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, 2016.

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

(805) 369-5200

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 November 2, 2016, there were 34,256,174 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, 2016 and December 31, 2015	4
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and September 30, 2015	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and September 30, 2015	6
		Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2016 and September 30, 2015	7
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and September 30, 2015	8
		Notes to Condensed Consolidated Financial Statements	10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
	Item 4.	Controls and Procedures	75
Part II.		Other Information
	Item 1.	Legal Proceedings	75
	Item 1A.	Risk Factors	75
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
	Item 3.	Defaults Upon Senior Securities	76
	Item 4.	Mine Safety Disclosures	76
	Item 5.	Other Information	76
	Item 6.	Exhibits	76
		Signatures	77

2

Part I.  Financial Information

Item 1. Financial Statements

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

3

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

	September 30,			December 31,
	2016			2015
	(dollars in thousands)
Assets
Cash and due from banks	$	23,893		$	15,610
Interest earning deposits in other banks	41,357			54,313
Total cash and cash equivalents	65,250			69,923
Investment securities available for sale, at fair value	456,464			450,935
Loans held for sale, at lower of cost or fair value	7,975			9,755
Gross loans held for investment	1,342,701			1,247,280
Net deferred loan fees	(1,146		)	(1,132		)
Allowance for loan and lease losses	(17,643		)	(17,452		)
Net loans held for investment	1,323,912			1,228,696
Premises and equipment, net	36,360			37,342
Bank-owned life insurance	33,500			32,850
Goodwill	24,885			24,885
Deferred tax assets, net	15,663			21,272
Federal Home Loan Bank stock	7,853			7,853
Other intangible assets	3,568			4,298
Other assets	12,877			11,930
Total assets	$	1,988,307		$	1,899,739
Liabilities
Non-interest bearing deposits	$	570,243		$	514,559
Interest bearing deposits	1,061,105			1,050,402
Total deposits	1,631,348			1,564,961
Short term FHLB borrowing	49,000			38,500
Long term FHLB borrowing	71,000			65,021
Junior subordinated debentures	10,572			10,438
Other liabilities	11,104			14,385
Total liabilities	1,773,024			1,693,305
Shareholders’ Equity
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 34,249,804 shares and 34,353,014 shares as of September 30, 2016 and December 31, 2015, respectively.	164,009			165,517
Additional paid in capital	8,971			8,251
Retained earnings	38,424			32,200
Accumulated other comprehensive income	3,879			466
Total shareholders’ equity	215,283			206,434
Total liabilities and shareholders’ equity	$	1,988,307		$	1,899,739

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

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,
	2016		2015		2016		2015
	(dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	15,222	$	14,781	$	45,152	$	44,454
Investment securities	2,215		1,864		6,604		5,193
Other interest-earning assets	232		312		671		979
Total interest income	17,669		16,957		52,427		50,626
Interest Expense
Deposits	898		941		2,668		2,748
Other borrowings	541		620		1,612		1,742
Total interest expense	1,439		1,561		4,280		4,490
Net interest income before (reversal of) provision for loan and lease losses	16,230		15,396		48,147		46,136
(Reversal of) provision for loan and lease losses	-		-		(1,000)		-
Net interest income after (reversal of) provision for loan and lease losses	16,230		15,396		49,147		46,136
Non-Interest Income
Fees and service charges	1,276		1,271		3,820		3,840
Net gain on sale of mortgage loans	708		407		1,696		1,277
Gain on derivative instruments	415		-		1,012		-
Earnings on BOLI	289		214		865		640
Gain on sale of investment securities	271		136		909		641
Other mortgage fee income	199		92		438		348
Gain on extinguishment of debt	-		552		-		552
Other income	186		134		594		780
Total non-interest income	3,344		2,806		9,334		8,078
Non-Interest Expense
Salaries and employee benefits	6,686		5,598		19,611		17,643
Professional services	1,776		2,234		5,634		5,342
Occupancy and equipment	1,657		1,688		4,933		5,023
Information technology	591		611		1,821		1,753
Sales and marketing	317		240		807		852
Loan department expense	284		252		770		798
Amortization of intangible assets	244		263		730		787
Regulatory assessments	222		298		847		895
Communication costs	122		150		372		435
OREO write-downs	-		-		217		-
Other expense	824		817		2,666		1,865
Total non-interest expense	12,723		12,151		38,408		35,393
Income before income taxes	6,851		6,051		20,073		18,821
Income tax expense	2,668		2,049		7,690		6,950
Net income	4,183		4,002		12,383		11,871
Accretion on preferred stock	-		-		-		70
Net income available to common shareholders	$	4,183	$	4,002	$	12,383	$	11,801
Earnings Per Common Share
Basic	$	0.12	$	0.12	$	0.36	$	0.34
Diluted	$	0.12	$	0.12	$	0.36	$	0.34
Dividends declared per common share	$	0.06	$	0.06	$	0.18	$	0.17

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

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,
	2016			2015			2016			2015
	(dollars in thousands)
Net income	$	4,183		$	4,002		$	12,383		$	11,871
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains on securities arising during the period	(1,643		)	1,963			6,798			1,220
Reclassification for net gains on investments included in net income	(271		)	(136		)	(909		)	(641		)
Other comprehensive (loss) income, before income tax (benefit) expense	(1,914		)	1,827			5,889			579
Income tax (benefit) expense related to items of other comprehensive income	(805		)	768			2,476			243
Other comprehensive (loss) income	(1,109		)	1,059			3,413			336
Comprehensive income	$	3,074		$	5,061		$	15,796		$	12,207

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

6

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

										Accumulated
			Common Stock			Additional				Other		Total
	Preferred		Number of			Paid-In		Retained		Comprehensive		Shareholders’
	Stock		Shares	Amount		Capital		Earnings		Income		Equity
	(dollars in thousands, except per share data)
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
Partial conversion of Series C preferred stock	(1,056)		348,697	1,056		70		(70)				-
Share-based compensation						814						814
Tax effect 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
Balance, December 31, 2015	$	-	34,353,014	$	165,517	$	8,251	$	32,200	$	466	$	206,434
Dividends declared ($0.18 per share)								(6,159)				(6,159		)
Repurchases of common stock			(226,170)	(1,635)								(1,635		)
Exercise of stock options			19,907	127								127
Share-based compensation						820						820
Tax effect of share-based compensation						(100)						(100		)
Net issuance of restricted share awards			103,053									-
Net income								12,383				12,383
Other comprehensive income										3,413		3,413
Balance, September 30, 2016	$	-	34,249,804	$	164,009	$	8,971	$	38,424	$	3,879	$	215,283

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

7

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

	For the Nine Months Ended
	September  30,
	2016		2015
	(dollars in thousands)
Cash Flows from Operating Activities
Net income	$	12,383	$	11,871
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	1,661		1,538
(Reversal of) provision for loan and lease losses	(1,000)		-
Write-downs on premises and equipment held for sale	-		68
Amortization of premiums / discounts	5,361		4,999
Amortization of intangible assets	730		787
Accretion of discount on acquired and purchased loans, net	(904)		(1,524)
Share-based compensation expense	915		814
Gain on extinguishment of debt	-		(552)
Gain on sale of securities, available for sale	(909)		(641)
Gain on sale of assets	-		(8)
Gain on sale of loans held for sale	(1,696)		(1,277)
Originations of loans held for sale	(123,427)		(104,656)
Proceeds from sale of loans held for sale	126,903		103,153
Net increase in bank owned life insurance	(650)		(480)
Decrease in deferred tax assets, net	3,133		3,255
Write-downs on OREO	217		-
Tax effect of share-based compensation	100		(96)
Decrease in other assets and other liabilities, net	1,355		1,487
Net cash provided by operating activities	24,172		18,738
Cash Flows from Investing Activities
Purchase of securities, available for sale	(146,833)		(173,560)
Sale of securities, available for sale	101,482		55,184
Proceeds from principal paydowns of securities, available for sale	41,364		37,690
Proceeds from sale of premises and equipment	-		9
Increase in loans, net	(100,539)		(12,820)
Recoveries on previously charged-off loans	1,232		776
Proceeds from sale of foreclosed collateral	-		91
Purchase of property, premises and equipment, net	(679)		(1,414)
Net cash used in investing activities	(103,973)		(94,044)

(Continued on next page)

8

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)

	For the Nine Months Ended
	September  30,
	2016		2015
	(dollars in thousands)
Cash Flows from Financing Activities
Increase in deposits, net	66,395		176,947
Proceeds from Federal Home Loan Bank borrowing	197,500		36,000
Repayments of Federal Home Loan Bank borrowing	(181,000)		(52,898)
Decrease in junior subordinated debentures	-		(2,550)
Net proceeds from exercise of stock options, including tax benefits	27		324
Dividends paid	(6,159)		(5,799)
Repurchases of common stock	(1,635)		(28)
Net cash provided by financing activities	75,128		151,996
Net (decrease) increase in cash and cash equivalents	(4,673)		76,690
Cash and cash equivalents, beginning of period	69,923		35,580
Cash and cash equivalents, end of period	$	65,250	$	112,270
Supplemental Cash Flow Information
Cash Flow Information
Interest paid	$	4,306	$	4,479
Income taxes paid	$	3,880	$	1,390
Non-Cash Flow Information
Change in unrealized gain (loss) on available for sale securities	$	6,798	$	1,220
Loans transferred to foreclosed assets	$	70	$	416
Accretion on preferred stock	$	-	$	70

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

9

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 2015 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 4, 2016; 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.

Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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.  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

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s 2015 Annual Report filed on Form 10-K. There have been no changes to these policies or their application during the three and nine months ended September 30, 2016, except as discussed below.

10

Note 1.  Summary of Significant Accounting Policies – continued

During 2016, the Company began presenting earnings per share (“EPS”) under the two-class method in accordance with ASC 260 “Earnings per Share,” which allocates distributed and undistributed earnings to participating securities.  Unvested restricted stock awards contain non-forfeitable rights to dividends or dividend equivalents.  As such, these awards are considered participating securities and the Company has applied the two-class method in the computation of basic and diluted EPS in periods where these awards are outstanding.  Under the two-class method distributed and undistributed earnings allocable to participating securities are deducted from net income to determine net income allocated to common shareholders, which is then used in the numerator of both basic and diluted EPS calculations.  The presentation of EPS in comparable periods in 2015 has been revised to conform to the current year presentation.

Recent Accounting Standards Updates

Recent Accounting Guidance Adopted

In September, 2015, the Financial Accounting Standards Board (“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 became 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.  This update did not have an impact on the Company’s condensed consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of the amendments within this update will have a material impact on the Company’s financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements.  Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.    This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted.  Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). This update simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance under the update requires all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit on the income statement.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 31, 2016, with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of this update, but does not expect a material impact on the Company’s financial statements.

11

Note 1.  Summary of Significant Accounting Policies – continued

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update improves the understanding and comparability of lessees’ financial commitments by requiring lease assets and lease liabilities to be recognized on the balance sheet for those leases classified as operating leases under current U.S. GAAP. This ASU requires a lessee to recognize on the balance sheet a lease liability to make lease payments and a right of use asset, representing the right to use the underlying asset, during the term of the lease.  This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, using a modified retrospective approach, with early adoption permitted. The Company is currently in the process of evaluating the impact that the adoption of this update will have on its financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).  The amendments in this update require that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income.  This ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2017.  The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on the Company’s 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 financial statements.

Note 2. Fair Value of Assets and Liabilities

Recurring Basis

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Available for sale investments:
Obligations of U.S. government agencies	$	58,992	$	-	$	58,992	$	-
Mortgage backed securities
U.S. government sponsored entities and agencies	247,193		-		247,193		-
Non-agency	25,521		-		25,521		-
State and municipal securities	115,449		-		115,449		-
Asset backed securities	9,309		-		9,309		-
Derivative financial instruments:
Interest rate swaps	1,910		-		1,910		-
Total assets measured on a recurring basis	$	458,374	$	-	$	458,374	$	-
Liabilities
Derivative financial instruments:
Interest rate swaps	$	1,910	$	-	$	1,910	$	-
Total liabilities measured on a recurring basis	$	1,910	$	-	$	1,910	$	-

12

Note 2. Fair Value of Assets and Liabilities - continued

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2015		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Available for sale investments:
Obligations of U.S. government agencies	$	47,318	$	-	$	47,318	$	-
Mortgage backed securities
U.S. government sponsored entities and agencies	245,235		-		245,235		-
Non-agency	34,317		-		34,317		-
State and municipal securities	108,406		-		108,406		-
Asset backed securities	15,627		-		15,627		-
Other investments	32		32		-		-
Derivative financial instruments:
Interest rate swaps	-		-		-		-
Total assets measured on a recurring basis	$	450,935	$	32	$	450,903	$	-
Liabilities
Derivative financial instruments:
Interest rate swaps	$	-	$	-	$	-	$	-
Total liabilities measured on a recurring basis	$	-	$	-	$	-	$	-

There were no transfers between levels of fair value measures during the nine months ended September 30, 2016 and December 31, 2015 for assets measured at fair value on a recurring basis.  As of September 30, 2016 and December 31, 2015, there were no assets or liabilities classified as Level 3.

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 that were recognized at fair value which was below cost. Certain impaired loans are recorded in the Company’s condensed consolidated financial statements using 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 considered a market rate for those loans. The discounted cash flow approach is used to measure impairment for certain impaired loans, because of the significant payment history and the global cash flow analysis performed on each borrower.

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		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
Foreclosed assets	$	181	$	-	$	181	$	-	$	235
Total assets measured on a non-recurring basis	$	181	$	-	$	181	$	-	$	235

13

Note 2. Fair Value of Assets and Liabilities - continued

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	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
Foreclosed assets	$	-	$	-	$	-	$	-	$	-
Total assets measured on a non-recurring basis	$	-	$	-	$	-	$	-	$	-

There were no transfers between levels of fair value measures during the nine months ended September 30, 2016 for assets measured at fair value on a non-recurring basis.

Fair Value of Financial Instruments

The following table provides a summary of the estimated fair value of financial instruments at September 30, 2016 and December 31, 2015:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		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	$	65,250	$	65,250	$	-	$	-	$	65,250
Investment securities available for sale	456,464		-		456,464		-		456,464
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net	1,323,912		-		-		1,332,933		1,332,933
Loans held for sale	7,975		-		7,975		-		7,975
Interest rate swaps	1,910		-		1,910		-		1,910
Accrued interest receivable	6,116		-		2,416		3,700		6,116
Liabilities
Non-interest bearing deposits	570,243		570,243		-		-		570,243
Interest bearing deposits	1,061,105		-		1,060,813		-		1,060,813
Federal Home Loan Bank advances	120,000		-		121,511		-		121,511
Junior subordinated debentures	10,572		-		-		8,531		8,531
Interest rate swaps	1,910		-		1,910		-		1,910
Accrued interest payable	364		-		364		-		364

14

Note 2. Fair Value of Assets and Liabilities - continued

	As of		Fair Value Measurements Using
	December 31, 2015 Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
			(dollars in thousands)
Assets
Cash and cash equivalents	$	69,923	$	69,923	$	-	$	-	$	69,923
Investment securities available for sale	450,935		32		450,903		-		450,935
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net	1,228,696		-		-		1,250,903		1,250,903
Loans held for sale	9,755		-		9,755		-		9,755
Interest rate swaps	-		-		-		-		-
Accrued interest receivable	6,256		-		2,589		3,667		6,256
Liabilities
Non-interest bearing deposits	514,559		514,559		-		-		514,559
Interest bearing deposits	1,050,402		-		1,051,731		-		1,051,731
Federal Home Loan Bank advances	103,521		-		104,718		-		104,718
Junior subordinated debentures	10,438		-		-		8,195		8,195
Interest rate swaps	-		-		-		-		-
Accrued interest payable	390		-		390		-		390

Information on off-balance sheet instruments as of September 30, 2016 and December 31, 2015 follows:

	September 30, 2016				December 31, 2015
	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	$	285,521	$	2,855	$	255,093	$	2,551

Note 3. Investment Securities

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are classified as available for sale at September 30, 2016 and December 31, 2015:

	September 30, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	59,223	$	218	$	(449)	$	58,992
Mortgage backed securities
U.S. government sponsored entities and agencies	246,284		2,205		(1,296)		247,193
Non-agency	25,318		223		(20)		25,521
State and municipal securities	109,443		6,077		(71)		115,449
Asset backed securities	9,503		-		(194)		9,309
Total available for sale securities	$	449,771	$	8,723	$	(2,030)	$	456,464

15

Note 3. Investment Securities - continued

	December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	47,478	$	269	$	(429)	$	47,318
Mortgage backed securities
U.S. government sponsored entities and agencies	246,561		986		(2,312)		245,235
Non-agency	34,645		-		(328)		34,317
State and municipal securities	105,164		3,486		(244)		108,406
Asset backed securities	16,183		-		(556)		15,627
Other investments	100		-		(68)		32
Total available for sale securities	$	450,131	$	4,741	$	(3,937)	$	450,935

Available for sale investment securities which have an unrealized loss position at September 30, 2016 and December 31, 2015 are detailed below:

	September 30, 2016
	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	$	21,361	$	(49)	$	23,291	$	(400)	$	44,652	$	(449)
Mortgage backed securities
U.S. government sponsored entities and agencies	64,304		(823)		22,102		(473)		86,406		(1,296)
Non-agency	5,996		(3)		3,243		(17)		9,239		(20)
State and municipal securities	5,723		(71)		-		-		5,723		(71)
Asset backed securities	-		-		9,309		(194)		9,309		(194)
Total	$	97,384	$	(946)	$	57,945	$	(1,084)	$	155,329	$	(2,030)

	December 31, 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	$	34,533	$	(429)	$	-	$	-	$	34,533	$	(429)
Mortgage backed securities
U.S. government sponsored entities and agencies	131,570		(1,485)		31,558		(827)		163,128		(2,312)
Non-agency	31,400		(317)		2,917		(11)		34,317		(328)
State and municipal securities	15,660		(243)		235		(1)		15,895		(244)
Asset backed securities	-		-		15,626		(556)		15,626		(556)
Other investments	32		(68)		-		-		32		(68)
Total	$	213,195	$	(2,542)	$	50,336	$	(1,395)	$	263,531	$	(3,937)

A total of 58 and 104 securities were in an unrealized loss position as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the Company believes that unrealized losses on its investment securities are not attributable to credit quality, but rather fluctuations in market prices.  In the case of the agency mortgage related securities, contractual cash flows are 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 depending on the instrument’s priority in the overall cash flow structure and the characteristics of the loans underlying the investment security.

16

Note 3. Investment Securities – continued

Management does not intend to sell and it is unlikely that management will be required to sell these securities prior to their anticipated recovery.  As of September 30, 2016, the Company does not believe unrealized losses related to any of its securities are other than temporary.

The proceeds from the sales and calls of securities and the associated gains and losses for the three and nine months ended September 30, 2016 and 2015 are listed below:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Proceeds	$	25,905	$	8,656	$	101,482	$	55,184
Gross gains	271		136		1,291		815
Gross losses	-		-		(382)		(174)

The income tax expense related to these net realized gains was $0.1 million and $57 thousand for the three months ended September 30, 2016 and 2015, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.

The table below provides a maturity distribution of available for sale investment securities at September 30, 2016 and December 31, 2015. The table reflects the expected lives of mortgage-backed securities, based on the Company’s historical prepayment experience, because borrowers have the right to prepay obligations without prepayment penalties.  Included in the Company’s mortgage-backed securities are home equity conversion mortgages, which typically possess prepayment characteristics that differ from traditional mortgage-backed securities, such that prepayment activity is not as closely correlated with changes in interest rates.  Contractual maturities are reflected for all other security types.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2016				December 31, 2015
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Due one year or less	$	46,457	$	46,563	$	51,049	$	50,978
Due after one year through five years	151,110		151,910		153,444		152,916
Due after five years through ten years	179,623		184,979		182,996		184,870
Due after ten years	72,581		73,012		62,642		62,171
Total	$	449,771	$	456,464	$	450,131	$	450,935

Securities having an amortized cost and a fair value of $145.8 million and $149.9 million, respectively at September 30, 2016, and $153.9 million and $155.2 million, respectively at December 31, 2015 were pledged to secure public deposits.  At September 30, 2016 and December 31, 2015, 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.

17

Note 3. Investment Securities – continued

The following table summarizes earnings on investment securities, both taxable, and those that are exempt from federal taxation for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Taxable earnings on investment securities
Mortgage backed securities	$	1,131	$	938	$	3,589	$	2,529
Obligations of U.S. government agencies	272		161		617		487
State and municipal securities	145		151		477		339
Asset backed securities	27		33		95		113
Earnings on investment securities exempt from federal taxation
State and municipal securities	640		581		1,826		1,725
Total	$	2,215	$	1,864	$	6,604	$	5,193

Note 4. Loans and Allowance for Loan and Lease Losses

The following table provides a summary of outstanding loan balances as of September 30, 2016 and December 31, 2015:

	September 30, 2016						December 31, 2015
	Non-PCI		PCI		Total Loans		Non-PCI		PCI		Total Loans
	Loans		Loans		Receivable		Loans		Loans		Receivable
	(dollars in thousands)
Real Estate Secured
Commercial	$	630,232	$	5,614	$	635,846	$	573,559	$	5,685	$	579,244
Residential 1 to 4 family	195,330		123		195,453		165,256		573		165,829
Farmland	132,723		-		132,723		120,566		-		120,566
Multi-family residential	81,536		-		81,536		79,381		-		79,381
Construction and land	26,595		241		26,836		35,387		282		35,669
Home equity lines of credit	24,910		-		24,910		31,387		-		31,387
Total real estate secured	1,091,326		5,978		1,097,304		1,005,536		6,540		1,012,076
Commercial
Commercial and industrial	184,698		501		185,199		164,025		783		164,808
Agriculture	54,263		1,465		55,728		62,911		1,452		64,363
Total commercial	238,961		1,966		240,927		226,936		2,235		229,171
Consumer	4,470		-		4,470		6,033		-		6,033
Total loans held for investment	1,334,757		7,944		1,342,701		1,238,505		8,775		1,247,280
Deferred loan fees	(1,146)		-		(1,146)		(1,132)		-		(1,132)
Allowance for loan and lease losses	(17,577)		(66)		(17,643)		(17,373)		(79)		(17,452)
Total net loans held for investment	$	1,316,034	$	7,878	$	1,323,912	$	1,220,000	$	8,696	$	1,228,696
Loans held for sale	$	7,975	$	-	$	7,975	$	9,755	$	-	$	9,755

18

Note 4. Loans and Allowance for Loan and Lease Losses – continued

Acquired non-PCI loans totaled $141.5 million and $163.8 million as of September 30, 2016 and December 31, 2015, respectively, and are included in total non-PCI loans in the table above.  The decline in these loan balances is attributable to loan prepayments, payoffs, and scheduled principal reduction.

Loans held for sale consist of single-family residential mortgage loans under contract to be sold in the secondary market.  In most cases these loans are sold within thirty to sixty days.

Concentration of Credit Risk

At September 30, 2016, the Company held loans that were collateralized by various forms of real estate totaling $1.1 billion, which includes residential 1 to 4 family loans originated and held for sale, compared to $1.0 billion at December 31, 2015.  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 assurance 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 Company’s condensed consolidated financial statements.  The unpaid principal balance of loans serviced for others, exclusive of Small Business Administration (“SBA”) loans, was $30.3 million and $38.0 million at September 30, 2016 and December 31, 2015, respectively.  Periodically, the Company originates SBA loans for sale for which it retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2016 and December 31, 2015, the unpaid principal balance of SBA loans serviced for others totaled $6.7 million and $8.5 million, respectively.  The Company did not sell any SBA loans during the nine months ended September 30, 2016 and 2015.

Pledged Loans

At September 30, 2016, the Bank has pledged $730.0 million of loans to the FHLB of San Francisco to secure a credit facility totaling $374.5 million under a blanket lien. Of this credit facility, $10.2 million is available as a line of credit, while the remainder is available for potential future borrowings.

Purchased Credit Impaired (“PCI”) Loans

As part of the acquisition of Mission Community Bancorp in 2014 (the “MISN Transaction”), the Company acquired certain loans classified as PCI loans. These loans have exhibited evidence of deterioration in credit quality since their origination, and at their acquisition it was deemed probable all contractually required payments would not be collected.

19

Note 4. Loans and Allowance for Loan and Lease Losses – continued

The table below summarizes the unpaid principal balance and carrying amount of PCI loans as of September 30, 2016 and December 31, 2015:

	September 30, 2016				December 31, 2015
	Unpaid Principal Balance		Carrying Amount		Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Commercial	$	6,936	$	5,614	$	7,139	$	5,685
Construction and land	322		241		382		282
Residential 1 to 4 family	196		123		875		573
Total real estate secured	7,454		5,978		8,396		6,540
Commercial
Agriculture	1,500		1,465		1,500		1,452
Commercial and industrial	789		501		1,211		783
Total commercial	2,289		1,966		2,711		2,235
Total PCI loans	$	9,743	$	7,944	$	11,107	$	8,775

The following table summarizes activity in the accretable yield, or income expected to be collected on PCI loans for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended,				For the Nine Months Ended,
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Beginning balance	$	3,269	$	4,464	$	3,821	$	4,374
Accretion of income	(210)		(258)		(865)		(1,190)
Changes in expected cash flows (1)	(144)		(161)		(41)		861
Ending balance	$	2,915	$	4,045	$	2,915	$	4,045

(1)Changes in expected cash flows during the three months ended September 30, 2016 and 2015, as well as for the nine months ended September 30, 2016, were driven by cash flows the Company no longer expects to collect resulting from the prepayment of certain PCI loans.  Changes in expected cash flows for the nine months ended September 30, 2015 were driven primarily by positive changes in expected cash flows on PCI loans.

20

Note 4. Loans and Allowance for Loan and Lease Losses – continued

Impaired Loans

The following tables provide a summary of the Company’s recorded investment in non-PCI and PCI impaired loans as of and for the periods presented:

							FortheThreeMonthsEnded				For the Nine Months Ended
	September 30, 2016						September 30, 2016				September 30, 2016
			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
Construction and land	$	4,185	$	8,884	$	-	$	4,511	$	16	$	4,864	$	57
Commercial	2,231		3,347		-		2,330		28		3,146		90
Residential 1 to 4 family	490		640		-		382		8		435		18
Farmland	325		331		-		363		5		564		28
Home equity lines of credit	84		86		-		84		-		75		-
Commercial
Commercial and industrial	2,996		3,255		-		3,329		51		3,333		153
Agriculture	1,778		1,869		-		1,573		18		1,182		39
Consumer	135		168		-		181		1		163		4
Total	12,224		18,580		-		12,753		127		13,762		389
With Related Allowance Real Estate Secured
Commercial	281		300		27		282		4		287		12
Commercial
Commercial and industrial	1,354		1,395		100		1,408		19		1,399		53
Agriculture	341		351		81		352		3		372		6
Total	1,976		2,046		208		2,042		26		2,058		71
Total Non-PCI impaired loans	$	14,200	$	20,626	$	208	$	14,795	$	153	$	15,820	$	460

21

Note 4. Loans and Allowance for Loan and Lease Losses – continued

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2016						September 30, 2016				September 30, 2016
			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	$	5,105	$	6,425	$	-	$	5,110	$	135	$	5,128	$	381
Residential 1 to 4 family	123		196		-		122		4		348		253
Construction and land	60		141		-		60		7		57		25
Commercial
Agriculture	1,465		1,500		-		1,462		30		1,458		87
Commercial and industrial	107		395		-		117		18		200		63
Total	6,860		8,657		-		6,871		194		7,191		809
With Related Allowance Real Estate Secured
Commercial	509		511		37		513		7		520		26
Construction and land	181		181		5		191		3		205		10
Commercial
Commercial and industrial	394		394		24		405		6		428		20
Total	1,084		1,086		66		1,109		16		1,153		56
Total PCI loans	$	7,944	$	9,743	$	66	$	7,980	$	210	$	8,344	$	865

							For the Three Months Ended				For the Nine Months Ended
	December 31, 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
Construction and land	$	5,138	$	9,615	$	-	$	1,556	$	24	$	1,798	$	71
Commercial	3,855		5,328		-		4,247		36		4,158		110
Residential 1 to 4 family	694		860		-		748		10		602		12
Farmland	587		588		-		385		7		558		26
Home equity lines of credit	85		86		-		85		-		119		-
Commercial
Commercial and industrial	2,295		2,510		-		3,252		10		3,541		45
Agriculture	724		815		-		654		6		671		7
Consumer	146		204		-		160		1		149		4
Total	13,524		20,006		-		11,087		94		11,596		275
With Related Allowance Real Estate Secured
Commercial	435		665		59		461		-		476		-
Land	-		-		-		4,084		-		4,147		-
Commercial
Commercial and industrial	1,944		1,972		156		1,444		22		1,139		50
Agriculture	400		400		39		-		-		-		-
Total	2,779		3,037		254		5,989		22		5,762		50
Total Non-PCI impaired loans	$	16,303	$	23,043	$	254	$	17,076	$	116	$	17,358	$	325

22

Note 4. Loans and Allowance for Loan and Lease Losses – continued

							For the Three Months Ended				For the Nine Months Ended
	December 31, 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	$	5,156	$	6,601	$	-	$	5,189	$	122	$	5,297	$	807
Residential 1 to 4 family	573		875		-		566		18		565		48
Construction and land	53		152		-		553		19		556		58
Commercial
Agriculture	1,452		1,500		-		1,440		30		1,437		87
Commercial and industrial	297		712		-		542		44		680		104
Total	7,531		9,840		-		8,290		233		8,535		1,104
With Related Allowance
Real Estate Secured
Commercial	529		538		41		537		10		536		38
Construction and land	229		230		5		254		5		272		15
Commercial
Commercial and industrial	486		499		33		490		10		500		33
Total	1,244		1,267		79		1,281		25		1,308		86
Total PCI loans	$	8,775	$	11,107	$	79	$	9,571	$	258	$	9,843	$	1,190

The Company did not record income from the receipt of cash payments related to non-accruing loans during the nine month periods ended September 30, 2016 and 2015.  If interest on non-accruing loans had been recognized at the original interest rates stipulated in the respective loan agreements, interest income would have increased $0.1 million and $0.2 million for the three month periods ended September 30, 2016 and 2015, respectively, and $0.3 million and $0.5 million for the nine month periods ended September 30, 2016 and 2015, respectively.  Interest income recognized on impaired loans in the tables above represents interest the Company recognized on accruing TDRs, as well as accruing PCI loans.

At September 30, 2016, the Company had no loans secured by residential 1 to 4 family real estate that were in the process of foreclosure.  There were no residential 1 to 4 family properties included in foreclosed assets as of September 30, 2016.

Troubled Debt Restructurings

The majority of the Bank’s TDRs were granted concessions with respect to interest rates, payment structure and/or maturity. Modifications to loans as TDRs during the three and nine month periods ended September 30, 2016 were primarily comprised of extensions of a loan’s maturity at the loan’s original interest rate, which was lower than the market rate of interest for new credit with similar risk.  Extensions of maturity were for periods ranging from 6 months to 10 years.  At September 30, 2016, the Company was not committed to lend any additional funds to borrowers with loans modified as TDRs.  As of September 30, 2016 the Company had established valuation allowances for loans modified as TDRs totaling $0.2 million.

23

Note 4. Loans and Allowance for Loan and Lease Losses – continued

The following table provides a summary of loans classified as TDRs as of September 30, 2016 and December 31, 2015:

	September 30, 2016						December 31, 2015
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Construction and land	$	742	$	3,233	$	3,975	$	1,171	$	3,968	$	5,139
Commercial	2,252		115		2,367		2,395		435		2,830
Farmland	250		74		324		504		82		586
Residential 1 to 4 family	490		-		490		613		81		694
Commercial
Commercial and industrial	3,432		751		4,183		2,698		1,515		4,213
Agriculture	2,119		-		2,119		1,124		-		1,124
Consumer	107		9		116		114		10		124
Total non-PCI loans	9,392		4,182		13,574		8,619		6,091		14,710
PCI loans
Real estate secured
Commercial	901		24		925		922		46		968
Construction and land	60		-		60		54		-		54
Commercial
Commercial and industrial	394		37		431		461		66		527
Total PCI loans	1,355		61		1,416		1,437		112		1,549
Total TDRs	$	10,747	$	4,243	$	14,990	$	10,056	$	6,203	$	16,259

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, 2016					September 30, 2016
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Residential 1 to 4 family	1	$	222	$	222	1	$	222	$	222
Commercial
Commercial and industrial	3	204		204		16	1,732		1,732
Agriculture	-	-		-		1	10		10
Total TDRs	4	$	426	$	426	18	$	1,964	$	1,964

24

Note 4. Loans and Allowance for Loan and Lease Losses – continued

	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 of	Recorded		Recorded		Number of	Recorded		Recorded
	TDRs	Investment		Investment		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
Total non-PCI loans	10	1,409		1,409		30	6,366		6,366
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 PCI loans	2	845		845		7	1,540		1,540
Total TDRs	12	$	2,254	$	2,254	37	$	7,906	$	7,906

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

	For the Three Months Ended			For the Nine Months Ended
	September 30, 2016			September 30, 2016
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Real Estate Secured
Farmland	-	$	-	1	$	80
Total	-	$	-	1	$	80
	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

25

Note 4. Loans and Allowance for Loan and Lease Losses – continued

Allowance for Loan and Lease Losses

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

	For the Three Months Ended September 30, 2016
	Balance June 30, 2016			Charge-offs			Recoveries			Provision for Loan and Lease Losses			Balance September 30, 2016
	(dollars in thousands)
Other real estate secured	$	10,654		$		-	$	6		$		175	$	10,835
Commercial	5,609			(5)			194			(92)			5,706
Construction and land	491			-			17			(191)			317
Consumer	182			(20)			3			(21)			144
Unallocated	512									129			641
Total	$	17,448		$		(25)	$	220		$		-	$	17,643
	For the Nine Months Ended September 30, 2016
	Balance December 31, 2015			Charge-offs			Recoveries			Provision for Loan and Lease Losses			Balance September 30, 2016
	(dollars in thousands)
Other real estate secured	$		11,161	$	-		$		632	$	(958)		$		10,835
Commercial	5,372			(17)			424			(73)			5,706
Construction and land	623			-			161			(467)			317
Consumer	173			(24)			15			(20)			144
Unallocated	123									518			641
Total	$		17,452	$	(41)		$		1,232	$	(1,000)		$		17,643

	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

26

Note 4. Loans and Allowance for Loan and Lease Losses – continued

	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

The following tables disaggregate the allowance for loan and lease losses and the recorded investment in loans by impairment methodology as of September 30, 2016 and December 31, 2015:

	September 30, 2016
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Other real estate secured	$	27	$	10,771	$	37	$	3,411	$	1,061,320	$	5,737
Commercial	181		5,501		24		6,469		232,492		1,966
Construction and land	-		312		5		4,185		22,410		241
Consumer	-		144		-		135		4,335		-
Unallocated	-		641		-		-		-		-
Total	$	208	$	17,369	$	66	$	14,200	$	1,320,557	$	7,944

	December 31, 2015
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Other real estate secured	$	59	$	11,061	$	41	$	5,656	$	964,493	$	6,258
Commercial	195		5,144		33		5,363		221,573		2,235
Construction and land	-		618		5		5,138		30,249		282
Consumer	-		173		-		146		5,887		-
Unallocated	-		123		-		-		-		-
Total	$	254	$	17,119	$	79	$	16,303	$	1,222,202	$	8,775

At September 30, 2016, total gross loans of $1.3 billion in the table above include $149.4 million of non-PCI and PCI loans acquired in the MISN Transaction.  These loans were initially recorded at fair value, and had no related ALLL on the acquisition date.  At September 30, 2016 and December 31, 2015 the ALLL for acquired non-PCI loans was $0.2 million, respectively, and is included in the ALLL for loans collectively evaluated for impairment.  The incremental ALLL allocation for acquired non-PCI loans was not due to deterioration in credit quality, but rather due to the accretion of purchase discounts on these loans.  The ALLL for PCI loans was $0.1 million as of September 30, 2016 and December 31, 2015, and is attributable to unfavorable changes in expected future cash flows on certain PCI loans.

27

Note 4. Loans and Allowance for Loan and Lease Losses – continued

Reserve for Off-Balance Sheet Loan Commitments

The Company has exposure to losses from unfunded loan commitments and letters of credit.  Estimated losses inherent in the outstanding balance of these commitments is not included in the ALLL, but is recorded separately, and included as a component of other liabilities in the condensed consolidated balance sheets.  The balance of the reserve for off-balance sheet commitments was $0.5 million at September 30, 2016 and December 31, 2015.

