HERITAGE OAKS BANCORP - FORM 10-Q/A

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EX-31.1 - HERITAGE OAKS BANCORP	v197395_ex31-1.htm
EX-32.1 - HERITAGE OAKS BANCORP	v197395_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

Commission File Number: 000-25020

HERITAGE OAKS BANCORP

(Exact name of registrant as specified in its charter)

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

545 12th Street,
Paso Robles, California		93446
(Address of principal 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 twelve (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 Website, 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 ¨ NO ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

YES ¨ NO x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of August 6, 2010 there were 25,062,682 shares outstanding of the Registrant’s common stock.

Explanatory Note

Heritage Oaks Bancorp (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A to amend its Quarterly Report on Form 10-Q as of and for the quarter ended June 30, 2010 that was originally filed with the Securities and Exchange Commission on August 9, 2010 (the “Original Filing”). As disclosed in the Company’s Form 8-K filing dated September 24, 2010, the Company is filing this Amendment No. 1 to reflect the change in its accounting treatment of the Series B Preferred Stock and to provide additional disclosure regarding the Series C Preferred Stock it issued in its March 2010 private placement. Upon reevaluating the accounting for the transaction, the Company determined it did not account for the contingent beneficial conversion feature of the Series B Preferred Stock and as such has revised its consolidated financial statements and the notes thereto as of and for the period ended June 30, 2010. The Company also revised the related Management’s Discussion and Analysis of Financial Condition and Results of Operations. These revisions are included in this Amendment No. 1.

The revised accounting relates to the intrinsic value of the contingent beneficial conversion feature of the Series B Preferred Stock and the additional disclosure of the contingent beneficial conversion feature of the Series C Preferred Stock. As more fully disclosed in Note 11. Preferred Stock, the Company issued a total of 56,160 shares of Series B Preferred Stock and 1,189,538 shares of its Series C Preferred Stock for total gross proceeds of approximately $60.0 million. On March 10, 2010 (the “commitment date”), the date the Company made a firm commitment to issue the Series B and Series C Preferred Stock, the price of the Company’s common stock at the close of the market was $3.45 per share compared to the $3.25 per common share conversion price of the Series B and Series C Preferred Stock. This $0.20 difference between the market value of the Company’s common stock and conversion price on the commitment date represented a contingent beneficial conversion feature of the Series B and Series C Preferred Stock of approximately $3.5 million, and $238 thousand, respectively.

The conversion of the Series B Preferred Stock as of the commitment date was contingent upon the approval of the Company’s common shareholders of additional authorized common shares sufficient to convert the Series B Preferred Stock to common stock and the approval of the issuance of common stock on conversion of the Series B Preferred Stock under NASDAQ rules. Such approvals were received during the second quarter of 2010 at which time the Company should have recorded the beneficial conversion feature related to the Series B Preferred Stock.

The conversion of the Series C Preferred Stock as of the commitment date was contingent upon the approval of the Company’s common shareholders to approve the contingent conversion of Series C Preferred Stock to common stock, under NASDAQ rules, upon the transfer of the Series C Preferred Stock from the investor to an unaffiliated third party. Approval of the contingent conversion of Series C Preferred Stock was received during the second quarter of 2010; however conversion of Series C Preferred Stock remains contingent upon the transfer from the investor to an unaffiliated third party. Therefore, the contingent beneficial conversion feature related to the Series C Preferred Stock has not resulted in any accounting adjustment, rather it will represent a disclosure item in the Company’s financial statements until such time that the contingency is removed.

The Company’s revised financial statements filed on this Form 10-Q/A as of and for the three and six month periods ended June 30, 2010 reflect the impact of the recognition of the beneficial conversion feature on the Series B Preferred Stock. The initial recognition of the beneficial conversion feature on the Series B Preferred Stock is accomplished through the establishment of a discount on Series B Preferred Stock and a corresponding increase in additional paid in capital. These adjustments also reflect the recognition of the immediate accretion of the discount on Series B Preferred Stock through retained earnings which should have occurred on June 11, 2010, the date the Company converted the outstanding Series B Preferred Stock to common stock.

The calculation of net loss applicable to common shareholders and basic earnings per share for the three and six months ended June 30, 2010 to properly reflect the accretion of the Series B Preferred Stock discount is shown in the tables below:

	For the three months ending,
				Accretion of
				beneficial conversion
	June 30, 2010			discount on Series B			June 30, 2010
(dollar amounts in thousands except per share data)	As reported			Preferred Stock			Restated
Net loss	$	(5,835	)				$	(5,835	)
Less: dividends and accretion on preferred stock		(353	)		(3,456	)		(3,809	)
Net loss applicable to common shareholders	$	(6,188	)				$	(9,644	)
Weighted average shares outstanding		11,250,989						11,250,989
Basic loss per share	$	(0.55	)				$	(0.86	)

	For the six months ending,
				Accretion of
				beneficial conversion
	June 30, 2010			discount on Series B			June 30, 2010
(dollar amounts in thousands except per share data)	As reported			Preferred Stock			Restated
Net loss	$	(7,174	)				$	(7,174	)
Less: dividends and accretion on preferred stock		(704	)		(3,456	)		(4,160	)
Net loss applicable to common shareholders	$	(7,878	)				$	(11,334	)
Weighted average shares outstanding		9,492,421						9,492,421
Basic loss per share	$	(0.83	)				$	(1.19	)

As previously mentioned, the Company adjusted the balances of additional paid in capital and retained earnings to properly reflect the issuance of the Series B Preferred Stock as well as the immediate accretion of the Series B Preferred Stock discount as of the date the Company converted the Series B Preferred Stock to common stock. The table below reflects the impact of those adjustments at June 30, 2010:

	June 30, 2010
	Additional Paid		Retained
(dollar amounts in thousands)	in Capital		Earnings
Balance as of June 30, 2010, as previously reported	$	3,430	$	5,529
Increase in additional paid in capital / (accretion) of beneficial conversion discount on Series B Preferred Stock	$	3,456	$	(3,456	)
Balance as of June 30, 2010, as adjusted	$	6,886	$	2,073

This Amendment No. 1 on Form 10-Q/A amends:

Part I. Financial Information

Item 1. Consolidated Financial Statements (un-audited, except for Balance Sheet as of 12/31/2009)

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

Item 4. Controls and Procedures

This Amendment No. 1 includes the Original Filing in its entirety and the Company is only amending those portions affected by the revisions described above. The only exhibits included with this Amendment No. 1 are Exhibits 31.1 and 32.1 related to the certifications by the principal executive officer and the principal financial officer, as required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended.

The Company also reassessed the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation and due to the restatement of the unaudited consolidated financial statements as of and for the quarter ended June 30, 2010, Management concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2010. However, Management believes that the consolidated financial statements included in this Amendment No. 1 on Form 10-Q/A were prepared in accordance with U.S. generally accepted accounting principles in all material respects.

