
	Balance June 30, 2014		Charge-offs		Recoveries		Provision for Loan and Lease Losses		Balance September 30, 2014
	(dollars in thousands)
Other real estate secured	$	8,747	$	(10)	$	(20)	$	802	$	9,519
Commercial	4,436		-		174		(296)		4,314
Construction and land	3,054		-		9		(721)		2,342
Consumer	100		(2)		1		10		109
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 and Lease Losses		Balance September 30, 2014
	(dollars in thousands)
Other real estate secured	$	9,025	$	(1,119)	$	35	$	1,578	$	9,519
Commercial	4,781		(650)		628		(445)		4,314
Construction and land	3,660		-		32		(1,350)		2,342
Consumer	131		(8)		10		(24)		109
Unallocated	262						241		503
Total	$	17,859	$	(1,777)	$	705	$	-	$	16,787

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

	September 30, 2015
	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)
Other real estate secured	$	94	$	10,120	$	41	$	6,036		$	939,103	$	6,282
Commercial	231		5,219		35		5,510			198,394		2,352
Construction and land	789		570		6		5,263			36,509		799
Consumer	-		191		-		163			6,329		-
Unallocated	-		-		-
Total	$	1,114	$	16,100	$	82	$	16,972		$	1,180,335	$	9,433
	December 31, 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)
Other real estate secured	$	148	$	8,981	$	-	$		5,299	$	918,975	$	6,669
Commercial	151		4,974		-		4,633			202,450		2,819
Construction and land	1,472		528		-		6,346			37,461		853
Consumer	-		202		-		112			7,866		-
Unallocated	-		346		-
Total	$	1,771	$	15,031	$	-	$		16,390	$	1,166,752	$	10,341

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Goodwill and Other Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Core deposit intangible
Gross Carrying Amount	$ 9,261		$ 9,261
Accumulated Amortization	(4,701)		(4,701)
Net Carrying Amount	4,560		4,560
Estimated Amortization
Year 2015	(262)		(262)
Year 2016	(944)		(944)
Year 2017	(588)		(588)
Year 2018	(549)		(549)
Year 2019	(522)		(522)
Year 2020	(441)		(441)
Goodwill	24,885		24,885		$ 24,885
Other Intangible Assets, Net	4,560		4,560		5,347
Amortization of Intangible Assets	263	$ 297	787	$ 760
Year 2015
Core deposit intangible
Net Carrying Amount	4,298		4,298		4,560
Year 2016
Core deposit intangible
Net Carrying Amount	3,354		3,354		4,298
Year 2017
Core deposit intangible
Net Carrying Amount	2,766		2,766		3,354
Year 2018
Core deposit intangible
Net Carrying Amount	2,217		2,217		2,766
Year 2019
Core deposit intangible
Net Carrying Amount	1,695		1,695		2,217
Year 2020
Core deposit intangible
Net Carrying Amount	$ 1,254		$ 1,254		$ 1,695

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Investment Securities (Details 5) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Earnings on both taxable and tax-exempt investment securities
Total	$ 1,864	$ 1,946	$ 5,193	$ 5,355
Obligations of U.S. government agencies
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	161	112	487	226
Mortgage backed securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	938	1,152	2,529	3,370
State and municipal securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	151	38	339	40
Non-taxable earnings on investment securities	581	545	1,725	1,452
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	$ 33	$ 99	$ 113	$ 261

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Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Condensed Consolidated Statements of Comprehensive Income
Net income	$ 4,002	$ 3,429	$ 11,871	$ 4,613
Other comprehensive income, net of tax:
Unrealized holding gains on securities arising during the period	1,963	983	1,220	6,206
Reclassification for net gains on investments included in net income	(136)	(450)	(641)	(549)
Other comprehensive income, before income tax expense	1,827	533	579	5,657
Income tax expense related to items of other comprehensive income	768	217	243	2,326
Other comprehensive income	1,059	316	336	3,331
Comprehensive income	$ 5,061	$ 3,745	$ 12,207	$ 7,944

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Business Combination

9 Months Ended

Sep. 30, 2015

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 (the “MISN Transaction”).  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 banking 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 operating results for MISN are included in the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2015, and from March 1, 2014 through September 30, 2014.  As of December 31, 2014, adjustments to the fair value of assets acquired and liabilities assumed in the MISN Transaction were complete.

The following table presents unaudited pro forma financial information for the three and nine months ended September 30, 2014, as if the MISN Transaction were reflected in the Company’s operating results beginning on January 1, 2013. 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.