Credit Quality

The following tables stratify loans held for investment by the Company’s internal risk grading system as of September 30, 2016 and December 31, 2015:

	September 30, 2016
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Commercial	$	605,020	$	7,225	$	17,987	$	-	$	630,232
Residential 1 to 4 family	194,615		222		493		-		195,330
Farmland	130,053		1,400		1,270		-		132,723
Multi-family residential	81,536		-		-		-		81,536
Construction and land	23,030		-		3,565		-		26,595
Home equity lines of credit	24,694		-		216		-		24,910
Commercial
Commercial and industrial	173,476		68		11,154		-		184,698
Agriculture	44,569		3,811		5,883		-		54,263
Consumer	4,378		-		92		-		4,470
Total non-PCI loans	1,281,371		12,726		40,660		-		1,334,757
PCI loans
Real estate secured
Commercial	774		2,241		2,599		-		5,614
Construction and land	241		-		-		-		241
Residential 1 to 4 family	-		123		-		-		123
Commercial
Agriculture	-		-		1,465		-		1,465
Commercial and industrial	54		-		447		-		501
Total PCI loans	1,069		2,364		4,511		-		7,944
Total loans held for investment	$	1,282,440	$	15,090	$	45,171	$	-	$	1,342,701

28

Note 4. Loans and Allowance for Loan and Lease Losses – continued

	December 31, 2015
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Commercial	$	545,614	$	4,402	$	23,543	$	-	$	573,559
Residential 1 to 4 family	164,226		405		625		-		165,256
Farmland	118,740		245		1,581		-		120,566
Multi-family residential	79,381		-		-		-		79,381
Construction and land	30,219		939		4,229		-		35,387
Home equity lines of credit	31,103		-		284		-		31,387
Commercial
Commercial and industrial	152,979		4,730		6,316		-		164,025
Agriculture	61,340		98		1,473		-		62,911
Consumer	5,922		-		111		-		6,033
Total non-PCI loans	1,189,524		10,819		38,162		-		1,238,505
PCI loans
Real estate secured
Commercial	-		1,094		4,591		-		5,685
Residential 1 to 4 family	455		-		118		-		573
Construction and land	228		54		-		-		282
Commercial
Agriculture	-		-		1,452		-		1,452
Commercial and industrial	75		81		627		-		783
Total PCI loans	758		1,229		6,788		-		8,775
Total loans held for investment	$	1,190,282	$	12,048	$	44,950	$	-	$	1,247,280

29

Note 4. 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, 2016
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing (1)		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Commercial	$	629,972	$	-	$	-	$	-	$	260	$	630,232
Residential 1 to 4 family	195,330		-		-		-		-		195,330
Farmland	132,648		-		-		-		75		132,723
Multi-family residential	81,536		-		-		-		-		81,536
Construction and land	23,152		-		-		-		3,443		26,595
Home equity lines of credit	24,826		-		-		-		84		24,910
Commercial
Commercial and industrial	183,740		39		-		-		919		184,698
Agriculture	54,263		-		-		-		-		54,263
Consumer	4,442		-		-		-		28		4,470
Total non-PCI loans	1,329,909		39		-		-		4,809		1,334,757
PCI loans
Real estate secured
Commercial	5,590		-		-		-		24		5,614
Construction and land	241		-		-		-		-		241
Residential 1 to 4 family	123		-		-		-		-		123
Commercial
Agriculture	1,465		-		-		-		-		1,465
Commercial and industrial	450		-		-		-		51		501
Total PCI loans	7,869		-		-		-		75		7,944
Total loans held for investment	$	1,337,778	$	39	$	-	$	-	$	4,884	$	1,342,701

(1)At September 30, 2016, $4.2 million of non-accruing loans were current, $0.1 million were 30-59 days past due, $0.1 million were 60-89 days past due, and $0.5 million were 90+ days past due.

30

Note 4. Loans and Allowance for Loan and Lease Losses – continued

	December 31, 2015
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing (1)		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Commercial	$	571,665	$	-	$	-	$	-	$	1,894	$	573,559
Residential 1 to 4 family	165,176		-		-		-		80		165,256
Farmland	120,483		-		-		-		83		120,566
Multi-family residential	79,381		-		-		-		-		79,381
Construction and land	31,419		-		-		-		3,968		35,387
Home equity lines of credit	31,303		-		-		-		84		31,387
Commercial
Commercial and industrial	162,223		66		195		-		1,541		164,025
Agriculture	62,911		-		-		-		-		62,911
Consumer	6,000		-		-		-		33		6,033
Total non-PCI loans	1,230,561		66		195		-		7,683		1,238,505
PCI loans
Real estate secured
Commercial	5,639		-		-		-		46		5,685
Residential 1 to 4 family	573		-		-		-		-		573
Construction and land	282		-		-		-		-		282
Commercial
Agriculture	1,452		-		-		-		-		1,452
Commercial and industrial	694		-		-		-		89		783
Total PCI loans	8,640		-		-		-		135		8,775
Total loans held for investment	$	1,239,201	$	66	$	195	$	-	$	7,818	$	1,247,280

(1)At December 31, 2015, $6.4 million of non-accruing loans were current, $28 thousand were 30-59 days past due, $26 thousand were 60-89 days past due, and $1.4 million were 90+ days past due.

Note 5. 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, 2016 and December 31, 2015, there was no valuation allowance for the Company’s deferred tax assets.  The Company’s deferred tax assets totaled $15.7 million at September 30, 2016, and $21.3 million at December 31, 2015.

The Company is subject to income taxation by both federal and state taxing authorities.  Income tax returns for the years ended December 31, 2015, 2014, and 2013 are open to audit by federal taxing authorities while income tax returns are open to audit by state taxing authorities for the years ended December 31, 2015, 2014, 2013, and 2012.

31

Note 6. Goodwill and Other Intangible Assets

Intangible assets consist of goodwill and core deposit intangible assets (“CDI”) associated with the acquisition of core deposit balances.  At September 30, 2016 and December 31, 2015, the carrying value of goodwill was $24.9 million.  At September 30, 2016 and December 31, 2015, the balance of CDI was $3.6 million and $4.3 million.  CDI assets are subject to amortization.  Amortization was $0.2 million and $0.3 million for the three months ended September 30, 2016 and 2015 and $0.7 million and $0.8 million for the nine months ended September 30, 2016 and 2015, respectively.

The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount of CDI and provides an estimate for future amortization as of September 30, 2016:

	September 30, 2016
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(5,693)	$	3,568

	September 30, 2016
	Beginning		Estimated		Projected Ending
	Balance		Amortization		Balance
	(dollars in thousands)
Period
Year 2016	$	3,568	$	(215)	$	3,353
Year 2017	3,353		(588)		2,765
Year 2018	2,765		(549)		2,216
Year 2019	2,216		(522)		1,694
Year 2020	1,694		(441)		1,253
Year 2021	1,253		(419)		834

Note 7. Share-based Compensation Plans

As of September 30, 2016, the Company had one active share-based 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, restricted stock awards, and restricted stock units.  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.  These plans are referred to as the “2005 Equity Based Compensation Plan,” and the “1997 Stock Option Plan.”  As of September 30, 2016, no further grants can be made from either of these plans.

32

Note 7. Share-based Compensation Plans – continued

Restricted Stock Awards

The Company grants restricted stock periodically for the benefit of employees and to members of the Board of Directors.  Restricted stock awards typically vest ratably over a period of three to five years depending on the specific terms of the award.  Restricted stock awards may be subject to the achievement of certain performance goals.  Compensation costs related to restricted stock awards are recognized over the period the awards are expected to vest and are included in salaries and employee benefits.  Compensation cost related to awards that are subject to performance conditions is recognized over the vesting period if the Company believes it is more likely than not that the performance conditions will be achieved.  If the Company believes it is more likely than not that performance conditions will not be achieved, the Company ceases the accrual of compensation cost for the related award, and previously recognized compensation cost for the unvested portion of the award is reversed from earnings.  The Company includes a forfeiture rate assumption in its accrual for compensation cost associated with restricted stock awards, which is based on the Company’s historical experience with such awards.

The following table provides a summary of activity related to restricted stock granted for the nine months ended September 30, 2016:

	Number of	Average Grant
	Shares	Date Fair Value
Balance December 31, 2015	162,394	$	7.30
Granted	120,818	7.85
Vested	(75,863)	7.39
Forfeited	(17,765)	7.76
Balance September 30, 2016	189,584	$	7.59
Expected to vest as of September 30, 2016	174,099	$	7.57

Included in the table above are performance-based grants of restricted stock totaling 13,245 shares as of September 30, 2016.

Restricted Stock Units

Restricted stock units are granted periodically for the benefit of employees.  Upon vesting, certain of these awards settle in shares of the Company’s common stock, while others settle in cash.  Awards that settle in shares of the Company’s common stock are made to executive officers, while those that settle in cash are made to other officers of the Bank.  The Company recognizes compensation cost associated with restricted stock units that settle in shares of the Company’s common stock through charges to current period earnings, included in salaries and employee benefits, and a corresponding increase in additional paid in capital.  Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest.  For restricted stock units that settle in cash, the Company accrues a liability for the ultimate settlement of the award through charges to current period earnings, included in salaries and employee benefits.  Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest.  However, the ultimate settlement value of these awards and the related compensation cost may fluctuate, based on increases and decreases in the value of the Company’s common stock over the vesting period.

Restricted stock units that settle in shares of the Company’s common stock have vesting conditions which are based on pre-determined performance targets.  Based on the achievement of these performance targets, the number of awards that vest can be adjusted upward to a maximum of 150% of the granted amount or downward to zero.  Certain of the Company’s performance based restricted stock units have performance targets based on the Company’s return on average assets and total shareholder return over a specified period of time, relative to the Company’s pre-determined peer group.

The grant date fair value of performance based restricted stock units that do not contain a market condition, such as those where vesting is based on total shareholder return, is equivalent to the price of the Company’s common stock on the date of grant.  The Company incorporates a forfeiture rate assumption in its accrual for compensation cost for these awards, which is based on the Company’s historical experience with similar awards.  For awards that contain a market condition, the Company employs the use of a Monte Carlo simulation through an independent party to determine the grant date fair value of those awards.  The Monte Carlo simulation estimates the grant date fair value of these awards using input assumptions similar to those in the Black-Scholes model, however it also incorporates into the grant date fair value calculation the probability that the performance targets will or will not be achieved.

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Note 7. Share-based Compensation Plans – continued

The grant date fair value for restricted stock units that settle in cash is equivalent to the price of the Company’s common stock on the date of grant.

The following table provides a summary of activity related to restricted stock units that settle in shares of the Company’s common stock for the nine months ended September 30, 2016:

	Settle in Stock
		Average Grant
	Shares	Date Fair Value
Balance, December 31, 2015	-	$	-
Granted	38,104	7.56
Forfeited	(1,388)	7.56
Balance, September 30, 2016	36,716	$	7.56
Expected to vest as of September 30, 2016	24,746	$	7.56

The following table provides a summary of activity related to restricted stock units that settle in cash for the nine months ended September 30, 2016:

	Settle in Cash
	Shares	Fair Value (1)
Balance, December 31, 2015	-
Granted	80,448
Forfeited	(1,923)
Balance, September 30, 2016	78,525	$	8.20
Expected to vest as of September 30, 2016	62,621	$	8.20

(1)Represents the closing share price of the Company’s common stock as of September 30, 2016.  As of September 30, 2016, the accrued liability for restricted stock units expected to vest that settle in cash was approximately $0.1 million.

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 such as expected volatility of the Company’s common stock, expected term of the option, expected dividend yield on the Company’s common stock, and the expected risk free rate of interest.  Expectations for volatility are based on the historical volatility of the Company’s common stock.  The Company estimates forfeiture rates based on historical option exercise and termination experience for its employees.  The Company recognizes share-based compensation costs ratably over the vesting period of the award, which is typically a period of three to five years.

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Note 7. Share-based Compensation Plans - continued

The following table summarizes activity related to stock options, provides information related to options that have vested or are expected to vest and exercisable options as of September 30, 2016:

	Options Outstanding			Average	Average
	Number	Weighted Average		Remaining	Intrinsic
	of Shares	Exercise Price		Life (years)	Value
Balance, December 31, 2015	932,553	$	7.19
Granted	36,022	7.27
Forfeited	(46,303)	7.50
Exercised	(19,907)	6.38
Balance, September 30, 2016	902,365	$	7.20	7.03	$	1,196,750
Exercisable September 30, 2016	511,663	$	6.99	6.00	$	909,295
Vested and expected to vest as of September 30, 2016	874,999	$	7.19	6.99	$	1,177,621

The total intrinsic value, the amount by which the stock price exceeded the exercise price on the date of exercise, of options exercised in all plans during the nine month period ended September 30, 2016 was $31 thousand.  The aggregate net tax deficiency related to stock options and disqualifying dispositions on the exercise of incentive stock options was $100 thousand during the nine month period ended September 30, 2016, and was recorded as an adjustment to additional paid in capital.

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted during the nine months ended September 30, 2016 and 2015:

	For the Nine Months Ended
	September 30,
	2016		2015
Expected volatility	31.85%		36.38%
Expected term (years)	5.00		5.00
Dividend yield	3.30%		2.82%
Risk free rate	1.31%		1.54%
Weighted-average grant date fair value	$	1.50	$	1.97

Share-Based Compensation Expense

Expense related to share-based compensation is charged to earnings over the period the awards are expected to vest, and is included in salaries and employee benefits in the condensed consolidated financial statements.  For the nine months ended September 30, 2016 the net income tax deficiency related to share-based compensation was $100 thousand.  For the nine months ended September 30, 2015, the net income tax benefit related to share-based compensation was $96 thousand.  At September 30, 2016, compensation expense related to unvested stock options, restricted stock awards and restricted stock units is expected to be recognized over 2.2 years, 1.8 years, and 2.6 years respectively.

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Note 7. Share-based Compensation Plans - continued

The following table provides a summary of the expense the Company recognized related to share-based compensation awards, as well as the remaining expense associated with those awards as of and for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Compensation expense:
Stock options	$	99	$	126	$	325	$	374
Restricted stock	181		153		464		440
Restricted stock units	66		-		126		-
Total	$	346	$	279	$	915	$	814
Unrecognized compensation expense:
Stock options	$	653	$	1,133
Restricted stock	1,025		982
Restricted stock units	575		-
Total	$	2,253	$	2,115

Note 8. Shareholders’ Equity

Cash Dividends

On January 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on February 29, 2016 to shareholders of the Company’s common stock as of February 17, 2016.

On April 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on May 31, 2016 to shareholders of the Company’s common stock as of May 18, 2016.

On July 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on July 27, 2016 to shareholders of the Company’s common stock as of August 31, 2016.

As discussed in Note 14. Subsequent Events of these condensed consolidated financial statements, on October 26, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on November 30, 2016 to shareholders of the Company’s common stock as of November 15, 2016.

Stock Repurchase Program

On July 22, 2016, the Company announced it had amended its previously announced program for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18.  Under the amended program, repurchase activity may commence on August 6, 2016 and may continue until February 8, 2017, the program’s new expiration date, or expire earlier upon the completion of the repurchase of $5.0 million of the Company’s common stock in addition to what has already been purchased under the program, as well as under certain other circumstances as set forth in the amended program.  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.

During the nine months ended September 30, 2016, the Company repurchased and cancelled 226,170 shares of its common stock at an aggregate cost of $1.6 million, or $7.23 per share.  The Company made no repurchases of its common stock during the three months ended September 30, 2016.  As of September 30, 2016, the Company had repurchased and cancelled a total of 281,598 shares of its common stock under this plan at an aggregate total cost of $2.0 million or $7.28 per share.

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Note 8. Shareholders’ Equity – continued

Regulatory Capital

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

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

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

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

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

·The capital conservation buffer is determined in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019.  The capital conservation buffer began phasing-in on January 1, 2016.

·The exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets and intangible assets.  For 2016, certain deferred tax assets and intangible assets are phased-out of CET I at a rate of 60%, compared to 40% for 2015.

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

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Note 8. Shareholders’ Equity – continued

The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of September 30, 2016 and December 31, 2015:

	Regulatory Standard to Be Considered
	Adequately Capitalized (1)		Well Capitalized (2)	September 30, 2016		December 31, 2015
	Company	Bank	Bank	Company	Bank	Company	Bank
Ratio
Common Equity Tier I Capital Ratio	5.125%	5.125%	6.50%	12.30%	12.23%	12.61%	12.48%
Leverage ratio	4.000%	4.000%	5.00%	9.83%	9.35%	9.90%	9.50%
Tier I Risk-Based Capital Ratio	6.625%	6.625%	8.00%	12.87%	12.23%	13.01%	12.48%
Total Risk-Based Capital Ratio	8.625%	8.625%	10.00%	14.09%	13.46%	14.26%	13.74%
(1)As of September 30, 2016, includes Capital Conservation Buffer of 0.625%.  On a fully phased-in basis, effective January 1, 2019, under Basel III Capital Rules, minimum capital ratios to be considered “adequately capitalized,” including the Capital Conservation Buffer of 2.5%, will be as follows: CET I: 7.0%; Leverage Ratio: 6.5%; Tier I Risk-Based Capital Ratio: 8.5%; Total Risk-Based Capital Ratio: 10.5%. (2)Reflects minimum threshold to be considered “well capitalized” under Prompt Corrective Action framework, specific to depository institutions.

At September 30, 2016, the Company was able to include $10.2 million of junior subordinated debt in its Tier I capital for regulatory capital purposes compared to $10.0 million at December 31, 2015.

Note 9. Earnings Per Share (“EPS”)

Basic EPS is determined by dividing net income allocated to common shareholders by the weighted average shares outstanding during the period.  Diluted EPS is determined by dividing net income allocated to common shareholders by the weighted average diluted shares outstanding, which reflects the diluted effect of share-based compensation awards during the period resulting from issued and outstanding stock options, restricted stock awards, and restricted stock units.  The Company determines the diluted effect of share-based compensation awards using the treasury stock method.  Unvested restricted stock awards contain non-forfeitable rights to dividends or dividend equivalents. As such, these awards are considered participating securities and the Company has applied the two-class method in the computation of basic and diluted EPS in periods where these awards are outstanding.  Under the two-class method distributed and undistributed earnings allocable to participating securities are deducted from net income to determine net income allocated to common shareholders, which is then used in the numerator of both basic and diluted EPS calculations.

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

	For the Three Months Ended September 30,
	2016			2015
	Net Income		Shares	Net Income		Shares
	(dollars in thousands, except per share data)
Net income	$	4,183		$	4,002
Less: net income allocated to participating securities	(22)			(21)
Net income allocated to common shareholders	$	4,161		$	3,981
Weighted average shares outstanding			34,037,252			34,158,081
Basic earnings per common share	$	0.12		$	0.12
Dilutive effect of share-based compensation awards			145,948			124,286
Weighted average diluted shares outstanding			34,183,200			34,282,367
Diluted earnings per common share	$	0.12		$	0.12

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Note 9. Earnings Per Share – continued

	For the Nine Months Ended September 30,
	2016			2015
	Net Income		Shares	Net Income		Shares
	(dollars in thousands, except per share data)
Net income	$	12,383		$	11,871
Less: accretion on preferred stock	-			(70)
Less: net income allocated to participating securities	(65)			(66)
Net income allocated to common shareholders	$	12,318		$	11,735
Weighted average shares outstanding			34,044,067			34,111,079
Basic earnings per common share (1)	$	0.36		$	0.34
Dilutive effect of share-based compensation awards			129,269			147,285
Weighted average diluted shares outstanding			34,173,336			34,258,364
Diluted earnings per common share	$	0.36		$	0.34

(1)Basic EPS for the nine months ended September 30, 2015 as presented under the two-class method is $0.34 per share ($0.344 per share when extended), compared to the $0.35 per share ($0.345 per share when extended) as presented last year.  This change in rounding is due to the application of the two-class method for presenting EPS, where an allocation of $66 thousand in earnings for the nine months ended September 30, 2015 is made to participating securities, which represent restricted stock awards.

For the three and nine months ended September 30, 2016 and 2015, common stock equivalents associated primarily with stock options, totaling approximately 62,000 shares and 126,000 shares, and 120,000 shares and 35,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.

Note 10. Commitments and Contingencies

In the normal course of business, various claims and lawsuits are brought by and against the Company. In the opinion of management and the Company’s legal counsel, the disposition of all pending or threatened proceedings will not 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. 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.

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Note 10. Commitments and Contingencies - continued

As of September 30, 2016 and December 31, 2015, the Company had the following outstanding financial commitments:

	September 30,		December 31,
	2016		2015
	(dollars in thousands)
Commitments to extend credit	$	273,129	$	242,125
Standby letters of credit (1)	12,392		12,968
Total commitments and standby letters of credit	$	285,521	$	255,093

(1)Includes a standby letter of credit to one customer in the amount of $10.2 million and $10.4 million at September 30, 2016 and December 31, 2015, respectively.

Commitments to extend credit and standby letters of credit are made at both fixed and variable rates of interest.  At September 30, 2016, the Company had $31.8 million in fixed rate commitments and $253.7 million in variable rate commitments.

Note 11. 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 believes that the remediation efforts required to address the issues identified in the BSA Consent Order are essentially complete at this time.  However, compliance with and resolution of the BSA Consent Order are determined by the FDIC and DBO in their sole discretion.

Note 12. Derivative Instruments

From time to time, the Company enters into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company.  At the same time, the Company enters into identical interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements it enters into with its borrowers.  At September 30, 2016, the Company had swaps with matched terms with an aggregate notional amount of $37.1 million and a fair value of $1.9 million.  The fair values of these swaps are recorded as components of other assets and other liabilities in the Company’s condensed consolidated balance sheet.  Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s income statement as a component of non-interest income.  Since the terms of the swap agreements between the Company and its borrowers have been matched with the terms of swap agreements with another financial institution, the adjustments for the change in their fair value offset each other in non-interest income.

Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of these swap agreements.  Offsetting swap agreements the Company has with other financial institutions are collateralized with cash, and swap agreements with borrowers are secured by the collateral arrangements for the underlying loans these borrowers have with the Company.  During the nine months ended September 30, 2016, there were no losses recorded on swap agreements, attributable to the change in credit risk associated with a counterparty.  All interest rate swap agreements entered into by the Company as of September 30, 2016 are not designated as hedging instruments.

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Note 12. Derivative Instruments - continued

The following table summarizes the Company’s derivative instruments, included in “other assets” and “other liabilities” in the condensed consolidated balance sheets, as of September 30, 2016:

	September 30, 2016
	Derivative Assets				Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value
	(dollars in thousands)
Derivative instruments not designated as hedging instruments:
Interest rate swap contracts - pay floating, receive fixed	$	37,116	$	1,910	$	-	$	-
Interest rate swap contracts - pay fixed, receive floating	-		-		37,116		1,910
Total	$	37,116	$	1,910	$	37,116	$	1,910

The Company was not party to any swap agreements as of December 31, 2015.

Note 13. Balance Sheet Offsetting

Derivative financial instruments may be eligible for offset in the consolidated balance sheets, such as those subject to enforceable master netting arrangements or a similar agreement.  Under these agreements, the Company has the right to net settle multiple contracts with the same counterparty.  The Company offers an interest rate swap product to qualified customers which are then paired with derivative contracts the Company enters into with a counterparty bank.  While derivative contracts entered into with counterparty banks may be subject to enforceable master netting agreements, derivative contracts with customers may not be subject to enforceable master netting arrangements.  As such, these instruments have been excluded from the table below.

Financial instruments that are eligible for offset in the consolidated balance sheets as of September 30, 2016 are presented in the table below:

							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts Recognized in the Condensed Consolidated Balance Sheets		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts Presented in the Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral		Net Amount
	(dollars in thousands)
September 30, 2016
Financial liabilities:
Derivatives not designated as hedging instruments	$	1,910	$	-	$	1,910	$	-	$	2,100	$	(190)
Total	$	1,910	$	-	$	1,910	$	-	$	2,100	$	(190)

As shown in the table above, as of September 30, 2016, the Company pledged cash collateral of $2.1 million for interest rate swaps in a liability position.

Note 14.  Subsequent Events

Dividend Declaration

On October 26, 2016, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2016, to shareholders of the Company’s common stock as of November 15, 2016.

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

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

Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed herein include the following: 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; our ability to attract and retain qualified employees; a failure or breach of our operational security systems or infrastructure or those of our customers, our third party vendors or other service providers, including as a result of a cyber-attack; any compromise in the secured transmission of personal, financial and/or confidential information over public networks, including theft of confidential information followed by fraudulent or other illegal activity; 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, 2015, filed by the Company with the U.S. Securities and Exchange Commission on March 4, 2016. Forward looking statements speak only as of the date they are made, and the Company does not undertake to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made, whether as a result of new information, future developments or otherwise, and specifically disclaims any obligation to revise or update such forward looking statements for any reason, except as may be required by law.

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Executive Overview

This overview of Management’s Discussion and Analysis of the Company’s Financial Condition and Results of Operations, 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 in addition to the Company’s other reports and filings with the U.S. Securities and Exchange Commission (“SEC”).  Each of these items could have an impact on the Company’s condensed consolidated financial results.

Heritage Oaks Bancorp (“Bancorp”) is a California corporation organized in 1994, and is 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 within San Luis Obispo, Santa Barbara and Ventura Counties. As of September 30, 2016, 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 those 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 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 all of the issued and outstanding shares of the Bank, Bancorp conducts no significant activities. In October 2006, 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 Bancorp, the sole purpose of which is to issue trust preferred securities. In conjunction with our acquisition of Mission Community Bancorp (“MISN”) in February 2014 (the “MISN Transaction”), 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.

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.

·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.

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Financial Highlights

The Company generated net income available to common shareholders of $4.2 million, or $0.12 per diluted common share, and $12.4 million, or $0.36 per diluted common share, for the three and nine months ended September 30, 2016, respectively as compared to net income available to common shareholders of $4.0 million, or $0.12 per diluted common share, and $11.8 million, of $0.34 per diluted common share, for the same period a year earlier.

Significant factors affecting the Company’s net income for the three and nine months ended September 30, 2016 are discussed below. Please also refer to “Results of Operations” for a more detailed discussion concerning our operating results for the three and nine months ended September 30, 2016 and 2015.

·Net Interest Income: For the third quarter of 2016 net interest income was $16.2 million, or 3.50% of average interest earning assets (“net interest margin” or “NIM”), compared with net interest income of $15.4 million and a 3.58% NIM, for the same period a year earlier.  The decline in our NIM for the three months ended September 30, 2016 as compared to the same period in 2015 was primarily due to declining loan yields stemming from the prevailing low interest rate environment.  However, the $134.7 million year over year increase in earning assets more than offset the impact the decline in the NIM had on net interest income.  For the three months ended September 30, 2016 interest income and the yield on earning assets was $17.7 million and 3.81%, respectively, compared to $17.0 million and 3.94%, respectively, for the same period in 2015.  For the three months ended September 30, 2016 interest expense and the cost of funds was $1.4 million and 0.33%, respectively, compared to $1.6 million and 0.38%, respectively, for the same period in 2015.

·Non-Interest Expense: Non-interest expense increased by $0.6 million, or 4.7%, to $12.7 million for the three months ended September 30, 2016 compared to $12.2 million for the three months ended September 30, 2015.  The increase in non-interest expense for the third quarter of 2016 as compared to the same period a year ago was largely the result of increases in salaries and benefits expense of $1.1 million, which is attributed to increases in base salaries and mortgage banking commissions, as well as increased incentive compensation plan expenses.  The increase in salaries and benefits costs were partially offset by declines in professional services expenses of $0.5 million, which can be attributed to slightly lower information technology services and consulting expenses, as well as lower legal expenses.  The efficiency ratio for the three and nine months ended September 30, 2016 was 64.44% and 66.04%, respectively, compared to 67.81% and 65.32% for the same periods a year earlier.

·Provision for Loan and Lease Losses:   The Company did not record a provision for loan and lease losses during the third quarter of 2016.  During the nine months ended September 30, 2016 the Company recorded a reversal of provision for loan and lease losses of $1.0 million.  The reversal of provision for loan and lease losses during the first nine months of 2016 was attributable to continued improvement in loan credit quality metrics, including an overall decline in the level of non-performing assets.  The Bank has also recorded net recoveries over the past nine consecutive quarters.  As of September 30, 2016, the allowance for loan and leases losses was $17.6 million, or 1.31% of total gross loans, compared to $17.5 million, or 1.40% of total gross loans at December 31, 2015. The allowance for loan and lease losses for acquired non-PCI and PCI loans was $0.3 million, or 0.17%, of total acquired loans, as of September 30, 2016.

·Non-Interest Income: Non-interest income for the third quarter of 2016 was $3.3 million compared to $2.8 million for the same period a year earlier. The increase in non-interest income was due to gains on derivative instruments associated with our “back-to-back” interest rate swap program of $0.4 million, an increase in mortgage banking revenues of $0.4 million, higher gains on the sale of investment securities of $0.1 million and increased earnings on bank owned life insurance of $0.1 million.  These increases were partially offset by the absence of gains on extinguishment of debt totaling $0.6 million, primarily attributable to the partial redemption of $3.0 million in junior subordinated debentures which occurred in the third quarter of 2015.

Critical Accounting Policies and Estimates

Our accounting policies are integral to understanding the Company’s financial condition and results of operations. Accounting policies 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, 2015 filed with the SEC on March 4, 2016. The following discussions should be read in conjunction with the condensed consolidated financial statements filed on this Quarterly Report on Form 10-Q, as well as with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015.

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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 allowance for loan and lease losses, 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 (“ALLL”)

In connection with the determination of the specific credit component of the ALLL for impaired loans, an analysis of the underlying collateral is performed for loans on non-accrual status at least quarterly and appraisals for any underlying collateral are typically obtained at least annually. Corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.  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.

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 a 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 in 2014, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value and therefore an ALLL is not recorded at the acquisition date.  Acquired loans are evaluated upon acquisition for evidence of deterioration in credit quality since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. Such loans are classified as purchased credit impaired (“PCI”) loans while all other acquired loans are classified as non-PCI loans.  PCI loans are accounted for under ASC 310-30, while all other acquired loans without evidence of deteriorated credit quality since their origination are not 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 current period earnings through a provision for loan and lease losses.

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 cash flows, including principal and interest, over the 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 established 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.

Due to the many judgments and variables that are part of 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 4. Loans and Allowance for Loan and Lease Losses, of the condensed consolidated financial statements filed on this Quarterly Report on 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 is established.

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Fair Value of Financial Instruments

The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of observable pricing.  Financial instruments with readily available, active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment is utilized in measuring the fair value of such instruments. Observable pricing is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and the characteristics specific to the financial instrument, including but not limited to credit and duration profiles. See also Note 2. Fair Value of Assets and Liabilities, of the condensed consolidated financial statements filed on this Quarterly Report on 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 or furnishes 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 or furnish 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 or furnished to the SEC and additional shareholder information is available free of charge on the Company’s website: www.heritageoaksbancorp.com.  The Company posts these reports and other filings to its website as soon as reasonably practicable after filing them with or furnishing them to the SEC.  None of the information on or hyperlinked from the Company’s website is incorporated into this Quarterly Report on Form 10-Q.

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Selected Financial Data

The table below provides selected financial data as of or for the periods indicated below:

	At or For The Three Months Ended
	9/30/2016		6/30/2016		3/31/2016		12/31/2015		9/30/2015
	(dollars in thousands, except per share data)
Consolidated Income Data:
Interest income	$	17,669	$	17,743	$	17,015	$	17,464	$	16,957
Interest expense	1,439		1,444		1,397		1,341		1,561
Net interest income	16,230		16,299		15,618		16,123		15,396
(Reversal of) provision for loan and lease losses	-		(1,000)		-		-		-
Net interest income after (reversal of) provision for loan and lease losses	16,230		17,299		15,618		16,123		15,396
Non-interest income	3,344		2,583		3,407		2,061		2,806
Non-interest expense	12,723		13,064		12,621		12,774		12,151
Income before income tax expense	6,851		6,818		6,404		5,410		6,051
Income tax expense	2,668		2,603		2,419		1,932		2,049
Net income	$	4,183	$	4,215	$	3,985	$	3,478	$	4,002
Share Data:
Earnings per common share - basic	$	0.12	$	0.12	$	0.12	$	0.10	$	0.12
Earnings per common share - diluted	$	0.12	$	0.12	$	0.12	$	0.10	$	0.12
Dividends declared per common share	$	0.06	$	0.06	$	0.06	$	0.06	$	0.06
Dividend payout ratio	49.13%		48.73%		51.44%		58.98%		50.70%
Common book value per share	$	6.29	$	6.25	$	6.10	$	6.01	$	5.98
Tangible common book value per share	$	5.45	$	5.41	$	5.26	$	5.16	$	5.12
Actual shares outstanding at end of period	34,249,804		34,205,542		34,129,425		34,353,014		34,352,445
Weighted average shares outstanding - basic	34,037,252		33,998,644		34,096,379		34,186,007		34,158,081
Weighted average shares outstanding - diluted	34,183,200		34,140,986		34,204,457		34,326,702		34,282,367
Selected Consolidated Balance Sheet Data:
Total cash and cash equivalents	$	65,250	$	56,042	$	53,575	$	69,923	$	112,270
Total investments and other securities	$	456,464	$	446,877	$	441,705	$	450,935	$	432,750
Total gross loans held for investment	$	1,342,701	$	1,333,719	$	1,291,346	$	1,247,280	$	1,206,740
Allowance for loan and lease losses	$	(17,643)	$	(17,448)	$	(17,565)	$	(17,452)	$	(17,296)
Total assets	$	1,988,307	$	1,961,532	$	1,913,120	$	1,899,739	$	1,873,925
Total deposits	$	1,631,348	$	1,607,089	$	1,582,589	$	1,564,961	$	1,571,770
Federal Home Loan Bank borrowings	$	120,000	$	120,503	$	103,012	$	103,521	$	78,546
Junior subordinated debentures	$	10,572	$	10,529	$	10,485	$	10,438	$	10,389
Total shareholders’ equity	$	215,283	$	213,882	$	208,330	$	206,434	$	205,458
Average assets	$	1,975,353	$	1,937,822	$	1,894,682	$	1,877,912	$	1,844,742
Average earning assets	$	1,843,145	$	1,808,166	$	1,762,984	$	1,742,758	$	1,708,398
Average shareholders’ equity	$	215,039	$	210,448	$	209,133	$	206,846	$	204,063
Selected Financial Ratios:
Return on average assets	0.84%		0.87%		0.85%		0.73%		0.86%
Return on average equity	7.74%		8.06%		7.66%		6.67%		7.78%
Return on average tangible common equity	8.93%		9.34%		8.90%		7.77%		9.10%
Net interest margin (1)	3.50%		3.63%		3.56%		3.67%		3.58%
Efficiency ratio (2)	64.44%		68.01%		65.71%		68.58%		67.81%
Non-interest expense to average assets	2.56%		2.71%		2.68%		2.70%		2.61%
Capital Ratios:
Average equity to average assets	10.89%		10.86%		11.04%		11.01%		11.06%
Common Equity Tier 1 Capital ratio	12.30%		12.16%		12.23%		12.61%		12.81%
Leverage ratio	9.83%		9.80%		9.86%		9.90%		9.96%
Tier 1 Risk-Based Capital ratio	12.87%		12.69%		12.74%		13.01%		13.20%
Total Risk-Based Capital ratio	14.09%		13.91%		13.99%		14.26%		14.46%
Selected Asset Quality Ratios:
Non-performing loans to total gross loans (3)	0.36%		0.51%		0.63%		0.63%		0.83%
Non-performing assets to total assets (4)	0.25%		0.35%		0.43%		0.43%		0.55%
Allowance for loan and lease losses to total gross loans	1.31%		1.31%		1.36%		1.40%		1.43%
Net recoveries to average loans	0.06%		0.27%		0.04%		0.05%		0.11%

(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 investment 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, gains on the extinguishment of debt, 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 loans that are past due 90 days or more, loans placed on non-accrual status, and OREO.

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Non-GAAP Financial Measures

The tables below provide reconciliations of shareholders’ equity (U.S. GAAP) to tangible common equity (non-U.S. GAAP).  The Company uses tangible common equity in the determination of the performance measures: tangible common book value per share and return on tangible common equity.  The Company believes that the presentation of tangible common book value per share and return on tangible common equity in this report provides useful measures for investors because they are widely used in the financial services industry to compare the relative market value and financial performance of one financial institution against another.  Additionally, the Company believes the measure of return on tangible common equity is more representative of the return to the Company’s shareholders relative to their investment in the Company.

The calculations of tangible common equity and average tangible common equity is intended to complement other measures defined by U.S. GAAP.  Since U.S. GAAP does not include these measures, the Company believes there are no comparable U.S. GAAP financial measures to these calculations.  Despite the importance of these measures to the Company, there are no standardized definitions for these measures and, as a result, the Company’s calculations may not be comparable with other organizations.  Additionally, there may be limits in the usefulness of these measures to investors.  As a result, the Company encourages readers to consider all of the information in its condensed consolidated financial statements and the notes thereto in their entirety and not to rely on a single financial measure.