		Page
Part I. Financial Information		5
Item 1. Consolidated Financial Statements (un-audited, except for Balance Sheet as of 12/31/2009)		5
Consolidated Balance Sheets		6
Consolidated Statements of Income		7
Consolidated Statements of Stockholders' Equity		8
Consolidated Statements of Cash Flows		9

Notes to Consolidated Financial Statements		10
Note 1. Consolidated Financial Statements		10
Note 2. Investment Securities		10
Note 3. Loans and the Allowance for Loan Losses		14
Note 4. Other Real Estate Owned		17
Note 5. Deferred Tax Assets		17
Note 6. Earnings / (Loss) Per Share		18
Note 7. Recent Accounting Pronouncements		19
Note 8. Share-Based Compensation		21
Note 9. Fair Value Disclosures		23
Note 10. Fair Value of Financial Instruments		25
Note 11. Preferred Stock		27
Note 12. Regulatory Order and Written Agreement		29
Note 13. Junior Subordinated Debentures		31
Note 14. Reclassifications		31

Forward Looking Statements		32

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		33
The Company		33
Where You Can Find More Information		33
Executive Summary		34
Recent Developments		36
Dividends and Stock Repurchases		37
Selected Financial Data		38
Local Economy		38
Critical Accounting Policies		39
Results of Operations		42
Net Interest Income and Margin		42
Non-Interest Income		47
Non-Interest Expenses		49
Provision for Income Taxes		50
Provision for Loan Losses		50
Financial Condition		52
Loans		52
Credit Quality		57
Allowance for Loan Losses		57
Non-Performing Assets		60
Total Cash and Cash Equivalents		65
Investment Securities and Other Earning Assets		65
Deposits and Borrowed Funds		67
Capital		69
Liquidity		72
Inflation		73
Off-Balance Sheet Arrangements		73

Item 3. Quantative and Qualitative Disclosure About Market Risk		74
Item 4. Controls and Procedures		75

Part II. Other Information		76
Item 1. Legal Proceedings		76
Item 1A. Risk Factors		77
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		77
Item 3. Defaults upon Senior Securities		77
Item 4. (Removed and Reserved)		77
Item 5. Other Information		77
Item 6. Exhibits		78

Signatures		79

Heritage Oaks Bancorp | - 4 -

Part I. Financial Information

Item 1. Consolidated Financial Statements

The financial statements and the notes thereto begin on next page.

Heritage Oaks Bancorp | - 5 -

Heritage Oaks Bancorp
and Subsidiaries
Consolidated Balance Sheets
				(audited)
	June 30,			December 31,
(dollars in thousands except per share data)	2010			2009

Assets
Cash and due from banks	$	17,849		$	19,342
Interest bearing due from banks		38,682			17,046
Federal funds sold		5,500			4,350
Total cash and cash equivalents		62,031			40,738

Interest bearing deposits with other banks		119			119
Securities available for sale		192,904			121,180
Federal Home Loan Bank stock, at cost		5,611			5,828
Loans held for sale		9,429			9,487
Loans, net of deferred fees of $1,698 and $1,825 and allowance for loan loss of $22,134 and $14,372 at June 30, 2010 and December 31, 2009, respectively.		673,344			712,482
Property, premises and equipment, net		6,410			6,779
Deferred tax assets		19,174			10,553
Bank owned life insurance		12,811			12,549
Goodwill		11,049			11,049
Core deposit intangible		2,385			2,642
Other real estate owned		4,953			946
Other assets		10,302			10,825

Total assets	$	1,010,522		$	945,177

Liabilities
Deposits
Demand, non-interest bearing	$	182,846		$	174,635
Savings, NOW, and money market deposits		380,257			365,602
Time deposits of $100 or more		116,372			117,420
Time deposits under $100		116,358			117,808
Total deposits		795,833			775,465

Short term FHLB borrowing		65,000			65,000
Junior subordinated debentures		8,248			13,403
Other liabilities		8,091			7,558

Total liabilities		877,172			861,426

Commitments and contingencies		-			-

Stockholders' Equity
Series A senior preferred stock, $1,000 per share stated value, 21,000 shares issued and outstanding		19,610			19,431
Series C preferred stock, $3.25 per share stated value, 1,189,538 shares issued and outstanding		3,608			-
Common stock, no par value; 100,000,000 shares authorized, issued and outstanding 25,062,682 and 7,771,952 as of June 30, 2010 and December 31, 2009, respectively.		101,197			48,747
Additional paid in capital		6,886			3,242
Retained earnings		2,073			13,407
Accumulated other comprehensive loss, net of tax benefit of $17 and $752 as of June 30, 2010 and December 31, 2009, respectively.		(24	)		(1,076	)

Total stockholders' equity		133,350			83,751

Total liabilities and stockholders' equity	$	1,010,522		$	945,177

See notes to condensed consolidated financial statements.

Heritage Oaks Bancorp | - 6 -

Heritage Oaks Bancorp
and Subsidiaries
Consolidated Statements of Income
	For the three months						For the six months
	ended June 30,						ended June 30,
(dollars in thousands except per share data)	2010			2009			2010			2009

Interest Income
Interest and fees on loans	$	11,429		$	11,416		$	22,570		$	22,563
Interest on investment securities
Mortgage backed securities		1,425			625			2,444			1,173
Obligations of state and political subdivisions		287			208			544			394
Interest on time deposits with other banks		1			1			1			2
Interest on due from Federal Reserve Bank		24			-			52			-
Interest on federal funds sold		1			10			2			17
Interest on other securities		9			9			13			16

Total interest income		13,176			12,269			25,626			24,165

Interest Expense
Interest on savings, NOW and money market deposits		802			839			1,884			1,656
Interest on time deposits in denominations of $100 or more		519			631			1,095			1,175
Interest on time deposits under $100		577			664			1,190			1,228
Other borrowings		138			293			370			697

Total interest expense		2,036			2,427			4,539			4,756

Net interest income before provision for possible loan losses		11,140			9,842			21,087			19,409

Provision for possible loan losses		16,100			2,700			21,300			4,810

Net interest (loss) / income after provision for possible loan losses		(4,960	)		7,142			(213	)		14,599

Non Interest Income
Fees and service charges		614			752			1,239			1,464
(Loss) / gain on sale of investment securities		(97	)		-			(97	)		122
Gain / (loss) on sale of OREO		62			(104	)		62			(131	)
Gain on sale of furniture fixtures and equipment		58			-			58			-
Gain on sale of SBA loans		209			-			209			-
Gain on extinguishment of debt		1,700			-			1,700			-
Other		1,067			852			2,028			1,705

Total non interest income		3,613			1,500			5,199			3,160

Non Interest Expenses
Salaries and employee benefits		4,351			3,745			8,729			7,548
Equipment		370			376			698			701
Occupancy		941			826			1,874			1,678
Other		3,166			3,067			6,393			5,512

Total non interest expenses		8,828			8,014			17,694			15,439

(Loss) / income before provision for income taxes		(10,175	)		628			(12,708	)		2,320

(Benefit) / provision for income taxes		(4,340	)		121			(5,534	)		711

Net (loss) / income		(5,835	)		507			(7,174	)		1,609

Dividends and accretion on preferred stock		3,809			250			4,160			261

Net (loss) / income applicable to common shareholders	$	(9,644	)	$	257		$	(11,334	)	$	1,348

(Loss) / Earnings Per Common Share
Basic	$	(0.86	)	$	0.03		$	(1.19	)	$	0.17
Diluted	$	(0.86	)	$	0.03		$	(1.19	)	$	0.17

See notes to condensed consolidated financial statements.

Heritage Oaks Bancorp | - 7 -

Heritage Oaks Bancorp
and Subsidiaries
Consolidated Statements of Stockholders' Equity

																	Accumulated
				Common Stock					Additional								Other			Total
	Preferred			Number of					Paid-In		Comprehensive			Retained			Comprehensive			Stockholders'
(dollars in thousands)	Stock			Shares			Amount		Capital		Income			Earnings			Income/(loss)			Equity
Balance, December 31, 2009	$	19,431			7,771,952		$	48,747	$	3,242				$	13,407		$	(1,076	)	$	83,751

Issuance of 56,160 shares of Series B preferred stock		52,408																			52,408
Discount on Series B preferred stock		(3,456	)							3,456											-
Conversion of Series B preferred stock to common stock		(52,408	)		17,279,995			52,408													-
Issuance of 1,189,538 shares of Series C preferred stock		3,608																			3,608
Accretion on Series A preferred stock		179													(179	)					-
Accretion on Series B preferred stock		3,456													(3,456	)					-
Dividends paid on preferred stock															(262	)					(262	)
Accrued dividends on preferred stock															(263	)					(263	)
Exercise of stock options					11,260			42													42
Share-based compensation expense										188											188
Retirement of restricted share awards					(525	)
Comprehensive income:
Net loss											$	(7,174	)		(7,174	)					(7,174	)
Unrealized security holding gains (net of $695 tax)												995						995			995
Realized loss on sale of securities (net of $40 tax benefit)												57						57			57