	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
	(dollars in thousands, except per share data)
Net interest income	$	15,395	$	45,761
Provision for loan and lease losses	-		-
Non-interest income	2,982		7,835
Non-interest expense	13,384		46,844
Income before income taxes	4,993		6,752
Income tax expense	1,682		2,315
Net income	$	3,311	$	4,437
Earnings Per Common Share
Basic	$	0.10	$	0.13
Diluted	$	0.10	$	0.13

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2015

Goodwill and Other Intangible Assets

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

	September 30, 2015
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(4,701)	$	4,560

Summary of an estimate for future amortization expense

	September 30, 2015
	Beginning Balance		Estimated Remaining Amortization		Projected Ending Balance
	(dollars in thousands)
Period
Year 2015	$	4,560	$	(262)	$	4,298
Year 2016	4,298		(944)		3,354
Year 2017	3,354		(588)		2,766
Year 2018	2,766		(549)		2,217
Year 2019	2,217		(522)		1,695
Year 2020	1,695		(441)		1,254

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Investment Securities (Details 2) $ in Thousands	9 Months Ended
	Sep. 30, 2015 USD ($) security	Dec. 31, 2014 USD ($) security
Investment securities
Less Than Twelve Months, Fair Value	$ 120,284	$ 62,277
Less Than Twelve Months, Unrealized Loss	(1,229)	(741)
Twelve Months or More, Fair Value	50,991	81,265
Twelve Months or More, Unrealized Loss	(923)	(1,797)
Total, Fair Value	171,275	143,542
Total, Unrealized Loss	$ (2,152)	$ (2,538)
Securities were in an unrealized loss position | security	78	57
Investment security holdings | Minimum
Securities in an unrealized loss position
Maturity period of available-for-sale securities	1 year
Investment security holdings | Maximum
Securities in an unrealized loss position
Maturity period of available-for-sale securities	40 years
Obligations of U.S. government agencies
Investment securities
Less Than Twelve Months, Fair Value	$ 32,115	$ 2,795
Less Than Twelve Months, Unrealized Loss	(320)	(17)
Twelve Months or More, Fair Value		2,607
Twelve Months or More, Unrealized Loss		(72)
Total, Fair Value	32,115	5,402
Total, Unrealized Loss	(320)	(89)
Mortgage-backed securities - U.S. government sponsored entities and agencies
Investment securities
Less Than Twelve Months, Fair Value	45,582	50,583
Less Than Twelve Months, Unrealized Loss	(376)	(670)
Twelve Months or More, Fair Value	32,365	58,753
Twelve Months or More, Unrealized Loss	(537)	(1,516)
Total, Fair Value	77,947	109,336
Total, Unrealized Loss	(913)	(2,186)
Mortgage-backed securities - Non-agency
Investment securities
Less Than Twelve Months, Fair Value	17,219	3,000
Less Than Twelve Months, Unrealized Loss	(142)	(7)
Twelve Months or More, Fair Value	1,581	507
Twelve Months or More, Unrealized Loss	(5)	(4)
Total, Fair Value	18,800	3,507
Total, Unrealized Loss	(147)	(11)
State and municipal securities
Investment securities
Less Than Twelve Months, Fair Value	25,333	5,899
Less Than Twelve Months, Unrealized Loss	(326)	(47)
Twelve Months or More, Fair Value	963	2,245
Twelve Months or More, Unrealized Loss	(5)	(14)
Total, Fair Value	26,296	8,144
Total, Unrealized Loss	(331)	(61)
Asset backed securities
Investment securities
Twelve Months or More, Fair Value	16,082	17,153
Twelve Months or More, Unrealized Loss	(376)	(191)
Total, Fair Value	16,082	17,153
Total, Unrealized Loss	(376)	$ (191)
Other investments
Investment securities
Less Than Twelve Months, Fair Value	35
Less Than Twelve Months, Unrealized Loss	(65)
Total, Fair Value	35
Total, Unrealized Loss	$ (65)

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Regulatory Matters

9 Months Ended

Sep. 30, 2015

Regulatory Matters

Regulatory Matters

Note 12. Regulatory Matters

BSA Consent Order

On November 5, 2014, the Bank entered into a Stipulation to the Issuance of a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Business Oversight (“DBO”), consenting to the issuance of a consent order (“the BSA 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 BSA Consent Order, the Bank must review, update and implement an enhanced Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) risk assessment process based on the 2010 Federal Financial Institutions Examination Council BSA/AML Examination Manual. Some of the areas highlighted in the BSA 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 BSA Consent Order remains outstanding.  The Company continues to make progress in addressing the issues identified in the BSA Consent Order that was entered into with its regulators in November of 2014.  However, the Company still has additional work to do in order to fully remediate the issues identified in the BSA Consent Order.  Compliance and resolution of the BSA Consent Order will ultimately be determined by the FDIC and DBO.