	September 30,		December 31,
	2016		2015
	(dollars in thousands, except per share data)
Period End Balances:
Total shareholders’ equity	$	215,283	$	206,434
Less intangibles:
Goodwill	(24,885)		(24,885)
Other intangible assets	(3,568)		(4,298)
Tangible common equity (non-U.S. GAAP)	$	186,830	$	177,251
Outstanding shares	34,249,804		34,353,014
Tangible book value per share (non-U.S. GAAP) (1)	$	5.45	$	5.16

(1)Determined by dividing tangible common equity by outstanding shares.

	For The Three Months Ended				For The Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Average Balances:
Total shareholders’ equity	$	215,039	$	204,063	$	211,553	$	202,133
Less preferred stock	-		-		-		(596)
Less intangibles:
Goodwill	(24,885)		(24,885)		(24,885)		(24,885)
Other intangible assets	(3,730)		(4,743)		(3,977)		(5,007)
Tangible common equity (non-U.S. GAAP)	$	186,424	$	174,435	$	182,691	$	171,645
Return on tangible common equity (non-U.S. GAAP) (1)	8.93%		9.10%		9.05%		9.19%

(1)Determined by dividing net income available to common shareholders by average tangible common equity, annualized using the number of days during the period.

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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, investments and other interest earning assets, 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 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, non-accruing loans, and changes in market interest rates.

The tables below set forth the details that make up NIM 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, 2016					September 30, 2015
	Average		Yield/	Income/		Average		Yield/	Income/
	Balance		Rate (4)	Expense		Balance		Rate (4)	Expense
	(dollars in thousands)
Interest Earning Assets
Loans (1) (2)	$	1,330,224	4.55%	$	15,222	$	1,184,229	4.95%	$	14,781
Investment securities	456,175		1.93%	2,215		414,519		1.78%	1,864
Interest earning deposits in other banks	47,007		0.29%	34		99,812		0.23%	58
Other investments	9,739		8.09%	198		9,838		10.24%	254
Total earning assets	1,843,145		3.81%	17,669		1,708,398		3.94%	16,957
Allowance for loan and lease losses	(17,561)					(17,216)
Other assets	149,769					153,560
Total assets	$	1,975,353				$	1,844,742
Interest Bearing Liabilities
Money market	$	586,612	0.28%	$	409	$	526,657	0.27%	$	355
Time deposits	241,942		0.70%	427		256,554		0.82%	528
Interest bearing demand	128,073		0.11%	34		118,441		0.11%	32
Savings	114,068		0.10%	28		103,891		0.10%	26
Total interest bearing deposits	1,070,695		0.33%	898		1,005,543		0.37%	941
Federal Home Loan Bank borrowing	99,691		1.64%	410		86,157		2.25%	489
Junior subordinated debentures	10,545		4.94%	131		11,726		4.43%	131
Total borrowed funds	110,236		1.95%	541		97,883		2.51%	620
Total interest bearing liabilities	1,180,931		0.48%	1,439		1,103,426		0.56%	1,561
Non interest bearing demand	568,453					528,354
Total funding	1,749,384		0.33%	1,439		1,631,780		0.38%	1,561
Other liabilities	10,930					8,899
Total liabilities	1,760,314					1,640,679
Shareholders’ Equity						204,063
Total shareholders’ equity	215,039					$	1,844,742
Total liabilities and shareholders’ equity	$	1,975,353
Net interest margin (3)			3.50%	$	16,230			3.58%	$	15,396
Interest rate spread			3.33%					3.38%
Cost of deposits			0.22%					0.24%

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

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

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

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

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	For the Nine Months Ended,					For the Nine Months Ended,
	September 30, 2016					September 30, 2015
	Average		Yield/	Income/		Average		Yield/	Income/
	Balance		Rate (4)	Expense		Balance		Rate (4)	Expense
	(dollars in thousands)
Interest Earning Assets
Loans (1) (2)	$	1,299,612	4.64%	$	45,152	$	1,197,715	4.96%	$	44,454
Investment securities	449,498		1.96%	6,604		379,228		1.83%	5,193
Interest earning deposits in other banks	46,056		0.31%	107		73,197		0.20%	112
Other investments	9,739		7.74%	564		9,838		11.78%	867
Total interest earning assets	1,804,905		3.88%	52,427		1,659,978		4.08%	50,626
Allowance for loan and lease losses	(17,627)					(17,040)
Other assets	148,818					151,391
Total assets	$	1,936,096				$	1,794,329
Interest Bearing Liabilities
Money market	$	579,669	0.28%	$	1,209	$	499,357	0.27%	$	1,027
Time deposits	241,973		0.70%	1,274		268,413		0.77%	1,551
Interest bearing demand	126,793		0.11%	102		117,696		0.11%	97
Savings	111,363		0.10%	83		98,142		0.10%	73
Total interest bearing deposits	1,059,798		0.34%	2,668		983,608		0.37%	2,748
Federal Home Loan Bank borrowing	110,107		1.48%	1,216		93,197		1.91%	1,328
Junior subordinated debentures	10,501		5.01%	394		12,756		4.34%	414
Other borrowed funds	73		3.66%	2		-		0.00%	-
Total borrowed funds	120,681		1.78%	1,612		105,953		2.20%	1,742
Total interest bearing liabilities	1,180,479		0.48%	4,280		1,089,561		0.55%	4,490
Non interest bearing demand	533,637					493,447
Total funding	1,714,116		0.33%	4,280		1,583,008		0.38%	4,490
Other liabilities	10,427					9,188
Total liabilities	1,724,543					1,592,196
Shareholders’ Equity
Total shareholders’ equity	211,553					202,133
Total liabilities and shareholders’ equity	$	1,936,096				$	1,794,329
Net interest margin (3)			3.56%	$	48,147			3.72%	$	46,136
Interest rate spread			3.40%					3.53%
Cost of deposits			0.22%					0.25%

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

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

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

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

50

The volume and rate variances table below sets forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities for the three and nine months ended September 30, 2016, and September 30, 2015:

	For the Three Months Ended
	September 30, 2016
	Volume		Rate		Rate/Volume		Total
	(dollars in thousands)
Interest Income
Loans	$	1,817	$	(1,191)	$	(185)	$	441
Investment securities	187		156		8		351
Interest earning deposits in other banks	(31)		15		(8)		(24)
Other investments	(3)		(53)		-		(56)
Net increase (decrease)	1,970		(1,073)		(185)		712
Interest Expense
Money market	40		13		1		54
Time deposits	(30)		(71)		-		(101)
Interest bearing demand	3		-		(1)		2
Savings	3		-		(1)		2
Federal Home Loan Bank borrowing	77		(134)		(22)		(79)
Junior subordinated debentures	(13)		15		(2)		-
Net increase (decrease)	80		(177)		(25)		(122)
Total net increase (decrease)	$	1,890	$	(896)	$	(160)	$	834

	For the Nine Months Ended
	September 30, 2016
	Volume		Rate		Rate/Volume		Total
	(dollars in thousands)
Interest Income
Loans	$	3,785	$	(2,869)	$	(218)	$	698
Investment securities	963		369		79		1,411
Interest earning deposits in other banks	(42)		60		(23)		(5)
Other investments	(9)		(298)		4		(303)
Net increase (decrease)	4,697		(2,738)		(158)		1,801
Interest Expense
Money market	165		-		17		182
Time deposits	(153)		(141)		17		(277)
Interest bearing demand	8		-		(3)		5
Savings	10		-		-		10
Federal Home Loan Bank borrowing	241		(300)		(53)		(112)
Junior subordinated debentures	(73)		64		(11)		(20)
Other borrowed funds	-		-		2		2
Net increase (decrease)	198		(377)		(31)		(210)
Total net increase (decrease)	$	4,499	$	(2,361)	$	(127)	$	2,011

For the three months ended September 30, 2016 and 2015, net interest income was   $16.3 million and   $15.4 million, respectively, and the NIM was 3.50% and 3.58%, respectively.  For the nine months ended September 30, 2016 and 2015, net interest income was $48.1 million and $46.1 million, respectively, and the NIM was 3.56% and 3.72%, respectively.  The historically low interest rate environment continued to have an adverse impact on earning assets yields thus far in 2016, and in particular, the overall yield on the loan portfolio.  This was the primary driver behind the decline in the NIM during the three and nine months ended September 30, 2016 as compared to the same periods ended in 2015.  The result of the low prevailing interest 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, resulting in a lower overall yield on the loan portfolio and contributing to the decline in the yield on earning assets and the NIM.  During the first nine months of 2016, the yield of newly originated loans averaged 3.79% as compared to an average yield of 4.05% for the same period in 2015, while the yield on loan payoffs averaged 4.60% in the nine months of 2016 as compared to 4.74% for the same period in 2015.

51

Average loan yields declined by 40 basis points to 4.55% for the three months ended September 30, 2016 compared to 4.95% for the same period in 2015.  For the nine months ended September 30, 2016 average loan yields declined by 32 basis points to 4.64%, compared to 4.96% for the same period in 2015.  As previously mentioned, the historically low interest rate environment continued to have an adverse impact on loan yields during the first nine months of 2016 as yields on new loan originations and renewals have been lower than the yields on loans that prepaid during that same period.

Loan yields and our NIM have benefitted from the discount accretion on loans acquired in the MISN Transaction since March 1, 2014 and this discount accretion has somewhat muted the impact of the historically low interest rate environment on our loan yields during 2016 and 2015.  Total discount accretion from acquired loans was $0.3 million and $1.4 million during the three and nine months ended September 30, 2016, compared to $0.5 million and $1.9 million for the three and nine months ended September 30, 2015.   Purchase discount accretion from acquired loans increased our loan yields by 10 basis points and 14 basis points during the three and nine months ended September 30, 2016, respectively, compared to 16 basis points and 21 basis points for the same periods in 2015.  Purchase discount accretion decreased during the three and nine months ended September 30, 2016 as compared to the same periods ended in 2015 due to a decline in accelerated accretion resulting from payoffs of certain acquired loans, as well as lower scheduled accretion due to normal portfolio attrition in conjunction with payoffs experienced in prior periods. The impact of discount accretion on earning asset yields and the NIM was 7 basis points and 10 basis points for the three and nine months ended September 30, 2016, respectively, compared to 11 basis points and 16 basis points, respectively, for the same periods ended in 2015. The Company anticipates that the amount of purchase discount accretion from acquired loans will continue to decline, absent any unscheduled loan payoffs, due to the decline in the amount of scheduled discount accretion attributable to the maturity of acquired loans.

Our earnings are directly 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 loans in our loan portfolio have 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 those rates rise above contractual interest rate floors on loans in our loan portfolio.  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 impacts 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, 2016 increased by $134.7 million or 7.9%, and $144.9 million, or 8.7%, respectively, when compared to the same periods in 2015.  The increase in average earning assets was primarily driven by growth in the loan portfolio and investment securities portfolio.  This growth in average earning assets over the last year was funded primarily through increases in average core deposit balances, and increases in Federal Home Loan Bank of San Francisco (“FHLB”) borrowings.

The average balance of interest bearing liabilities was $77.5 million, or 7.0% higher, and $90.9 million or 8.3% higher, for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015.  The growth in average interest bearing liabilities over the last year was primarily the result of successful core deposit gathering activities, and to a lesser extent, an increase in FHLB borrowings.

The rate paid on interest bearing deposits declined by 4 basis points to 0.33% during the three months ended September 30, 2016 when compared to 0.37% for the same period a year earlier.  For the nine months ended September 30, 2016 the rate paid on interest bearing deposits was 0.34%, or 3 basis points lower than the 0.37% reported for the same period a year earlier.  These declines are due in part to the historically low interest rate environment that has existed for the last several years, in conjunction with our efforts to systematically lower our cost of deposits over this same time period.  Although these efforts have contributed to a moderate decline in average time deposits, the overall deposit mix and cost of our deposit portfolio has improved as a result of these efforts.  In addition to the favorable effects realized from these changes in our interest bearing deposits, average non-interest bearing demand deposit balances increased by $40.1 million, or 7.6%, to $568.5 million, for the third quarter of 2016 as compared to $528.4 million for the same period a year earlier.  For the first nine months of 2016, non-interest bearing demand balances increased $40.2 million, or 8.1%, to $533.6 million, compared to $493.4 million for the same period in 2015.  The overall cost of deposits was 0.22% for the three and nine months ended September 30, 2016 compared to 0.24% and 0.25% for the same periods in 2015.

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The cost of borrowed funds was 1.95% and 1.78% for the three and nine months ended September 30, 2016, respectively, compared to 2.51% and 2.20% for the same three and nine month periods ended a year earlier.  The decline in the cost of borrowed funds is attributable to lower rates paid on borrowings with the FHLB during the first nine months of 2016.  As longer-term fixed rate advances have matured or been paid off over the last year, the Company has replaced them with shorter-term and open-ended advances which have been at lower rates.  The average rate paid on FHLB borrowing was 1.64% and 1.48% for the three and nine months ended September 30, 2016, respectively.  This compares to the average rate on FHLB borrowing of 2.25% and 1.91% during the three and nine months ended September 30, 2015.

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 that may be incurred in the loan portfolio as of the balance sheet date.  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, of the consolidated financial statements included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015, and Note 4. Loans and Allowance for Loan and Lease Losses, of the condensed consolidated financial statements filed on this Quarterly Report on Form 10-Q for additional information concerning the ALLL.

The ALLL is based on estimates, and actual losses may vary from current estimates.  Such variances could be material and may 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.  For additional information see the “Allowance for Loan and Lease Losses” discussion in the Financial Condition section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

During the nine months ended September 30, 2016, the Company recorded a reversal of provision for loan and lease losses of $1.0 million.  The Company did not record a provision for loan and lease losses during the third quarter of 2016.  The reversal of provision for loan and lease losses during the first nine months of 2016 was attributable to continued improvement in credit quality metrics of the loan portfolio, including the continued decline in classified and non-performing loans.  In addition the Company has recorded net loan recoveries for the past nine consecutive quarters.  For the three and nine months ended September 30, 2015, the Company did not record a provision for loan and lease losses.

The Company continues to see improvement in property values that serve as collateral for a large portion of loans in the loan portfolio, a reduction in the overall level of loans on non-accrual status, continued low levels of past due loans, as well as lower levels of special mention and substandard loans compared to historical periods.  These factors have been slightly offset by increased ALLL requirements due to the growth in the loan portfolio, and qualitative factor adjustments.  As of September 30, 2016, the Company’s ALLL represented 1.31% of total gross loans compared to 1.40% at December 31, 2015.  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.

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Non-Interest Income

The table below sets forth changes in non-interest income for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended				For the Nine Months Ended				Variances
	September 30,				September 30,				For the Three Months			For the Nine Months
	2016		2015		2016		2015		Dollar		Percent	Dollar		Percent
	(dollars in thousands)
Fees and service charges	$	1,276	$	1,271	$	3,820	$	3,840	$	5	0.4%	$	(20)	-0.5%
Net gain on sale of mortgage loans	708		407		1,696		1,277		301		74.0%	419		32.8%
Gain on derivative instruments	415		-		1,012		-		415		-	1,012		-
Earnings on BOLI	289		214		865		640		75		35.0%	225		35.2%
Gain on sale of investment securities	271		136		909		641		135		99.3%	268		41.8%
Other mortgage fee income	199		92		438		348		107		116.3%	90		25.9%
Gain on extinguishment of debt	-		552		-		552		(552)		-100.0%	(552)		-100.0%
Other income	186		134		594		780		52		38.8%	(186)		-23.8%
Total	$	3,344	$	2,806	$	9,334	$	8,078	$	538	19.2%	$	1,256	15.5%

Non-interest income for the three and nine months ended September 30, 2016 was $3.3 million and $9.3 million, respectively, compared to $2.8 million and $8.1 million for the same periods ended in 2015.  The primary driver behind the increase in non-interest income for both the three and nine month periods ended September 30, 2016, can be attributed to gains on derivative instruments, higher mortgage banking revenues, increased gains from the sale of investment securities, and an increase in earnings on bank owned life insurance (“BOLI”).  These increases were partially offset by the absence of gain on the extinguishment of debt, largely due to the partial redemption of junior subordinated debentures in the third quarter of 2015.

Gains on derivative instruments are attributed to the new “back-to-back” interest rate swap program the Company rolled out in the latter part of 2015.  This program allows commercial loan clients to effectively obtain fixed rate loan financing through the use of “back-to-back” interest rate swaps, while the Bank extends variable rate credit to these clients.

Mortgage banking revenues increased by $0.4 million, or 81.8%, and $0.5 million, or 31.3%, for the three and nine months ended September 30, 2016, respectively, when compared to the same periods in 2015.  Increases in mortgage origination activity, including higher purchase and re-finance volumes was the primary driver behind the year over year increase in mortgage banking revenues.  For the three and nine months ended September 30, 2016, held-for-sale mortgage production totaled $52.5 million and $123.8 million, respectively.  This represents an increase of $24.1 million, or 84.5%, and $18.7 million, or 17.8%, for the three and nine months ended September 30, 2016 when compared to the same periods in 2015.

Earnings on BOLI increased $0.1 million, or 35.0%, and $0.2 million, or 35.2%, during the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015.  The increase in earnings on BOLI can be attributed to an additional $7.5 million purchase of BOLI the Bank made during the fourth quarter of 2015.

The decrease in other income for the nine months ended September 30, 2016 compared to the same period ended in 2015 can be attributed to a decline in the level of recoveries on fully charged-off loans acquired through the MISN Transaction in February 2014.  These loans were fully charged-off and had no carrying value at the time of their acquisition.  Recoveries on fully charged-off acquired loans totaled $21 thousand and $0.2 million for the three and nine month periods ended September 30, 2016, respectively, compared to $12 thousand and $0.4 million for the same periods ended in 2015.

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Non-Interest Expenses

The table below sets forth changes in non-interest expense for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended				For the Nine Months Ended				Variances
	September 30,				September 30,				For the Three Months			For the Nine Months
	2016		2015		2016		2015		Dollar		Percent	Dollar		Percent
	(dollars in thousands)
Salaries and employee benefits	$	6,686	$	5,598	$	19,611	$	17,643	$	1,088	19.4%	$	1,968	11.2%
Professional services	1,776		2,234		5,634		5,342		(458)		-20.5%	292		5.5%
Occupancy and equipment	1,657		1,688		4,933		5,023		(31)		-1.8%	(90)		-1.8%
Information technology	591		611		1,821		1,753		(20)		-3.3%	68		3.9%
Sales and marketing	317		240		807		852		77		32.1%	(45)		-5.3%
Loan department expense	284		252		770		798		32		12.7%	(28)		-3.5%
Amortization of intangible assets	244		263		730		787		(19)		-7.2%	(57)		-7.2%
Regulatory assessments	222		298		847		895		(76)		-25.5%	(48)		-5.4%
Communication costs	122		150		372		435		(28)		-18.7%	(63)		-14.5%
OREO write-downs	-		-		217		-		-		-	217		-
Other expense	824		817		2,666		1,865		7		0.9%	801		42.9%
Total	$	12,723	$	12,151	$	38,408	$	35,393	$	572	4.7%	$	3,015	8.5%

The table below provides a breakdown of professional services expenses for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Professional Services
BSA/AML related costs	$	631	$	598	$	1,907	$	1,363
Audit and tax costs	321		367		1,072		889
Information technology services and consulting	312		458		944		1,097
Legal costs	73		319		152		738
All other costs	439		492		1,559		1,255
Total professional services	$	1,776	$	2,234	$	5,634	$	5,342

Non-interest expense for the three and nine months ended September 30, 2016 was $12.7 million and $38.4 million, respectively, compared with $12.2 million and $35.4 million for the same periods ended in 2015.  The increase in non-interest expense for the three and nine months ended September 30, 2016 was due primarily to higher salaries and benefits costs.  Increases in other expenses and professional services also contributed to higher non-interest expenses for the nine months ended September 30, 2016.

Higher salaries and benefits costs for the three and nine months ended September 30, 2016 compared to the same periods in 2015 are attributed primarily to increases in base salaries and higher mortgage banking commissions, and increased incentive compensation plan expenses.

Increases in other expenses for the nine months ended September 30, 2016 compared to the same period ended in 2015 can be attributed to operating losses incurred due to the reimbursement of certain customers for losses they incurred resulting from debit card fraud.  The Bank was responsible for reimbursing these customers for losses they experienced in accordance with Regulation E and Visa network operating rules.

Professional services expenses declined during the three months ended September 30, 2016 compared to the same period ended in 2015, which can be attributed primarily to lower legal related expenses during 2016.  The increase in professional services expenses for the nine months ended September 30, 2016 compared to the same period ended in 2015 can be attributed to the Company’s on-going BSA/AML program remediation efforts, higher audit and tax related costs, and increases in other general professional services.  These costs were slightly offset by a decline in legal expenses for the nine months ended September 30, 2016 when compared to the same period ended in 2015.

55

Increases in non-interest expense for the nine months ended September 30, 2016 were also impacted by the write-down of one OREO property in the amount of $0.2 million during the first quarter of 2016, resulting from the re-zoning of this property.

Provision for Income Taxes

For the three and nine months ended September 30, 2016, the Company recorded income tax expense of approximately $2.7 million and $7.7 million, respectively.  This compares to $2.0 million and $7.0 million for the same periods ended in 2015.  The Company’s effective income tax rate was 38.9% and 38.3% for the three and nine months ended September 30, 2016, respectively, compared to 33.9% and 36.9% for the same periods in 2015.  The increase in the effective tax rate for the three and nine months ended September 30, 2016 as compared to the same periods ended in 2015 can be attributed to higher pre-tax income.  The Company’s effective tax rate is impacted by various factors, including changes in the level of pre-tax income and changes in the amount and composition of permanent book-tax differences.

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 deferred tax assets on a quarterly basis.  As of September 30, 2016 and December 31, 2015 there was no valuation allowance for deferred tax assets.  Please see Note 5. Income Taxes, of the condensed consolidated financial statements filed on this Quarterly Report on Form 10-Q as well as Note 7. Income Taxes, of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion concerning the Company’s deferred tax assets.

Financial Condition

At September 30, 2016, total assets were $1.99 billion, an increase of approximately $88.6 million or 4.7%, when compared to December 31, 2015.  The increase in total assets can be attributed to an increase in gross loan balances, which were funded by an increase in deposit balances, increased FHLB borrowings, and use of lower interest-earning cash balances during the first nine months of 2016.  Gross loan balances increased by $95.4 million, or 7.7%, to $1.34 billion as of September 30, 2016 when compared to December 31, 2015.  Total deposits increased $66.4 million, or 4.2%, during the first nine months of 2016 with approximately $55.7 million of this growth coming from increases in non-interest bearing demand account balances.  Deposit growth is attributed to the Company’s continued focus on the acquisition of new, and expansion of existing customer relationships.  Borrowings from the FHLB increased $16.5 million, or 15.9%, during the first nine months of 2016.  Higher FHLB borrowings were used to support loan growth, which outpaced deposit growth during the first nine months of 2016.

56

Total Cash and Cash Equivalents

Total cash and cash equivalents were $65.2 million and $69.9 million at September 30, 2016 and December 31, 2015, respectively. 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.  The decrease in cash and cash equivalents during the first nine months of 2016 can be attributed in part to the funding of loan growth during the period.

Investment Securities and Other Earning Assets

Other earning assets are comprised of interest earning deposits due from the Federal Reserve Bank, investments in securities and short-term interest bearing deposits at other financial institutions. These assets are maintained for 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, which include home equity conversion mortgages, and state and municipal securities. The Company has a Management Asset/Liability Committee 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 Management Asset/Liability Committee is responsible for reporting and monitoring compliance with the investment policy.  Reports are provided to the Company’s Board of Directors on a regular basis.

The following table provides a summary of investment securities by type as of September 30, 2016 and December 31, 2015:

	September 30, 2016				December 31, 2015
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	59,223	$	58,992	$	47,478	$	47,318
Mortgage backed securities
U.S. government sponsored entities and agencies	246,284		247,193		246,561		245,235
Non-agency	25,318		25,521		34,645		34,317
State and municipal securities	109,443		115,449		105,164		108,406
Asset backed securities	9,503		9,309		16,183		15,627
Other investments	-		-		100		32
Total available for sale securities	$	449,771	$	456,464	$	450,131	$	450,935

At September 30, 2016, the fair value of the investment portfolio was approximately $456.5 million or $5.5 million higher than that reported at December 31, 2015.  The increase in the balance of the investments portfolio can be attributed to purchases of securities during the third quarter of 2016.

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, 2016, the securities portfolio had net unrealized gains, net of taxes, of approximately $3.9 million, an increase of approximately $3.4 million from the net unrealized gain position of $0.5 million reported at December 31, 2015.  Changes in the fair value of the investment portfolio during the first nine months of 2016 can be attributed to the decline in interest rates and decreases in values of U.S. equity securities stemming from volatility in global economies and equity markets following Britain’s decision to exit the European Union.

57

All fixed and adjustable rate mortgage pools contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages, which are directly impacted by changes in interest rates.  The Company employs the use of 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.  Included in the Company’s mortgage-backed securities are home equity conversion mortgages, which typically possess prepayment characteristics that differ from traditional mortgage-backed securities, such that prepayment activity is not as closely correlated with changes in interest rates.  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”).  At September 30, 2016, approximately $247.2 million or 90.6%, of the Company’s mortgage related securities were issued by government agencies and government sponsored entities, such as those listed above.

The following table sets forth the maturity distribution of the investment portfolio and the weighted average yield for each category at September 30, 2016.  All investment securities are classified as available for sale:

	September 30, 2016
	One Year or Less		Over 1 Year Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
	(dollars in thousands)
Obligations of U.S. government agencies	$	5,697	$	19,803	$	23,764	$	9,728	$	58,992
Mortgage backed securities
U.S. government sponsored entities and agencies	32,584		101,575		59,531		53,503		247,193
Non-agency	5,996		11,679		7,846		-		25,521
State and municipal securities	2,286		16,942		89,400		6,821		115,449
Asset backed securities	-		1,911		4,438		2,960		9,309
Total available for sale securities	$	46,563	$	151,910	$	184,979	$	73,012	$	456,464
Amortized cost	$	46,457	$	151,110	$	179,623	$	72,581	$	449,771
Weighted average yield	2.12%		2.17%		2.57%		2.77%		2.42%

Federal Home Loan Bank 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, 2016 and December 31, 2015, the Company held approximately $7.9 million in FHLB stock.

Loans

Summary of Market Conditions

Total gross loans increased $95.4 million during the nine months ended September 30, 2016, with growth attributed to increases in commercial real estate, residential 1 to 4 family, commercial and industrial, farmland, and multi-family loans.  The growth in these categories was slightly offset by declines in construction and land, agriculture, home equity lines of credit and consumer loans.  The declines in these categories 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 held for investment during the nine months ended September 30, 2016 totaling $215.6 million.  Utilization on lines of credit contributed another $33.7 million to the year to date growth in the loan portfolio.  New loan production was offset by loan prepayments and payoffs of $113.7 million during the first nine months of 2016.

The Company continues to see stabilization and 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 growth.

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Although local economic conditions within the region the Company operates have been relatively favorable over the last several years, management recognizes 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 defined lending standards, and seeks to originate loans to borrowers that 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.

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 4. Loans and Allowance for Loan and Lease Losses, of the condensed consolidated financial statements filed on 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, 2016, loans held for sale totaled $8.0 million compared to $9.8 million at December 31, 2015.

The table below sets forth the composition of the loan portfolio as of September 30, 2016 and December 31, 2015:

	September 30,			December 31,
	2016			2015			Variance
	Balance		Percent	Balance		Percent	Dollar		Percent
	(dollars in thousands)
Real Estate Secured
Commercial	$	635,846	47.3%	$	579,244	46.3%	$	56,602	9.8%
Residential 1 to 4 family	195,453		14.6%	165,829		13.3%	29,624		17.9%
Farmland	132,723		9.9%	120,566		9.7%	12,157		10.1%
Multi-family residential	81,536		6.1%	79,381		6.4%	2,155		2.7%
Construction and land	26,836		2.0%	35,669		2.9%	(8,833)		-24.8%
Home equity lines of credit	24,910		1.9%	31,387		2.5%	(6,477)		-20.6%
Total real estate secured	1,097,304		81.8%	1,012,076		81.1%	85,228		8.4%
Commercial
Commercial and industrial	185,199		13.7%	164,808		13.2%	20,391		12.4%
Agriculture	55,728		4.2%	64,363		5.2%	(8,635)		-13.4%
Total commercial	240,927		17.9%	229,171		18.4%	11,756		5.1%
Consumer	4,470		0.3%	6,033		0.5%	(1,563)		-25.9%
Total loans held for investment	1,342,701		100.0%	1,247,280		100.0%	95,421		7.7%
Deferred loan fees	(1,146)			(1,132)			(14)		1.2%
Allowance for loan and lease losses	(17,643)			(17,452)			(191)		1.1%
Total net loans held for investment	$	1,323,912		$	1,228,696		$	95,216	7.7%
Loans held for sale	$	7,975		$	9,755		$	(1,780)	-18.2%

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Real Estate Secured

Other Real Estate Loans

The following table provides a break-down of the other real estate secured segment of the Company’s loan portfolio, which is exclusive of construction and land loans, as of September 30, 2016:

	September 30, 2016							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)
Other Real Estate Secured
Residential 1 to 4 family	$	195,453	$	1,010	$	196,463	17.4%	98.8%	384	$	4,500	$	133,939
Commercial	168,952		1,195		170,147		15.1%	85.6%	189	9,250		75,553
Hotels	143,489		6,721		150,210		13.4%	75.5%	54	14,772		4,216
Farmland	132,723		1,866		134,589		12.0%	67.7%	81	17,647		74,455
Professional	113,486		151		113,637		10.1%	57.1%	120	11,500		26,870
Retail	92,231		1,140		93,371		8.3%	46.9%	109	5,724		39,986
Multi-family	81,536		3,282		84,818		7.5%	42.6%	57	9,000		-
Healthcare / medical	56,047		528		56,575		5.0%	28.4%	53	12,420		36,999
Home equity lines of credit	24,910		38,452		63,362		5.6%	31.9%	451	1,200		23,770
Restaurants and other hospitality	27,866		1,009		28,875		2.6%	14.5%	25	13,713		8,431
Other	33,775		361		34,136		3.0%	17.2%	42	4,749		25,964
Total	$	1,070,468	$	55,715	$	1,126,183	100.0%	566.2%	1,565	$	17,647	$	450,183

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2016.

At September 30, 2016 the Other Real Estate Secured segment of the loan portfolio, which excludes construction and land loans disclosed below, represented $1.1 billion, or 79.7%, of total gross loans.  When compared to that reported at December 31, 2015 this represents an increase of approximately $94.1 million, or 9.6%.  This increase is attributed to new loan production in the commercial real estate, residential 1 to 4 family, farmland, and multi-family portfolios, slightly offset by decreases in construction and land loans and home equity lines of credit.  At September 30, 2016, a total of $33.8 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 $30.1 million.  At December 31, 2015, Other Real Estate Secured balances graded special mention, substandard or doubtful totaled $36.9 million, of which $33.6 million can be attributed to commercial real estate loans.  At September 30, 2016 and December 31, 2015, Other Real Estate Secured balances, including undisbursed commitments, represented 566% and 531%, respectively, of the Bank’s total risk-based capital.  At September 30, 2016, approximately $450.2 million, or 42.1%, of the Other Real Estate Secured segment of the loan portfolio was considered owner occupied.  Loans meeting the regulatory classification of non-owner occupied commercial real estate, which includes construction and land loans, represented 279% of the Bank’s total risk-based capital at September 30, 2016 compared to 266% at December 31, 2015.

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Construction and Land Loans

The following provides a break-down of the Company’s construction and land portfolio as of September 30, 2016:

	September 30, 2016							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	$	17,018	$	12,810	$	29,828	65.8%	15.0%	26	$	6,732
Tract	6,297		2,765		9,062		20.0%	4.6%	8	10,673
Single family residential	1,794		271		2,065		4.6%	1.0%	12	800
Multi-family	1,084		-		1,084		2.4%	0.5%	3	900
Single family residential - Spec.	643		2,641		3,284		7.2%	1.7%	7	1,750
Total	$	26,836	$	18,487	$	45,323	100.0%	22.8%	56	$	10,673

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2016.

At September 30, 2016, the construction and land portfolio represented $26.8 million, or 2.0%, of total gross loans, a decrease of $8.8 million, or 24.8%, from that reported at December 31, 2015.  Construction loans are typically granted for a one year period and then refinanced at the completion of the construction project into permanent loans with varying maturities.  The ratio of total construction and land loans, including undisbursed commitments, to the Bank’s total risk-based capital was 23% and 29% at September 30, 2016 and December 31, 2015, respectively.  At September 30, 2016 there were $3.6 million of construction and land balances risk graded special mention, substandard, or doubtful.  This compares to $5.2 million risk graded special mention, substandard or doubtful at December 31, 2015.

Commercial Loans

The following table provides a break-down of the Company’s commercial and industrial segment of the commercial loan portfolio as of September 30, 2016:

	September 30, 2016							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
Manufacturing	$	33,464	$	11,645	$	45,109	14.8%	22.7%	135	$	5,000
Professional services	29,141		22,582		51,723		17.0%	26.0%	191	4,936
Real estate / rental and leasing	21,004		13,501		34,505		11.3%	17.4%	109	6,522
Healthcare / medical	19,139		17,125		36,264		11.9%	18.2%	117	10,162
Wholesale and retail	19,044		10,720		29,764		9.8%	15.0%	133	5,000
Construction	19,061		28,806		47,867		15.7%	24.1%	148	5,000
Restaurants / hospitality	12,911		4,708		17,619		5.8%	8.9%	75	5,000
Media and information services	7,286		1,867		9,153		3.0%	4.6%	20	5,000
Transportation and warehousing	4,477		763		5,240		1.7%	2.6%	62	596
Financial services	4,657		2,547		7,204		2.4%	3.6%	31	3,000
Oil gas and utilities	797		798		1,595		0.5%	0.8%	6	500
All other	14,218		4,665		18,883		6.1%	9.4%	253	2,342
Total	$	185,199	$	119,727	$	304,926	100.0%	153.3%	1,280	$	10,162

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2016.

At September 30, 2016, commercial and industrial loans represented $185.2 million, or 13.7% of total gross loans. This represents an increase of $20.4 million, or 12.4% from December 31, 2015.  The ratio of total commercial and industrial loans, including undisbursed commitments, to the Bank’s total risk-based capital was 153% at September 30, 2016 and 142% at December 31, 2015.

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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, 2016, a total of $11.7 million of the commercial and industrial portfolio was risk graded as special mention, substandard or doubtful.  This compares to $11.8 million being risk graded special mention, substandard or doubtful as of December 31, 2015.

Agriculture Loans

The following table provides a break-down of the agriculture segment of the Company’s commercial loan portfolio as of September 30, 2016:

	September 30, 2016							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	$	22,820	$	22,363	$	45,183	45.2%	22.7%	39	$	8,750
Wholesale merchants	9,656		4,568		14,224		14.2%	7.1%	10	8,000
Vegetable and melon farming	8,640		5,196		13,836		13.9%	7.0%	16	4,000
Food and beverage	5,210		933		6,143		6.2%	3.1%	18	1,500
Animal production	1,947		2,977		4,924		4.9%	2.5%	37	600
Support activities for agriculture	2,992		4,119		7,111		7.1%	3.6%	26	1,800
Other crop farming	2,682		1,700		4,382		4.4%	2.2%	7	2,353
Transportation and warehousing	16		-		16		0.1%	0.0%	2	25
All other	1,765		2,275		4,040		4.0%	2.0%	12	1,600
Total	$	55,728	$	44,131	$	99,859	100.0%	50.2%	167	$	8,750

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2016.

At September 30, 2016, agriculture loans totaled $55.7 million, or 4.2% of total gross loans, which represents a decrease of $8.6 million, or 13.4%, from December 31, 2015.  The ratio of total agriculture loans, including undisbursed commitments, to the Bank’s total risk-based capital was 50% at September 30, 2016 and 53% at December 31, 2015.  As of September 30, 2016, a total of $11.2 million of the agriculture portfolio was risk graded as special mention, substandard or doubtful.  This compares to $3.0 million of the agriculture portfolio being risk graded special mention, substandard or doubtful as of December 31, 2015.  The year to date increase in agriculture loans graded special mention, substandard or doubtful can be attributed to one relationship.  The Bank continues to monitor this relationship closely.