Total comprehensive loss											$	(6,122	)

Balance, June 30, 2010	$	23,218			25,062,682		$	101,197	$	6,886				$	2,073		$	(24	)	$	133,350

Balance, December 31, 2008	$	-			7,753,078		$	48,649	$	1,055				$	21,420		$	(1,092	)	$	70,032

Issuance of 21,000 shares of Series A Senior preferred stock and common stock warrant		19,152								1,848											21,000
Accretion on Series A preferred stock		101													(101	)					-
Dividends paid on preferred stock															(160	)					(160	)
Exercise of stock options (including $9 excess tax benefit from exercise of stock options)					10,050			46													46
Share-based compensation expense										184											184
Retirement of restricted share awards					(1,575	)
Comprehensive income:
Net income											$	1,609			1,609						1,609
Unrealized security holding losses (net of $1,027 tax benefit)												(1,469	)					(1,469	)		(1,469	)
Realized gains on sale of securities (net of $50 tax)												72						72			72

Total comprehensive income											$	212

Balance, June 30, 2009	$	19,253			7,761,553		$	48,695	$	3,087				$	22,768		$	(2,489	)	$	91,314

See notes to condensed consolidated financial statements.

Heritage Oaks Bancorp | - 8 -

Heritage Oaks Bancorp
and Subsidiaries
Consolidated Statements of Cash Flows
	For the six month periods
	ended June 30,
(dollars in thousands)	2010			2009

Cash flows from operating activities:
Net (loss) / income	$	(7,174	)	$	1,609
Adjustments to reconcile net income to net cash provided / (used) by operating activities:
Depreciation and amortization		638			547
Provision for possible loan losses		21,300			4,810
Amortization of premiums / discounts on investment securities, net		591			29
Amortization of intangible assets		257			525
Share-based compensation expense		188			184
Loss / (gain) on sale of available for sale securities		97			(122	)
Gain on extinguishment of debt		(1,700	)		-
Decrease / (increase) in loans held for sale		58			(3,753	)
Net increase in bank owned life insurance		(262	)		(212	)
(Increase) / decrease in deferred tax asset		(9,356	)		12
(Gain) / loss on sale of other real estate owned		(62	)		73
Write-downs on other real estate owned		205			131
Increase in other assets		(4,464	)		(7,799	)
Increase in other liabilities		270			822
Excess tax benefit related to share-based compensation expense		-			(9	)

NET CASH PROVIDED / (USED) IN OPERATING ACTIVITIES		586			(3,153	)

Cash flows from investing activities:
Purchase of securities, available for sale		(83,443	)		(38,553	)
Sale of available for sale securities		2,197			4,762
Maturities and calls of available for sale securities		338			1,136
Proceeds from principal reductions and maturities of available for sale securities		10,283			5,410
Purchase of Federal Home Loan Bank stock		-			(705	)
Redemption of Federal Home Loan Bank stock		217			-
Decrease / (increase) in loans, net		16,198			(21,991	)
Allowance for loan and lease loss recoveries		1,640			22
Purchase of property, premises and equipment, net		(269	)		(578	)
Proceeds from sale of other real estate owned		837			2,863

NET CASH USED IN INVESTING ACTIVITIES		(52,002	)		(47,634	)

Cash flows from financing activities:
Increase in deposits, net		20,368			100,468
Proceeds from Federal Home Loan Bank borrowing		-			75,000
Repayments of Federal Home Loan Bank borrowing		-			(119,000	)
Decrease in repurchase agreements		-			(2,796	)
Decrease in junior subordinated debentures		(3,455	)		-
Excess tax benefit related to share-based compensation expense		-			9
Proceeds from exercise of stock options		42			37
Cash dividends paid		(262	)		(160	)
Proceeds from issuance of preferred stock and common stock warrants, net		56,016			21,000

NET CASH PROVIDED BY FINANCING ACTIVITIES		72,709			74,558

Net increase in cash and cash equivalents		21,293			23,771

Cash and cash equivalents, beginning of period		40,738			24,571

Cash and cash equivalents, end of period	$	62,031		$	48,342

Supplemental Cash Flow Disclosures:

Cash Flow information
Interest paid	$	4,692		$	4,836
Income taxes paid	$	3,125		$	220

Non-Cash Flow Information
Change in other valuation allowance for investment securities	$	1,787		$	(2,374	)
Loans transferred to OREO or foreclosed collateral	$	4,987		$	8,403
Preferred stock dividends declared not paid	$	263		$	-
Accretion of preferred stock discount	$	3,635		$	-
Conversion of preferred stock to common stock	$	52,408		$	-

See notes to condensed consolidated financial statements.

Heritage Oaks Bancorp | - 9 -

Notes to Consolidated Financial Statements

Note 1. Consolidated Financial Statements

The accompanying un-audited condensed consolidated financial statements of Heritage Oaks Bancorp and subsidiaries (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 condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2009 Annual Report filed on Form 10-K.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned financial subsidiary, Heritage Oaks Bank (“the Bank”). All significant inter-company balances and transactions have been eliminated. Heritage Oaks Capital Trust II is an unconsolidated subsidiary formed solely for the purpose of issuing trust preferred securities. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. Certain amounts in the consolidated financial statements for the year ended December 31, 2009 and for the three and six months ended June 30, 2009 may have been reclassified to conform to the presentation of the consolidated financial statements in 2010.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Events or transactions that provided evidence about conditions that did not exist at June 30, 2010, but arose before the financial statements were available to be issued have not been recognized in the financial statements as of and for the periods ended June 30, 2010. Based on all currently available information, the Company is not aware of any such events. Events or transactions that were deemed to be of a material nature and provide evidence about conditions that did exist at June 30, 2010 have been recognized in these consolidated financial statements.

Note 2. Investment Securities

In accordance with U.S. GAAP, investment securities are classified in three categories and accounted for as follows: debt and mortgage-backed securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are measured at amortized cost; debt and equity securities bought and held principally for the purpose of selling in the near term are classified as trading securities and are measured at fair value, with the unrealized gains and losses included in earnings; debt and equity securities not classified as either held-to-maturity or trading securities are deemed as available-for-sale and are measured at fair value, with the unrealized gains and losses, net of applicable taxes, reported in a separate component of stockholders’ equity. Any gains and losses on sales of investments are computed on a specific identification basis. Premiums and discounts are amortized or accreted using the interest method over the lives of the related securities.

Heritage Oaks Bancorp | - 10 -

Notes to Consolidated Financial Statements

The following table sets forth the amortized cost and fair values of investment securities available for sale at June 30, 2010 and December 31, 2009:

(dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
As of June 30, 2010	Cost		Gains		Losses			Value
Obligations of U.S. government agencies and corporations	$	104	$	-	$	(4	)	$	100
Mortgage backed securities
Agency		146,080		1,330		(444	)		146,966
Non-agency		19,095		909		(2,271	)		17,733
Obligations of state and political subdivisions		27,557		576		(137	)		27,996
Other securities		109		-		-			109

Total	$	192,945	$	2,815	$	(2,856	)	$	192,904

As of December 31, 2009
Obligations of U.S. government agencies	$	108	$	-	$	(4	)	$	104
Mortgage-backed securities
Agency		78,203		619		(872	)		77,950
Non-agency		21,935		1,184		(2,966	)		20,153
Obligations of state and political subdivisions		22,653		421		(210	)		22,864
Other securities		109		-		-			109

Total	$	123,008	$	2,224	$	(4,052	)	$	121,180

During the six months ended June 30, 2010 the Bank purchased approximately $83.4 million in investment securities. Sales of investments totaled approximately $2.2 million. In connection with these sales, the Bank recognized an aggregate pre-tax loss of $0.1 million. Sales of investment securities during the first six months of 2009 totaled approximately $4.8 million. Gains recognized in connection with those sales totaled approximately $0.1 million. Principal pay-downs on mortgage related securities totaled approximately $10.3 million during the first six months of 2010.

