Note 10. Borrowings

The Bank has several sources from which it may obtain borrowed funds. While deposits are the Bank's primary funding source, borrowings are a secondary source of funds. Borrowings can take the form of Federal Funds purchased through arrangements it has established with correspondent banks or advances from the FHLB. Borrowing may occur for a variety of reasons including daily liquidity needs and balance sheet growth. The following provides a summary of the borrowing facilities available to the Bank and Company as well as the level of borrowings that were outstanding as of December 31, 2015 and 2014.

Federal Funds Purchased

The Bank has borrowing lines with correspondent banks totaling $57.0 million as of December 31, 2015. As of December 31, 2015 and 2014, there were no balances outstanding on these borrowing lines.

Federal Reserve Borrowing Facility

At December 31, 2015, the Bank has a collateralized borrowing line with the Federal Reserve Bank in the amount of $4.6 million, which is collateralized by $6.2 million in loans. At December 31, 2015 and 2014, there was no outstanding balance on this borrowing line.

Federal Home Loan Bank Borrowings

At December 31, 2015 and 2014, the Bank had $103.5 million and $95.6 million of borrowings with the FHLB. The following table provides a summary of those borrowings as of December 31, 2015:

	Year of Maturity
	2016		2017		2018		2019		2020		Over 5 Years
		(dollars in thousands)
Federal Home Loan Bank borrowings	$	38,521	$	13,500	$	2,500	$	10,000	$	11,000	$	28,000
Weighted average interest rate		0.41%		1.19%		1.12%		1.72%		2.32%		2.41%

Borrowings from the FHLB are collateralized by a blanket lien on certain qualifying loans in the Company's loan portfolio. FHLB borrowings require monthly interest only payments, with the full amount borrowed due at maturity. Of the $103.5 million outstanding, $78.5 million are comprised of fixed rate borrowings with rates ranging from 0.63% to 2.73%. The remaining $25.0 million are comprised of short-term, variable rate borrowings, with an interest rate of 0.27% as of December 31, 2015, which rate is tied to the Federal Funds Rate.

At December 31, 2015, $3.0 million of outstanding FHLB fixed rate borrowings were assumed in the MISN Transaction. These borrowings had purchase accounting fair value adjustments of $21 thousand at December 31, 2015, which will be amortized into interest expense over the remaining lives of these borrowings. For the year ended December 31, 2015, amortization of the premium on the FHLB advances assumed in the MISN Transaction totaled $36 thousand.

During 2015, the Bank prepaid certain FHLB borrowings in an effort to lower the future overall cost of borrowings from the FHLB. Certain of these borrowings had prepayment incentive fees associated with them, while others contained prepayment penalties. The result of the prepayment of these borrowings was a $0.1 million gain on the extinguishment of debt, and $0.1 million in additional interest expense recorded during the year ended December 31, 2015.

At December 31, 2015, $643.0 million in loans were pledged as collateral to secure a credit facility of $437.0 million under a blanket lien, of which $103.5 million was outstanding at December 31, 2015, as represented in the table above. Additionally, of the total amount of the credit facility with the FHLB, $11.5 million is available as a line of credit.

Holding Company Line of Credit

In addition to the Bank's sources of liquidity, the Company has an unsecured revolving line of credit with a correspondent bank totaling $10.0 million, which provides an additional source of liquidity to the holding company. This line of credit is subject to annual renewal. The Company pays a 0.20% annual fee to maintain this credit facility, as well as a 0.25% annual rate on the unused portion of the line. Interest on borrowings is at prime, or at the Company's option, a fixed rate based on LIBOR.

Junior Subordinated Debentures

On October 27, 2006, the Company issued $8.2 million of floating rate junior subordinated debt securities to Heritage Oaks Capital Trust II, a statutory trust created under the laws of the State of Delaware. These debentures are subordinated to effectively all borrowings of the Company. The Company used the proceeds from these borrowings for general corporate purposes, which include among other things, capital contributions to the Bank, investments, payment of dividends, and repurchases of the Company's common stock. During 2015, the Company redeemed $3.0 million of the original $8.2 million issuance of junior subordinated debentures to Heritage Oaks Capital Trust II. In connection with this redemption, the Company realized a pretax gain on the extinguishment of debt in the amount of $0.5 million. The remaining outstanding debentures associated with Heritage Oaks Capital Trust II are callable by the Company at par. At December 31, 2015, the carrying value of these debentures was $5.2 million.

The Company also assumed floating rate junior subordinated debt in the amount of $8.2 million in connection with the MISN Transaction in 2014. The trust preferred securities associated with these debentures were issued by Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust prior to the MISN Transaction. These debentures are effectively subordinated to all borrowings of the Company. At December 31, 2015, the carrying value of these borrowings was $5.2 million, which reflects purchase accounting fair value adjustments of $3.0 million, related to MISN Transaction.

Purchase accounting adjustments were based on current market rates for similar instruments at the time of the MISN Transaction, and are accreted into interest expense over the lives of the debentures. For the year ended December 31, 2015, accretion of the discount on the junior subordinated debt assumed in the MISN Transaction totaled $0.2 million. These borrowings are callable by the Company at par.

The following table provides detail of junior subordinated debentures outstanding at December 31, 2015:

	Amount Issued		Carrying Value		Current Rate		Issue Date		Scheduled Maturity		Rate Type
		(dollars in thousands)
Heritage Oaks Capital Trust II	$	5,248	$	5,248		2.33%		27-Oct-06		Aug-37		Variable 3-month LIBOR + 1.72%
Mission Community Capital Trust I	$	3,093	$	2,204		3.57%		14-Oct-03		Oct-33		Variable 3-month LIBOR + 2.95%
Santa Lucia Bancorp (CA) Capital Trust	$	5,155	$	2,986		2.10%		28-Apr-06		Jul-36		Variable 3-month LIBOR + 1.48%

Pursuant to rules issued by the Federal Reserve Board, the Company is permitted to include junior subordinated debt in its determination of Tier I capital. Junior subordinated debt may not, however, constitute more than 25% of the Company's Tier I capital, subject to certain limitations. At December 31, 2015 and 2014, the Company was able to include $10.0 million and $12.8 million of junior subordinated debt in its Tier I capital for regulatory capital purposes. Please also see Note 13. Shareholders' Equity, of these consolidated financial statements for additional information concerning regulatory capital for the Company and the Bank.