Consumer

At September 30, 2016, the consumer loan portfolio totaled $4.5 million compared to $6.0 million reported at December 31, 2015.  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 stratifies the loan portfolio according to the earlier of maturity or re-pricing date as well as provides information about fixed and variable rate loans:

	September 30, 2016
	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	$	58,288	$	72,640	$	133,203	$	100,585	$	271,130	$	-	$	635,846
Residential 1 to 4 family	326		4,465		21,785		55,824		111,280		1,773		195,453
Farmland	14,121		3,244		16,590		22,228		76,540		-		132,723
Multi-family residential	7,879		2,467		39,031		10,769		21,390		-		81,536
Construction and land	18,770		2,289		3,007		-		2,770		-		26,836
Home equity lines of credit	24,840		41		-		26		-		3		24,910
Commercial
Commercial and industrial	92,236		13,571		24,144		30,939		24,141		168		185,199
Agriculture	48,182		95		4,359		1,431		1,072		589		55,728
Consumer	763		80		199		262		2,289		877		4,470
Total loans held for investment	$	265,405	$	98,892	$	242,318	$	222,064	$	510,612	$	3,410	$	1,342,701
Variable rate loans (1)	$	259,014	$	76,825	$	178,721	$	151,808	$	244,080	$	-	$	910,448
Fixed rate loans	6,391		22,067		63,597		70,256		266,532		3,410		432,253
Total loans held for investment	$	265,405	$	98,892	$	242,318	$	222,064	$	510,612	$	3,410	$	1,342,701

(1)Variable rate loans include $562.1 million of loans that are at their contractual floor rates.  To the extent that overall interest rates rise, the Company will not experience the benefit of rising interest rates until interest rates on these loans rise above their floor rates.

At September 30, 2016, our loans held for investment were scheduled to mature or re-price in the following dollar and percentage amounts of total loans held for investment: $364.3 million, or 27.1%, in one year or less; $464.4 million, or 34.6%, in one through five years; and $514.0 million, or 38.3%, over five years.  Of the $514.0 million of loans scheduled to mature or re-price over five years, $326.1 million or 63.4% were scheduled to mature or re-price over five years through eight years; $158.4 million or 30.8% were scheduled to mature or re-price over eight years through ten years; and $29.6 million or 5.8% were scheduled to mature or re-price over ten years.

Allowance for Loan and Lease Losses (“ALLL”)

The Company maintains an ALLL deemed by management to be appropriate to absorb probable credit losses that may be incurred 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 reserves 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.

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

The Company allocates the ALLL across various segments and classes of loans within the loan portfolio. The following table provides a summary of the ALLL and its allocation as of September 30, 2016 and 2015 and December 31, 2015:

	September 30,						December 31,
	2016			2015			2015
			Percent			Percent			Percent
			of Loans to			of Loans to			of Loans to
	ALLL		Total Loans	ALLL		Total Loans	ALLL		Total Loans
	(dollars in thousands)
Real Estate Secured
Commercial	$	5,584	47.3%	$	5,672	48.2%	$	6,293	46.3%
Farmland	2,644		9.9%	1,840		8.9%	2,275		9.7%
Residential 1 to 4 family	2,109		14.6%	1,961		12.9%	2,064		13.3%
Multi-family residential	401		6.1%	627		6.3%	402		6.4%
Construction and land	317		2.0%	1,365		3.5%	623		2.9%
Home equity lines of credit	97		1.9%	155		2.6%	127		2.5%
Commercial
Commercial and industrial	2,926		13.7%	3,366		13.2%	2,834		13.2%
Agriculture	2,780		4.2%	2,119		3.9%	2,538		5.2%
Consumer	144		0.3%	191		0.5%	173		0.5%
Unallocated	641			-			123
Total	$	17,643	100.0%	$	17,296	100.0%	$	17,452	100.0%

Allocation of the ALLL

The Company continued to experience overall favorable metrics with respect to credit quality in the non-PCI loan portfolio during the first nine months of 2016 when compared to historical periods.  The balance of the ALLL at September 30, 2016 was $0.2 million higher when compared to the balance at December 31, 2015.  The Company experienced net recoveries of $1.2 million during the nine months ended September 30, 2016.  The continued improvement in credit quality of the loan portfolio, as evidenced by a continued decline in non-performing asset levels relative to historical periods, resulted in a reversal of provision for loan and lease losses of $1.0 million during the nine months ended September 30, 2016, which was recorded during the second quarter of 2016.

Changes in the level of and trend in past due and non-accrual loans, as well as changes in the level of and trend in special mention, substandard and doubtful loans have an impact on the amount and allocation of the ALLL to various segments of the loan portfolio.  Non-accrual loans declined to $4.9 million at September 30, 2016 compared to $7.8 million at December 31, 2015, and loans 30-89 days past due were $39 thousand compared to $0.3 million at December 31, 2015.  The balance of loans classified as special mention, substandard or doubtful totaled $60.3 million compared to $57.0 million at December 31, 2015.  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.  However, the overall underlying favorable trend in the credit quality of the loan portfolio resulted in a reversal of provision for loan and lease losses during the first nine months of 2016.

The ALLL as a percentage of total gross loans was 1.31% at September 30, 2016 compared to 1.40% at December 31, 2015.  The ALLL attributable to the legacy Heritage portfolio, excluding acquired loans, was $17.4 million, or 1.46% of legacy Heritage loans and leases at September 30, 2016, compared to $17.1 million or 1.59% of legacy Heritage loans and leases at December 31, 2015.  At September 30, 2016 the ALLL attributable to acquired non-PCI loans was $0.2 million or 0.13% of acquired non-PCI loans, compared to $0.3 million, or 0.20% at December 31, 2015.  As of September 30, 2016, the remaining unaccreted discount on acquired non-PCI loans was $2.7 million compared to $3.2 million at December 31, 2015.

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The ALLL for PCI loans was $0.1 million at September 30, 2016 and December 31, 2015, respectively.  The ALLL established for PCI loans resulted from unfavorable changes in expected future cash flows on certain PCI loans.  At September 30, 2016, the remaining unaccreted discount on PCI loans was $1.7 million compared to $2.3 million at December 31, 2015.

The ALLL attributable to loans collectively evaluated for impairment on the legacy Heritage portfolio at September 30, 2016 was approximately $17.4 million compared to $16.7 million at December 31, 2015.  Approximately $6.9 million of the ALLL attributable to loans collectively evaluated for impairment is the result of qualitative adjustments at September 30, 2016 compared to $6.7 million at December 31, 2015.

At September 30, 2016 and December 31, 2015, approximately $1.6 million and $1.8 million, respectively, of the ALLL was attributable to qualitative adjustments associated with the potential impacts of the California drought on various segments of our loan portfolio, including farmland, agriculture, and commercial and industrial loans.  Concerns associated with the impact of the California drought on our customer’s businesses, and concerns about the impact directly to agriculture, and indirectly to other businesses such as hospitality and tourism have resulted in this allocation of the qualitative component of the ALLL at September 30, 2016 and December 31, 2015.  Evidence of the drought’s impact on agricultural businesses has 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.  Furthermore, the State of California, as well as certain municipalities within California, have mandated 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 maintain the qualitative factor allocation 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 $0.2 million at September 30, 2016 and $0.3 million at December 31, 2015.  As of September 30, 2016, the Company believes that the ALLL was appropriate to cover probable credit losses that may be incurred in the Company’s loan and lease portfolio.

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The following table provides a summary of the activity in the ALLL for the nine months ended September 30, 2016 and 2015:

	For the Nine Months Ended September 30,
	2016		2015
	(dollars in thousands)
Balance, beginning of period	$	17,452	$	16,802
Charge-offs:
Consumer	(24)		(6)
Commercial
Commercial and industrial	(17)		(186)
Agriculture	-		(1)
Real Estate Secured
Home equity lines of credit	-		(55)
Construction and land	-		(34)
Total charge-offs	(41)		(282)
Recoveries:
Real Estate Secured
Commercial	614		-
Construction and land	161		48
Residential 1 to 4 family	10		5
Home equity lines of credit	8		76
Commercial
Commercial and industrial	374		457
Agriculture	50		179
Consumer	15		11
Total recoveries	1,232		776
Net recoveries	1,191		494
(Reversal of) provision for loan and lease losses	(1,000)		-
Balance, end of period	$	17,643	$	17,296
Gross loans, end of period	$	1,342,701	$	1,206,740
ALLL to total gross loans	1.31%		1.43%
Net recoveries to average loans	0.12%		0.06%

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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 also Note 4. Loans and Allowance for Loan and Lease Losses, of the condensed consolidated financial statements filed on this Form 10-Q for additional information concerning non-performing loans.  The following table provides a summary of the Company’s non-performing loans, foreclosed assets and troubled debt restructurings (“TDRs”) as of September 30, 2016 and December 31, 2015:

	September 30,		December 31,
	2016		2015
	(dollars in thousands)
Non-Performing Loans
Construction and land	$	3,443	$	3,968
Commercial and industrial	970		1,630
Commercial real estate	284		1,940
Home equity lines of credit	84		84
Farmland	75		83
Consumer	28		33
Residential 1 to 4 family	-		80
Total non-performing loans	4,884		7,818
Foreclosed assets	181		328
Total non-performing assets	$	5,065	$	8,146
TDRs
Accruing	$	10,747	$	10,056
Included in non-performing loans	4,243		6,203
Total TDRs	$	14,990	$	16,259
Ratio of allowance for loan and lease losses to total gross loans	1.31%		1.40%
Ratio of non-performing loans to total gross loans	0.36%		0.63%
Ratio of non-performing assets to total assets	0.25%		0.43%

Non-Accruing Loans

The following table reconciles the change in total non-accruing loans for the nine months ended September 30, 2016:

	Balance						Transfers		Returns to				Balance
	December 31,				Net		to Foreclosed		Accrual				September 30,
	2015		Additions		Paydowns		Assets		Status		Charge-offs		2016
	(dollars in thousands)
Real Estate Secured
Construction and land	$	3,968	$	349	$	(874)	$	-	$	-	$	-	$	3,443
Commercial	1,940		49		(1,415)		-		(290)		-		284
Home equity lines of credit	84		38		-		-		(38)		-		84
Farmland	83		-		(8)		-		-		-		75
Residential 1 to 4 family	80		-		(3)		-		(77)		-		-
Commercial
Commercial and industrial	1,630		1,954		(326)		-		(2,271)		(17)		970
Agriculture	-		400		(59)		-		(341)		-		-
Consumer	33		94		(5)		(70)		-		(24)		28
Total	$	7,818	$	2,884	$	(2,690)	$	(70)	$	(3,017)	$	(41)	$	4,884

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At September 30, 2016, the balance of non-accruing loans was $4.9 million, or $2.9 million lower than that reported at December 31, 2015.  The change in non-accruing loans can be attributed to $3.0 million in loans returning to accrual status following a sustained period of repayment and net paydowns of $2.7 million, offset by $2.9 million in loans transferred to non-accrual during the first nine months of 2016.  At September 30, 2016, $4.2 million of non-accruing loans were considered current with their contractual payments due, compared to $6.4 million at December 31, 2015.

Deposits and Borrowed Funds

The following table provides a summary of the composition of deposits as of September 30, 2016 and December 31, 2015:

	September 30,		December 31,		Variance
	2016		2015		Dollar		Percent
	(dollars in thousands)
Non-interest bearing deposits	$	570,243	$	514,559	$	55,684	10.82	%
Money market deposits	571,357		565,060		6,297		1.11	%
Time deposits	241,580		245,742		(4,162)		-1.69	%
NOW accounts	134,465		129,254		5,211		4.03	%
Other savings deposits	113,703		110,346		3,357		3.04	%
Total deposits	$	1,631,348	$	1,564,961	$	66,387	4.24	%

At September 30, 2016, total deposits were $1.63 billion, representing an increase of $66.4 million, or 4.2%, from December 31, 2015.  The increase in deposit balances in 2016 can be attributed to the Company’s continued focus on gathering and retaining core relationships in an effort to reduce overall funding costs.

At September 30, 2016, core deposits, which are defined as total deposits exclusive of time deposits over $100,000, represented 89.0% of total deposits, up from the 88.6% reported at December 31, 2015, due primarily to growth in non-interest bearing demand, money market, and NOW account deposits during the first nine months of 2016.  Non-interest bearing demand deposits comprise 35.0%, and 32.9% of total deposits at September 30, 2016 and December 31, 2015, 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, 2016, FHLB borrowings were $120.0 million with a weighted average maturity of 2.4 years, compared to $103.5 million at December 31, 2015 with a weighted average maturity of 2.8 years.  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.

At September 30, 2016, the Company had junior subordinated debentures issued and outstanding with a carrying value of $10.6 million, compared to $10.4 million at December 31, 2015.  These debentures were issued to three different trusts as follows:

	As of September 30, 2016
	Amount		Carrying		Current	Issue	Scheduled
	Issued		Value		Rate	Date	Maturity	Rate Type
	(dollars in thousands)
Heritage Oaks Capital Trust II	$	5,248	$	5,248	2.57%	27-Oct-06	Aug-37	Variable 3-month LIBOR + 1.72%
Mission Community Capital Trust I	$	3,093	$	2,243	3.63%	14-Oct-03	Oct-33	Variable 3-month LIBOR + 2.95%
Santa Lucia Bancorp (CA) Capital Trust	$	5,155	$	3,081	2.16%	28-Apr-06	Jul-36	Variable 3-month LIBOR + 1.48%

These three debentures are callable by the Company at par.  At September 30, 2016, the Company included $10.2 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 debentures, see Note 10. Borrowings, in the Company’s consolidated financial statements included in the Company’s 2015 Annual Report filed on Form 10-K.

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Capital

At September 30, 2016, total shareholders’ equity was approximately $215.3 million.  This represents an increase of $8.8 million from December 31, 2015.  The change in shareholders’ equity is primarily attributable to net income of $12.4 million, of which approximately $6.2 million was retained after the payment of $6.2 million in dividends on the Company’s common stock.  Additional significant activity within shareholders’ equity during the nine months ended September 30, 2016 include: an increase in accumulated other comprehensive income of $3.4 million related to the overall net positive change in fair value of the available for sale investment portfolio, common stock repurchases totaling $1.6 million, and a $0.7 million net increase in additional paid in capital related to share-based compensation.

Cash Dividends

On January 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on February 29, 2016 to shareholders of the Company’s common stock as of February 17, 2016.

On April 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on May 31, 2016 to shareholders of the Company’s common stock as of May 18, 2016.

On July 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on August 31, 2016 to shareholders of the Company’s common stock as of August 15, 2016.

On October 26, 2016, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2016, to shareholders of the Company’s common stock as of November 15, 2016.

Stock Repurchase Program

On July 22, 2016, the Company announced it had amended its previously announced program for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18.  Under the amended program, repurchase activity may commence on August 6, 2016 and may continue until February 8, 2017, the program’s new expiration date, or expire earlier upon the completion of the repurchase of $5.0 million of the Company’s common stock in addition to what has already been purchased under the program, as well as under certain other circumstances as set forth in the amended program.  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.

During the nine months ended September 30, 2016, the Company repurchased and cancelled 226,170 shares of its common stock at an aggregate cost of $1.6 million, or $7.23 per share.  The Company made no repurchases of its common stock during the three months ended September 30, 2016.  As of September 30, 2016, the Company had repurchased and cancelled a total of 281,598 shares of its common stock under this plan at an aggregate total cost of $2.0 million or $7.28 per share.

Regulatory Capital

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

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

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

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

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

·A capital conservation buffer is required in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019.  The capital conservation buffer began phasing-in on January 1, 2016.

·The exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets and intangible assets.  For 2016, certain deferred tax assets and intangible assets are phased-out of CET I at a rate of 60%, compared to 40% for 2015.

When Basel III Capital Rules are fully phased-in on January 1, 2019, the Company and the Bank will 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 as of September 30, 2016 and December 31, 2015:

	Regulatory Standard to Be Considered
	Adequately Capitalized (1)		Well Capitalized (2)	September 30, 2016		December 31, 2015
	Company	Bank	Bank	Company	Bank	Company	Bank
Ratio
Common Equity Tier I Capital Ratio	5.125%	5.125%	6.50%	12.30%	12.23%	12.61%	12.48%
Leverage ratio	4.000%	4.000%	5.00%	9.83%	9.35%	9.90%	9.50%
Tier I Risk-Based Capital Ratio	6.625%	6.625%	8.00%	12.87%	12.23%	13.01%	12.48%
Total Risk-Based Capital Ratio	8.625%	8.625%	10.00%	14.09%	13.46%	14.26%	13.74%

(1)As of September 30, 2016, includes Capital Conservation Buffer of 0.625%.  On a fully phased-in basis, effective January 1, 2019, under Basel III Capital Rules, minimum capital ratios to be considered “adequately capitalized,” including the Capital Conservation Buffer of 2.5%, will be as follows: CET I: 7.0%; Leverage Ratio: 6.5%; Tier I Risk-Based Capital Ratio: 8.5%; Total Risk-Based Capital Ratio: 10.5%.

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

Capital ratios for both the Bank and the Company decreased slightly during the first nine months of 2016 as compared to that reported at December 31, 2015.  The decrease in capital ratios for the Bank can be attributed in large part to a $10.0 million dividend paid to the holding company during the first quarter of 2016 to assist with the operational needs of the holding company, the payment of dividends on the Company’s common stock, and to fund repurchases of the Company’s common stock.  Capital ratios for the Bank were also impacted by growth in risk weighted assets during the first nine months of 2016, which is primarily attributable to the growth in the loan portfolio.   The decrease in capital ratios for the Company during the first nine months of 2016 can be attributed to growth in risk weighted assets, in conjunction with the payment of common stock dividends and repurchases of common stock.  As of September 30, 2016 and December 31, 2015 the Bank’s capital ratios were above minimum thresholds to generally be considered “well capitalized” for bank regulatory purposes.

At September 30, 2016, the Company was able to include $10.2 million of junior subordinated debt in Tier I capital for regulatory capital purposes compared to $10.0 million at December 31, 2015.

Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities

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.

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In the ordinary course of business, the Company has entered into off-balance sheet arrangements consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the 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 following table provides a summary of the Company’s significant and determinable contractual obligations by payment date as of September 30, 2016:

	Less Than		One to Three		Three to Five		More than		September 30,		December 31,
	One Year		Years		Years		Five Years		2016		2015
	(dollars in thousands)
Deposits (1)	$	1,532,650	$	68,973	$	25,217	$	4,498	$	1,631,338	$	1,564,944
FHLB advances and other borrowings	49,000		19,500		18,500		33,000		120,000		103,500
Operating lease obligations	1,410		2,251		2,098		1,903		7,662		7,083
Salary continuation payments	262		524		524		3,083		4,393		4,590
Junior subordinated debentures	-		-		-		13,496		13,496		13,496
Total obligations	$	1,583,322	$	91,248	$	46,339	$	55,980	$	1,776,889	$	1,693,613

(1) Deposits with no stated maturity of $1.4 billion are included in amounts due less than one year.

The Company is contingently liable for letters of credit made to its customers in the ordinary course of business totaling $12.4 million at September 30, 2016 compared to the $13.0 million at December 31, 2015.  Included in these letter of credit commitments is a single standby letter of credit, which was issued in September 2004, to guarantee the payment of taxable variable rate demand bonds.  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 amount of this letter of credit was $10.2 million and $10.4 million as of September 30, 2016 and December 31, 2015, respectively.  The letter of credit was undrawn as of September 30, 2016 and December 31, 2015, and will expire in September 2020.  The Bank has a corresponding line of credit with the FHLB in the amount of $10.2 million, which is collateralized by a blanket lien that includes all qualifying loans on the Bank’s balance sheet.

Additionally at September 30, 2016 and December 31, 2015, the Company had undisbursed loan commitments, made in the ordinary course of business, totaling $273.1 million and $242.1 million, respectively.  The following table provides a breakdown of undisbursed loan commitments, as well as the total for standby letters of credit as of September 30, 2016 and December 31, 2015:

	September 30,		December 31,
	2016		2015
	(dollars in thousands)
Commitments to Extend Credit
Commercial and industrial	$	106,748	$	101,592
Secured by real estate	49,165		37,269
Agriculture	44,231		38,146
Home equity lines of credit	38,452		32,072
Not secured by real estate	17,860		13,860
Other unused commitments	15,020		17,601
Credit card lines	1,653		1,585
Total commitments to extend credit	273,129		242,125
Standby letters of credit (1)	12,392		12,968
Total commitments and standby letters of credit	$	285,521	$	255,093

(1) Includes a standby letter of credit to one customer in the amount of $10.2 million and $10.4 million at September 30, 2016 and December 31, 2015, respectively.

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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.  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.

Liquidity

The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. Asset liquidity is primarily derived from loan payments and the maturity of other earning assets. Liquidity from liabilities is obtained primarily from the receipt of new deposits. The Company’s Management Asset Liability Committee (“Management 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. Management 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, 2016, these credit lines totaled $77.0 million and are unsecured. The Bank had no borrowings against the credit lines with its correspondent banks.  The Bank is a member of the FHLB and has available collateralized borrowing capacity of $374.5 million at September 30, 2016, in addition to the $120 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 Bancorp.

The Company 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, 2016, 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 24.18% at September 30, 2016 compared to 25.32% at December 31, 2015.

The ratio of gross loans to deposits, another key liquidity ratio, increased to 82.31% at September 30, 2016 compared to 79.7% at December 31, 2015. Management believes the level of liquid assets and available credit facilities are sufficient to meet current and anticipated funding needs. In addition, the Company’s Management ALCO oversees the Company’s liquidity position by reviewing a monthly liquidity report. Management is not aware of any trends, demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material change in the Company’s liquidity.

Subsequent Events

Dividend Declaration

On October 26, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on November 30, 2016 to shareholders of the Company’s common stock as of November 15, 2016.

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Item 3.  Quantitative and Qualitative Disclosures 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. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level. Thus, virtually all of the Company’s interest rate risk exposure lies at the Bank level other than $13.5 million in subordinated debentures issued by the Company’s subsidiary grantor trusts. 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 San Luis Obispo and Santa Barbara Counties of California, is subject to risks of changes in the underlying value of collateral as a result of changes in the local economy.

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

The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. Management believes historically 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 effects of interest rate changes under various interest rate scenarios.

Management employs asset and liability management software to measure the Company’s exposure to future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of September 30, 2016. 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. The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s Management ALCO policies. Management will continue to perform this analysis each quarter.

The hypothetical impacts 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, 2016 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (“bp”) and 200 bp rate increase and a 100 bp decrease is acceptable to management and within policy guidelines at this time. Given the low interest rate environment, a 200 bp decrease is not considered a realistic possibility and is therefore not presented.

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The results in the table below indicate the change in net interest income the Company would expect to see as of September 30, 2016, if interest rates were to change immediately in the amounts set forth:

	September 30, 2016
	-100bp		+100bp		+200bp
	(dollars in thousands)
Net interest income	$	59,213	$	62,433	$	64,194
$ Change from base	$	(1,621)	$	1,599	$	3,360
% Change from base	-2.7%		2.6%		5.5%

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

The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily and fixed rate loans, and estimates of re-pricing opportunities for the entire loan portfolio at September 30, 2016 and December 31, 2015:

	September 30, 2016			December 31, 2015
			Percent of			Percent of
	Balance		Total	Balance		Total
	(dollars in thousands)
Rate Type
Variable - daily	$	184,002	13.7%	$	168,957	13.5%
Variable other than daily	726,446		54.1%	659,365		52.9%
Fixed rate	432,253		32.2%	418,958		33.6%
Total gross loans	$	1,342,701	100.0%	$	1,247,280	100.0%

As of September 30, 2016, the table above identifies approximately 13.7% of the loan portfolio that will re-price immediately in a changing rate environment.  At September 30, 2016, approximately $910.5 million, or 67.8%, 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 market rates as September 30, 2016:

	September 30, 2016
	Move in Index Rate (bps)
	+100		+150		+200		+250		+300		+350
	(dollars in thousands)
Cumulative variable daily	$	82,477	$	92,456	$	95,344	$	97,195	$	97,324	$	97,324
Cumulative variable other than daily	422,177		441,424		466,555		475,581		478,618		478,867
Cumulative total variable at floor	$	504,654	$	533,880	$	561,899	$	572,776	$	575,942	$	576,191

As interest rates began to fall at the end of the last decade, the Company moved to protect the net interest margin by implementing floors on new loan originations. Management believes this strategy proved successful in insulating the net interest margin in the declining interest rate environment experienced over the last several years. However, looking forward into a possible rising rate environment, management believes that these loan floors could result in compression of the net interest margin and potentially a decline in net interest income.  As such, the Company began lowering the floor rates on new and renewed loans over the last couple of years to reduce the level of market interest rate movement required to adjust above floor rates and return those loans to a fully variable interest rate profile.

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Item 4.  Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as 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, has 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 the 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, 2016 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

Due to the nature of our business we are involved in legal proceedings that arise in the ordinary course of our business.  While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A.  Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed under “Part I. Item 1A. Risk Factors” included in our 2015 Annual Report on Form 10-K for the year ended December 31, 2015.  These risk factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q.  During the nine months ended September 30, 2016, there have been no material changes from the risk factors described in our 2015 Annual Report on Form 10-K.

75

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.

Item 6.  Exhibits

(a) Exhibits:

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, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015 (unaudited), (iv) Condensed Consolidated Statements of Shareholders’ Equity, for the nine months ended September 30, 2016 and 2015 (unaudited), (v) Condensed Consolidated Statements of Cash Flows, for the three and nine months ended September 30, 2016 and 2015 (unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (unaudited).

* Filed herewith.

76

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: November 4, 2016

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

77

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: November 4, 2016
	/s/ Simone F. Lagomarsino
	Simone F. Lagomarsino
	President and Chief Executive Officer
	(Principal Executive Officer)

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:  November 4, 2016

/s/ Jason C. Castle

Jason C. Castle

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

HERITAGE OAKS BANCORP

Quarterly Report on Form 10-Q

for the quarter ended September 30, 2016

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, 2016, 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: November 4, 2016	/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.

EX-32.2

EXHIBIT 32.2

HERITAGE OAKS BANCORP

Quarterly Report on Form 10-Q

for the quarter ended September 30, 2016

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, 2016, 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: November 4, 2016	/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.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 02, 2016
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, 2016
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		34,256,174
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Assets
Cash and due from banks	$ 23,893	$ 15,610
Interest earning deposits in other banks	41,357	54,313
Total cash and cash equivalents	65,250	69,923
Investment securities available for sale, at fair value	456,464	450,935
Loans held for sale, at lower of cost or fair value	7,975	9,755
Gross loans held for investment	1,342,701	1,247,280
Net deferred loan fees	(1,146)	(1,132)
Allowance for loan and lease losses	(17,643)	(17,452)
Net loans held for investment	1,323,912	1,228,696
Premises and equipment, net	36,360	37,342
Bank-owned life insurance	33,500	32,850
Goodwill	24,885	24,885
Deferred tax assets, net	15,663	21,272
Federal Home Loan Bank stock	7,853	7,853
Other intangible assets	3,568	4,298
Other assets	12,877	11,930
Total assets	1,988,307	1,899,739
Liabilities
Non-interest bearing deposits	570,243	514,559
Interest bearing deposits	1,061,105	1,050,402
Total deposits	1,631,348	1,564,961
Short term FHLB borrowing	49,000	38,500
Long term FHLB borrowing	71,000	65,021
Junior subordinated debentures	10,572	10,438
Other liabilities	11,104	14,385
Total liabilities	1,773,024	1,693,305
Shareholders' Equity
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 34,249,804 shares and 34,353,014 shares as of September 30, 2016 and December 31, 2015, respectively.	164,009	165,517
Additional paid in capital	8,971	8,251
Retained earnings	38,424	32,200
Accumulated other comprehensive income	3,879	466
Total shareholders' equity	215,283	206,434
Total liabilities and shareholders' equity	$ 1,988,307	$ 1,899,739

XML

Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2016	Dec. 31, 2015
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	34,249,804	34,353,014
Common stock, shares outstanding	34,249,804	34,353,014

XML

Condensed Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Interest Income
Loans, including fees	$ 15,222	$ 14,781	$ 45,152	$ 44,454
Investment securities	2,215	1,864	6,604	5,193
Other interest-earning assets	232	312	671	979
Total interest income	17,669	16,957	52,427	50,626
Interest Expense
Deposits	898	941	2,668	2,748
Other borrowings	541	620	1,612	1,742
Total interest expense	1,439	1,561	4,280	4,490
Net interest income before (reversal of) provision for loan and lease losses	16,230	15,396	48,147	46,136
(Reversal of) provision for loan and lease losses			(1,000)
Net interest income after (reversal of) provision for loan and lease losses	16,230	15,396	49,147	46,136
Non-Interest Income
Fees and service charges	1,276	1,271	3,820	3,840
Net gain on sale of mortgage loans	708	407	1,696	1,277
Gain on derivative instruments	415		1,012
Earnings on BOLI	289	214	865	640
Gain on sale of investment securities	271	136	909	641
Other mortgage fee income	199	92	438	348
Gain on extinguishment of debt		552		552
Other income	186	134	594	780
Total non-interest income	3,344	2,806	9,334	8,078
Non-Interest Expense
Salaries and employee benefits	6,686	5,598	19,611	17,643
Professional services	1,776	2,234	5,634	5,342
Occupancy and equipment	1,657	1,688	4,933	5,023
Information technology	591	611	1,821	1,753
Sales and marketing	317	240	807	852
Loan department expense	284	252	770	798
Amortization of intangible assets	244	263	730	787
Regulatory assessments	222	298	847	895
Communication costs	122	150	372	435
OREO Write-downs			217
Other expense	824	817	2,666	1,865
Total non-interest expense	12,723	12,151	38,408	35,393
Income before income taxes	6,851	6,051	20,073	18,821
Income tax expense	2,668	2,049	7,690	6,950
Net income	4,183	4,002	12,383	11,871
Accretion on preferred stock				70
Net income available to common shareholders	$ 4,183	$ 4,002	$ 12,383	$ 11,801
Earnings Per Common Share
Basic (in dollars per share)	$ 0.12	$ 0.12	$ 0.36	$ 0.34
Diluted (in dollars per share)	0.12	0.12	0.36	0.34
Dividends Declared Per Common Share (in dollars per share)	$ 0.06	$ 0.06	$ 0.18	$ 0.17

XML

Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Condensed Consolidated Statements of Comprehensive Income
Net income	$ 4,183	$ 4,002	$ 12,383	$ 11,871
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains on securities arising during the period	(1,643)	1,963	6,798	1,220
Reclassification for net gains on investments included in net income	(271)	(136)	(909)	(641)
Other comprehensive (loss) income , before income tax (benefit) expense	(1,914)	1,827	5,889	579
Income tax (benefit) expense related to items of other comprehensive income	(805)	768	2,476	243
Other comprehensive (loss) income	(1,109)	1,059	3,413	336
Comprehensive income	$ 3,074	$ 5,061	$ 15,796	$ 12,207

XML

Condensed Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Preferred Stock	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income	Total
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				(5,799)		(5,799)
Repurchases of common stock		$ (28)				(28)
Repurchases of common stock (in shares)		(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
Balance at Dec. 31, 2015		$ 165,517	8,251	32,200	466	206,434
Balance (in shares) at Dec. 31, 2015		34,353,014
Increase (Decrease) in Stockholders' Equity
Dividends declared				(6,159)		(6,159)
Repurchases of common stock		$ (1,635)				(1,635)
Repurchases of common stock (in shares)		(226,170)
Exercise of stock options		$ 127				127
Exercise of stock options (in shares)		19,907
Share-based compensation			820			820
Tax benefit of share-based compensation			(100)			(100)
Net issuance of restricted share awards (in shares)		103,053
Net income				12,383		12,383
Other comprehensive income					3,413	3,413
Balance at Sep. 30, 2016		$ 164,009	$ 8,971	$ 38,424	$ 3,879	$ 215,283
Balance (in shares) at Sep. 30, 2016		34,249,804

XML

Condensed Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares				3 Months Ended		9 Months Ended
	Jul. 27, 2016	Apr. 27, 2016	Jan. 27, 2016	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Condensed Consolidated Statements of Shareholders' Equity
Cash dividend declared (in dollars per share)	$ 0.06	$ 0.06	$ 0.06	$ 0.06	$ 0.06	$ 0.18	$ 0.17

XML

Condensed Consolidated Statements of Cash Flows $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)
Cash Flows from Operating Activities
Net income	$ 12,383	$ 11,871
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	1,661	1,538
(Reversal of) provision for loan and lease losses	(1,000)
Write-downs on premises and equipment held for sale		68
Amortization of premiums / discounts	5,361	4,999
Amortization of intangible assets	730	787
Accretion of discount on acquired and purchased loans, net	(904)	(1,524)
Share-based compensation expense	915	814
Gain on extinguishment of debt		(552)
Gain on sale of available for sale securities	(909)	(641)
Gain on sale of assets		(8)
Gain on sale of loans held for sale	(1,696)	(1,277)
Originations of loans held for sale	(123,427)	(104,656)
Proceeds from sale of loans held for sale	126,903	103,153
Net increase in bank owned life insurance	(650)	(480)
Decrease in deferred tax assets, net	3,133	3,255
Write-downs on OREO	217
Tax impact of share-based compensation	100	(96)
Decrease in other assets and other liabilities, net	1,355	1,487
Net cash provided by operating activities	24,172	18,738
Cash Flows from Investing Activities
Purchase of securities, available for sale	(146,833)	(173,560)
Sale of securities, available for sale	101,482	55,184
Proceeds from principal paydowns of securities, available for sale	41,364	37,690
Proceeds from sale of premises and equipment		9
Increase in loans, net	(100,539)	(12,820)
Recoveries on previously charged-off loans	1,232	776
Proceeds from sale of foreclosed collateral		91
Purchase of property, premises and equipment, net	(679)	(1,414)
Net cash used in investing activities	(103,973)	(94,044)
Cash Flows from Financing Activities
Increase in deposits, net	66,395	176,947
Proceeds from Federal Home Loan Bank borrowing	197,500	36,000
Repayments of Federal Home Loan Bank borrowing	(181,000)	(52,898)
Decrease in junior subordinated debentures		(2,550)
Net proceeds from exercise of stock options, including tax benefits	27	324
Dividends paid	(6,159)	(5,799)
Repurchases of common stock	(1,635)	(28)
Net cash provided by financing activities	75,128	151,996
Net (decrease) increase in cash and cash equivalents	(4,673)	76,690
Cash and cash equivalents, beginning of period	69,923	35,580
Cash and cash equivalents, end of period	65,250	112,270
Cash Flow Information
Interest paid	4,306	4,479
Income taxes paid	3,880	1,390
Non-Cash Flow Information
Change in unrealized gain (loss) on available for sale securities	6,798	1,220
Loans transferred to foreclosed assets	$ 70	416
Accretion on preferred stock		$ 70

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2016

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 2015 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 4, 2016; 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.

Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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.  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

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s 2015 Annual Report filed on Form 10-K. There have been no changes to these policies or their application during the three and nine months ended September 30, 2016, except as discussed below.

During 2016, the Company began presenting earnings per share (“EPS”) under the two-class method in accordance with ASC 260 “Earnings per Share,” which allocates distributed and undistributed earnings to participating securities.  Unvested restricted stock awards contain non-forfeitable rights to dividends or dividend equivalents.  As such, these awards are considered participating securities and the Company has applied the two-class method in the computation of basic and diluted EPS in periods where these awards are outstanding.  Under the two-class method distributed and undistributed earnings allocable to participating securities are deducted from net income to determine net income allocated to common shareholders, which is then used in the numerator of both basic and diluted EPS calculations.  The presentation of EPS in comparable periods in 2015 has been revised to conform to the current year presentation.

Recent Accounting Standards Updates

Recent Accounting Guidance Adopted

In September, 2015, the Financial Accounting Standards Board (“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 became 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.  This update did not have an impact on the Company’s condensed consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of the amendments within this update will have a material impact on the Company’s financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements.  Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.    This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted.  Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). This update simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance under the update requires all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit on the income statement.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 31, 2016, with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of this update, but does not expect a material impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update improves the understanding and comparability of lessees’ financial commitments by requiring lease assets and lease liabilities to be recognized on the balance sheet for those leases classified as operating leases under current U.S. GAAP. This ASU requires a lessee to recognize on the balance sheet a lease liability to make lease payments and a right of use asset, representing the right to use the underlying asset, during the term of the lease.  This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, using a modified retrospective approach, with early adoption permitted. The Company is currently in the process of evaluating the impact that the adoption of this update will have on its financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).  The amendments in this update require that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income.  This ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2017.  The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on the Company’s 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 financial statements.

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Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2016

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

Note 2. Fair Value of Assets and Liabilities

Recurring Basis

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Available for sale investments:
Obligations of U.S. government agencies	$	58,992	$	-	$	58,992	$	-
Mortgage backed securities
U.S. government sponsored entities and agencies	247,193		-		247,193		-
Non-agency	25,521		-		25,521		-
State and municipal securities	115,449		-		115,449		-
Asset backed securities	9,309		-		9,309		-
Derivative financial instruments:
Interest rate swaps	1,910		-		1,910		-
Total assets measured on a recurring basis	$	458,374	$	-	$	458,374	$	-
Liabilities
Derivative financial instruments:
Interest rate swaps	$	1,910	$	-	$	1,910	$	-
Total liabilities measured on a recurring basis	$	1,910	$	-	$	1,910	$	-

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2015		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Available for sale investments:
Obligations of U.S. government agencies	$	47,318	$	-	$	47,318	$	-
Mortgage backed securities
U.S. government sponsored entities and agencies	245,235		-		245,235		-
Non-agency	34,317		-		34,317		-
State and municipal securities	108,406		-		108,406		-
Asset backed securities	15,627		-		15,627		-
Other investments	32		32		-		-
Derivative financial instruments:
Interest rate swaps	-		-		-		-
Total assets measured on a recurring basis	$	450,935	$	32	$	450,903	$	-
Liabilities
Derivative financial instruments:
Interest rate swaps	$	-	$	-	$	-	$	-
Total liabilities measured on a recurring basis	$	-	$	-	$	-	$	-

There were no transfers between levels of fair value measures during the nine months ended September 30, 2016 and December 31, 2015 for assets measured at fair value on a recurring basis.  As of September 30, 2016 and December 31, 2015, there were no assets or liabilities classified as Level 3.