Other than Temporary Impairment

Management periodically evaluates investments in the portfolio for other than temporary impairment and more specifically when conditions warrant such an evaluation. When evaluating whether impairment is other than temporary, Management considers, among other things, the following: (1) the length of time the security has been in an unrealized loss position, (2) the extent to which the security’s fair value is less than its cost, (3) the financial condition of the issuer, (4) any adverse changes in ratings issued by various rating agencies, (5) the intent and ability of the Bank to hold such securities for a period of time sufficient to allow for any anticipated recovery in fair value and (6) in the case of mortgage related securities, credit enhancements, loan-to-values, credit scores, delinquency and default rates, cash flows and the extent to which those cash flows are within Management’s initial expectations based on pre-purchase analyses.

During the fourth quarter of 2009 the Company performed an analysis, with the assistance of an independent third party, on several non-agency whole loan collateralized mortgage obligations (“CMOs”) in the investment portfolio for other than temporary impairment (“OTTI”). These securities were in a net unrealized loss position for more than 12 months, were downgraded to below investment grade status, and had been experiencing increases in delinquency and default rates for a period of at least 12 months. The Company’s review of these securities was performed under FASB ASC 320, which includes new guidance the Company was required to adopt on January 1, 2009 in evaluating investments for other than temporary impairment. OTTI is considered to have occurred: (1) if the Company intends to sell the related securities; (2) if it is “more likely than not” the Company will be required to sell the securities before recovery of its amortized cost basis; or (3) the present value of expected future cash flows is not sufficient to recover the entire amortized cost basis of the securities.

Under FASB ASC 320, an OTTI loss must be fully recognized in earnings if an investor has the intent to sell the security or if it is more likely than not the investor will be required to sell the security before the recovery of its amortized cost. However, if an investor does not intend to sell the security, it must still evaluate the expected future cash flows to be received to determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment related to the credit loss is recognized in earnings. OTTI amounts related to all other factors, such as market conditions, are recorded as a component of accumulated other comprehensive income.

Although as of the date of evaluation the Company had the ability and intent to hold the related securities it evaluated for OTTI for the foreseeable future, the results of the analysis performed on these securities indicated that the present value of the expected future cash flows on each security was not sufficient to recover their entire amortized cost basis and thus indicating a credit loss had occurred.

Heritage Oaks Bancorp | - 11 -

Notes to Consolidated Financial Statements

The results of the Company’s Q4 2009 evaluation of several non-agency whole loan CMOs indicated there was OTTI on four holdings in the investment portfolio as of December 31, 2009. The gross unrealized loss on these holdings at the time impairment was determined was approximately $2.0 million. The Company’s analysis indicated that approximately $0.4 million of these losses were credit related, while approximately $1.6 million were related to all other factors, including general market conditions. These amounts were recorded in the Company’s consolidated financial statements during the fourth quarter of 2009. As of June 30, 2010 the remaining book balance of these securities was approximately $3.9 million, compared to the $5.4 million reported at December 31, 2009. During the second quarter of 2010 the Bank sold one of the four securities mentioned above in an effort to take advantage of current, more favorable, market pricing during the second quarter. The Bank recognized a loss of approximately $150 thousand on the sale of this security. The Company will continue to engage an independent third party to review these securities on a quarterly basis for the foreseeable future.

The Company’s evaluations of non-agency whole loan CMOs, with the assistance of an independent third party, compile relevant collateral details and performance statistics on a security-by-security basis. These evaluations also include assumptions about prepayment rates, future delinquencies, and loss severities based on the underlying collateral characteristics, and vintage. Additionally, evaluations include consideration of actual recent collateral performance, the structuring of the security, including the Company’s position within that structure, and expectations of relevant market and economic data as of the end of the reporting period. Assumptions made concerning the items listed above allow the Company to then derive an estimate for the net present value of each security’s expected future cash flows. This amount is then compared to the amortized cost of each security to determine the amount of any possible credit loss.

As of June 30, 2010, net unrealized losses on non-agency CMOs within the Bank’s investment portfolio totaled approximately $1.4 million compared to $1.8 million reported at December 31, 2009 and were primarily attributable to market interest rate volatility and a significant widening of interest rate spreads relating to the continued uncertainty in financial markets, rather than to credit risk. Current characteristics of each security owned, such as delinquency rates, foreclosure levels, credit enhancements, and projected losses, are reviewed periodically by Management. Accordingly, it is expected that these securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell these investments and it is not more likely than not that the Company will be required to sell these investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other than temporarily impaired as of June 30, 2010. However, it is possible that the underlying loan collateral of these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows on these securities and future OTTI losses. Events that could trigger material unrecoverable declines in fair values, and therefore potential OTTI losses for these securities in the future, include, but are not limited to, further significantly weakened economic conditions, deterioration of credit metrics, significantly higher levels of default, loss in value on the underlying collateral, deteriorating credit enhancement, and further uncertainty and illiquidity in the financial markets.

As of June 30, 2010, the Company believes that unrealized losses on all other mortgage related securities such as agency securities, including those issued by the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”) and the Government National Mortgage Association (“GNMA”) are not attributable to credit quality, but rather fluctuations in market prices for these types of investments. Additionally, these securities have maturity dates that range from 1 to 30 years and have contractual cash flows guaranteed by agencies of the U.S. Government. As of June 30, 2010, the Company does not believe unrealized losses related to these securities are other than temporary.

The following table provides a roll forward as of June 30, 2010 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized. The Company did not record any OTTI on investment securities during the three and six months ended June 30, 2010.

				OTTI Related to
	OTTI Related			All Other			Total
(dollar amounts in thousands)	to Credit Loss			Factors			OTTI
Balance, December 31, 2009	$	372		$	1,584		$	1,956
Charges on securities for which OTTI was not previously recognized		-			-			-
Realized losses for securities sold		(45	)		(70	)		(115	)

Balance, June 30, 2010	$	327		$	1,514		$	1,841

Heritage Oaks Bancorp | - 12 -

Notes to Consolidated Financial Statements

The following table provides a summary of investment securities in an unrealized loss position as of June 30, 2010 and December 31, 2009:

	Securities In A Loss Position
	For Less Than 12 Months					For 12 Months or More					Total
(dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
As of June 30, 2010	Value		Loss			Value		Loss			Value		Loss
Obligations of U.S. government agencies and corporations	$	-	$	-		$	100	$	(4	)	$	100	$	(4	)
Mortgage-backed securities
Agency		60,479		(444	)		76		-			60,555		(444	)
Non-agency		-		-			10,054		(2,271	)		10,054		(2,271	)
Obligations of state and political subdivisions		5,902		(124	)		139		(13	)		6,041		(137	)

Total	$	66,381	$	(568	)	$	10,369	$	(2,288	)	$	76,750	$	(2,856	)

As of December 31, 2009
Obligations of U.S. government agencies	$	-	$	-		$	104	$	(4	)	$	104	$	(4	)
Mortgage backed securities
Agency		38,625		(870	)		357		(2	)		38,982		(872	)
Non-agency		-		-			11,618		(2,966	)		11,618		(2,966	)
Obligations of state and political subdivisions		6,012		(210	)		-		-			6,012		(210	)

Total	$	44,637	$	(1,080	)	$	12,079	$	(2,972	)	$	56,716	$	(4,052	)

The Bank continues to perform regular extensive analyses, quarterly, on PMBS bonds in the portfolio including but not limited to updates on: credit enhancements, loan-to-values, credit scores, delinquency rates and default rates. These investment securities continue to demonstrate cash flows as expected, based on pre-purchase analyses. As of June 30, 2010, Management does not believe that losses on PMBS in the portfolio, other than those previously discussed, are other than temporary.