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 that were recognized at fair value which was below cost. Certain impaired loans are recorded in the Company’s condensed consolidated financial statements using 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 considered a market rate for those loans. The discounted cash flow approach is used to measure impairment for certain impaired loans, because of the significant payment history and the global cash flow analysis performed on each borrower.

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		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
Foreclosed assets	$	181	$	-	$	181	$	-	$	235
Total assets measured on a non-recurring basis	$	181	$	-	$	181	$	-	$	235

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	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
Foreclosed assets	$	-	$	-	$	-	$	-	$	-
Total assets measured on a non-recurring basis	$	-	$	-	$	-	$	-	$	-

There were no transfers between levels of fair value measures during the nine months ended September 30, 2016 for assets measured at fair value on a non-recurring basis.

Fair Value of Financial Instruments

The following table provides a summary of the estimated fair value of financial instruments at September 30, 2016 and December 31, 2015:

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		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	$	65,250	$	65,250	$	-	$	-	$	65,250
Investment securities available for sale	456,464		-		456,464		-		456,464
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net	1,323,912		-		-		1,332,933		1,332,933
Loans held for sale	7,975		-		7,975		-		7,975
Interest rate swaps	1,910		-		1,910		-		1,910
Accrued interest receivable	6,116		-		2,416		3,700		6,116
Liabilities
Non-interest bearing deposits	570,243		570,243		-		-		570,243
Interest bearing deposits	1,061,105		-		1,060,813		-		1,060,813
Federal Home Loan Bank advances	120,000		-		121,511		-		121,511
Junior subordinated debentures	10,572		-		-		8,531		8,531
Interest rate swaps	1,910		-		1,910		-		1,910
Accrued interest payable	364		-		364		-		364

	As of		Fair Value Measurements Using
	December 31, 2015 Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
			(dollars in thousands)
Assets
Cash and cash equivalents	$	69,923	$	69,923	$	-	$	-	$	69,923
Investment securities available for sale	450,935		32		450,903		-		450,935
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net	1,228,696		-		-		1,250,903		1,250,903
Loans held for sale	9,755		-		9,755		-		9,755
Interest rate swaps	-		-		-		-		-
Accrued interest receivable	6,256		-		2,589		3,667		6,256
Liabilities
Non-interest bearing deposits	514,559		514,559		-		-		514,559
Interest bearing deposits	1,050,402		-		1,051,731		-		1,051,731
Federal Home Loan Bank advances	103,521		-		104,718		-		104,718
Junior subordinated debentures	10,438		-		-		8,195		8,195
Interest rate swaps	-		-		-		-		-
Accrued interest payable	390		-		390		-		390

Information on off-balance sheet instruments as of September 30, 2016 and December 31, 2015 follows:

	September 30, 2016				December 31, 2015
	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	$	285,521	$	2,855	$	255,093	$	2,551

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Investment Securities

9 Months Ended

Sep. 30, 2016

Investment Securities

Investment Securities

Note 3. Investment Securities

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are classified as available for sale at September 30, 2016 and December 31, 2015:

	September 30, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	59,223	$	218	$	(449)	$	58,992
Mortgage backed securities
U.S. government sponsored entities and agencies	246,284		2,205		(1,296)		247,193
Non-agency	25,318		223		(20)		25,521
State and municipal securities	109,443		6,077		(71)		115,449
Asset backed securities	9,503		-		(194)		9,309
Total available for sale securities	$	449,771	$	8,723	$	(2,030)	$	456,464

	December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	47,478	$	269	$	(429)	$	47,318
Mortgage backed securities
U.S. government sponsored entities and agencies	246,561		986		(2,312)		245,235
Non-agency	34,645		-		(328)		34,317
State and municipal securities	105,164		3,486		(244)		108,406
Asset backed securities	16,183		-		(556)		15,627
Other investments	100		-		(68)		32
Total available for sale securities	$	450,131	$	4,741	$	(3,937)	$	450,935

Available for sale investment securities which have an unrealized loss position at September 30, 2016 and December 31, 2015 are detailed below:

	September 30, 2016
	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	$	21,361	$	(49)	$	23,291	$	(400)	$	44,652	$	(449)
Mortgage backed securities
U.S. government sponsored entities and agencies	64,304		(823)		22,102		(473)		86,406		(1,296)
Non-agency	5,996		(3)		3,243		(17)		9,239		(20)
State and municipal securities	5,723		(71)		-		-		5,723		(71)
Asset backed securities	-		-		9,309		(194)		9,309		(194)
Total	$	97,384	$	(946)	$	57,945	$	(1,084)	$	155,329	$	(2,030)

	December 31, 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	$	34,533	$	(429)	$	-	$	-	$	34,533	$	(429)
Mortgage backed securities
U.S. government sponsored entities and agencies	131,570		(1,485)		31,558		(827)		163,128		(2,312)
Non-agency	31,400		(317)		2,917		(11)		34,317		(328)
State and municipal securities	15,660		(243)		235		(1)		15,895		(244)
Asset backed securities	-		-		15,626		(556)		15,626		(556)
Other investments	32		(68)		-		-		32		(68)
Total	$	213,195	$	(2,542)	$	50,336	$	(1,395)	$	263,531	$	(3,937)

A total of 58 and 104 securities were in an unrealized loss position as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the Company believes that unrealized losses on its investment securities are not attributable to credit quality, but rather fluctuations in market prices.  In the case of the agency mortgage related securities, contractual cash flows are 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 depending 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 these securities prior to their anticipated recovery.  As of September 30, 2016, the Company does not believe unrealized losses related to any of its securities are other than temporary.

The proceeds from the sales and calls of securities and the associated gains and losses for the three and nine months ended September 30, 2016 and 2015 are listed below:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Proceeds	$	25,905	$	8,656	$	101,482	$	55,184
Gross gains	271		136		1,291		815
Gross losses	-		-		(382)		(174)

The income tax expense related to these net realized gains was $0.1 million and $57 thousand for the three months ended September 30, 2016 and 2015, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.

The table below provides a maturity distribution of available for sale investment securities at September 30, 2016 and December 31, 2015. The table reflects the expected lives of mortgage-backed securities, based on the Company’s historical prepayment experience, because borrowers have the right to prepay obligations without prepayment penalties.  Included in the Company’s mortgage-backed securities are home equity conversion mortgages, which typically possess prepayment characteristics that differ from traditional mortgage-backed securities, such that prepayment activity is not as closely correlated with changes in interest rates.  Contractual maturities are reflected for all other security types.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2016				December 31, 2015
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Due one year or less	$	46,457	$	46,563	$	51,049	$	50,978
Due after one year through five years	151,110		151,910		153,444		152,916
Due after five years through ten years	179,623		184,979		182,996		184,870
Due after ten years	72,581		73,012		62,642		62,171
Total	$	449,771	$	456,464	$	450,131	$	450,935

Securities having an amortized cost and a fair value of $145.8 million and $149.9 million, respectively at September 30, 2016, and $153.9 million and $155.2 million, respectively at December 31, 2015 were pledged to secure public deposits.  At September 30, 2016 and December 31, 2015, 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 investment securities, both taxable, and those that are exempt from federal taxation for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Taxable earnings on investment securities
Mortgage backed securities	$	1,131	$	938	$	3,589	$	2,529
Obligations of U.S. government agencies	272		161		617		487
State and municipal securities	145		151		477		339
Asset backed securities	27		33		95		113
Earnings on investment securities exempt from federal taxation
State and municipal securities	640		581		1,826		1,725
Total	$	2,215	$	1,864	$	6,604	$	5,193

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Loans and Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2016

Loans and Allowance for Loan and Lease Losses

Loans and Allowance for Loan and Lease Losses

Note 4. Loans and Allowance for Loan and Lease Losses

The following table provides a summary of outstanding loan balances as of September 30, 2016 and December 31, 2015:

	September 30, 2016						December 31, 2015
	Non-PCI		PCI		Total Loans		Non-PCI		PCI		Total Loans
	Loans		Loans		Receivable		Loans		Loans		Receivable
	(dollars in thousands)
Real Estate Secured
Commercial	$	630,232	$	5,614	$	635,846	$	573,559	$	5,685	$	579,244
Residential 1 to 4 family	195,330		123		195,453		165,256		573		165,829
Farmland	132,723		-		132,723		120,566		-		120,566
Multi-family residential	81,536		-		81,536		79,381		-		79,381
Construction and land	26,595		241		26,836		35,387		282		35,669
Home equity lines of credit	24,910		-		24,910		31,387		-		31,387
Total real estate secured	1,091,326		5,978		1,097,304		1,005,536		6,540		1,012,076
Commercial
Commercial and industrial	184,698		501		185,199		164,025		783		164,808
Agriculture	54,263		1,465		55,728		62,911		1,452		64,363
Total commercial	238,961		1,966		240,927		226,936		2,235		229,171
Consumer	4,470		-		4,470		6,033		-		6,033
Total loans held for investment	1,334,757		7,944		1,342,701		1,238,505		8,775		1,247,280
Deferred loan fees	(1,146)		-		(1,146)		(1,132)		-		(1,132)
Allowance for loan and lease losses	(17,577)		(66)		(17,643)		(17,373)		(79)		(17,452)
Total net loans held for investment	$	1,316,034	$	7,878	$	1,323,912	$	1,220,000	$	8,696	$	1,228,696
Loans held for sale	$	7,975	$	-	$	7,975	$	9,755	$	-	$	9,755

Acquired non-PCI loans totaled $141.5 million and $163.8 million as of September 30, 2016 and December 31, 2015, respectively, and are included in total non-PCI loans in the table above.  The decline in these loan balances is attributable to loan prepayments, payoffs, and scheduled principal reduction.

Loans held for sale consist of single-family residential mortgage loans under contract to be sold in the secondary market.  In most cases these loans are sold within thirty to sixty days.

Concentration of Credit Risk

At September 30, 2016, the Company held loans that were collateralized by various forms of real estate totaling $1.1 billion, which includes residential 1 to 4 family loans originated and held for sale, compared to $1.0 billion at December 31, 2015.  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 assurance 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 Company’s condensed consolidated financial statements.  The unpaid principal balance of loans serviced for others, exclusive of Small Business Administration (“SBA”) loans, was $30.3 million and $38.0 million at September 30, 2016 and December 31, 2015, respectively.  Periodically, the Company originates SBA loans for sale for which it retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2016 and December 31, 2015, the unpaid principal balance of SBA loans serviced for others totaled $6.7 million and $8.5 million, respectively.  The Company did not sell any SBA loans during the nine months ended September 30, 2016 and 2015.

Pledged Loans

At September 30, 2016, the Bank has pledged $730.0 million of loans to the FHLB of San Francisco to secure a credit facility totaling $374.5 million under a blanket lien. Of this credit facility, $10.2 million is available as a line of credit, while the remainder is available for potential future borrowings.

Purchased Credit Impaired (“PCI”) Loans

As part of the acquisition of Mission Community Bancorp in 2014 (the “MISN Transaction”), the Company acquired certain loans classified as PCI loans. These loans have exhibited evidence of deterioration in credit quality since their origination, and at their acquisition it was deemed probable all contractually required payments would not be collected.

The table below summarizes the unpaid principal balance and carrying amount of PCI loans as of September 30, 2016 and December 31, 2015:

	September 30, 2016				December 31, 2015
	Unpaid Principal Balance		Carrying Amount		Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Commercial	$	6,936	$	5,614	$	7,139	$	5,685
Construction and land	322		241		382		282
Residential 1 to 4 family	196		123		875		573
Total real estate secured	7,454		5,978		8,396		6,540
Commercial
Agriculture	1,500		1,465		1,500		1,452
Commercial and industrial	789		501		1,211		783
Total commercial	2,289		1,966		2,711		2,235
Total PCI loans	$	9,743	$	7,944	$	11,107	$	8,775

The following table summarizes activity in the accretable yield, or income expected to be collected on PCI loans for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended,				For the Nine Months Ended,
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Beginning balance	$	3,269	$	4,464	$	3,821	$	4,374
Accretion of income	(210)		(258)		(865)		(1,190)
Changes in expected cash flows (1)	(144)		(161)		(41)		861
Ending balance	$	2,915	$	4,045	$	2,915	$	4,045

(1)Changes in expected cash flows during the three months ended September 30, 2016 and 2015, as well as for the nine months ended September 30, 2016, were driven by cash flows the Company no longer expects to collect resulting from the prepayment of certain PCI loans.  Changes in expected cash flows for the nine months ended September 30, 2015 were driven primarily by positive changes in expected cash flows on PCI loans.

Impaired Loans

The following tables provide a summary of the Company’s recorded investment in non-PCI and PCI impaired loans as of and for the periods presented:

							FortheThreeMonthsEnded				For the Nine Months Ended
	September 30, 2016						September 30, 2016				September 30, 2016
			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
Construction and land	$	4,185	$	8,884	$	-	$	4,511	$	16	$	4,864	$	57
Commercial	2,231		3,347		-		2,330		28		3,146		90
Residential 1 to 4 family	490		640		-		382		8		435		18
Farmland	325		331		-		363		5		564		28
Home equity lines of credit	84		86		-		84		-		75		-
Commercial
Commercial and industrial	2,996		3,255		-		3,329		51		3,333		153
Agriculture	1,778		1,869		-		1,573		18		1,182		39
Consumer	135		168		-		181		1		163		4
Total	12,224		18,580		-		12,753		127		13,762		389
With Related Allowance Real Estate Secured
Commercial	281		300		27		282		4		287		12
Commercial
Commercial and industrial	1,354		1,395		100		1,408		19		1,399		53
Agriculture	341		351		81		352		3		372		6
Total	1,976		2,046		208		2,042		26		2,058		71
Total Non-PCI impaired loans	$	14,200	$	20,626	$	208	$	14,795	$	153	$	15,820	$	460

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2016						September 30, 2016				September 30, 2016
			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	$	5,105	$	6,425	$	-	$	5,110	$	135	$	5,128	$	381
Residential 1 to 4 family	123		196		-		122		4		348		253
Construction and land	60		141		-		60		7		57		25
Commercial
Agriculture	1,465		1,500		-		1,462		30		1,458		87
Commercial and industrial	107		395		-		117		18		200		63
Total	6,860		8,657		-		6,871		194		7,191		809
With Related Allowance Real Estate Secured
Commercial	509		511		37		513		7		520		26
Construction and land	181		181		5		191		3		205		10
Commercial
Commercial and industrial	394		394		24		405		6		428		20
Total	1,084		1,086		66		1,109		16		1,153		56
Total PCI loans	$	7,944	$	9,743	$	66	$	7,980	$	210	$	8,344	$	865

							For the Three Months Ended				For the Nine Months Ended
	December 31, 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
Construction and land	$	5,138	$	9,615	$	-	$	1,556	$	24	$	1,798	$	71
Commercial	3,855		5,328		-		4,247		36		4,158		110
Residential 1 to 4 family	694		860		-		748		10		602		12
Farmland	587		588		-		385		7		558		26
Home equity lines of credit	85		86		-		85		-		119		-
Commercial
Commercial and industrial	2,295		2,510		-		3,252		10		3,541		45
Agriculture	724		815		-		654		6		671		7
Consumer	146		204		-		160		1		149		4
Total	13,524		20,006		-		11,087		94		11,596		275
With Related Allowance Real Estate Secured
Commercial	435		665		59		461		-		476		-
Land	-		-		-		4,084		-		4,147		-
Commercial
Commercial and industrial	1,944		1,972		156		1,444		22		1,139		50
Agriculture	400		400		39		-		-		-		-
Total	2,779		3,037		254		5,989		22		5,762		50
Total Non-PCI impaired loans	$	16,303	$	23,043	$	254	$	17,076	$	116	$	17,358	$	325

							For the Three Months Ended				For the Nine Months Ended
	December 31, 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	$	5,156	$	6,601	$	-	$	5,189	$	122	$	5,297	$	807
Residential 1 to 4 family	573		875		-		566		18		565		48
Construction and land	53		152		-		553		19		556		58
Commercial
Agriculture	1,452		1,500		-		1,440		30		1,437		87
Commercial and industrial	297		712		-		542		44		680		104
Total	7,531		9,840		-		8,290		233		8,535		1,104
With Related Allowance
Real Estate Secured
Commercial	529		538		41		537		10		536		38
Construction and land	229		230		5		254		5		272		15
Commercial
Commercial and industrial	486		499		33		490		10		500		33
Total	1,244		1,267		79		1,281		25		1,308		86
Total PCI loans	$	8,775	$	11,107	$	79	$	9,571	$	258	$	9,843	$	1,190

The Company did not record income from the receipt of cash payments related to non-accruing loans during the nine month periods ended September 30, 2016 and 2015.  If interest on non-accruing loans had been recognized at the original interest rates stipulated in the respective loan agreements, interest income would have increased $0.1 million and $0.2 million for the three month periods ended September 30, 2016 and 2015, respectively, and $0.3 million and $0.5 million for the nine month periods ended September 30, 2016 and 2015, respectively.  Interest income recognized on impaired loans in the tables above represents interest the Company recognized on accruing TDRs, as well as accruing PCI loans.

At September 30, 2016, the Company had no loans secured by residential 1 to 4 family real estate that were in the process of foreclosure.  There were no residential 1 to 4 family properties included in foreclosed assets as of September 30, 2016.

Troubled Debt Restructurings

The majority of the Bank’s TDRs were granted concessions with respect to interest rates, payment structure and/or maturity. Modifications to loans as TDRs during the three and nine month periods ended September 30, 2016 were primarily comprised of extensions of a loan’s maturity at the loan’s original interest rate, which was lower than the market rate of interest for new credit with similar risk.  Extensions of maturity were for periods ranging from 6 months to 10 years.  At September 30, 2016, the Company was not committed to lend any additional funds to borrowers with loans modified as TDRs.  As of September 30, 2016 the Company had established valuation allowances for loans modified as TDRs totaling $0.2 million.

The following table provides a summary of loans classified as TDRs as of September 30, 2016 and December 31, 2015:

	September 30, 2016						December 31, 2015
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Construction and land	$	742	$	3,233	$	3,975	$	1,171	$	3,968	$	5,139
Commercial	2,252		115		2,367		2,395		435		2,830
Farmland	250		74		324		504		82		586
Residential 1 to 4 family	490		-		490		613		81		694
Commercial
Commercial and industrial	3,432		751		4,183		2,698		1,515		4,213
Agriculture	2,119		-		2,119		1,124		-		1,124
Consumer	107		9		116		114		10		124
Total non-PCI loans	9,392		4,182		13,574		8,619		6,091		14,710
PCI loans
Real estate secured
Commercial	901		24		925		922		46		968
Construction and land	60		-		60		54		-		54
Commercial
Commercial and industrial	394		37		431		461		66		527
Total PCI loans	1,355		61		1,416		1,437		112		1,549
Total TDRs	$	10,747	$	4,243	$	14,990	$	10,056	$	6,203	$	16,259

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, 2016					September 30, 2016
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Residential 1 to 4 family	1	$	222	$	222	1	$	222	$	222
Commercial
Commercial and industrial	3	204		204		16	1,732		1,732
Agriculture	-	-		-		1	10		10
Total TDRs	4	$	426	$	426	18	$	1,964	$	1,964

	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 of	Recorded		Recorded		Number of	Recorded		Recorded
	TDRs	Investment		Investment		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
Total non-PCI loans	10	1,409		1,409		30	6,366		6,366
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 PCI loans	2	845		845		7	1,540		1,540
Total TDRs	12	$	2,254	$	2,254	37	$	7,906	$	7,906

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

	For the Three Months Ended			For the Nine Months Ended
	September 30, 2016			September 30, 2016
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Real Estate Secured
Farmland	-	$	-	1	$	80
Total	-	$	-	1	$	80

	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

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, 2016
	Balance June 30, 2016			Charge-offs			Recoveries			Provision for Loan and Lease Losses			Balance September 30, 2016
	(dollars in thousands)
Other real estate secured	$	10,654		$		-	$	6		$		175	$	10,835
Commercial	5,609			(5)			194			(92)			5,706
Construction and land	491			-			17			(191)			317
Consumer	182			(20)			3			(21)			144
Unallocated	512									129			641
Total	$	17,448		$		(25)	$	220		$		-	$	17,643
	For the Nine Months Ended September 30, 2016
	Balance December 31, 2015			Charge-offs			Recoveries			Provision for Loan and Lease Losses			Balance September 30, 2016
	(dollars in thousands)
Other real estate secured	$		11,161	$	-		$		632	$	(958)		$		10,835
Commercial	5,372			(17)			424			(73)			5,706
Construction and land	623			-			161			(467)			317
Consumer	173			(24)			15			(20)			144
Unallocated	123									518			641
Total	$		17,452	$	(41)		$		1,232	$	(1,000)		$		17,643

	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

The following tables disaggregate the allowance for loan and lease losses and the recorded investment in loans by impairment methodology as of September 30, 2016 and December 31, 2015:

	September 30, 2016
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Other real estate secured	$	27	$	10,771	$	37	$	3,411	$	1,061,320	$	5,737
Commercial	181		5,501		24		6,469		232,492		1,966
Construction and land	-		312		5		4,185		22,410		241
Consumer	-		144		-		135		4,335		-
Unallocated	-		641		-		-		-		-
Total	$	208	$	17,369	$	66	$	14,200	$	1,320,557	$	7,944

	December 31, 2015
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Other real estate secured	$	59	$	11,061	$	41	$	5,656	$	964,493	$	6,258
Commercial	195		5,144		33		5,363		221,573		2,235
Construction and land	-		618		5		5,138		30,249		282
Consumer	-		173		-		146		5,887		-
Unallocated	-		123		-		-		-		-
Total	$	254	$	17,119	$	79	$	16,303	$	1,222,202	$	8,775

At September 30, 2016, total gross loans of $1.3 billion in the table above include $149.4 million of non-PCI and PCI loans acquired in the MISN Transaction.  These loans were initially recorded at fair value, and had no related ALLL on the acquisition date.  At September 30, 2016 and December 31, 2015 the ALLL for acquired non-PCI loans was $0.2 million, respectively, and is included in the ALLL for loans collectively evaluated for impairment.  The incremental ALLL allocation for acquired non-PCI loans was not due to deterioration in credit quality, but rather due to the accretion of purchase discounts on these loans.  The ALLL for PCI loans was $0.1 million as of September 30, 2016 and December 31, 2015, and is attributable to unfavorable changes in expected future cash flows on certain PCI loans.

Reserve for Off-Balance Sheet Loan Commitments

The Company has exposure to losses from unfunded loan commitments and letters of credit.  Estimated losses inherent in the outstanding balance of these commitments is not included in the ALLL, but is recorded separately, and included as a component of other liabilities in the condensed consolidated balance sheets.  The balance of the reserve for off-balance sheet commitments was $0.5 million at September 30, 2016 and December 31, 2015.

Credit Quality

The following tables stratify loans held for investment by the Company’s internal risk grading system as of September 30, 2016 and December 31, 2015:

	September 30, 2016
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Commercial	$	605,020	$	7,225	$	17,987	$	-	$	630,232
Residential 1 to 4 family	194,615		222		493		-		195,330
Farmland	130,053		1,400		1,270		-		132,723
Multi-family residential	81,536		-		-		-		81,536
Construction and land	23,030		-		3,565		-		26,595
Home equity lines of credit	24,694		-		216		-		24,910
Commercial
Commercial and industrial	173,476		68		11,154		-		184,698
Agriculture	44,569		3,811		5,883		-		54,263
Consumer	4,378		-		92		-		4,470
Total non-PCI loans	1,281,371		12,726		40,660		-		1,334,757
PCI loans
Real estate secured
Commercial	774		2,241		2,599		-		5,614
Construction and land	241		-		-		-		241
Residential 1 to 4 family	-		123		-		-		123
Commercial
Agriculture	-		-		1,465		-		1,465
Commercial and industrial	54		-		447		-		501
Total PCI loans	1,069		2,364		4,511		-		7,944
Total loans held for investment	$	1,282,440	$	15,090	$	45,171	$	-	$	1,342,701

	December 31, 2015
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Commercial	$	545,614	$	4,402	$	23,543	$	-	$	573,559
Residential 1 to 4 family	164,226		405		625		-		165,256
Farmland	118,740		245		1,581		-		120,566
Multi-family residential	79,381		-		-		-		79,381
Construction and land	30,219		939		4,229		-		35,387
Home equity lines of credit	31,103		-		284		-		31,387
Commercial
Commercial and industrial	152,979		4,730		6,316		-		164,025
Agriculture	61,340		98		1,473		-		62,911
Consumer	5,922		-		111		-		6,033
Total non-PCI loans	1,189,524		10,819		38,162		-		1,238,505
PCI loans
Real estate secured
Commercial	-		1,094		4,591		-		5,685
Residential 1 to 4 family	455		-		118		-		573
Construction and land	228		54		-		-		282
Commercial
Agriculture	-		-		1,452		-		1,452
Commercial and industrial	75		81		627		-		783
Total PCI loans	758		1,229		6,788		-		8,775
Total loans held for investment	$	1,190,282	$	12,048	$	44,950	$	-	$	1,247,280

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, 2016
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing (1)		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Commercial	$	629,972	$	-	$	-	$	-	$	260	$	630,232
Residential 1 to 4 family	195,330		-		-		-		-		195,330
Farmland	132,648		-		-		-		75		132,723
Multi-family residential	81,536		-		-		-		-		81,536
Construction and land	23,152		-		-		-		3,443		26,595
Home equity lines of credit	24,826		-		-		-		84		24,910
Commercial
Commercial and industrial	183,740		39		-		-		919		184,698
Agriculture	54,263		-		-		-		-		54,263
Consumer	4,442		-		-		-		28		4,470
Total non-PCI loans	1,329,909		39		-		-		4,809		1,334,757
PCI loans
Real estate secured
Commercial	5,590		-		-		-		24		5,614
Construction and land	241		-		-		-		-		241
Residential 1 to 4 family	123		-		-		-		-		123
Commercial
Agriculture	1,465		-		-		-		-		1,465
Commercial and industrial	450		-		-		-		51		501
Total PCI loans	7,869		-		-		-		75		7,944
Total loans held for investment	$	1,337,778	$	39	$	-	$	-	$	4,884	$	1,342,701

(1)At September 30, 2016, $4.2 million of non-accruing loans were current, $0.1 million were 30-59 days past due, $0.1 million were 60-89 days past due, and $0.5 million were 90+ days past due.

	December 31, 2015
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing (1)		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Commercial	$	571,665	$	-	$	-	$	-	$	1,894	$	573,559
Residential 1 to 4 family	165,176		-		-		-		80		165,256
Farmland	120,483		-		-		-		83		120,566
Multi-family residential	79,381		-		-		-		-		79,381
Construction and land	31,419		-		-		-		3,968		35,387
Home equity lines of credit	31,303		-		-		-		84		31,387
Commercial
Commercial and industrial	162,223		66		195		-		1,541		164,025
Agriculture	62,911		-		-		-		-		62,911
Consumer	6,000		-		-		-		33		6,033
Total non-PCI loans	1,230,561		66		195		-		7,683		1,238,505
PCI loans
Real estate secured
Commercial	5,639		-		-		-		46		5,685
Residential 1 to 4 family	573		-		-		-		-		573
Construction and land	282		-		-		-		-		282
Commercial
Agriculture	1,452		-		-		-		-		1,452
Commercial and industrial	694		-		-		-		89		783
Total PCI loans	8,640		-		-		-		135		8,775
Total loans held for investment	$	1,239,201	$	66	$	195	$	-	$	7,818	$	1,247,280

(1)At December 31, 2015, $6.4 million of non-accruing loans were current, $28 thousand were 30-59 days past due, $26 thousand were 60-89 days past due, and $1.4 million were 90+ days past due.

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Income Taxes

9 Months Ended

Sep. 30, 2016

Income Taxes

Income Taxes

Note 5. 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, 2016 and December 31, 2015, there was no valuation allowance for the Company’s deferred tax assets.  The Company’s deferred tax assets totaled $15.7 million at September 30, 2016, and $21.3 million at December 31, 2015.

The Company is subject to income taxation by both federal and state taxing authorities.  Income tax returns for the years ended December 31, 2015, 2014, and 2013 are open to audit by federal taxing authorities while income tax returns are open to audit by state taxing authorities for the years ended December 31, 2015, 2014, 2013, and 2012.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2016

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Note 6. Goodwill and Other Intangible Assets

Intangible assets consist of goodwill and core deposit intangible assets (“CDI”) associated with the acquisition of core deposit balances.  At September 30, 2016 and December 31, 2015, the carrying value of goodwill was $24.9 million.  At September 30, 2016 and December 31, 2015, the balance of CDI was $3.6 million and $4.3 million.  CDI assets are subject to amortization.  Amortization was $0.2 million and $0.3 million for the three months ended September 30, 2016 and 2015 and $0.7 million and $0.8 million for the nine months ended September 30, 2016 and 2015, respectively.

The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount of CDI and provides an estimate for future amortization as of September 30, 2016:

	September 30, 2016
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(5,693)	$	3,568

	September 30, 2016
	Beginning		Estimated		Projected Ending
	Balance		Amortization		Balance
	(dollars in thousands)
Period
Year 2016	$	3,568	$	(215)	$	3,353
Year 2017	3,353		(588)		2,765
Year 2018	2,765		(549)		2,216
Year 2019	2,216		(522)		1,694
Year 2020	1,694		(441)		1,253
Year 2021	1,253		(419)		834

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Share-based Compensation Plans

9 Months Ended

Sep. 30, 2016

Share-based Compensation Plans

Share-based Compensation Plans

Note 7. Share-based Compensation Plans

As of September 30, 2016, the Company had one active share-based 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, restricted stock awards, and restricted stock units.  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.  These plans are referred to as the “2005 Equity Based Compensation Plan,” and the “1997 Stock Option Plan.”  As of September 30, 2016, no further grants can be made from either of these plans.

Restricted Stock Awards

The Company grants restricted stock periodically for the benefit of employees and to members of the Board of Directors.  Restricted stock awards typically vest ratably over a period of three to five years depending on the specific terms of the award.  Restricted stock awards may be subject to the achievement of certain performance goals.  Compensation costs related to restricted stock awards are recognized over the period the awards are expected to vest and are included in salaries and employee benefits.  Compensation cost related to awards that are subject to performance conditions is recognized over the vesting period if the Company believes it is more likely than not that the performance conditions will be achieved.  If the Company believes it is more likely than not that performance conditions will not be achieved, the Company ceases the accrual of compensation cost for the related award, and previously recognized compensation cost for the unvested portion of the award is reversed from earnings.  The Company includes a forfeiture rate assumption in its accrual for compensation cost associated with restricted stock awards, which is based on the Company’s historical experience with such awards.

The following table provides a summary of activity related to restricted stock granted for the nine months ended September 30, 2016:

	Number of	Average Grant
	Shares	Date Fair Value
Balance December 31, 2015	162,394	$	7.30
Granted	120,818	7.85
Vested	(75,863)	7.39
Forfeited	(17,765)	7.76
Balance September 30, 2016	189,584	$	7.59
Expected to vest as of September 30, 2016	174,099	$	7.57

Included in the table above are performance-based grants of restricted stock totaling 13,245 shares as of September 30, 2016.

Restricted Stock Units

Restricted stock units are granted periodically for the benefit of employees.  Upon vesting, certain of these awards settle in shares of the Company’s common stock, while others settle in cash.  Awards that settle in shares of the Company’s common stock are made to executive officers, while those that settle in cash are made to other officers of the Bank.  The Company recognizes compensation cost associated with restricted stock units that settle in shares of the Company’s common stock through charges to current period earnings, included in salaries and employee benefits, and a corresponding increase in additional paid in capital.  Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest.  For restricted stock units that settle in cash, the Company accrues a liability for the ultimate settlement of the award through charges to current period earnings, included in salaries and employee benefits.  Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest.  However, the ultimate settlement value of these awards and the related compensation cost may fluctuate, based on increases and decreases in the value of the Company’s common stock over the vesting period.

Restricted stock units that settle in shares of the Company’s common stock have vesting conditions which are based on pre-determined performance targets.  Based on the achievement of these performance targets, the number of awards that vest can be adjusted upward to a maximum of 150% of the granted amount or downward to zero.  Certain of the Company’s performance based restricted stock units have performance targets based on the Company’s return on average assets and total shareholder return over a specified period of time, relative to the Company’s pre-determined peer group.

The grant date fair value of performance based restricted stock units that do not contain a market condition, such as those where vesting is based on total shareholder return, is equivalent to the price of the Company’s common stock on the date of grant.  The Company incorporates a forfeiture rate assumption in its accrual for compensation cost for these awards, which is based on the Company’s historical experience with similar awards.  For awards that contain a market condition, the Company employs the use of a Monte Carlo simulation through an independent party to determine the grant date fair value of those awards.  The Monte Carlo simulation estimates the grant date fair value of these awards using input assumptions similar to those in the Black-Scholes model, however it also incorporates into the grant date fair value calculation the probability that the performance targets will or will not be achieved.

The grant date fair value for restricted stock units that settle in cash is equivalent to the price of the Company’s common stock on the date of grant.

The following table provides a summary of activity related to restricted stock units that settle in shares of the Company’s common stock for the nine months ended September 30, 2016:

	Settle in Stock
		Average Grant
	Shares	Date Fair Value
Balance, December 31, 2015	-	$	-
Granted	38,104	7.56
Forfeited	(1,388)	7.56
Balance, September 30, 2016	36,716	$	7.56
Expected to vest as of September 30, 2016	24,746	$	7.56

The following table provides a summary of activity related to restricted stock units that settle in cash for the nine months ended September 30, 2016:

	Settle in Cash
	Shares	Fair Value (1)
Balance, December 31, 2015	-
Granted	80,448
Forfeited	(1,923)
Balance, September 30, 2016	78,525	$	8.20
Expected to vest as of September 30, 2016	62,621	$	8.20

(1) Represents the closing share price of the Company’s common stock as of September 30, 2016.  As of September 30, 2016, the accrued liability for restricted stock units expected to vest that settle in cash was approximately $0.1 million.

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 such as expected volatility of the Company’s common stock, expected term of the option, expected dividend yield on the Company’s common stock, and the expected risk free rate of interest.  Expectations for volatility are based on the historical volatility of the Company’s common stock.  The Company estimates forfeiture rates based on historical option exercise and termination experience for its employees.  The Company recognizes share-based compensation costs ratably over the vesting period of the award, which is typically a period of three to five years.

The following table summarizes activity related to stock options, provides information related to options that have vested or are expected to vest and exercisable options as of September 30, 2016:

	Options Outstanding			Average	Average
	Number	Weighted Average		Remaining	Intrinsic
	of Shares	Exercise Price		Life (years)	Value
Balance, December 31, 2015	932,553	$	7.19
Granted	36,022	7.27
Forfeited	(46,303)	7.50
Exercised	(19,907)	6.38
Balance, September 30, 2016	902,365	$	7.20	7.03	$	1,196,750
Exercisable September 30, 2016	511,663	$	6.99	6.00	$	909,295
Vested and expected to vest as of September 30, 2016	874,999	$	7.19	6.99	$	1,177,621

The total intrinsic value, the amount by which the stock price exceeded the exercise price on the date of exercise, of options exercised in all plans during the nine month period ended September 30, 2016 was $31 thousand.  The aggregate net tax deficiency related to stock options and disqualifying dispositions on the exercise of incentive stock options was $100 thousand during the nine month period ended September 30, 2016, and was recorded as an adjustment to additional paid in capital.

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted during the nine months ended September 30, 2016 and 2015:

	For the Nine Months Ended
	September 30,
	2016		2015
Expected volatility	31.85%		36.38%
Expected term (years)	5.00		5.00
Dividend yield	3.30%		2.82%
Risk free rate	1.31%		1.54%
Weighted-average grant date fair value	$	1.50	$	1.97

Share-Based Compensation Expense

Expense related to share-based compensation is charged to earnings over the period the awards are expected to vest, and is included in salaries and employee benefits in the condensed consolidated financial statements.  For the nine months ended September 30, 2016 the net income tax deficiency related to share-based compensation was $100 thousand.  For the nine months ended September 30, 2015, the net income tax benefit related to share-based compensation was $96 thousand.  At September 30, 2016, compensation expense related to unvested stock options, restricted stock awards and restricted stock units is expected to be recognized over 2.2 years, 1.8 years, and 2.6 years respectively.

The following table provides a summary of the expense the Company recognized related to share-based compensation awards, as well as the remaining expense associated with those awards as of and for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Compensation expense:
Stock options	$	99	$	126	$	325	$	374
Restricted stock	181		153		464		440
Restricted stock units	66		-		126		-
Total	$	346	$	279	$	915	$	814
Unrecognized compensation expense:
Stock options	$	653	$	1,133
Restricted stock	1,025		982
Restricted stock units	575		-
Total	$	2,253	$	2,115

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Shareholders' Equity

9 Months Ended

Sep. 30, 2016

Shareholders' Equity

Shareholders' Equity

Note 8. Shareholders’ Equity

Cash Dividends

On January 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on February 29, 2016 to shareholders of the Company’s common stock as of February 17, 2016.

On April 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on May 31, 2016 to shareholders of the Company’s common stock as of May 18, 2016.

On July 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on July 27, 2016 to shareholders of the Company’s common stock as of August 31, 2016.

As discussed in Note 14. Subsequent Events of these condensed consolidated financial statements, on October 26, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on November 30, 2016 to shareholders of the Company’s common stock as of November 15, 2016.

Stock Repurchase Program

On July 22, 2016, the Company announced it had amended its previously announced program for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18.  Under the amended program, repurchase activity may commence on August 6, 2016 and may continue until February 8, 2017, the program’s new expiration date, or expire earlier upon the completion of the repurchase of $5.0 million of the Company’s common stock in addition to what has already been purchased under the program, as well as under certain other circumstances as set forth in the amended program.  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.

During the nine months ended September 30, 2016, the Company repurchased and cancelled 226,170 shares of its common stock at an aggregate cost of $1.6 million, or $7.23 per share.  The Company made no repurchases of its common stock during the three months ended September 30, 2016.  As of September 30, 2016, the Company had repurchased and cancelled a total of 281,598 shares of its common stock under this plan at an aggregate total cost of $2.0 million or $7.28 per share.

Regulatory Capital

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

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

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

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

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

· The capital conservation buffer is determined in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019.  The capital conservation buffer began phasing-in on January 1, 2016.

· The exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets and intangible assets.  For 2016, certain deferred tax assets and intangible assets are phased-out of CET I at a rate of 60%, compared to 40% for 2015.

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

The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of September 30, 2016 and December 31, 2015:

	Regulatory Standard to Be Considered
	Adequately Capitalized (1)		Well Capitalized (2)	September 30, 2016		December 31, 2015
	Company	Bank	Bank	Company	Bank	Company	Bank
Ratio
Common Equity Tier I Capital Ratio	5.125%	5.125%	6.50%	12.30%	12.23%	12.61%	12.48%
Leverage ratio	4.000%	4.000%	5.00%	9.83%	9.35%	9.90%	9.50%
Tier I Risk-Based Capital Ratio	6.625%	6.625%	8.00%	12.87%	12.23%	13.01%	12.48%
Total Risk-Based Capital Ratio	8.625%	8.625%	10.00%	14.09%	13.46%	14.26%	13.74%

(1) As of September 30, 2016, includes Capital Conservation Buffer of 0.625%.  On a fully phased-in basis, effective January 1, 2019, under Basel III Capital Rules, minimum capital ratios to be considered “adequately capitalized,” including the Capital Conservation Buffer of 2.5%, will be as follows: CET I: 7.0%; Leverage Ratio: 6.5%; Tier I Risk-Based Capital Ratio: 8.5%; Total Risk-Based Capital Ratio: 10.5%.

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

At September 30, 2016, the Company was able to include $10.2 million of junior subordinated debt in its Tier I capital for regulatory capital purposes compared to $10.0 million at December 31, 2015.

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Earnings Per Share ("EPS")

9 Months Ended

Sep. 30, 2016

Earnings Per Share ("EPS")

Earnings Per Share ("EPS")

Note 9. Earnings Per Share (“EPS”)

Basic EPS is determined by dividing net income allocated to common shareholders by the weighted average shares outstanding during the period.  Diluted EPS is determined by dividing net income allocated to common shareholders by the weighted average diluted shares outstanding, which reflects the diluted effect of share-based compensation awards during the period resulting from issued and outstanding stock options, restricted stock awards, and restricted stock units.  The Company determines the diluted effect of share-based compensation awards using the treasury stock method.  Unvested restricted stock awards contain non-forfeitable rights to dividends or dividend equivalents. As such, these awards are considered participating securities and the Company has applied the two-class method in the computation of basic and diluted EPS in periods where these awards are outstanding.  Under the two-class method distributed and undistributed earnings allocable to participating securities are deducted from net income to determine net income allocated to common shareholders, which is then used in the numerator of both basic and diluted EPS calculations.

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

	For the Three Months Ended September 30,
	2016			2015
	Net Income		Shares	Net Income		Shares
	(dollars in thousands, except per share data)
Net income	$	4,183		$	4,002
Less: net income allocated to participating securities	(22)			(21)
Net income allocated to common shareholders	$	4,161		$	3,981
Weighted average shares outstanding			34,037,252			34,158,081
Basic earnings per common share	$	0.12		$	0.12
Dilutive effect of share-based compensation awards			145,948			124,286
Weighted average diluted shares outstanding			34,183,200			34,282,367
Diluted earnings per common share	$	0.12		$	0.12

	For the Nine Months Ended September 30,
	2016			2015
	Net Income		Shares	Net Income		Shares
	(dollars in thousands, except per share data)
Net income	$	12,383		$	11,871
Less: accretion on preferred stock	-			(70)
Less: net income allocated to participating securities	(65)			(66)
Net income allocated to common shareholders	$	12,318		$	11,735
Weighted average shares outstanding			34,044,067			34,111,079
Basic earnings per common share (1)	$	0.36		$	0.34
Dilutive effect of share-based compensation awards			129,269			147,285
Weighted average diluted shares outstanding			34,173,336			34,258,364
Diluted earnings per common share	$	0.36		$	0.34

(1)Basic EPS for the nine months ended September 30, 2015 as presented under the two-class method is $0.34 per share ($0.344 per share when extended), compared to the $0.35 per share ($0.345 per share when extended) as presented last year.  This change in rounding is due to the application of the two-class method for presenting EPS, where an allocation of $66 thousand in earnings for the nine months ended September 30, 2015 is made to participating securities, which represent restricted stock awards.

For the three and nine months ended September 30, 2016 and 2015, common stock equivalents associated primarily with stock options, totaling approximately 62,000 shares and 126,000 shares, and 120,000 shares and 35,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies.

Commitments and Contingencies

Note 10. Commitments and Contingencies

In the normal course of business, various claims and lawsuits are brought by and against the Company. In the opinion of management and the Company’s legal counsel, the disposition of all pending or threatened proceedings will not 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. 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, 2016 and December 31, 2015, the Company had the following outstanding financial commitments:

	September 30,		December 31,
	2016		2015
	(dollars in thousands)
Commitments to extend credit	$	273,129	$	242,125
Standby letters of credit (1)	12,392		12,968
Total commitments and standby letters of credit	$	285,521	$	255,093

(1) Includes a standby letter of credit to one customer in the amount of $10.2 million and $10.4 million at September 30, 2016 and December 31, 2015, respectively.

Commitments to extend credit and standby letters of credit are made at both fixed and variable rates of interest.  At September 30, 2016, the Company had $31.8 million in fixed rate commitments and $253.7 million in variable rate commitments.

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Regulatory Matters

9 Months Ended

Sep. 30, 2016

Regulatory Matters

Regulatory Matters

Note 11. 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 believes that the remediation efforts required to address the issues identified in the BSA Consent Order are essentially complete at this time.  However, compliance with and resolution of the BSA Consent Order are determined by the FDIC and in their sole discretion.

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Derivative Instruments

9 Months Ended

Sep. 30, 2016

Derivative Instrument

Derivative Instruments

Note 12. Derivative Instruments

From time to time, the Company enters into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company.  At the same time, the Company enters into identical interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements it enters into with its borrowers.  At September 30, 2016, the Company had swaps with matched terms with an aggregate notional amount of $37.1 million and a fair value of $1.9 million.  The fair values of these swaps are recorded as components of other assets and other liabilities in the Company’s condensed consolidated balance sheet.  Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s income statement as a component of non-interest income.  Since the terms of the swap agreements between the Company and its borrowers have been matched with the terms of swap agreements with another financial institution, the adjustments for the change in their fair value offset each other in non-interest income.

Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of these swap agreements.  Offsetting swap agreements the Company has with other financial institutions are collateralized with cash, and swap agreements with borrowers are secured by the collateral arrangements for the underlying loans these borrowers have with the Company.  During the nine months ended September 30, 2016, there were no losses recorded on swap agreements, attributable to the change in credit risk associated with a counterparty.  All interest rate swap agreements entered into by the Company as of September 30, 2016 are not designated as hedging instruments.

The following table summarizes the Company’s derivative instruments, included in “other assets” and “other liabilities” in the condensed consolidated balance sheets, as of September 30, 2016:

	September 30, 2016
	Derivative Assets				Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value
	(dollars in thousands)
Derivative instruments not designated as hedging instruments:
Interest rate swap contracts - pay floating, receive fixed	$	37,116	$	1,910	$	-	$	-
Interest rate swap contracts - pay fixed, receive floating	-		-		37,116		1,910
Total	$	37,116	$	1,910	$	37,116	$	1,910

The Company was not party to any swap agreements as of December 31, 2015.

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Balance Sheet Offsetting

9 Months Ended

Sep. 30, 2016

Balance Sheet Offsetting

Balance Sheet Offsetting

Note 13. Balance Sheet Offsetting

Derivative financial instruments may be eligible for offset in the consolidated balance sheets, such as those subject to enforceable master netting arrangements or a similar agreement.  Under these agreements, the Company has the right to net settle multiple contracts with the same counterparty.  The Company offers an interest rate swap product to qualified customers which are then paired with derivative contracts the Company enters into with a counterparty bank.  While derivative contracts entered into with counterparty banks may be subject to enforceable master netting agreements, derivative contracts with customers may not be subject to enforceable master netting arrangements.  As such, these instruments have been excluded from the table below.

Financial instruments that are eligible for offset in the consolidated balance sheets as of September 30, 2016 are presented in the table below:

							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts Recognized in the Condensed Consolidated Balance Sheets		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts Presented in the Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral		Net Amount
	(dollars in thousands)
September 30, 2016
Financial liabilities:
Derivatives not designated as hedging instruments	$	1,910	$	-	$	1,910	$	-	$	2,100	$	(190)
Total	$	1,910	$	-	$	1,910	$	-	$	2,100	$	(190)

As shown in the table above, as of September 30, 2016, the Company pledged cash collateral of $2.1 million for interest rate swaps in a liability position.

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Subsequent Events

9 Months Ended

Sep. 30, 2016

Subsequent Events

Subsequent Events

Note 14. Subsequent Events

Dividend Declaration

On October 26, 2016, the Company’s Board of Directors declared a cash dividend of $0.06 per share, payable on November 30, 2016, to shareholders of the Company’s common stock as of November 15, 2016.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2016

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.  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 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.

Recent Accounting Guidance Adopted

Recent Accounting Guidance Adopted

In September, 2015, the Financial Accounting Standards Board (“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 became 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.  This update did not have an impact on the Company’s condensed consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

Recent Accounting Guidance Not Yet Effective

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of the amendments within this update will have a material impact on the Company’s financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements.  Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.    This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted.  Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). This update simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance under the update requires all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit on the income statement.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 31, 2016, with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of this update, but does not expect a material impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update improves the understanding and comparability of lessees’ financial commitments by requiring lease assets and lease liabilities to be recognized on the balance sheet for those leases classified as operating leases under current U.S. GAAP. This ASU requires a lessee to recognize on the balance sheet a lease liability to make lease payments and a right of use asset, representing the right to use the underlying asset, during the term of the lease.  This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, using a modified retrospective approach, with early adoption permitted. The Company is currently in the process of evaluating the impact that the adoption of this update will have on its financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).  The amendments in this update require that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income.  This ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2017.  The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on the Company’s 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 financial statements.

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Fair Value of Assets and Liabilities (Tables)

9 Months Ended

Sep. 30, 2016

Fair Value of Assets and Liabilities

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

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Available for sale investments:
Obligations of U.S. government agencies	$	58,992	$	-	$	58,992	$	-
Mortgage backed securities
U.S. government sponsored entities and agencies	247,193		-		247,193		-
Non-agency	25,521		-		25,521		-
State and municipal securities	115,449		-		115,449		-
Asset backed securities	9,309		-		9,309		-
Derivative financial instruments:
Interest rate swaps	1,910		-		1,910		-
Total assets measured on a recurring basis	$	458,374	$	-	$	458,374	$	-
Liabilities
Derivative financial instruments:
Interest rate swaps	$	1,910	$	-	$	1,910	$	-
Total liabilities measured on a recurring basis	$	1,910	$	-	$	1,910	$	-

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	2015		Active Markets for		Observable		Unobservable
	Assets At		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
Assets
Available for sale investments:
Obligations of U.S. government agencies	$	47,318	$	-	$	47,318	$	-
Mortgage backed securities
U.S. government sponsored entities and agencies	245,235		-		245,235		-
Non-agency	34,317		-		34,317		-
State and municipal securities	108,406		-		108,406		-
Asset backed securities	15,627		-		15,627		-
Other investments	32		32		-		-
Derivative financial instruments:
Interest rate swaps	-		-		-		-
Total assets measured on a recurring basis	$	450,935	$	32	$	450,903	$	-
Liabilities
Derivative financial instruments:
Interest rate swaps	$	-	$	-	$	-	$	-
Total liabilities measured on a recurring basis	$	-	$	-	$	-	$	-

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

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		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
Foreclosed assets	$	181	$	-	$	181	$	-	$	235
Total assets measured on a non-recurring basis	$	181	$	-	$	181	$	-	$	235

	As of		Fair Value Measurements Using
	December 31,		Quoted Prices in		Significant Other		Significant
	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
Foreclosed assets	$	-	$	-	$	-	$	-	$	-
Total assets measured on a non-recurring basis	$	-	$	-	$	-	$	-	$	-

Summary of the estimated fair value of financial instruments

	As of		Fair Value Measurements Using
	September 30,		Quoted Prices in		Significant Other		Significant
	2016		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	$	65,250	$	65,250	$	-	$	-	$	65,250
Investment securities available for sale	456,464		-		456,464		-		456,464
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net	1,323,912		-		-		1,332,933		1,332,933
Loans held for sale	7,975		-		7,975		-		7,975
Interest rate swaps	1,910		-		1,910		-		1,910
Accrued interest receivable	6,116		-		2,416		3,700		6,116
Liabilities
Non-interest bearing deposits	570,243		570,243		-		-		570,243
Interest bearing deposits	1,061,105		-		1,060,813		-		1,060,813
Federal Home Loan Bank advances	120,000		-		121,511		-		121,511
Junior subordinated debentures	10,572		-		-		8,531		8,531
Interest rate swaps	1,910		-		1,910		-		1,910
Accrued interest payable	364		-		364		-		364

	As of		Fair Value Measurements Using
	December 31, 2015 Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
			(dollars in thousands)
Assets
Cash and cash equivalents	$	69,923	$	69,923	$	-	$	-	$	69,923
Investment securities available for sale	450,935		32		450,903		-		450,935
Federal Home Loan Bank stock	7,853		-		-		-		N/A
Loans receivable, net	1,228,696		-		-		1,250,903		1,250,903
Loans held for sale	9,755		-		9,755		-		9,755
Interest rate swaps	-		-		-		-		-
Accrued interest receivable	6,256		-		2,589		3,667		6,256
Liabilities
Non-interest bearing deposits	514,559		514,559		-		-		514,559
Interest bearing deposits	1,050,402		-		1,051,731		-		1,051,731
Federal Home Loan Bank advances	103,521		-		104,718		-		104,718
Junior subordinated debentures	10,438		-		-		8,195		8,195
Interest rate swaps	-		-		-		-		-
Accrued interest payable	390		-		390		-		390

Summary of off-balance sheet instruments

	September 30, 2016				December 31, 2015
	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	$	285,521	$	2,855	$	255,093	$	2,551

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2016

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, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	59,223	$	218	$	(449)	$	58,992
Mortgage backed securities
U.S. government sponsored entities and agencies	246,284		2,205		(1,296)		247,193
Non-agency	25,318		223		(20)		25,521
State and municipal securities	109,443		6,077		(71)		115,449
Asset backed securities	9,503		-		(194)		9,309
Total available for sale securities	$	449,771	$	8,723	$	(2,030)	$	456,464

	December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(dollars in thousands)
Obligations of U.S. government agencies	$	47,478	$	269	$	(429)	$	47,318
Mortgage backed securities
U.S. government sponsored entities and agencies	246,561		986		(2,312)		245,235
Non-agency	34,645		-		(328)		34,317
State and municipal securities	105,164		3,486		(244)		108,406
Asset backed securities	16,183		-		(556)		15,627
Other investments	100		-		(68)		32
Total available for sale securities	$	450,131	$	4,741	$	(3,937)	$	450,935

Summary of investment securities in an unrealized loss position

	September 30, 2016
	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	$	21,361	$	(49)	$	23,291	$	(400)	$	44,652	$	(449)
Mortgage backed securities
U.S. government sponsored entities and agencies	64,304		(823)		22,102		(473)		86,406		(1,296)
Non-agency	5,996		(3)		3,243		(17)		9,239		(20)
State and municipal securities	5,723		(71)		-		-		5,723		(71)
Asset backed securities	-		-		9,309		(194)		9,309		(194)
Total	$	97,384	$	(946)	$	57,945	$	(1,084)	$	155,329	$	(2,030)

	December 31, 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	$	34,533	$	(429)	$	-	$	-	$	34,533	$	(429)
Mortgage backed securities
U.S. government sponsored entities and agencies	131,570		(1,485)		31,558		(827)		163,128		(2,312)
Non-agency	31,400		(317)		2,917		(11)		34,317		(328)
State and municipal securities	15,660		(243)		235		(1)		15,895		(244)
Asset backed securities	-		-		15,626		(556)		15,626		(556)
Other investments	32		(68)		-		-		32		(68)
Total	$	213,195	$	(2,542)	$	50,336	$	(1,395)	$	263,531	$	(3,937)

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Proceeds	$	25,905	$	8,656	$	101,482	$	55,184
Gross gains	271		136		1,291		815
Gross losses	-		-		(382)		(174)

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

	September 30, 2016				December 31, 2015
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(dollars in thousands)
Due one year or less	$	46,457	$	46,563	$	51,049	$	50,978
Due after one year through five years	151,110		151,910		153,444		152,916
Due after five years through ten years	179,623		184,979		182,996		184,870
Due after ten years	72,581		73,012		62,642		62,171
Total	$	449,771	$	456,464	$	450,131	$	450,935

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,
	2016		2015		2016		2015
	(dollars in thousands)
Taxable earnings on investment securities
Mortgage backed securities	$	1,131	$	938	$	3,589	$	2,529
Obligations of U.S. government agencies	272		161		617		487
State and municipal securities	145		151		477		339
Asset backed securities	27		33		95		113
Earnings on investment securities exempt from federal taxation
State and municipal securities	640		581		1,826		1,725
Total	$	2,215	$	1,864	$	6,604	$	5,193

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Loans and Allowance for Loan and Lease Losses (Tables)

9 Months Ended

Sep. 30, 2016

Loans and Allowance for Loan and Lease Losses

Summary of outstanding loan balances

	September 30, 2016						December 31, 2015
	Non-PCI		PCI		Total Loans		Non-PCI		PCI		Total Loans
	Loans		Loans		Receivable		Loans		Loans		Receivable
	(dollars in thousands)
Real Estate Secured
Commercial	$	630,232	$	5,614	$	635,846	$	573,559	$	5,685	$	579,244
Residential 1 to 4 family	195,330		123		195,453		165,256		573		165,829
Farmland	132,723		-		132,723		120,566		-		120,566
Multi-family residential	81,536		-		81,536		79,381		-		79,381
Construction and land	26,595		241		26,836		35,387		282		35,669
Home equity lines of credit	24,910		-		24,910		31,387		-		31,387
Total real estate secured	1,091,326		5,978		1,097,304		1,005,536		6,540		1,012,076
Commercial
Commercial and industrial	184,698		501		185,199		164,025		783		164,808
Agriculture	54,263		1,465		55,728		62,911		1,452		64,363
Total commercial	238,961		1,966		240,927		226,936		2,235		229,171
Consumer	4,470		-		4,470		6,033		-		6,033
Total loans held for investment	1,334,757		7,944		1,342,701		1,238,505		8,775		1,247,280
Deferred loan fees	(1,146)		-		(1,146)		(1,132)		-		(1,132)
Allowance for loan and lease losses	(17,577)		(66)		(17,643)		(17,373)		(79)		(17,452)
Total net loans held for investment	$	1,316,034	$	7,878	$	1,323,912	$	1,220,000	$	8,696	$	1,228,696
Loans held for sale	$	7,975	$	-	$	7,975	$	9,755	$	-	$	9,755

Schedule of carrying amount and unpaid principal balance of PCI loans

	September 30, 2016				December 31, 2015
	Unpaid Principal Balance		Carrying Amount		Unpaid Principal Balance		Carrying Amount
	(dollars in thousands)
Real Estate Secured
Commercial	$	6,936	$	5,614	$	7,139	$	5,685
Construction and land	322		241		382		282
Residential 1 to 4 family	196		123		875		573
Total real estate secured	7,454		5,978		8,396		6,540
Commercial
Agriculture	1,500		1,465		1,500		1,452
Commercial and industrial	789		501		1,211		783
Total commercial	2,289		1,966		2,711		2,235
Total PCI loans	$	9,743	$	7,944	$	11,107	$	8,775

Schedule of accretable yield, or income expected to be collected on PCI loans

	For the Three Months Ended,				For the Nine Months Ended,
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Beginning balance	$	3,269	$	4,464	$	3,821	$	4,374
Accretion of income	(210)		(258)		(865)		(1,190)
Changes in expected cash flows (1)	(144)		(161)		(41)		861
Ending balance	$	2,915	$	4,045	$	2,915	$	4,045

(1) Changes in expected cash flows during the three months ended September 30, 2016 and 2015, as well as for the nine months ended September 30, 2016, were driven by cash flows the Company no longer expects to collect resulting from the prepayment of certain PCI loans.  Changes in expected cash flows for the nine months ended September 30, 2015 were driven primarily by positive changes in expected cash flows on PCI loans.

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

							FortheThreeMonthsEnded				For the Nine Months Ended
	September 30, 2016						September 30, 2016				September 30, 2016
			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
Construction and land	$	4,185	$	8,884	$	-	$	4,511	$	16	$	4,864	$	57
Commercial	2,231		3,347		-		2,330		28		3,146		90
Residential 1 to 4 family	490		640		-		382		8		435		18
Farmland	325		331		-		363		5		564		28
Home equity lines of credit	84		86		-		84		-		75		-
Commercial
Commercial and industrial	2,996		3,255		-		3,329		51		3,333		153
Agriculture	1,778		1,869		-		1,573		18		1,182		39
Consumer	135		168		-		181		1		163		4
Total	12,224		18,580		-		12,753		127		13,762		389
With Related Allowance Real Estate Secured
Commercial	281		300		27		282		4		287		12
Commercial
Commercial and industrial	1,354		1,395		100		1,408		19		1,399		53
Agriculture	341		351		81		352		3		372		6
Total	1,976		2,046		208		2,042		26		2,058		71
Total Non-PCI impaired loans	$	14,200	$	20,626	$	208	$	14,795	$	153	$	15,820	$	460

							For the Three Months Ended				For the Nine Months Ended
	September 30, 2016						September 30, 2016				September 30, 2016
			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	$	5,105	$	6,425	$	-	$	5,110	$	135	$	5,128	$	381
Residential 1 to 4 family	123		196		-		122		4		348		253
Construction and land	60		141		-		60		7		57		25
Commercial
Agriculture	1,465		1,500		-		1,462		30		1,458		87
Commercial and industrial	107		395		-		117		18		200		63
Total	6,860		8,657		-		6,871		194		7,191		809
With Related Allowance Real Estate Secured
Commercial	509		511		37		513		7		520		26
Construction and land	181		181		5		191		3		205		10
Commercial
Commercial and industrial	394		394		24		405		6		428		20
Total	1,084		1,086		66		1,109		16		1,153		56
Total PCI loans	$	7,944	$	9,743	$	66	$	7,980	$	210	$	8,344	$	865

							For the Three Months Ended				For the Nine Months Ended
	December 31, 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
Construction and land	$	5,138	$	9,615	$	-	$	1,556	$	24	$	1,798	$	71
Commercial	3,855		5,328		-		4,247		36		4,158		110
Residential 1 to 4 family	694		860		-		748		10		602		12
Farmland	587		588		-		385		7		558		26
Home equity lines of credit	85		86		-		85		-		119		-
Commercial
Commercial and industrial	2,295		2,510		-		3,252		10		3,541		45
Agriculture	724		815		-		654		6		671		7
Consumer	146		204		-		160		1		149		4
Total	13,524		20,006		-		11,087		94		11,596		275
With Related Allowance Real Estate Secured
Commercial	435		665		59		461		-		476		-
Land	-		-		-		4,084		-		4,147		-
Commercial
Commercial and industrial	1,944		1,972		156		1,444		22		1,139		50
Agriculture	400		400		39		-		-		-		-
Total	2,779		3,037		254		5,989		22		5,762		50
Total Non-PCI impaired loans	$	16,303	$	23,043	$	254	$	17,076	$	116	$	17,358	$	325

							For the Three Months Ended				For the Nine Months Ended
	December 31, 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	$	5,156	$	6,601	$	-	$	5,189	$	122	$	5,297	$	807
Residential 1 to 4 family	573		875		-		566		18		565		48
Construction and land	53		152		-		553		19		556		58
Commercial
Agriculture	1,452		1,500		-		1,440		30		1,437		87
Commercial and industrial	297		712		-		542		44		680		104
Total	7,531		9,840		-		8,290		233		8,535		1,104
With Related Allowance
Real Estate Secured
Commercial	529		538		41		537		10		536		38
Construction and land	229		230		5		254		5		272		15
Commercial
Commercial and industrial	486		499		33		490		10		500		33
Total	1,244		1,267		79		1,281		25		1,308		86
Total PCI loans	$	8,775	$	11,107	$	79	$	9,571	$	258	$	9,843	$	1,190

Summary of loans classified as TDRs

	September 30, 2016						December 31, 2015
	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Construction and land	$	742	$	3,233	$	3,975	$	1,171	$	3,968	$	5,139
Commercial	2,252		115		2,367		2,395		435		2,830
Farmland	250		74		324		504		82		586
Residential 1 to 4 family	490		-		490		613		81		694
Commercial
Commercial and industrial	3,432		751		4,183		2,698		1,515		4,213
Agriculture	2,119		-		2,119		1,124		-		1,124
Consumer	107		9		116		114		10		124
Total non-PCI loans	9,392		4,182		13,574		8,619		6,091		14,710
PCI loans
Real estate secured
Commercial	901		24		925		922		46		968
Construction and land	60		-		60		54		-		54
Commercial
Commercial and industrial	394		37		431		461		66		527
Total PCI loans	1,355		61		1,416		1,437		112		1,549
Total TDRs	$	10,747	$	4,243	$	14,990	$	10,056	$	6,203	$	16,259

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, 2016					September 30, 2016
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	TDRs	Investment		Investment		TDRs	Investment		Investment
	(dollars in thousands)
Non-PCI Loans
Real Estate Secured
Residential 1 to 4 family	1	$	222	$	222	1	$	222	$	222
Commercial
Commercial and industrial	3	204		204		16	1,732		1,732
Agriculture	-	-		-		1	10		10
Total TDRs	4	$	426	$	426	18	$	1,964	$	1,964

	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 of	Recorded		Recorded		Number of	Recorded		Recorded
	TDRs	Investment		Investment		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
Total non-PCI loans	10	1,409		1,409		30	6,366		6,366
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 PCI loans	2	845		845		7	1,540		1,540
Total TDRs	12	$	2,254	$	2,254	37	$	7,906	$	7,906

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, 2016			September 30, 2016
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Non-PCI Loans	(dollars in thousands)
Real Estate Secured
Farmland	-	$	-	1	$	80
Total	-	$	-	1	$	80
	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

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

	For the Three Months Ended September 30, 2016
	Balance June 30, 2016			Charge-offs			Recoveries			Provision for Loan and Lease Losses			Balance September 30, 2016
	(dollars in thousands)
Other real estate secured	$	10,654		$		-	$	6		$		175	$	10,835
Commercial	5,609			(5)			194			(92)			5,706
Construction and land	491			-			17			(191)			317
Consumer	182			(20)			3			(21)			144
Unallocated	512									129			641
Total	$	17,448		$		(25)	$	220		$		-	$	17,643
	For the Nine Months Ended September 30, 2016
	Balance December 31, 2015			Charge-offs			Recoveries			Provision for Loan and Lease Losses			Balance September 30, 2016
	(dollars in thousands)
Other real estate secured	$		11,161	$	-		$		632	$	(958)		$		10,835
Commercial	5,372			(17)			424			(73)			5,706
Construction and land	623			-			161			(467)			317
Consumer	173			(24)			15			(20)			144
Unallocated	123									518			641
Total	$		17,452	$	(41)		$		1,232	$	(1,000)		$		17,643

	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

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

	September 30, 2016
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Other real estate secured	$	27	$	10,771	$	37	$	3,411	$	1,061,320	$	5,737
Commercial	181		5,501		24		6,469		232,492		1,966
Construction and land	-		312		5		4,185		22,410		241
Consumer	-		144		-		135		4,335		-
Unallocated	-		641		-		-		-		-
Total	$	208	$	17,369	$	66	$	14,200	$	1,320,557	$	7,944

	December 31, 2015
	Allowance for Loan and Lease Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality
	(dollars in thousands)
Other real estate secured	$	59	$	11,061	$	41	$	5,656	$	964,493	$	6,258
Commercial	195		5,144		33		5,363		221,573		2,235
Construction and land	-		618		5		5,138		30,249		282
Consumer	-		173		-		146		5,887		-
Unallocated	-		123		-		-		-		-
Total	$	254	$	17,119	$	79	$	16,303	$	1,222,202	$	8,775

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

	September 30, 2016
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Commercial	$	605,020	$	7,225	$	17,987	$	-	$	630,232
Residential 1 to 4 family	194,615		222		493		-		195,330
Farmland	130,053		1,400		1,270		-		132,723
Multi-family residential	81,536		-		-		-		81,536
Construction and land	23,030		-		3,565		-		26,595
Home equity lines of credit	24,694		-		216		-		24,910
Commercial
Commercial and industrial	173,476		68		11,154		-		184,698
Agriculture	44,569		3,811		5,883		-		54,263
Consumer	4,378		-		92		-		4,470
Total non-PCI loans	1,281,371		12,726		40,660		-		1,334,757
PCI loans
Real estate secured
Commercial	774		2,241		2,599		-		5,614
Construction and land	241		-		-		-		241
Residential 1 to 4 family	-		123		-		-		123
Commercial
Agriculture	-		-		1,465		-		1,465
Commercial and industrial	54		-		447		-		501
Total PCI loans	1,069		2,364		4,511		-		7,944
Total loans held for investment	$	1,282,440	$	15,090	$	45,171	$	-	$	1,342,701

	December 31, 2015
	Credit Risk Grades
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Non-PCI loans
Real estate secured
Commercial	$	545,614	$	4,402	$	23,543	$	-	$	573,559
Residential 1 to 4 family	164,226		405		625		-		165,256
Farmland	118,740		245		1,581		-		120,566
Multi-family residential	79,381		-		-		-		79,381
Construction and land	30,219		939		4,229		-		35,387
Home equity lines of credit	31,103		-		284		-		31,387
Commercial
Commercial and industrial	152,979		4,730		6,316		-		164,025
Agriculture	61,340		98		1,473		-		62,911
Consumer	5,922		-		111		-		6,033
Total non-PCI loans	1,189,524		10,819		38,162		-		1,238,505
PCI loans
Real estate secured
Commercial	-		1,094		4,591		-		5,685
Residential 1 to 4 family	455		-		118		-		573
Construction and land	228		54		-		-		282
Commercial
Agriculture	-		-		1,452		-		1,452
Commercial and industrial	75		81		627		-		783
Total PCI loans	758		1,229		6,788		-		8,775
Total loans held for investment	$	1,190,282	$	12,048	$	44,950	$	-	$	1,247,280

Summary of the aging of loans held for investment

	September 30, 2016
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing (1)		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Commercial	$	629,972	$	-	$	-	$	-	$	260	$	630,232
Residential 1 to 4 family	195,330		-		-		-		-		195,330
Farmland	132,648		-		-		-		75		132,723
Multi-family residential	81,536		-		-		-		-		81,536
Construction and land	23,152		-		-		-		3,443		26,595
Home equity lines of credit	24,826		-		-		-		84		24,910
Commercial
Commercial and industrial	183,740		39		-		-		919		184,698
Agriculture	54,263		-		-		-		-		54,263
Consumer	4,442		-		-		-		28		4,470
Total non-PCI loans	1,329,909		39		-		-		4,809		1,334,757
PCI loans
Real estate secured
Commercial	5,590		-		-		-		24		5,614
Construction and land	241		-		-		-		-		241
Residential 1 to 4 family	123		-		-		-		-		123
Commercial
Agriculture	1,465		-		-		-		-		1,465
Commercial and industrial	450		-		-		-		51		501
Total PCI loans	7,869		-		-		-		75		7,944
Total loans held for investment	$	1,337,778	$	39	$	-	$	-	$	4,884	$	1,342,701

(1) At September 30, 2016, $4.2 million of non-accruing loans were current, $0.1 million were 30-59 days past due, $0.1 million were 60-89 days past due, and $0.5 million were 90+ days past due.

	December 31, 2015
			Days Past Due
							90+ and Still		Non-
	Current		30-59		60-89		Accruing		Accruing (1)		Total
	(dollars in thousands)
Non-PCI loans
Real Estate Secured
Commercial	$	571,665	$	-	$	-	$	-	$	1,894	$	573,559
Residential 1 to 4 family	165,176		-		-		-		80		165,256
Farmland	120,483		-		-		-		83		120,566
Multi-family residential	79,381		-		-		-		-		79,381
Construction and land	31,419		-		-		-		3,968		35,387
Home equity lines of credit	31,303		-		-		-		84		31,387
Commercial
Commercial and industrial	162,223		66		195		-		1,541		164,025
Agriculture	62,911		-		-		-		-		62,911
Consumer	6,000		-		-		-		33		6,033
Total non-PCI loans	1,230,561		66		195		-		7,683		1,238,505
PCI loans
Real estate secured
Commercial	5,639		-		-		-		46		5,685
Residential 1 to 4 family	573		-		-		-		-		573
Construction and land	282		-		-		-		-		282
Commercial
Agriculture	1,452		-		-		-		-		1,452
Commercial and industrial	694		-		-		-		89		783
Total PCI loans	8,640		-		-		-		135		8,775
Total loans held for investment	$	1,239,201	$	66	$	195	$	-	$	7,818	$	1,247,280

(1) At December 31, 2015, $6.4 million of non-accruing loans were current, $28 thousand were 30-59 days past due, $26 thousand were 60-89 days past due, and $1.4 million were 90+ days past due.

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2016

Goodwill and Other Intangible Assets

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

	September 30, 2016
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
	(dollars in thousands)
Core deposit intangibles	$	9,261	$	(5,693)	$	3,568

Summary of an estimate for future amortization expense

	September 30, 2016
	Beginning		Estimated		Projected Ending
	Balance		Amortization		Balance
	(dollars in thousands)
Period
Year 2016	$	3,568	$	(215)	$	3,353
Year 2017	3,353		(588)		2,765
Year 2018	2,765		(549)		2,216
Year 2019	2,216		(522)		1,694
Year 2020	1,694		(441)		1,253
Year 2021	1,253		(419)		834

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Share-based Compensation Plans (Tables)

9 Months Ended

Sep. 30, 2016

Share-based Compensation Plans

Summary of activity related to restricted stock granted

	Number of	Average Grant
	Shares	Date Fair Value
Balance December 31, 2015	162,394	$	7.30
Granted	120,818	7.85
Vested	(75,863)	7.39
Forfeited	(17,765)	7.76
Balance September 30, 2016	189,584	$	7.59
Expected to vest as of September 30, 2016	174,099	$	7.57

Summary of activity related to restricted stock units granted

	Settle in Stock
		Average Grant
	Shares	Date Fair Value
Balance, December 31, 2015	-	$	-
Granted	38,104	7.56
Forfeited	(1,388)	7.56
Balance, September 30, 2016	36,716	$	7.56
Expected to vest as of September 30, 2016	24,746	$	7.56

	Settle in Cash
	Shares	Fair Value (1)
Balance, December 31, 2015	-
Granted	80,448
Forfeited	(1,923)
Balance, September 30, 2016	78,525	$	8.20
Expected to vest as of September 30, 2016	62,621	$	8.20

(1)Represents the closing share price of the Company’s common stock as of September 30, 2016.  As of September 30, 2016, the accrued liability for restricted stock units expected to vest that settle in cash was approximately $0.1 million.