Heritage Oaks Bancorp | - 13 -

Notes to Consolidated Financial Statements

Note 3. Loans and the Allowance for Loan Losses

The following table provides a summary of outstanding loan balances as of June 30, 2010 compared to December 31, 2009:

	June 30,		December 31,
(dollars in thousands)	2010		2009
Real Estate Secured
Multi-family residential	$	18,911	$	20,631
Residential 1 to 4 family		29,476		25,483
Home equity lines of credit		30,541		29,780
Commercial		351,598		337,940
Farmland		13,032		13,079
Commercial
Commercial and industrial		144,928		157,270
Agriculture		16,071		17,698
Other		246		238
Construction
Single family residential		9,501		15,538
Single family residential - Spec.		2,750		3,400
Tract		-		2,215
Multi-family		1,883		2,300
Hospitality		-		14,306
Commercial		31,398		27,128
Land		39,356		52,793
Installment loans to individuals		7,232		8,327
All other loans (including overdrafts)		253		553

Total loans, gross		697,176		728,679

Deferred loan fees		1,698		1,825
Allowance for loan losses		22,134		14,372

Total loans, net	$	673,344	$	712,482

Loans held for sale	$	9,429	$	9,487

Concentration of Credit Risk

At June 30, 2010, approximately $528.4 million or 75.8% of the Bank’s loan portfolio was collateralized by various forms of real estate, this represents a decrease of approximately $16.1 million when compared to that reported at December 31, 2009. Such loans are generally made to borrowers located in San Luis Obispo and Santa Barbara Counties. The Bank attempts to reduce its concentration of credit risk by making loans which are diversified by industry and project type. While Management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that further significant deterioration in the California real estate market would not expose the Bank to significantly greater credit risk.

At June 30, 2010, the Bank was contingently liable for letters of credit accommodations made to its customers totaling approximately $15.7 million and un-disbursed loan commitments in the approximate amount of $119.2 million. The Bank makes commitments to extend credit in the normal course of business to meet the financing needs of its customers. 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total outstanding commitment amount does not necessarily represent future cash requirements. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as those involved in extending loan facilities to customers. The Bank currently anticipates no losses as a result of such transactions. For more detailed information on concentrations of credit risk, please refer to “Loans” of “Financial Condition” under “Management’s Discussion and Analysis of Results and Operations” contained within this document.

Heritage Oaks Bancorp | - 14 -

Notes to Consolidated Financial Statements

Loans Serviced for Others

Loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of loans serviced for others, exclusive of Small Business Administration (“SBA”) loans was $15.1 million and $16.3 million at June 30, 2010 and December 31, 2009, respectively.

The Bank originates SBA loans for sale to governmental agencies and institutional investors. At June 30, 2010 and December 31, 2009, the unpaid principal balance of SBA loans serviced for others totaled $6.6 million and $4.4 million, respectively. In accordance with ASC 860, the Bank recognized approximately $0.2 million in gains on the sale of SBA loans for the three and six months ended June 30, 2010. The Bank also recorded approximately $31 thousand and $79 thousand in servicing assets related to the sale of SBA loans during the three and six months ended June 30, 2010. These servicing assets are recoded initially at fair value and will be amortized in proportion to and over the period of estimated net servicing income associated with each SBA loan for which the Bank provides servicing.

The following table provides a reconciliation of the change in net SBA servicing assets for the three and six months ended June 30, 2010:

	For the three months ended						For the six months ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009
Beginning balance	$	29		$	(18	)	$	(19	)	$	(18	)
Additions		31			-			79			-
Disposals		-			-			-			-
Amortization		(1	)		-			(1	)		-

Ending balance	$	59		$	(18	)	$	59		$	(18	)

U.S. GAAP requires that the Company record the transfer of a portion of a financial asset (such as SBA loans) as secured borrowing in its consolidated financial statements until such time that the transfer of a portion of the financial asset represents a participating interest and the transfer of the participating interest has met the conditions for surrender of control, as defined in ASC 860.

The following summarizes the conditions that must be met to qualify as a participating interest:

The portions of a financial asset must represent a proportionate ownership interest in an entire financial asset.

From the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership.

The transfer of the financial asset shall involve no recourse (other than standard representation and warranties) to, or subordination by, any participating interest holder.

No party has the right to pledge or exchange the entire financial asset.

If the participating interest or surrender of control criteria are not met the transfer of the financial asset is not accounted for as a sale and de-recognition of the asset is not appropriate and the Bank would continue to account for the transfer as secured borrowing.

The accounting guidance provided under ASC 860 has impacted the way the Bank accounts for the sale of SBA loans. The terms contained in certain participation and loan sale agreements, specifically those that relate to the sale of SBA loans, are outside the control of the Company. These sales agreements contain recourse provisions (generally 90 days) that initially require the Bank to account for the transfer of a portion of these financial assets as secured borrowing, until such time that the recourse provision expires. Once the recourse provision expires, transfers of a portion of these financial assets are re-evaluated to determine if they meet the participating interest definition and subsequently accounted for as a sale. As a result, the Bank will report SBA transfers as secured borrowings over the period for which recourse provisions exist, which will result in the deferral of any potential gain on sale from these transactions, assuming all other sales criteria for each transaction are met.

Heritage Oaks Bancorp | - 15 -

Notes to Consolidated Financial Statements

Impaired Loans

The following provides a summary of the Bank’s investment in impaired loans, the corresponding valuation allowance for such loans, and income recognized thereon as of June 30, 2010 and 2009:

	June 30,		December 31,
(dollar amounts in thousands)	2010		2009
Non-accruing loans	$	35,066	$	38,170
Loans 90 days or more past due and still accruing		-		151
Troubled debt restructurings		10,731		9,703

Total impaired loans	$	45,797	$	48,024

Impaired loans with a valuation allowance	$	7,482	$	6,155
Valuation allowance related to impaired loans	$	2,408	$	852
Impaired loans without a valuation allowance	$	38,315	$	41,869

Average recorded investment in impaired loans	$	51,450	$	32,781
Cash receipts applied to reduce principal balance	$	9,772	$	7,042

The provisions of U.S. GAAP permit the valuation allowances reported above to be determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics. Because all of the loans currently identified as impaired have unique risk characteristics, valuation allowances the Bank has recorded were determined on a loan-by-loan basis.

Loans the Company considers to be impaired totaled approximately $45.8 million and $48.0 million at June 30, 2010 and December 31, 2009, respectively. The Company classifies all non-accruing loans, loans 90 days or more past due and still accruing as well as loans classified as troubled debt restructures as impaired. If interest on non-accruing loans had been recognized at the original interest rates stipulated in the respective loan agreements, interest income would have been approximately $1.0 million and $1.6 million higher during the three and six months ended June 30, 2010 compared to that reported for the same periods ended a year earlier. The Company recognized approximately $0.2 million and $0.3 million in interest income on certain loans classified as impaired for the three and six months ended June 30, 2010. This compares to $4 thousand and $8 thousand in interest income recognized on impaired loans for the same periods ended a year earlier. Interest income recognition on impaired loans related exclusively to troubled debt restructurings (“TDRs”) that were performing under the modified terms of their respective loan agreements. It should be noted that a significant portion of the Company’s impaired loans were carried at fair value as of June 30, 2010, resulting in large part from the charge-off of loan balances following the receipt of appraisal information on the underlying collateral.

At June 30, 2010, approximately $14.7 million in loans were classified as TDRs of which approximately $4.0 million were non-accruing. As of June 30, 2010 substantially all TDRs were evaluated based on the underlying collateral of the respective loans. In a majority of cases, the Company has granted concessions regarding interest rates, payment structure and maturity. Foregone interest related to TDRs totaled approximately $35 thousand and $77 thousand for the three and six months ended June 30, 2010. This compares to the $7 thousand and $9 thousand reported in the same three and six month periods ended a year earlier.

Allowance for Loan Losses

An allowance for loan losses has been established by Management to provide for those loans that may not be repaid in their entirety for a variety of reasons. The allowance is maintained at a level considered by Management to be adequate to provide for probable incurred losses. The allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. The provision for loan losses is based upon past loan loss experience and Management’s evaluation of the loan portfolio under current economic conditions. Loans are charged to the allowance for loan losses when, and to the extent, they are deemed by Management to be uncollectible.

Heritage Oaks Bancorp | - 16 -

Notes to Consolidated Financial Statements

The following table provides a summary for the activity in the allowance for loan losses during the periods indicated:

	For the three months ended				For the six months ended				For the year ended
	June 30,				June 30,				December 31,
(dollars in thousands)	2010		2009		2010		2009		2009
Balance at beginning of period	$	18,559	$	10,429	$	14,372	$	10,412	$	10,412
Provision expense		16,100		2,700		21,300		4,810		24,066
Loans charged-off
Commercial real estate		2,583		-		2,583		-		339
Farmland		235		-		235		-		-
Residential 1-4 family		282		-		282		-		558
Commercial and industrial		7,869		942		8,818		1,225		5,816
Agriculture		1,209		-		1,209		-		2,224
Construction		525		415		988		1,821		2,218
Land		956		681		956		991		8,886
Other		9		4		107		101		163

Total charge-offs		13,668		2,042		15,178		4,138		20,204

Recoveries of loans previously charged off		1,143		19		1,640		22		98

Balance at end of period	$	22,134	$	11,106	$	22,134	$	11,106	$	14,372

During the three and six months ended June 30, 2010, the Company made provisions for loan losses in the amount of $16.1 million and $21.3 million, respectively. This when compared to the $2.7 million and $4.8 million reported for the same periods ended a year earlier, represents an increase of approximately $13.4 million and $16.5 million, respectively. Elevated provision expenses are reflective of, among other things, additional loan balances charged-off during the six months of 2010, continued weakness in local, state and national economic conditions, the number and dollar volume of loans placed on non-accruing status when compared to historical periods and the downgrade of certain credits within the loan portfolio.

Note 4. Other Real Estate Owned (“OREO”)

The following table provides a summary of the change in the balance of OREO for the periods indicated below:

	For the three months ended						For the six months ended						For the year ended
	June 30,						June 30,						December 31,
(dollar amounts in thousands)	2010			2009			2010			2009			2009
Beginning balance	$	741		$	2,893		$	946		$	1,337		$	1,337
Additions		4,987			6,655			4,987			8,403			9,595
Dispositions		(775	)		(2,879	)		(775	)		(2,998	)		(8,521	)
Write-downs		-			-			(205	)		(73	)		(1,465	)

Ending balance	$	4,953		$	6,669		$	4,953		$	6,669		$	946

Note 5. Deferred Tax Assets

The Company is permitted to recognize deferred tax assets (“DTA”) only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities. The determination of the amount of DTA which is more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of the DTA is assessed by the Company periodically. If the Company determines that there is not sufficient positive evidence to support the realization of its DTA beyond what it can realize from the carry-back of operating losses a valuation allowance is established for all or a portion of the DTA it expects will not be realized.

Heritage Oaks Bancorp | - 17 -

Notes to Consolidated Financial Statements

In the fourth quarter of 2009, the Company performed an in depth analysis of its DTA to determine if the current carrying value of the DTA would be realized in future periods. Based on the Company’s analysis and all currently available information, the Company believes that as of June 30, 2010 the carrying value of the DTA can be supported and that a valuation allowance is not necessary at this time.

Companies are subject to a change in ownership test under Section 382 of the Internal Revenue Code, that if met, would limit the annual utilization of pre-change of ownership carry-forward as well as the ability to use certain unrealized built-in losses (as determined by Section 382 testing). As a result of the Company’s March 2010 private placement, a change of ownership was deemed to have occurred under Section 382. Under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate and the sum of the values of our common stock and our TARP preferred stock immediately before the ownership change. Our ability to utilize deductions related to credit losses during the twelve month period following the deemed ownership change would also be limited under Section 382, together with net operating loss carry-forwards, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change.

Because the amount of equity issued in the Company’s March 2010 private placement triggered an ownership change under Section 382, our ability to use the net operating loss carry-forwards and certain “built-in” losses existing at the time of the deemed change in ownership to offset future income may be substantially limited. Therefore, the Company may incur higher than anticipated income tax expense in future periods and / or may not fully realize portions of its DTA subject to the Section 382 limitation.

Note 6. Earnings / (Loss) Per Share

Basic earnings / (loss) per common share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the reporting period. Diluted earnings / (loss) per common share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding over the reporting period, adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares are calculated using the Treasury Stock Method and include incremental shares issuable upon exercise of outstanding stock options, other share-based compensation awards and any other security in which its conversion / exercise may result in the issuance of common stock, such as the warrant the Company issued to the U.S. Treasury during 2009. U.S. GAAP prohibits the computation of diluted earnings / (loss) per share from assuming exercise or issuance of securities that would have an anti-dilutive effect on earnings per share. As a result, the outstanding shares from the potential exercise of share-based compensation awards and the warrant issued to the U.S. Treasury were not included in the calculation of diluted earnings / (loss) per share for the three and six months ended June 30, 2010.

The following table sets forth the number of shares used in the calculation of both basic and diluted earnings / (loss) per share for the three and six months ended June 30, 2010 and 2009:

	For the three months ending,
	June 30, 2010					June 30, 2009
	Net					Net
(dollar amounts in thousands except per share data)	Income			Shares		Income			Shares
Net (loss) / income	$	(5,835	)			$	507
Dividends and accretion on preferred stock		(3,809	)				(250	)

Net (loss) / income applicable to common shareholders	$	(9,644	)			$	257

Weighted average shares outstanding					11,250,989					7,696,027

Basic (loss) / earnings per common share	$	(0.86	)			$	0.03

Dilutive effect of share-based compensation awards					-					94,681
Dilutive effect of common stock warrant					-					76,254
Dilutive effect of mandatorily convertible preferred stock					-					-

Weighted average diluted shares outstanding					11,250,989					7,866,962

Diluted (loss) / earnings per common share	$	(0.86	)			$	0.03

Heritage Oaks Bancorp | - 18 -

Notes to Consolidated Financial Statements

	For the six months ending,
	June 30, 2010					June 30, 2009
	Net					Net
(dollar amounts in thousands except per share data)	Income			Shares		Income			Shares
Net (loss) / income	$	(7,174	)			$	1,609
Dividends and accretion on preferred stock		(4,160	)				(261	)

Net (loss) / income applicable to common shareholders	$	(11,334	)			$	1,348

Weighted average shares outstanding					9,492,421					7,692,765

Basic (loss) / earnings per common share	$	(1.19	)			$	0.17

Dilutive effect of share-based compensation awards					-					85,606
Dilutive effect of common stock warrant					-					-
Dilutive effect of mandatorily convertible preferred stock					-					-

Weighted average diluted shares outstanding					9,492,421					7,778,371

Diluted (loss) / earnings per common share	$	(1.19	)			$	0.17

Note 7. Recent Accounting Pronouncements

On July 21, 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosures will require significantly more information about credit quality in a financial institution’s loan portfolio. This statement addresses only disclosures and does change recognition or measurement of the allowance for loan losses. The provisions under this statement are effective for interim and annual reporting periods beginning after December 15, 2010.

In April 2010, the FASB issued ASU No. 2010-18, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” ASU No. 2010-18 provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition, specifically those loans acquired and accounted for in the aggregate as a pool. As a result of the amendments in this Update, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The Company is required to adopt the provisions of this ASU in its first interim period beginning after July 15, 2010. The Company does not currently believe the adoption of this ASU will have a material impact on its consolidated financial statements.

In February 2010, the Financial FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855) Amendments to Certain Recognition and disclosure Requirements.” The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated. Removal of the disclosure requirement did not have an effect on the nature or timing of subsequent events evaluations performed by the Company. ASU 2010-09 became effective upon issuance.