Summary of activity related to options that have vested or are expected to vest and exercisable options

	Options Outstanding			Average	Average
	Number	Weighted Average		Remaining	Intrinsic
	of Shares	Exercise Price		Life (years)	Value
Balance, December 31, 2015	932,553	$	7.19
Granted	36,022	7.27
Forfeited	(46,303)	7.50
Exercised	(19,907)	6.38
Balance, September 30, 2016	902,365	$	7.20	7.03	$	1,196,750
Exercisable September 30, 2016	511,663	$	6.99	6.00	$	909,295
Vested and expected to vest as of September 30, 2016	874,999	$	7.19	6.99	$	1,177,621

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

	For the Nine Months Ended
	September 30,
	2016		2015
Expected volatility	31.85%		36.38%
Expected term (years)	5.00		5.00
Dividend yield	3.30%		2.82%
Risk free rate	1.31%		1.54%
Weighted-average grant date fair value	$	1.50	$	1.97

Summary of recognized and unrecognized share based compensation expense

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Compensation expense:
Stock options	$	99	$	126	$	325	$	374
Restricted stock	181		153		464		440
Restricted stock units	66		-		126		-
Total	$	346	$	279	$	915	$	814
Unrecognized compensation expense:
Stock options	$	653	$	1,133
Restricted stock	1,025		982
Restricted stock units	575		-
Total	$	2,253	$	2,115

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Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2016

Shareholders' Equity

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

	Regulatory Standard to Be Considered
	Adequately Capitalized (1)		Well Capitalized (2)	September 30, 2016		December 31, 2015
	Company	Bank	Bank	Company	Bank	Company	Bank
Ratio
Common Equity Tier I Capital Ratio	5.125%	5.125%	6.50%	12.30%	12.23%	12.61%	12.48%
Leverage ratio	4.000%	4.000%	5.00%	9.83%	9.35%	9.90%	9.50%
Tier I Risk-Based Capital Ratio	6.625%	6.625%	8.00%	12.87%	12.23%	13.01%	12.48%
Total Risk-Based Capital Ratio	8.625%	8.625%	10.00%	14.09%	13.46%	14.26%	13.74%

(1) As of September 30, 2016, includes Capital Conservation Buffer of 0.625%.  On a fully phased-in basis, effective January 1, 2019, under Basel III Capital Rules, minimum capital ratios to be considered “adequately capitalized,” including the Capital Conservation Buffer of 2.5%, will be as follows: CET I: 7.0%; Leverage Ratio: 6.5%; Tier I Risk-Based Capital Ratio: 8.5%; Total Risk-Based Capital Ratio: 10.5%.

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

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Earnings Per Share ("EPS") (Tables)

9 Months Ended

Sep. 30, 2016

Earnings Per Share ("EPS")

Schedule of calculation of basic and diluted earnings per common share

	For the Three Months Ended September 30,
	2016			2015
	Net Income		Shares	Net Income		Shares
	(dollars in thousands, except per share data)
Net income	$	4,183		$	4,002
Less: net income allocated to participating securities	(22)			(21)
Net income allocated to common shareholders	$	4,161		$	3,981
Weighted average shares outstanding			34,037,252			34,158,081
Basic earnings per common share	$	0.12		$	0.12
Dilutive effect of share-based compensation awards			145,948			124,286
Weighted average diluted shares outstanding			34,183,200			34,282,367
Diluted earnings per common share	$	0.12		$	0.12

	For the Nine Months Ended September 30,
	2016			2015
	Net Income		Shares	Net Income		Shares
	(dollars in thousands, except per share data)
Net income	$	12,383		$	11,871
Less: accretion on preferred stock	-			(70)
Less: net income allocated to participating securities	(65)			(66)
Net income allocated to common shareholders	$	12,318		$	11,735
Weighted average shares outstanding			34,044,067			34,111,079
Basic earnings per common share (1)	$	0.36		$	0.34
Dilutive effect of share-based compensation awards			129,269			147,285
Weighted average diluted shares outstanding			34,173,336			34,258,364
Diluted earnings per common share	$	0.36		$	0.34

(1)Basic EPS for the nine months ended September 30, 2015 as presented under the two-class method is $0.34 per share ($0.344 per share when extended), compared to the $0.35 per share ($0.345 per share when extended) as presented last year.  This change in rounding is due to the application of the two-class method for presenting EPS, where an allocation of $66 thousand in earnings for the nine months ended September 30, 2015 is made to participating securities, which represent restricted stock awards.

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies.

Schedule of outstanding financial commitments

	September 30,		December 31,
	2016		2015
	(dollars in thousands)
Commitments to extend credit	$	273,129	$	242,125
Standby letters of credit (1)	12,392		12,968
Total commitments and standby letters of credit	$	285,521	$	255,093

(1) Includes a standby letter of credit to one customer in the amount of $10.2 million and $10.4 million at September 30, 2016 and December 31, 2015, respectively.

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Derivative Instruments (Tables)

9 Months Ended

Sep. 30, 2016

Derivative Instrument

Schedule of derivative instruments

	September 30, 2016
	Derivative Assets				Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value
	(dollars in thousands)
Derivative instruments not designated as hedging instruments:
Interest rate swap contracts - pay floating, receive fixed	$	37,116	$	1,910	$	-	$	-
Interest rate swap contracts - pay fixed, receive floating	-		-		37,116		1,910
Total	$	37,116	$	1,910	$	37,116	$	1,910

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Balance Sheet Offsetting (Tables)

9 Months Ended

Sep. 30, 2016

Balance Sheet Offsetting

Schedule of financial instruments eligible for offsetting

							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts Recognized in the Condensed Consolidated Balance Sheets		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts Presented in the Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral		Net Amount
	(dollars in thousands)
September 30, 2016
Financial liabilities:
Derivatives not designated as hedging instruments	$	1,910	$	-	$	1,910	$	-	$	2,100	$	(190)
Total	$	1,910	$	-	$	1,910	$	-	$	2,100	$	(190)

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Summary of Significant Accounting Policies - Nature of Operations (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($) segment	Dec. 31, 2015 USD ($)
Financial instruments the Company measures at fair value on a recurring basis
Total assets	$ 1,988,307	$ 1,899,739
Nature of Operations
Number of reportable operating segments | segment	1
All Non-United States countries
Financial instruments the Company measures at fair value on a recurring basis
Total assets	$ 0
Revenue	$ 0

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Fair Value of Assets and Liabilities - Recurring (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	$ 456,464	$ 450,935
Derivative Liability	1,910
Obligations of U.S. government agencies
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	58,992	47,318
Mortgage-backed securities - U.S. government sponsored entities and agencies
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	247,193	245,235
Mortgage-backed securities - Non-agency
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	25,521	34,317
State and municipal securities
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	115,449	108,406
Asset backed securities
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	9,309	15,627
Other investments
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments		32
Assets At Fair Value
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	456,464	450,935
Assets At Fair Value | Interest rate swaps
Financial instruments the Company measures at fair value on a recurring basis
Derivative assets	1,910
Derivative Liability	1,910
Assets At Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1)
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments		32
Assets At Fair Value | Significant Other Observable Inputs (Level 2)
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	456,464	450,903
Assets At Fair Value | Significant Other Observable Inputs (Level 2) | Interest rate swaps
Financial instruments the Company measures at fair value on a recurring basis
Derivative assets	1,910
Derivative Liability	1,910
Recurring basis
Transfers between level 1 and level 2
Assets transfer from Level 1 to level 2	0	0
Assets transfer from Level 2 to level 1	0	0
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Financial instruments the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis		32
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other investments
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments		32
Recurring basis | Significant Other Observable Inputs (Level 2)
Financial instruments the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	458,374	450,903
Total liabilities measured on a recurring bases	1,910
Recurring basis | Significant Other Observable Inputs (Level 2) | Obligations of U.S. government agencies
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	58,992	47,318
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - U.S. government sponsored entities and agencies
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	247,193	245,235
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - Non-agency
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	25,521	34,317
Recurring basis | Significant Other Observable Inputs (Level 2) | State and municipal securities
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	115,449	108,406
Recurring basis | Significant Other Observable Inputs (Level 2) | Asset backed securities
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	9,309	15,627
Recurring basis | Significant Other Observable Inputs (Level 2) | Interest rate swaps
Financial instruments the Company measures at fair value on a recurring basis
Derivative assets	1,910
Derivative Liability	1,910
Recurring basis | Assets At Fair Value
Financial instruments the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	458,374	450,935
Total liabilities measured on a recurring bases	1,910
Recurring basis | Assets At Fair Value | Obligations of U.S. government agencies
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	58,992	47,318
Recurring basis | Assets At Fair Value | Mortgage-backed securities - U.S. government sponsored entities and agencies
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	247,193	245,235
Recurring basis | Assets At Fair Value | Mortgage-backed securities - Non-agency
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	25,521	34,317
Recurring basis | Assets At Fair Value | State and municipal securities
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	115,449	108,406
Recurring basis | Assets At Fair Value | Asset backed securities
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments	9,309	15,627
Recurring basis | Assets At Fair Value | Other investments
Financial instruments the Company measures at fair value on a recurring basis
Available-for-sale investments		$ 32
Recurring basis | Assets At Fair Value | Interest rate swaps
Financial instruments the Company measures at fair value on a recurring basis
Derivative assets	1,910
Derivative Liability	1,910
Recurring basis | Assets At Fair Value | Significant Unobservable Inputs (Level 3)
Financial instruments the Company measures at fair value on a recurring basis
Total assets measured on a recurring basis	0
Total liabilities measured on a recurring bases	$ 0

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Fair Value of Assets and Liabilities - Non-recurring (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($)
Commercial real estate
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date Losses/(Recoveries) on impaired loans	$ 235
Non-recurring basis
Total Losses for assets measured at fair value on a non-recurring basis
Year to Date Losses/(Recoveries)	235
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 | Significant Other Observable Inputs (Level 2)
Assets
Total assets measured on a non-recurring basis	181
Non-recurring basis | Significant Other Observable Inputs (Level 2) | Commercial real estate
Assets
Impaired loans	181
Non-recurring basis | Assets At Fair Value
Assets
Total assets measured on a non-recurring basis	181
Non-recurring basis | Assets At Fair Value | Commercial real estate
Assets
Impaired loans	$ 181

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Fair Value of Assets and Liabilities - Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Assets
Investment securities available for sale, at fair value	$ 456,464	$ 450,935
Liabilities
Non-interest bearing deposits	570,243	514,559
Junior subordinated debentures	10,572	10,438
Derivative Liability	1,910
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Notional Amount	285,521	255,093
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Cost to Cede or Assume	2,855	2,551
Carrying Amount
Assets
Cash and cash equivalents	65,250	69,923
Investment securities available for sale, at fair value	456,464	450,935
Federal Home Loan Bank stock	7,853	7,853
Loans receivable, net	1,323,912	1,228,696
Loans held for sale	7,975	9,755
Accrued interest receivable	6,116	6,256
Liabilities
Non-interest bearing deposits	570,243	514,559
Interest bearing deposits	1,061,105	1,050,402
Federal Home Loan Bank advances	120,000	103,521
Junior subordinated debentures	10,572	10,438
Accrued interest payable	364	390
Assets At Fair Value
Assets
Cash and cash equivalents	65,250	69,923
Investment securities available for sale, at fair value	456,464	450,935
Loans receivable, net	1,332,933	1,250,903
Loans held for sale	7,975	9,755
Accrued interest receivable	6,116	6,256
Liabilities
Non-interest bearing deposits	570,243	514,559
Interest bearing deposits	1,060,813	1,051,731
Federal Home Loan Bank advances	121,511	104,718
Junior subordinated debentures	8,531	8,195
Accrued interest payable	364	390
Assets At Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Cash and cash equivalents	65,250	69,923
Investment securities available for sale, at fair value		32
Liabilities
Non-interest bearing deposits	570,243	514,559
Assets At Fair Value | Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	456,464	450,903
Loans held for sale	7,975	9,755
Accrued interest receivable	2,416	2,589
Liabilities
Interest bearing deposits	1,060,813	1,051,731
Federal Home Loan Bank advances	121,511	104,718
Accrued interest payable	364	390
Assets At Fair Value | Significant Unobservable Inputs (Level 3)
Assets
Loans receivable, net	1,332,933	1,250,903
Accrued interest receivable	3,700	3,667
Liabilities
Junior subordinated debentures	8,531	8,195
Obligations of U.S. government agencies
Assets
Investment securities available for sale, at fair value	58,992	47,318
Obligations of U.S. government agencies | Recurring basis | Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	58,992	47,318
Obligations of U.S. government agencies | Recurring basis | Assets At Fair Value
Assets
Investment securities available for sale, at fair value	58,992	47,318
Mortgage-backed securities - U.S. government sponsored entities and agencies
Assets
Investment securities available for sale, at fair value	247,193	245,235
Mortgage-backed securities - U.S. government sponsored entities and agencies | Recurring basis | Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	247,193	245,235
Mortgage-backed securities - U.S. government sponsored entities and agencies | Recurring basis | Assets At Fair Value
Assets
Investment securities available for sale, at fair value	247,193	245,235
Mortgage-backed securities - Non-agency
Assets
Investment securities available for sale, at fair value	25,521	34,317
Mortgage-backed securities - Non-agency | Recurring basis | Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	25,521	34,317
Mortgage-backed securities - Non-agency | Recurring basis | Assets At Fair Value
Assets
Investment securities available for sale, at fair value	25,521	34,317
State and municipal securities
Assets
Investment securities available for sale, at fair value	115,449	108,406
State and municipal securities | Recurring basis | Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	115,449	108,406
State and municipal securities | Recurring basis | Assets At Fair Value
Assets
Investment securities available for sale, at fair value	115,449	108,406
Asset backed securities
Assets
Investment securities available for sale, at fair value	9,309	15,627
Asset backed securities | Recurring basis | Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale, at fair value	9,309	15,627
Asset backed securities | Recurring basis | Assets At Fair Value
Assets
Investment securities available for sale, at fair value	9,309	15,627
Other investments
Assets
Investment securities available for sale, at fair value		32
Other investments | Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Investment securities available for sale, at fair value		32
Other investments | Recurring basis | Assets At Fair Value
Assets
Investment securities available for sale, at fair value		$ 32
Interest rate swaps | Carrying Amount
Assets
Derivative Asset	1,910
Liabilities
Derivative Liability	1,910
Interest rate swaps | Assets At Fair Value
Assets
Derivative Asset	1,910
Liabilities
Derivative Liability	1,910
Interest rate swaps | Assets At Fair Value | Significant Other Observable Inputs (Level 2)
Assets
Derivative Asset	1,910
Liabilities
Derivative Liability	1,910
Interest rate swaps | Recurring basis | Significant Other Observable Inputs (Level 2)
Assets
Derivative Asset	1,910
Liabilities
Derivative Liability	1,910
Interest rate swaps | Recurring basis | Assets At Fair Value
Assets
Derivative Asset	1,910
Liabilities
Derivative Liability	$ 1,910

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Investment Securities - Fair Value (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	$ 449,771	$ 450,131
Gross Unrealized Gains	8,723	4,741
Gross Unrealized Losses	(2,030)	(3,937)
Fair Value	456,464	450,935
Obligations of U.S. government agencies
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	59,223	47,478
Gross Unrealized Gains	218	269
Gross Unrealized Losses	(449)	(429)
Fair Value	58,992	47,318
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	246,284	246,561
Gross Unrealized Gains	2,205	986
Gross Unrealized Losses	(1,296)	(2,312)
Fair Value	247,193	245,235
Mortgage-backed securities - Non-agency
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	25,318	34,645
Gross Unrealized Gains	223
Gross Unrealized Losses	(20)	(328)
Fair Value	25,521	34,317
State and municipal securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	109,443	105,164
Gross Unrealized Gains	6,077	3,486
Gross Unrealized Losses	(71)	(244)
Fair Value	115,449	108,406
Asset backed securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total	9,503	16,183
Gross Unrealized Losses	(194)	(556)
Fair Value	$ 9,309	15,627
Other investments
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Total		100
Gross Unrealized Losses		(68)
Fair Value		$ 32

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Investment Securities - Unrealized Losses (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($) security	Dec. 31, 2015 USD ($) security
Investment securities
Less Than Twelve Months, Fair Value	$ 97,384	$ 213,195
Less Than Twelve Months, Unrealized Loss	(946)	(2,542)
Twelve Months or More, Fair Value	57,945	50,336
Twelve Months or More, Unrealized Loss	(1,084)	(1,395)
Total, Fair Value	155,329	263,531
Total, Unrealized Loss	$ (2,030)	$ (3,937)
Securities in an unrealized loss position
Securities in an unrealized loss position | security	58	104
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	$ 21,361	$ 34,533
Less Than Twelve Months, Unrealized Loss	(49)	(429)
Twelve Months or More, Fair Value	23,291
Twelve Months or More, Unrealized Loss	(400)
Total, Fair Value	44,652	34,533
Total, Unrealized Loss	(449)	(429)
Mortgage-backed securities - U.S. government sponsored entities and agencies
Investment securities
Less Than Twelve Months, Fair Value	64,304	131,570
Less Than Twelve Months, Unrealized Loss	(823)	(1,485)
Twelve Months or More, Fair Value	22,102	31,558
Twelve Months or More, Unrealized Loss	(473)	(827)
Total, Fair Value	86,406	163,128
Total, Unrealized Loss	(1,296)	(2,312)
Mortgage-backed securities - Non-agency
Investment securities
Less Than Twelve Months, Fair Value	5,996	31,400
Less Than Twelve Months, Unrealized Loss	(3)	(317)
Twelve Months or More, Fair Value	3,243	2,917
Twelve Months or More, Unrealized Loss	(17)	(11)
Total, Fair Value	9,239	34,317
Total, Unrealized Loss	(20)	(328)
State and municipal securities
Investment securities
Less Than Twelve Months, Fair Value	5,723	15,660
Less Than Twelve Months, Unrealized Loss	(71)	(243)
Twelve Months or More, Fair Value		235
Twelve Months or More, Unrealized Loss		(1)
Total, Fair Value	5,723	15,895
Total, Unrealized Loss	(71)	(244)
Asset backed securities
Investment securities
Twelve Months or More, Fair Value	9,309	15,626
Twelve Months or More, Unrealized Loss	(194)	(556)
Total, Fair Value	9,309	15,626
Total, Unrealized Loss	$ (194)	(556)
Other investments
Investment securities
Less Than Twelve Months, Fair Value		32
Less Than Twelve Months, Unrealized Loss		(68)
Total, Fair Value		32
Total, Unrealized Loss		$ (68)

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Investment Securities - Proceeds (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Proceeds from the sales and calls of securities and the associated gains and losses
Proceeds	$ 25,905	$ 8,656	$ 101,482	$ 55,184
Gross gains	271	136	1,291	815
Gross losses			(382)	(174)
Income tax expense related to net realized gains on sale of securities	$ 100	$ 57	$ 400	$ 300

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Investment Securities - MBS Maturities (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Available for sale securities, Amortized cost
Due one year or less	$ 46,457	$ 51,049
Due after one year through five years	151,110	153,444
Due after five years through ten years	179,623	182,996
Due after ten years	72,581	62,642
Total	449,771	450,131
Available for sale securities, Fair Value
Due one year or less	46,563	50,978
Due after one year through five years	151,910	152,916
Due after five years through ten years	184,979	184,870
Due after ten years	73,012	62,171
Total	456,464	450,935
Securities pledged to secure public deposits
Available for sale securities, Amortized cost
Total	145,800	153,900
Available for sale securities, Fair Value
Total	$ 149,900	$ 155,200

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Investment Securities - Investment Income (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Earnings on both taxable and tax-exempt investment securities
Total	$ 2,215	$ 1,864	$ 6,604	$ 5,193
Mortgage backed securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	1,131	938	3,589	2,529
Obligations of U.S. government agencies
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	272	161	617	487
State and municipal securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	145	151	477	339
Earnings on investment securities exempt from federal taxation	640	581	1,826	1,725
Asset backed securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	$ 27	$ 33	$ 95	$ 113

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Loans and Allowance for Loan and Lease Losses - Loan Balances (Details) $ in Thousands	3 Months Ended		9 Months Ended		21 Months Ended
	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) loan	Jun. 30, 2016 USD ($)	Dec. 31, 2015 USD ($)	Jun. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
Outstanding loan balances
Total gross loans held for investment	$ 1,342,701		$ 1,342,701		$ 1,342,701		$ 1,247,280
Net deferred loan fees	(1,146)		(1,146)		(1,146)		(1,132)
Allowance for loan and lease losses	(17,643)	$ (17,296)	(17,643)	$ (17,296)	(17,643)	$ (17,448)	(17,452)	$ (16,982)	$ (16,802)
Net loans held for investment	1,323,912		1,323,912		1,323,912		1,228,696
Loans held for sale	7,975		7,975		7,975		9,755
Concentration of Credit Risk
Loan portfolio collateralized by various forms of real estate	1,100,000		1,100,000		1,100,000		1,000,000
Pledged Loans
Loans pledged as collateral to FHLB	730,000		730,000		730,000
FHLB secured credit facility	374,500		374,500		374,500
FHLB secured line of credit	10,200		10,200		10,200
Loans Serviced for Others
Unpaid principal balance of loans serviced for others, exclusive of SBA loans	30,300		30,300		30,300		38,000
Unpaid principal balance of SBA loans serviced for others	6,700		6,700		$ 6,700		8,500
Number of SBA loans sold | loan					0
Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	1,334,757		1,334,757		$ 1,334,757		1,238,505
Net deferred loan fees	(1,146)		(1,146)		(1,146)		(1,132)
Allowance for loan and lease losses	(17,577)		(17,577)		(17,577)		(17,373)
Net loans held for investment	1,316,034		1,316,034		1,316,034		1,220,000
Loans held for sale	7,975		7,975		7,975		9,755
PCI loans
Outstanding loan balances
Total gross loans held for investment	7,944		7,944		7,944		8,775
Allowance for loan and lease losses	(66)		(66)		(66)		(79)
Net loans held for investment	7,878		7,878		7,878		8,696
Unpaid Principal Balance	9,743		9,743		9,743		11,107
Carrying Amount	7,944		7,944		7,944		8,775
Accretable yield, or income expected to be collected
Balance at the beginning of the period	3,269	4,464	3,821	4,374	4,374
Accretion of income	(210)	(258)	(865)	(1,190)
Changes in expected cash flows	(144)	(161)	(41)	861
Balance at the end of the period	2,915	4,045	2,915	4,045	2,915
MISN | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	141,500		141,500		141,500		163,800
Real Estate Secured
Outstanding loan balances
Total gross loans held for investment	1,097,304		1,097,304		1,097,304		1,012,076
Real Estate Secured | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	1,091,326		1,091,326		1,091,326		1,005,536
Real Estate Secured | PCI loans
Outstanding loan balances
Total gross loans held for investment	5,978		5,978		5,978		6,540
Unpaid Principal Balance	7,454		7,454		7,454		8,396
Carrying Amount	5,978		5,978		5,978		6,540
Real Estate Secured | Commercial real estate
Outstanding loan balances
Total gross loans held for investment	635,846		635,846		635,846		579,244
Real Estate Secured | Commercial real estate | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	630,232		630,232		630,232		573,559
Real Estate Secured | Commercial real estate | PCI loans
Outstanding loan balances
Total gross loans held for investment	5,614		5,614		5,614		5,685
Unpaid Principal Balance	6,936		6,936		6,936		7,139
Carrying Amount	5,614		5,614		5,614		5,685
Real Estate Secured | Residential 1 to 4 family
Outstanding loan balances
Total gross loans held for investment	195,453		195,453		195,453		165,829
Real Estate Secured | Residential 1 to 4 family | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	195,330		195,330		195,330		165,256
Real Estate Secured | Residential 1 to 4 family | PCI loans
Outstanding loan balances
Total gross loans held for investment	123		123		123		573
Unpaid Principal Balance	196		196		196		875
Carrying Amount	123		123		123		573
Real Estate Secured | Farmland
Outstanding loan balances
Total gross loans held for investment	132,723		132,723		132,723		120,566
Real Estate Secured | Farmland | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	132,723		132,723		132,723		120,566
Real Estate Secured | Multi-family residential
Outstanding loan balances
Total gross loans held for investment	81,536		81,536		81,536		79,381
Real Estate Secured | Multi-family residential | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	81,536		81,536		81,536		79,381
Real Estate Secured | Construction and land
Outstanding loan balances
Total gross loans held for investment	26,836		26,836		26,836		35,669
Real Estate Secured | Construction and land | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	26,595		26,595		26,595		35,387
Real Estate Secured | Construction and land | PCI loans
Outstanding loan balances
Total gross loans held for investment	241		241		241		282
Unpaid Principal Balance	322		322		322		382
Carrying Amount	241		241		241		282
Real Estate Secured | Home equity lines of credit
Outstanding loan balances
Total gross loans held for investment	24,910		24,910		24,910		31,387
Real Estate Secured | Home equity lines of credit | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	24,910		24,910		24,910		31,387
Commercial
Outstanding loan balances
Total gross loans held for investment	240,927		240,927		240,927		229,171
Allowance for loan and lease losses	(5,706)	(5,485)	(5,706)	(5,485)	(5,706)	(5,609)	(5,372)	(4,993)	(5,125)
Commercial | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	238,961		238,961		238,961		226,936
Commercial | PCI loans
Outstanding loan balances
Total gross loans held for investment	1,966		1,966		1,966		2,235
Unpaid Principal Balance	2,289		2,289		2,289		2,711
Carrying Amount	1,966		1,966		1,966		2,235
Commercial | Commercial and industrial
Outstanding loan balances
Total gross loans held for investment	185,199		185,199		185,199		164,808
Commercial | Commercial and industrial | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	184,698		184,698		184,698		164,025
Commercial | Commercial and industrial | PCI loans
Outstanding loan balances
Total gross loans held for investment	501		501		501		783
Unpaid Principal Balance	789		789		789		1,211
Carrying Amount	501		501		501		783
Commercial | Agriculture
Outstanding loan balances
Total gross loans held for investment	55,728		55,728		55,728		64,363
Commercial | Agriculture | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	54,263		54,263		54,263		62,911
Commercial | Agriculture | PCI loans
Outstanding loan balances
Total gross loans held for investment	1,465		1,465		1,465		1,452
Unpaid Principal Balance	1,500		1,500		1,500		1,500
Carrying Amount	1,465		1,465		1,465		1,452
Consumer
Outstanding loan balances
Total gross loans held for investment	4,470		4,470		4,470		6,033
Allowance for loan and lease losses	(144)	$ (191)	(144)	$ (191)	(144)	$ (182)	(173)	$ (171)	$ (202)
Consumer | Non-PCI Loans
Outstanding loan balances
Total gross loans held for investment	$ 4,470		$ 4,470		$ 4,470		$ 6,033

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Loans and Allowance for Loan and Lease Losses - Impaired Loans (Details)	3 Months Ended			6 Months Ended	9 Months Ended		21 Months Ended
	Sep. 30, 2016 USD ($) loan	Sep. 30, 2015 USD ($)	Jun. 30, 2015 USD ($)	Jun. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) loan	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) loan	Dec. 31, 2015 USD ($)
Investment in impaired loans
Interest loss related to rate concessions on certain TDRs	$ 100,000	$ 200,000			$ 300,000	$ 500,000
Interest and Fee Income, Loans and Leases	$ 15,222,000	14,781,000			$ 45,152,000	44,454,000
Foreclosures
Number of foreclosures | loan	0				0		0
Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	$ 12,224,000				$ 12,224,000		$ 12,224,000	$ 13,524,000
Recorded investment with related allowance	1,976,000				1,976,000		1,976,000	2,779,000
Unpaid principal balance without related allowance	18,580,000				18,580,000		18,580,000	20,006,000
Unpaid principal balance with related allowance	2,046,000				2,046,000		2,046,000	3,037,000
Specific Allowance for Impaired Loans	208,000				208,000		208,000	254,000
Average recorded investment without related allowance	12,753,000	11,087,000			13,762,000	11,596,000
Average recorded investment with related allowance	2,042,000	5,989,000			2,058,000	5,762,000
Interest income recognized without related allowance	127,000	94,000			389,000	275,000
Interest income recognized with related allowance	26,000	22,000			71,000	50,000
Recorded Investment	14,200,000				14,200,000		14,200,000	16,303,000
Unpaid Principal Balance	20,626,000				20,626,000		20,626,000	23,043,000
Average Recorded Investment	14,795,000	17,076,000			15,820,000	17,358,000
Interest Income Recognized	153,000	116,000			460,000	325,000
PCI loans
Investment in impaired loans
Recorded investment without related allowance	6,860,000				6,860,000		6,860,000	7,531,000
Recorded investment with related allowance	1,084,000				1,084,000		1,084,000	1,244,000
Unpaid principal balance without related allowance	8,657,000				8,657,000		8,657,000	9,840,000
Unpaid principal balance with related allowance	1,086,000				1,086,000		1,086,000	1,267,000
Specific Allowance for Impaired Loans	66,000				66,000		66,000	79,000
Average recorded investment without related allowance	6,871,000		$ 8,290,000	$ 8,535,000	7,191,000
Average recorded investment with related allowance	1,109,000		1,281,000	1,308,000	1,153,000
Interest income recognized without related allowance	194,000		233,000	1,104,000	809,000
Interest income recognized with related allowance	16,000		25,000	86,000	56,000
Recorded Investment	7,944,000				7,944,000		7,944,000	8,775,000
Unpaid Principal Balance	9,743,000				9,743,000		9,743,000	11,107,000
Average Recorded Investment	7,980,000		9,571,000	9,843,000	8,344,000
Interest Income Recognized	$ 210,000		258,000	1,190,000	$ 865,000
Interest and Fee Income, Loans and Leases							$ 9
Residential 1 to 4 family
Foreclosures
Number of foreclosures | loan	0				0		0
Foreclosed assets	$ 0				$ 0		$ 0
Real Estate Secured | Commercial real estate | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	2,231,000				2,231,000		2,231,000	3,855,000
Recorded investment with related allowance	281,000				281,000		281,000	435,000
Unpaid principal balance without related allowance	3,347,000				3,347,000		3,347,000	5,328,000
Unpaid principal balance with related allowance	300,000				300,000		300,000	665,000
Specific Allowance for Impaired Loans	27,000				27,000		27,000	59,000
Average recorded investment without related allowance	2,330,000	4,247,000			3,146,000	4,158,000
Average recorded investment with related allowance	282,000	461,000			287,000	476,000
Interest income recognized without related allowance	28,000	36,000			90,000	110,000
Interest income recognized with related allowance	4,000				12,000
Real Estate Secured | Commercial real estate | PCI loans
Investment in impaired loans
Recorded investment without related allowance	5,105,000				5,105,000		5,105,000	5,156,000
Recorded investment with related allowance	509,000				509,000		509,000	529,000
Unpaid principal balance without related allowance	6,425,000				6,425,000		6,425,000	6,601,000
Unpaid principal balance with related allowance	511,000				511,000		511,000	538,000
Specific Allowance for Impaired Loans	37,000				37,000		37,000	41,000
Average recorded investment without related allowance	5,110,000		5,189,000	5,297,000	5,128,000
Average recorded investment with related allowance	513,000		537,000	536,000	520,000
Interest income recognized without related allowance	135,000		122,000	807,000	381,000
Interest income recognized with related allowance	7,000		10,000	38,000	26,000
Real Estate Secured | Residential 1 to 4 family | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	490,000				490,000		490,000	694,000
Unpaid principal balance without related allowance	640,000				640,000		640,000	860,000
Average recorded investment without related allowance	382,000	748,000			435,000	602,000
Interest income recognized without related allowance	8,000	10,000			18,000	12,000
Real Estate Secured | Residential 1 to 4 family | PCI loans
Investment in impaired loans
Recorded investment without related allowance	123,000				123,000		123,000	573,000
Unpaid principal balance without related allowance	196,000				196,000		196,000	875,000
Average recorded investment without related allowance	122,000		566,000	565,000	348,000
Interest income recognized without related allowance	4,000		18,000	48,000	253,000
Real Estate Secured | Construction and land | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	4,185,000				4,185,000		4,185,000	5,138,000
Unpaid principal balance without related allowance	8,884,000				8,884,000		8,884,000	9,615,000
Average recorded investment without related allowance	4,511,000	1,556,000			4,864,000	1,798,000
Interest income recognized without related allowance	16,000	24,000			57,000	71,000
Real Estate Secured | Construction and land | PCI loans
Investment in impaired loans
Recorded investment without related allowance	60,000				60,000		60,000	53,000
Recorded investment with related allowance	181,000				181,000		181,000	229,000
Unpaid principal balance without related allowance	141,000				141,000		141,000	152,000
Unpaid principal balance with related allowance	181,000				181,000		181,000	230,000
Specific Allowance for Impaired Loans	5,000				5,000		5,000	5,000
Average recorded investment without related allowance	60,000		553,000	556,000	57,000
Average recorded investment with related allowance	191,000		254,000	272,000	205,000
Interest income recognized without related allowance	7,000		19,000	58,000	25,000
Interest income recognized with related allowance	3,000		5,000	15,000	10,000
Real Estate Secured | Farmland | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	325,000				325,000		325,000	587,000
Unpaid principal balance without related allowance	331,000				331,000		331,000	588,000
Average recorded investment without related allowance	363,000	385,000			564,000	558,000
Interest income recognized without related allowance	5,000	7,000			28,000	26,000
Real Estate Secured | Land | Non-PCI Loans
Investment in impaired loans
Average recorded investment with related allowance		4,084,000				4,147,000
Real Estate Secured | Home equity lines of credit | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	84,000				84,000		84,000	85,000
Unpaid principal balance without related allowance	86,000				86,000		86,000	86,000
Average recorded investment without related allowance	84,000	85,000			75,000	119,000
Commercial | Agriculture | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	1,778,000				1,778,000		1,778,000	724,000
Recorded investment with related allowance	341,000				341,000		341,000	400,000
Unpaid principal balance without related allowance	1,869,000				1,869,000		1,869,000	815,000
Unpaid principal balance with related allowance	351,000				351,000		351,000	400,000
Specific Allowance for Impaired Loans	81,000				81,000		81,000	39,000
Average recorded investment without related allowance	1,573,000	654,000			1,182,000	671,000
Average recorded investment with related allowance	352,000				372,000
Interest income recognized without related allowance	18,000	6,000			39,000	7,000
Interest income recognized with related allowance	3,000				6,000
Commercial | Agriculture | PCI loans
Investment in impaired loans
Recorded investment without related allowance	1,465,000				1,465,000		1,465,000	1,452,000
Unpaid principal balance without related allowance	1,500,000				1,500,000		1,500,000	1,500,000
Average recorded investment without related allowance	1,462,000		1,440,000	1,437,000	1,458,000
Interest income recognized without related allowance	30,000		30,000	87,000	87,000
Commercial | Commercial and industrial | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	2,996,000				2,996,000		2,996,000	2,295,000
Recorded investment with related allowance	1,354,000				1,354,000		1,354,000	1,944,000
Unpaid principal balance without related allowance	3,255,000				3,255,000		3,255,000	2,510,000
Unpaid principal balance with related allowance	1,395,000				1,395,000		1,395,000	1,972,000
Specific Allowance for Impaired Loans	100,000				100,000		100,000	156,000
Average recorded investment without related allowance	3,329,000	3,252,000			3,333,000	3,541,000
Average recorded investment with related allowance	1,408,000	1,444,000			1,399,000	1,139,000
Interest income recognized without related allowance	51,000	10,000			153,000	45,000
Interest income recognized with related allowance	19,000	22,000			53,000	50,000
Commercial | Commercial and industrial | PCI loans
Investment in impaired loans
Recorded investment without related allowance	107,000				107,000		107,000	297,000
Recorded investment with related allowance	394,000				394,000		394,000	486,000
Unpaid principal balance without related allowance	395,000				395,000		395,000	712,000
Unpaid principal balance with related allowance	394,000				394,000		394,000	499,000
Specific Allowance for Impaired Loans	24,000				24,000		24,000	33,000
Average recorded investment without related allowance	117,000		542,000	680,000	200,000
Average recorded investment with related allowance	405,000		490,000	500,000	428,000
Interest income recognized without related allowance	18,000		44,000	104,000	63,000
Interest income recognized with related allowance	6,000		$ 10,000	$ 33,000	20,000
Consumer | Non-PCI Loans
Investment in impaired loans
Recorded investment without related allowance	135,000				135,000		135,000	146,000
Unpaid principal balance without related allowance	168,000				168,000		$ 168,000	$ 204,000
Average recorded investment without related allowance	181,000	160,000			163,000	149,000
Interest income recognized without related allowance	$ 1,000	$ 1,000			$ 4,000	$ 4,000