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. These new disclosure requirements were effective for the period ended March 31, 2010, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Heritage Oaks Bancorp | - 19 -

Notes to Consolidated Financial Statements

In December 2009, FASB issued an accounting standard incorporated into Accounting Standards Codification (“ASC”) 860. This update codifies SFAS No. 166, “Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140,” which was previously issued by the FASB in June 2009 but was not included in the original codification. This update to ASC 860 creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This statement is effective for all annual and interim reporting periods beginning after November 15, 2009. Under this standard, in order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest: (i) the portions of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership, (iii) involve no recourse (other than standard representation and warranties) to, or subordination by, any participating interest holder, and (iv) no party has the right to pledge or exchange the entire financial asset. If the participating interest or surrender of control criteria are not met the transfer is not accounted for as a sale and de-recognition of the asset is not appropriate. Rather the transaction is accounted for as a secured borrowing arrangement. The impact to certain transactions such as the sale of SBA loans or certain participations being reported as secured borrowings rather than derecognizing a portion of a financial asset would increase total assets (loans) and liabilities (other borrowings). The terms contained in certain participation and loan sale agreements are outside the control of the Company and largely relate to Small Business Administration (“SBA”) loan sales. These sales agreements contain recourse provisions (generally 90 days) that will initially preclude sale accounting. However, once the recourse provision expires, transfers of portions of financial assets may be reevaluated to determine if they meet the participating interest definition and subsequently accounted for as a sale. As a result, The Company will report SBA transfers as secured borrowings over the period for which recourse provisions exist, which will result in the deferral of any potential gain on sale from these transactions, assuming all other sales criteria for each transaction are met. The Company does not believe it has or will have a significant amount of participations subject to recourse provisions or other features that would preclude de-recognition of the assets transferred. The Company adopted this accounting standard on January 1, 2010 and does not currently believe the impact of adoption will have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued an accounting standard, incorporated into ASC topic 810 “Consolidation,” that seeks to improve financial reporting by companies involved with variable interest entities. Also addressed under this standard are concerns about the application of certain key provisions, including those in which the accounting and disclosures do not always provide timely and useful information about a company’s involvement in a variable interest entity. The standard requires a company to perform analyses to determine if its variable interest(s) give it a controlling financial interest in a variable interest entity. These analyses identify the primary beneficiary of the variable interest entity as the company that has both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly impact the company’s economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This standard is effective for all annual and interim reporting periods beginning after November 15, 2009 with earlier application prohibited. The adoption of this standard did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued an accounting standard which was incorporated into ASC topic 860 “Transfers and Servicing.” This standard seeks to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Company adopted this accounting standard on January 1, 2010 and the adoption did not have a material impact on the Company’s financial statements.

In December 2008, the FASB issued an accounting standard which was subsequently incorporated into ASC topic 715 “Compensation – Retirement Benefits.” This standard seeks to provide users of financial statements with an understanding of: how investment allocation decisions are made, the major categories of plan assets, the inputs and valuations techniques used to measure the fair value of those assets, the effect of fair value measurements using unobservable inputs on changes in plan assets during a reporting period, and significant concentrations of risk within plan assets. The Company is adopted this accounting standard on January 1, 2010. The adoption of this standard did not have a material impact on its financial statements.

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Notes to Consolidated Financial Statements

Note 8. Share-Based Compensation

As of June 30, 2010, the Company had two share-based employee compensation plans, which are more fully described in Note 15 of the consolidated financial statements in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2009. These plans include the “1997 Stock Option Plan” and the “2005 Equity Based Compensation Plan.” Share-based compensation expense for all share-based compensation awards granted after January 1, 2006, is based on the grant-date fair value. For all awards except stock option awards, the grant date fair value is either the fair market value per share or book value per share (corresponding to the type of stock awarded) as of the grant date. For stock option awards, the grant date fair value is estimated using the Black-Scholes option pricing model. For all awards, the Company recognizes these compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the award, for which we use the related vesting term. The Company estimates forfeiture rates based on historical employee option exercise and employee termination experience.

The share-based compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, 2010 and 2009 is based on awards ultimately expected to vest, and accordingly has been adjusted by the amount of estimated forfeitures. U.S. GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The following table provides a summary of the expenses the Company has recognized related to share-based compensation as well as the impact those expenses have had on diluted earnings per share for the periods indicated below:

	For the three months ended				For the six months ended
	June 30,				June 30,
(dollars in thousands except share and per share data)	2010		2009		2010		2009
Share-based compensation expense:
Stock option expense	$	45	$	42	$	92	$	86
Restricted stock expense		44		52		96		98

Total share-based compensation expense		89	$	94		188	$	184

Total share-based compensation expense, net of tax	$	56	$	57	$	119	$	113

Diluted shares outstanding		11,250,989		7,866,962		9,492,421		7,778,371
Impact on diluted earnings per share	$	-	$	0.007	$	-	$	0.015

Unrecognized compensation expense:
Stock option expense	$	158	$	258
Restricted stock expense		133		368

Total unrecognized share-based compensation expense	$	291	$	626

Total unrecognized share-based compensation expense, net of tax	$	203	$	380

At June 30, 2010, there was a total of $158 thousand of unrecognized compensation expense related to non-vested stock option awards. That expense is expected to be recognized over a weighted-average period of 1.5 years.

The Company grants restricted share awards periodically for the benefit of employees. These restricted shares generally “cliff vest” after five years of issuance. Recipients of restricted shares have the right to vote all shares subject to such grant, and receive all dividends with respect to such shares, whether or not the shares have vested. Recipients do not pay any cash consideration for the shares. The total unrecognized compensation expense related to restricted share awards at June 30, 2010 was $133 thousand. That expense is expected to be recognized over the next 0.7 years.

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of 2010 and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders exercised their options on June 30, 2010). The aggregate pretax intrinsic value is subject to change based on the fair market value of the Company's stock. There was no aggregate intrinsic value associated with options that were exercised during 2010. The pretax intrinsic value associated with options exercised in the second quarter of 2009 was approximately $22 thousand.

Heritage Oaks Bancorp | - 21 -

Notes to Consolidated Financial Statements

The following table provides a summary of the aggregate intrinsic value of options outstanding and exercisable as well as options granted, exercised, and forfeited during the year-to-date periods ended June 30, 2010 and 2009:

						Average
				Weighted		Remaining		Total
				Average		Contractual		Intrinsic
	Number of			Exercise		Term		Value
	Shares			Price		(in years)		(in 000's)

Options outstanding, January 1, 2010		440,738		$	9.15
Granted		-			-
Exercised		(11,260	)		3.73
Forfeited		-			-

Options outstanding, June 30, 2010		429,478		$	9.29		3.95	$	980

Exercisable at June 30, 2010		356,290		$	9.54		3.02	$	980

Options outstanding, January 1, 2009		408,830		$	9.34
Granted		30,324			4.81
Exercised		(10,050	)		3.73
Forfeited		-			-

Options outstanding, June 30, 2009		429,104		$	9.15		4.34	$	288

Exercisable at June 30, 2009		347,172		$	8.92		3.28	$	245

The Company did not grant any options during the three and six months ended June 30, 2010. During the first quarter of 2009 the Company granted 25,000 options to various non-management members of the Company’s Board of Directors. The Company also granted 5,324 options to one other individual during the second quarter of 2009. The following table presents the assumptions used in the calculation of the weighted average fair value of options granted during the first six months of 2009:

	2009
Expected volatility		42.26	%
Expected term (years)		10
Dividend yield		0.00	%
Risk free rate		2.84	%

Weighted-average grant date fair value	$	2.74

The table above presents the assumptions used to estimate the fair value of stock options granted on the date of grant using the Black-Scholes pricing model. The Black-Scholes model incorporates a range of assumptions for inputs that are disclosed in the table above. Expected volatilities are based on the daily historical stock price over the expected life of the option. The expected term of options granted is derived from the output of the model and represents the period of time that options granted are expected to be outstanding. Dividend yields are estimated based on the dividend yield on the Company’s common stock at the time of grant. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant.