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Loans and Allowance for Loan and Lease Losses - TDRs (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016 USD ($) loan	Sep. 30, 2015 USD ($) item	Sep. 30, 2016 USD ($) loan item	Sep. 30, 2015 USD ($) item	Dec. 31, 2015 USD ($)
Troubled debt restructurings
Allowance for credit losses of receivables, identified as TDRs under the newly adopted provisions	$ 200		$ 200
Accruing loans that were classified as TDRs	10,747		10,747		$ 10,056
Non-Accruing loans that were classified as TDRs	4,243		4,243		6,203
Total loans classified as TDRs	$ 14,990		$ 14,990		16,259
Number of TDRs	4	12	18	37
Pre-Modification Outstanding Recorded Investment	$ 426	$ 2,254	$ 1,964	$ 7,906
Post-Modification Outstanding Recorded Investment	426	$ 2,254	$ 1,964	$ 7,906
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	9,392		$ 9,392		8,619
Non-Accruing loans that were classified as TDRs	4,182		4,182		6,091
Total loans classified as TDRs	13,574		$ 13,574		14,710
Number of TDRs | item		10		30
Pre-Modification Outstanding Recorded Investment		$ 1,409		$ 6,366
Post-Modification Outstanding Recorded Investment		$ 1,409		$ 6,366
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs | item			1	1
Recorded Investment			$ 80	$ 18
Non-PCI Loans | Real Estate Secured | Commercial real estate
Troubled debt restructurings
Accruing loans that were classified as TDRs	2,252		2,252		2,395
Non-Accruing loans that were classified as TDRs	115		115		435
Total loans classified as TDRs	2,367		2,367		2,830
Number of TDRs | item				4
Pre-Modification Outstanding Recorded Investment				$ 670
Post-Modification Outstanding Recorded Investment				$ 670
Non-PCI Loans | Real Estate Secured | Land
Troubled debt restructurings
Number of TDRs | item				1
Pre-Modification Outstanding Recorded Investment				$ 97
Post-Modification Outstanding Recorded Investment				$ 97
Non-PCI Loans | Real Estate Secured | Construction and land
Troubled debt restructurings
Accruing loans that were classified as TDRs	742		742		1,171
Non-Accruing loans that were classified as TDRs	3,233		3,233		3,968
Total loans classified as TDRs	3,975		3,975		5,139
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Troubled debt restructurings
Accruing loans that were classified as TDRs	490		490		613
Non-Accruing loans that were classified as TDRs					81
Total loans classified as TDRs	490		490		694
Number of TDRs | item		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	250		250		504
Non-Accruing loans that were classified as TDRs	74		74		82
Total loans classified as TDRs	324		$ 324		586
Number of TDRs | item		1		2
Pre-Modification Outstanding Recorded Investment		$ 232		$ 730
Post-Modification Outstanding Recorded Investment		$ 232		$ 730
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs | item			1
Recorded Investment			$ 80
Non-PCI Loans | Commercial | Commercial and industrial
Troubled debt restructurings
Accruing loans that were classified as TDRs	3,432		3,432		2,698
Non-Accruing loans that were classified as TDRs	751		751		1,515
Total loans classified as TDRs	$ 4,183		$ 4,183		4,213
Number of TDRs	3	4	16	13
Pre-Modification Outstanding Recorded Investment	$ 204	$ 323	$ 1,732	$ 2,436
Post-Modification Outstanding Recorded Investment	204	$ 323	1,732	$ 2,436
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs | item				1
Recorded Investment				$ 18
Non-PCI Loans | Commercial | Agriculture
Troubled debt restructurings
Accruing loans that were classified as TDRs	2,119		2,119		1,124
Total loans classified as TDRs	$ 2,119		$ 2,119		1,124
Number of TDRs	0	3	1	4
Pre-Modification Outstanding Recorded Investment	$ 0	$ 714	$ 10	$ 1,612
Post-Modification Outstanding Recorded Investment	0	$ 714	10	$ 1,612
Non-PCI Loans | Consumer
Troubled debt restructurings
Accruing loans that were classified as TDRs	107		107		114
Non-Accruing loans that were classified as TDRs	9		9		10
Total loans classified as TDRs	116		116		124
Number of TDRs | item		1		2
Pre-Modification Outstanding Recorded Investment		$ 11		$ 68
Post-Modification Outstanding Recorded Investment		$ 11		$ 68
PCI loans
Troubled debt restructurings
Accruing loans that were classified as TDRs	1,355		1,355		1,437
Non-Accruing loans that were classified as TDRs	61		61		112
Total loans classified as TDRs	1,416		1,416		1,549
Number of TDRs | item		2		7
Pre-Modification Outstanding Recorded Investment		$ 845		$ 1,540
Post-Modification Outstanding Recorded Investment		$ 845		$ 1,540
PCI loans | Real Estate Secured | Commercial real estate
Troubled debt restructurings
Accruing loans that were classified as TDRs	901		901		922
Non-Accruing loans that were classified as TDRs	24		24		46
Total loans classified as TDRs	925		925		968
Number of TDRs | item		1		5
Pre-Modification Outstanding Recorded Investment		$ 348		$ 993
Post-Modification Outstanding Recorded Investment		$ 348		$ 993
PCI loans | Real Estate Secured | Land
Troubled debt restructurings
Number of TDRs | item				1
Pre-Modification Outstanding Recorded Investment				$ 50
Post-Modification Outstanding Recorded Investment				$ 50
PCI loans | Real Estate Secured | Construction and land
Troubled debt restructurings
Accruing loans that were classified as TDRs	60		60		54
Total loans classified as TDRs	60		60		54
PCI loans | Commercial | Commercial and industrial
Troubled debt restructurings
Accruing loans that were classified as TDRs	394		394		461
Non-Accruing loans that were classified as TDRs	37		37		66
Total loans classified as TDRs	$ 431		$ 431		$ 527

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Loans and Allowance for Loan and Lease Losses - ALLL Activity (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended	21 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015	Sep. 30, 2016
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	$ 17,448	$ 16,982	$ 17,452	$ 16,802	$ 16,802	$ 16,802
Charge-offs	(25)	(45)	(41)	(282)
Recoveries	220	359	1,232	776
(Reversal of) provision for loan and lease losses			(1,000)
Balance, at the end of the period	17,643	17,296	17,643	17,296	17,452	17,643
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment	208		208		254	208
Allowance for loan and lease losses collectively evaluated for impairment	17,369		17,369		17,119	17,369
Recorded investment in loan individually evaluated for impairment	14,200		14,200		16,303	14,200
Recorded investment in loan collectively evaluated for impairment	1,320,557		1,320,557		1,222,202	1,320,557
Total gross loans held for investment	1,342,701		1,342,701		1,247,280	1,342,701
Reserve for off-balance sheet commitments						500
Receivables Acquired with Deteriorated Credit Quality
Amount of allowance attributed to:
Allowance for Loans acquired with deteriorated credit quality	66		66		79	66
Recorded investment in loans acquired with deteriorated credit quality	7,944		7,944		8,775	7,944
Non-PCI Loans
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period			17,373
Balance, at the end of the period	17,577		17,577		17,373	17,577
Amount of allowance attributed to:
Total gross loans held for investment	1,334,757		1,334,757		1,238,505	1,334,757
PCI loans
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period			79
Balance, at the end of the period	66		66		79	66
Amount of allowance attributed to:
Total gross loans held for investment	7,944		7,944		8,775	7,944
Allowance for losses on acquired loans and leases			100		100
MISN | Non-PCI Loans
Amount of allowance attributed to:
Total gross loans held for investment	141,500		141,500		163,800	141,500
Allowance for losses on acquired loans and leases			200		200
MISN | Non-PCI & PCI Loans
Amount of allowance attributed to:
Total gross loans held for investment	149,400		149,400			149,400
Commercial
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	5,609	4,993	5,372	5,125	5,125	5,125
Charge-offs	(5)	(44)	(17)	(187)
Recoveries	194	327	424	636
(Reversal of) provision for loan and lease losses	(92)	209	(73)	(89)
Balance, at the end of the period	5,706	5,485	5,706	5,485	5,372	5,706
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment	181		181		195	181
Allowance for loan and lease losses collectively evaluated for impairment	5,501		5,501		5,144	5,501
Recorded investment in loan individually evaluated for impairment	6,469		6,469		5,363	6,469
Recorded investment in loan collectively evaluated for impairment	232,492		232,492		221,573	232,492
Total gross loans held for investment	240,927		240,927		229,171	240,927
Commercial | Receivables Acquired with Deteriorated Credit Quality
Amount of allowance attributed to:
Allowance for Loans acquired with deteriorated credit quality	24		24		33	24
Recorded investment in loans acquired with deteriorated credit quality	1,966		1,966		2,235	1,966
Commercial | Non-PCI Loans
Amount of allowance attributed to:
Total gross loans held for investment	238,961		238,961		226,936	238,961
Commercial | PCI loans
Amount of allowance attributed to:
Total gross loans held for investment	1,966		1,966		2,235	1,966
Construction and land
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	491	1,940	623	2,000	2,000	2,000
Charge-offs				(34)
Recoveries	17	24	161	48
(Reversal of) provision for loan and lease losses	(191)	(599)	(467)	(649)
Balance, at the end of the period	317	1,365	317	1,365	623	317
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment	312		312		618	312
Recorded investment in loan individually evaluated for impairment	4,185		4,185		5,138	4,185
Recorded investment in loan collectively evaluated for impairment	22,410		22,410		30,249	22,410
Construction and land | Receivables Acquired with Deteriorated Credit Quality
Amount of allowance attributed to:
Allowance for Loans acquired with deteriorated credit quality	5		5		5	5
Recorded investment in loans acquired with deteriorated credit quality	241		241		282	241
Consumer
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	182	171	173	202	202	202
Charge-offs	(20)	(1)	(24)	(6)
Recoveries	3	3	15	11
(Reversal of) provision for loan and lease losses	(21)	18	(20)	(16)
Balance, at the end of the period	144	191	144	191	173	144
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment	144		144		173	144
Recorded investment in loan individually evaluated for impairment	135		135		146	135
Recorded investment in loan collectively evaluated for impairment	4,335		4,335		5,887	4,335
Total gross loans held for investment	4,470		4,470		6,033	4,470
Consumer | Non-PCI Loans
Amount of allowance attributed to:
Total gross loans held for investment	4,470		4,470		6,033	4,470
Unallocated
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	512	243	123	346	346	346
(Reversal of) provision for loan and lease losses	129	(243)	518	(346)
Balance, at the end of the period	641		641		123	641
Amount of allowance attributed to:
Allowance for loan and lease losses collectively evaluated for impairment	641		641		123	641
Other real estate secured
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	10,654	9,635	11,161	9,129	9,129	9,129
Charge-offs				(55)
Recoveries	6	5	632	81
(Reversal of) provision for loan and lease losses	175	615	(958)	1,100
Balance, at the end of the period	10,835	$ 10,255	10,835	$ 10,255	11,161	10,835
Amount of allowance attributed to:
Allowance for loan and lease losses individually evaluated for impairment	27		27		59	27
Allowance for loan and lease losses collectively evaluated for impairment	10,771		10,771		11,061	10,771
Recorded investment in loan individually evaluated for impairment	3,411		3,411		5,656	3,411
Recorded investment in loan collectively evaluated for impairment	1,061,320		1,061,320		964,493	1,061,320
Other real estate secured | Receivables Acquired with Deteriorated Credit Quality
Amount of allowance attributed to:
Allowance for Loans acquired with deteriorated credit quality	37		37		41	37
Recorded investment in loans acquired with deteriorated credit quality	$ 5,737		$ 5,737		$ 6,258	$ 5,737

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Loans and Allowance for Loan and Lease Losses - Credit Quality (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Non-PCI loans by the internal risk grading system
Total Gross loans	$ 1,342,701	$ 1,247,280
Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	1,282,440	1,190,282
Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	15,090	12,048
Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	45,171	44,950
Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	1,097,304	1,012,076
Real Estate Secured | Commercial real estate
Non-PCI loans by the internal risk grading system
Total Gross loans	635,846	579,244
Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	195,453	165,829
Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans	132,723	120,566
Real Estate Secured | Multi-family residential
Non-PCI loans by the internal risk grading system
Total Gross loans	81,536	79,381
Real Estate Secured | Construction and land
Non-PCI loans by the internal risk grading system
Total Gross loans	26,836	35,669
Real Estate Secured | Home equity lines of credit
Non-PCI loans by the internal risk grading system
Total Gross loans	24,910	31,387
Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	240,927	229,171
Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	185,199	164,808
Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	55,728	64,363
Consumer
Non-PCI loans by the internal risk grading system
Total Gross loans	4,470	6,033
Non-PCI Loans
Non-PCI loans by the internal risk grading system
Total Gross loans	1,334,757	1,238,505
Non-PCI Loans | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	1,281,371	1,189,524
Non-PCI Loans | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	12,726	10,819
Non-PCI Loans | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	40,660	38,162
Non-PCI Loans | Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	1,091,326	1,005,536
Non-PCI Loans | Real Estate Secured | Commercial real estate
Non-PCI loans by the internal risk grading system
Total Gross loans	630,232	573,559
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	605,020	545,614
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	7,225	4,402
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	17,987	23,543
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	195,330	165,256
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	194,615	164,226
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	222	405
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	493	625
Non-PCI Loans | Real Estate Secured | Farmland
Non-PCI loans by the internal risk grading system
Total Gross loans	132,723	120,566
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	130,053	118,740
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	1,400	245
Non-PCI Loans | Real Estate Secured | Farmland | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	1,270	1,581
Non-PCI Loans | Real Estate Secured | Multi-family residential
Non-PCI loans by the internal risk grading system
Total Gross loans	81,536	79,381
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	81,536	79,381
Non-PCI Loans | Real Estate Secured | Construction and land
Non-PCI loans by the internal risk grading system
Total Gross loans	26,595	35,387
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	23,030	30,219
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		939
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	3,565	4,229
Non-PCI Loans | Real Estate Secured | Home equity lines of credit
Non-PCI loans by the internal risk grading system
Total Gross loans	24,910	31,387
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	24,694	31,103
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	216	284
Non-PCI Loans | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	238,961	226,936
Non-PCI Loans | Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	184,698	164,025
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	173,476	152,979
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	68	4,730
Non-PCI Loans | Commercial | Commercial and industrial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	11,154	6,316
Non-PCI Loans | Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	54,263	62,911
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	44,569	61,340
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	3,811	98
Non-PCI Loans | Commercial | Agriculture | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	5,883	1,473
Non-PCI Loans | Consumer
Non-PCI loans by the internal risk grading system
Total Gross loans	4,470	6,033
Non-PCI Loans | Consumer | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	4,378	5,922
Non-PCI Loans | Consumer | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	92	111
PCI loans
Non-PCI loans by the internal risk grading system
Total Gross loans	7,944	8,775
PCI loans | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	1,069	758
PCI loans | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans	2,364	1,229
PCI loans | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	4,511	6,788
PCI loans | Real Estate Secured
Non-PCI loans by the internal risk grading system
Total Gross loans	5,978	6,540
PCI loans | Real Estate Secured | Commercial real estate
Non-PCI loans by the internal risk grading system
Total Gross loans	5,614	5,685
PCI loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	774
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	2,241	1,094
PCI loans | Real Estate Secured | Commercial real estate | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	2,599	4,591
PCI loans | Real Estate Secured | Residential 1 to 4 family
Non-PCI loans by the internal risk grading system
Total Gross loans	123	573
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		455
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	123
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		118
PCI loans | Real Estate Secured | Construction and land
Non-PCI loans by the internal risk grading system
Total Gross loans	241	282
PCI loans | Real Estate Secured | Construction and land | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	241	228
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		54
PCI loans | Commercial
Non-PCI loans by the internal risk grading system
Total Gross loans	1,966	2,235
PCI loans | Commercial | Commercial and industrial
Non-PCI loans by the internal risk grading system
Total Gross loans	501	783
PCI loans | Commercial | Commercial and industrial | Credit Risk Grades, Pass
Non-PCI loans by the internal risk grading system
Total Gross loans	54	75
PCI loans | Commercial | Commercial and industrial | Credit Risk Grades, Special Mention
Non-PCI loans by the internal risk grading system
Total Gross loans		81
PCI loans | Commercial | Commercial and industrial | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	447	627
PCI loans | Commercial | Agriculture
Non-PCI loans by the internal risk grading system
Total Gross loans	1,465	1,452
PCI loans | Commercial | Agriculture | Credit Risk Grades, Substandard
Non-PCI loans by the internal risk grading system
Total Gross loans	$ 1,465	$ 1,452

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Loans and Allowance for Loan and Lease Losses - Aging (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Aging of loans held for investment
Current	$ 1,337,778	$ 1,239,201
Past due	1,342,701	1,247,280
Non-Accruing	4,884	7,818
Total	1,342,701	1,247,280
Real Estate Secured
Aging of loans held for investment
Total	1,097,304	1,012,076
Real Estate Secured | Commercial real estate
Aging of loans held for investment
Total	635,846	579,244
Real Estate Secured | Residential 1 to 4 family
Aging of loans held for investment
Total	195,453	165,829
Real Estate Secured | Farmland
Aging of loans held for investment
Total	132,723	120,566
Real Estate Secured | Multi-family residential
Aging of loans held for investment
Total	81,536	79,381
Real Estate Secured | Construction and land
Aging of loans held for investment
Total	26,836	35,669
Real Estate Secured | Home equity lines of credit
Aging of loans held for investment
Total	24,910	31,387
Commercial
Aging of loans held for investment
Total	240,927	229,171
Commercial | Commercial and industrial
Aging of loans held for investment
Total	185,199	164,808
Commercial | Agriculture
Aging of loans held for investment
Total	55,728	64,363
Consumer
Aging of loans held for investment
Total	4,470	6,033
Non-PCI Loans
Aging of loans held for investment
Current	1,329,909	1,230,561
Past due	1,334,757	1,238,505
Non-Accruing	4,809	7,683
Total	1,334,757	1,238,505
Non-PCI Loans | Real Estate Secured
Aging of loans held for investment
Total	1,091,326	1,005,536
Non-PCI Loans | Real Estate Secured | Commercial real estate
Aging of loans held for investment
Current	629,972	571,665
Past due		573,559
Non-Accruing	260	1,894
Total	630,232	573,559
Non-PCI Loans | Real Estate Secured | Residential 1 to 4 family
Aging of loans held for investment
Current	195,330	165,176
Past due		165,256
Non-Accruing		80
Total	195,330	165,256
Non-PCI Loans | Real Estate Secured | Farmland
Aging of loans held for investment
Current	132,648	120,483
Past due		120,566
Non-Accruing	75	83
Total	132,723	120,566
Non-PCI Loans | Real Estate Secured | Multi-family residential
Aging of loans held for investment
Current	81,536	79,381
Past due		79,381
Total	81,536	79,381
Non-PCI Loans | Real Estate Secured | Construction and land
Aging of loans held for investment
Current	23,152	31,419
Past due		35,387
Non-Accruing	3,443	3,968
Total	26,595	35,387
Non-PCI Loans | Real Estate Secured | Home equity lines of credit
Aging of loans held for investment
Current	24,826	31,303
Past due		31,387
Non-Accruing	84	84
Total	24,910	31,387
Non-PCI Loans | Commercial
Aging of loans held for investment
Total	238,961	226,936
Non-PCI Loans | Commercial | Commercial and industrial
Aging of loans held for investment
Current	183,740	162,223
Past due		164,025
Non-Accruing	919	1,541
Total	184,698	164,025
Non-PCI Loans | Commercial | Agriculture
Aging of loans held for investment
Current	54,263	62,911
Past due		62,911
Total	54,263	62,911
Non-PCI Loans | Consumer
Aging of loans held for investment
Current	4,442	6,000
Past due		6,033
Non-Accruing	28	33
Total	4,470	6,033
Non-PCI Loans | MISN
Aging of loans held for investment
Total	141,500	163,800
PCI loans
Aging of loans held for investment
Current	7,869	8,640
Past due		8,775
Non-Accruing	75	135
Total	7,944	8,775
PCI loans | Real Estate Secured
Aging of loans held for investment
Total	5,978	6,540
PCI loans | Real Estate Secured | Commercial real estate
Aging of loans held for investment
Current	5,590	5,639
Past due		5,685
Non-Accruing	24	46
Total	5,614	5,685
PCI loans | Real Estate Secured | Residential 1 to 4 family
Aging of loans held for investment
Current	123	282
Past due		282
Total	123	573
PCI loans | Real Estate Secured | Construction and land
Aging of loans held for investment
Current	241	573
Past due		573
Total	241	282
PCI loans | Commercial
Aging of loans held for investment
Total	1,966	2,235
PCI loans | Commercial | Commercial and industrial
Aging of loans held for investment
Current	450	694
Past due		783
Non-Accruing	51	89
Total	501	783
PCI loans | Commercial | Agriculture
Aging of loans held for investment
Current	1,465	1,452
Past due		1,452
Total	1,465	1,452
Current
Aging of loans held for investment
Non-Accruing	4,200	6,400
30 to 59 Days Past Due
Aging of loans held for investment
Past due	39	66
Non-Accruing	100	28,000
30 to 59 Days Past Due | Non-PCI Loans
Aging of loans held for investment
Past due	39	66
30 to 59 Days Past Due | Non-PCI Loans | Commercial | Commercial and industrial
Aging of loans held for investment
Past due	39	66
60 to 89 Days Past Due
Aging of loans held for investment
Past due		195
Non-Accruing	100	26,000
60 to 89 Days Past Due | Non-PCI Loans
Aging of loans held for investment
Past due		195
60 to 89 Days Past Due | Non-PCI Loans | Commercial | Commercial and industrial
Aging of loans held for investment
Past due		195
90+ Days Past Due
Aging of loans held for investment
Non-Accruing	$ 500	$ 1,400

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Income Taxes (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Income Taxes
Deferred tax valuation allowance	$ 0	$ 0

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Goodwill and Other Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Core deposit intangible
Goodwill	$ 24,885		$ 24,885		$ 24,885
Other intangible assets	3,568		3,568		4,298
Amortization of Intangible Assets	244	$ 263	730	$ 787
Gross Carrying Amount	9,261		9,261
Accumulated Amortization	(5,693)		(5,693)
Net Carrying Amount	3,568		3,568
Estimated Amortization
Year 2016	(215)		(215)
Year 2017	(588)		(588)
Year 2018	(549)		(549)
Year 2019	(522)		(522)
Year 2020	(441)		(441)
Year 2021	(419)		(419)
Year 2016
Core deposit intangible
Net Carrying Amount	3,353		3,353		3,568
Year 2017
Core deposit intangible
Net Carrying Amount	2,765		2,765		3,353
Year 2018
Core deposit intangible
Net Carrying Amount	2,216		2,216		2,765
Year 2019
Core deposit intangible
Net Carrying Amount	1,694		1,694		2,216
Year 2020
Core deposit intangible
Net Carrying Amount	1,253		1,253		1,694
Year 2021
Core deposit intangible
Net Carrying Amount	$ 834		$ 834		$ 1,253

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Share-based Compensation Plans - Number of Plans (Details)	9 Months Ended
	Sep. 30, 2016 plan shares
Summary of the expenses the Company has recognized related to share-based compensation
Shares counted against plan (ratio)	2
Aggregate number of shares that may be granted during any calendar year per individual	250,000
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
Maximum number of shares that may be issued	2,500,000
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

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Share-based Compensation Plans - Restricted Stock Awards (Details)	9 Months Ended
	Sep. 30, 2016 $ / shares shares
Restricted stock
Number of Shares
Balance at the beginning of the period (in shares)	162,394
Granted (in shares)	120,818
Vested (in shares)	(75,863)
Forfeited (in shares)	(17,765)
Balance at the end of the period (in shares)	189,584
Expected to vest at the end of the period (in shares)	174,099
Average Grant Date Fair Value
Balance at the beginning of the period (in dollars per share) | $ / shares	$ 7.30
Granted (in dollars per share) | $ / shares	7.85
Vested (in dollars per share) | $ / shares	7.39
Forfeited (in dollars per share) | $ / shares	7.76
Balance at the end of the period (in dollars per share) | $ / shares	7.59
Expected to vest at the end of the period (in dollars per share) | $ / shares	$ 7.57
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 Restricted stock
Average Grant Date Fair Value
Performance based grant (in shares)	13,245

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Share-based Compensation Plans - Restricted Stock Units (Details) - Restricted stock units $ / shares in Units, $ in Millions	9 Months Ended
	Sep. 30, 2016 USD ($) $ / shares shares
Settle in Stock, Shares
Granted (in shares)	38,104
Forfeited (in shares)	(1,388)
Balance at the end of the period (in shares)	36,716
Expected to vest at the end of the period (in shares)	24,746
Settle in Stock, Average Grant Date Fair Value
Granted (in dollars per share) | $ / shares	$ 7.56
Forfeited (in dollars per share) | $ / shares	7.56
Balance at the end of the period (in dollars per share) | $ / shares	7.56
Expected to vest at the end of the period (in dollars per share) | $ / shares	$ 7.56
Settle in Cash, Shares
Granted (in shares)	80,448
Forfeited (in shares)	(1,923)
Balance at the end of the period (in shares)	78,525
Expected to vest at the end of the period (in shares)	62,621
Settle in Cash, Average Grant Date Fair Value
Balance at the end of the period (in dollars per share) | $ / shares	$ 8.20
Expected to vest at the end of the period (in dollars per share) | $ / shares	$ 8.20
Accrued liability of cash settled restricted stock units | $	$ 0.1
Minimum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting percentage of units settled in shares	0.00%
Maximum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting percentage of units settled in shares	150.00%

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Share-based Compensation Plans - Stock Options (Details) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($) $ / shares shares
Aggregate intrinsic value of options exercised
Income tax benefit recognized related to share-based compensation | $	$ 100
Stock options
Number of shares
Options outstanding, at the beginning of the period (in shares) | shares	932,553
Granted (in shares) | shares	36,022
Forfeited (in shares) | shares	(46,303)
Exercised (in shares) | shares	(19,907)
Options outstanding, at the end of the period (in shares) | shares	902,365
Exercisable, at the end of the period (in shares) | shares	511,663
Vested and expected to vest , at the end of the period (in shares) | shares	874,999
Weighted Average Exercise Price
Options outstanding, at the beginning of the period (in dollars per share) | $ / shares	$ 7.19
Granted (in dollars per share) | $ / shares	7.27
Forfeited (in dollars per share) | $ / shares	7.50
Exercised (in dollars per share) | $ / shares	6.38
Options outstanding, at the end of the period (in dollars per share) | $ / shares	7.20
Exercisable, at the end of the period (in dollars per share) | $ / shares	6.99
Vested and expected to vest , at the end of the period (in dollars per share) | $ / shares	$ 7.19
Average Remaining Life (years)
Outstanding, at end of period	7 years 11 days
Exercisable, at the end of the period	6 years
Vested and expected to vest, at the end of the period	6 years 11 months 27 days
Average Intrinsic Value
Outstanding, at the end of the period | $	$ 1,196,750
Exercisable, at the end of the period | $	909,295
Vested and expected to vest, at the end of the period | $	1,177,621
Aggregate intrinsic value of options exercised
Total intrinsic value of options exercised | $	31
Income tax benefit recognized related to share-based compensation | $	$ 100
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

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Share-based Compensation Plans - Assumptions (Details) - Stock options - $ / shares	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Assumptions used in the calculation of the weighted average fair value of options granted
Expected volatility (as a percent)	31.85%	36.38%
Expected term	5 years	5 years
Dividend yield (as a percent)	3.30%	2.82%
Risk free rate (as a percent)	1.31%	1.54%
Weighted-average grant date fair value (in dollars per share)	$ 1.50	$ 1.97

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Share-based Compensation Plans - Share-Based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Summary of the expenses the Company has recognized related to share-based compensation
Allocated Share-based Compensation Expense	$ 346	$ 279	$ 915	$ 814
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	2,253	2,115	2,253	2,115
Income tax benefit recognized related to share-based compensation			100
Stock options
Summary of the expenses the Company has recognized related to share-based compensation
Allocated Share-based Compensation Expense	99	126	325	374
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	653	1,133	653	1,133
Income tax benefit recognized related to share-based compensation			$ 100
Weighted-average period over which expense is expected to be recognized			2 years 2 months 12 days
Restricted stock
Summary of the expenses the Company has recognized related to share-based compensation
Allocated Share-based Compensation Expense	181	153	$ 464	440
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	1,025	$ 982	$ 1,025	$ 982
Weighted-average period over which expense is expected to be recognized			1 year 9 months 18 days
Restricted stock units
Summary of the expenses the Company has recognized related to share-based compensation
Allocated Share-based Compensation Expense	66		$ 126
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 575		$ 575
Weighted-average period over which expense is expected to be recognized			2 years 7 months 6 days

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Shareholders' Equity - Preferred Stock, Cash Dividends and Stock Repurchase Program (Details) - USD ($) $ / shares in Units, $ in Millions								3 Months Ended		9 Months Ended		24 Months Ended
	Nov. 30, 2016	Oct. 26, 2016	Jul. 27, 2016	May 31, 2016	Apr. 27, 2016	Feb. 29, 2016	Jan. 27, 2016	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Jul. 22, 2016
Stock line items
Cash dividend declared (in dollars per share)			$ 0.06		$ 0.06		$ 0.06	$ 0.06	$ 0.06	$ 0.18	$ 0.17
Cash dividend paid on common stock (in dollars per share)			$ 0.06	$ 0.06		$ 0.06
Shares repurchased and cancelled								0		226,170		281,598
Cost of shares repurchased and cancelled										$ 1.6		$ 2.0
Price per share of shares repurchased and cancelled										$ 7.23		$ 7.28
Maximum
Stock line items
Repurchase of shares, dollar amount authorized													$ 5.0
Subsequent Event
Stock line items
Cash dividend declared (in dollars per share)		$ 0.06
Cash dividend paid on common stock (in dollars per share)	$ 0.06

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Shareholders' Equity - Regulatory Capital (Details) - USD ($) $ in Millions	Sep. 30, 2016	Dec. 31, 2015
Capital conservation buffer
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 to risk-weighted assets:
2019 Minimum Common Equity Tier I Capital Ratio (as a percent)	7.00%
Phased-out rate of certain deferred tax assets and intangible assets	60.00%	40.00%
Tier I capital to average assets
2019 Minimum Leverage Ratio (as a percent)	6.50%
Tier I Risk-Based Capital
2019 Minimum Tier I Risk-based Capital Ratio (as a percent)	8.50%
Total Risk-Based Capital Ratio
2019 Minimum Total Risk-based Capital Ratio	10.50%
Minimum
Common Equity Tier I capital to risk-weighted assets:
CET I to risk-weighted assets	4.50%
Total Risk-Based Capital Ratio
Regulatory standard to be well capitalized (as a percent)	6.50%
Heritage Oaks Bank
Company's and the Bank's actual regulatory capital amounts and ratios
Regulatory standard to be adequately capitalized (as a percent)	8.625%
Common Equity Tier I capital to risk-weighted assets:
Actual Common Equity Tier I (as a percent)	12.23%	12.48%
Regulatory standard to be adequately capitalized (as a percent)	5.125%
Regulatory standard to be well capitalized (as a percent)	6.50%
Tier I capital to average assets
Regulatory standard to be adequately capitalized (as a percent)	4.00%
Regulatory standard to be well capitalized (as a percent)	5.00%
Actual Leverage ratio (as a percent)	9.35%	9.50%
Tier I Risk-Based Capital
Regulatory standard to be adequately capitalized (as a percent)	6.625%
Regulatory standard to be well capitalized (as a percent)	8.00%
Actual Tier I capital (as a percent)	12.23%	12.48%
Total Risk-Based Capital Ratio
Regulatory standard to be adequately capitalized (as a percent)	8.625%
Actual total risk based capital (as a percent)	13.46%	13.74%
Regulatory standard to be well capitalized (as a percent)	10.00%
Heritage Oaks Bancorp
Company's and the Bank's actual regulatory capital amounts and ratios
Regulatory standard to be adequately capitalized (as a percent)	8.625%
Common Equity Tier I capital to risk-weighted assets:
Actual Common Equity Tier I (as a percent)	12.30%	12.61%
Regulatory standard to be adequately capitalized (as a percent)	5.125%
Tier I capital to average assets
Regulatory standard to be adequately capitalized (as a percent)	4.00%
Actual Leverage ratio (as a percent)	9.83%	9.90%
Tier I Risk-Based Capital
Regulatory standard to be adequately capitalized (as a percent)	6.625%
Actual Tier I capital (as a percent)	12.87%	13.01%
Total Risk-Based Capital Ratio
Regulatory standard to be adequately capitalized (as a percent)	8.625%
Actual total risk based capital (as a percent)	14.09%	14.26%
Junior subordinated debentures
Tier I Risk-Based Capital
Actual, Capital Amount	$ 10.2	$ 10.0

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Earnings Per Share ("EPS") (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Calculation of both basic and diluted earnings (loss) per common share
Net income	$ 4,183	$ 4,002	$ 12,383	$ 11,871
Accretion on preferred stock				(70)
Net income allocated to participating securities	(22)	(21)	(65)	(66)
Net income allocated to common shareholders	$ 4,161	$ 3,981	$ 12,318	$ 11,735
Weighted average shares outstanding	34,037,252	34,158,081	34,044,067	34,111,079
Basic earnings per common share (in dollars per share)	$ 0.12	$ 0.12	$ 0.36	$ 0.34
Dilutive effect of share-based compensation awards (in shares)	145,948	124,286	129,269	147,285
Weighted average diluted shares outstanding	34,183,200	34,282,367	34,173,336	34,258,364
Diluted earnings per common share (in dollars per share)	$ 0.12	$ 0.12	$ 0.36	$ 0.34
Stock options
Shares excluded from the calculation of diluted earnings per share
Shares excluded from the calculation of diluted earnings per share	62,000	120,000	126,000	35,000

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Commitments and Contingencies - Total Commitments (Details) - Heritage Oaks Bank - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Commitments and Contingencies
Total commitments and standby letters of credit	$ 285,521	$ 255,093
Outstanding financial fixed rate commitments	31,800
Outstanding financial variable rate commitments	253,700
Commitments to extend credit
Commitments and Contingencies
Total commitments and standby letters of credit	273,129	242,125
Standby letters of credit
Commitments and Contingencies
Total commitments and standby letters of credit	12,392	12,968
Standby letters of credit | One customer
Commitments and Contingencies
Total commitments and standby letters of credit	$ 10,200	$ 10,400

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Derivative Instruments (Details) $ in Thousands	Sep. 30, 2016 USD ($)
Derivatives
Derivative assets, notional amount	$ 37,116
Derivative assets, fair value	1,910
Derivative liability, notional amount	37,116
Derivative liability, fair value	1,910
Interest rate swaps
Derivatives
Notional amount of derivative	37,100
Fair value of derivative	1,900
Interest rate swaps | Pay Floating Receive Fixed Contract
Derivatives
Derivative assets, notional amount	37,116
Derivative assets, fair value	1,910
Interest rate swaps | Pay Fixed Receive Floating Contract
Derivatives
Derivative liability, notional amount	37,116
Derivative liability, fair value	$ 1,910

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Balance Sheet Offsetting (Details) $ in Thousands	Sep. 30, 2016 USD ($)
Derivatives
Gross amounts recognized in Consolidated Balance Sheets (asset)	$ 1,910
Gross amounts recognized in Consolidated Balance Sheets (liability)	1,910
Net amount presented in the Consolidated Balance Sheets (liability)	1,910
Gross cash collateral not offset in Consolidated Balance Sheets (liability)	2,100
Net amount not offset in Consolidated Balance Sheets	(190)
Not Designated as Hedging Instrument
Derivatives
Gross amounts recognized in Consolidated Balance Sheets (liability)	1,910
Net amount presented in the Consolidated Balance Sheets (liability)	1,910
Gross cash collateral not offset in Consolidated Balance Sheets (liability)	2,100
Net amount not offset in Consolidated Balance Sheets	(190)
Interest rate swaps | Pay Floating Receive Fixed Contract
Derivatives
Gross amounts recognized in Consolidated Balance Sheets (asset)	1,910
Interest rate swaps | Pay Fixed Receive Floating Contract
Derivatives
Gross amounts recognized in Consolidated Balance Sheets (liability)	$ 1,910

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Subsequent Events (Details) - $ / shares					3 Months Ended		9 Months Ended
	Oct. 26, 2016	Jul. 27, 2016	Apr. 27, 2016	Jan. 27, 2016	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Subsequent events
Cash dividend declared (in dollars per share)		$ 0.06	$ 0.06	$ 0.06	$ 0.06	$ 0.06	$ 0.18	$ 0.17
Subsequent Event
Subsequent events
Cash dividend declared (in dollars per share)	$ 0.06