Estimates of fair value derived from the Company’s use of the Black-Scholes pricing model are theoretical values for stock options and changes in the assumptions used in the models could result in different fair value estimates. The actual value of the stock options granted will depend on the market value of the Company’s common stock when the options are exercised.

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Notes to Consolidated Financial Statements

Note 9. Fair Value Disclosures

The Company determines the fair market values of certain financial instruments based on the fair value hierarchy established in U.S. GAAP which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and describes three levels of inputs that may be used to measure fair value.

The following provides a summary of the hierarchical levels used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities may include debt and equity securities that are traded in an active exchange market and that are highly liquid and are actively traded in over-the-counter markets.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and other instruments whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts, residential mortgage and loans held-for-sale.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential MSRs, asset-backed securities (“ABS”), highly structured or long-term derivative contracts and certain collateralized debt obligations (“CDOs”) where independent pricing information was not able to be obtained for a significant portion of the underlying assets.

Fair Value Measurements

The Company used the following methods and significant assumptions to estimate fair value:

Securities

The fair value of securities available-for-sale are determined by obtaining quoted prices on nationally recognized exchanges or matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the security’s relationship to other benchmark quoted securities.

Loans Held For Sale

The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted price exists, the fair value of the loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan.

Impaired Loans

A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows. The Company measures impairment on all non-accrual loans for which it has established specific reserves as part of the specific credit allocation component of the allowance for loan losses. As such, the Company records impaired loans as non-recurring Level 2 when the fair value of the underlying collateral is based on an observable market price or current appraised value. When current market prices are not available or the Company determines that the fair value of the underlying collateral is further impaired below appraised values, the Company records impaired loans as non-recurring Level 3. At June 30, 2010, a significant majority of the Company’s impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to Management.

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Notes to Consolidated Financial Statements

Other Real Estate Owned and Foreclosed Collateral

Other real estate owned and foreclosed collateral are adjusted to fair value, less any estimated costs to sell, at the time the loans are transferred into this category. The fair value of these assets is based on independent appraisals, observable market prices for similar assets, or Management’s estimation of value. When the fair value is based on independent appraisals or observable market prices for similar assets, the Company records other real estate owned or foreclosed collateral as non-recurring Level 2 assets. When appraised values are not available, there is no observable market price for similar assets, or Management determines the fair value of the asset is further impaired below appraised values or observable market prices, the Company records other real estate owned or foreclosed collateral as non-recurring Level 3 assets.

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis as of June 30, 2010:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
(dollars in thousands)	Identical Assets		Inputs		Inputs		Assets At
As of June 30, 2010	(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Obligations of U.S. government agencies	$	-	$	100	$	-	$	100
Mortgage backed securities
Agency		-		146,966		-		146,966
Non-agency		-		17,733		-		17,733
Obligations of state and political subdivisions		-		27,241		755		27,996
Other securities		-		109		-		109

Total assets measured on a recurring basis	$	-	$	192,149	$	755	$	192,904

As of December 31, 2009
Assets
Obligations of U.S. government agencies	$	-	$	104	$	-	$	104
Mortgage backed securities
Agency		-		77,950		-		77,950
Non-agency		-		20,153		-		20,153
Obligations of state and political subdivisions		-		22,127		737		22,864
Other securities		-		109		-		109

Total assets measured on a recurring basis	$	-	$	120,443	$	737	$	121,180

The following table provides a summary of the changes in balance sheet carrying values associated with Level 3 financial instruments during the six months ended June 30, 2010:

					Purchases,
	Balance as of		Gains / (Losses)		Issuances, and		Balance as of
(dollars in thousands)	December 31, 2009		Included in OCI (1)		Settlements		June 30, 2010
Obligations of state and political subdivisions	$	737	$	18	$	-	$	755

(1) Realized or unrealized gains from the changes in values of Level 3 financial instruments represent gains from changes in values of financial instruments only for the period(s) in which the instruments were classified as Level 3.

The assets presented under level 3 of the fair value hierarchy classified as obligations of state and political subdivisions represent available for sale investment securities in the form of certificates of participation where an active market for such securities is not currently available.

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Notes to Consolidated Financial Statements

The following table provides a summary of the financial instruments the Company measures at fair value on a non-recurring basis as of June 30, 2010:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
(dollars in thousands)	Identical Assets		Inputs		Inputs		Assets At		Total
As of June 30, 2010	(Level 1)		(Level 2)		(Level 3)		Fair Value		Gains (Losses)
Assets
Impaired loans	$	-	$	43,389	$	-	$	43,389	$	(1,547	)
Loans held for sale		-		9,429		-		9,429		-
Other real estate owned		-		4,953		-		4,953		(36	)
Goodwill		-		-		11,049		11,049		-

Total assets measured on a non-recurring basis	$	-	$	57,771	$	11,049	$	68,820	$	(1,583	)

As of December 31, 2009
Assets
Impaired loans	$	-	$	47,172	$	-	$	47,172	$	(20,204	)
Loans held for sale		-		9,487		-		9,487		-
Other real estate owned		-		946		-		946		(1,496	)
Goodwill		-		-		11,049		11,049		-

Total assets measured on a non-recurring basis	$	-	$	57,605	$	11,049	$	68,654	$	(21,700	)

Goodwill assets are recorded at fair value initially and assessed for impairment periodically thereafter under the provisions set forth in U.S. GAAP. During the fiscal year ended December 31, 2009, the carrying amount of goodwill assets were compared to their fair value. No change in carrying amount resulted in accordance with the provisions set forth in U.S. GAAP. Additionally, the Company has certain other loans that are measured at fair value on a non-recurring basis such as loans that were acquired in the acquisition of Business First National Bank.

Note 10. Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.

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Notes to Consolidated Financial Statements

The following table provides a summary of the estimated fair value of financial instruments at June 30, 2010 and December 31, 2009:

	June 30, 2010				December 31, 2009
	Carrying				Carrying
(dollars in thousands)	Amount		Fair Value		Amount		Fair Value
Assets
Cash and cash equivalents	$	62,031	$	62,031	$	40,738	$	40,738
Interest bearing deposits		119		119		119		119
Investments and mortgage-backed securities		192,904		192,904		121,180		121,180
Federal Home Loan Bank stock		5,611		5,611		5,828		5,828
Loans receivable, net of deferred fees and costs		695,478		692,214		726,854		731,045
Loans held for sale		9,429		9,429		9,487		9,487
Bank owned life insurance		12,811		12,811		12,549		12,549
Accrued interest receivable		3,701		3,701		3,639		3,639

Liabilities
Non-interest bearing deposits		182,846		182,846		174,635		174,635
Interest bearing deposits		612,987		613,773		600,830		596,782
Federal Home Loan Bank advances		65,000		65,056		65,000		65,180
Junior subordinated debentures		8,248		7,660		13,403		12,390
Accrued interest payable		437		437		590		590

	Notional		Cost to Cede		Notional		Cost to Cede
	Amount		or Assume		Amount		or Assume
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	135,411	$	1,354	$	169,578	$	1,696

The following methods and assumptions were used by the Company in estimating fair values of financial instruments:

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of those assets due to the short-term nature of the assets.

Interest Bearing Deposits at Other Financial Institutions

The carrying amounts reported in the balance sheet for interest bearing deposits at other financial institutions approximates the fair value of these assets due to the short-term nature of the assets.

Investments Including Federal Home Loan Bank Stock and Mortgage-Backed Securities

Fair values are based upon quoted market prices, where available. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments or through the use of other observable data supporting a valuation model. Fair values for holdings of Federal Home Loan Bank stock is based on carrying amounts.

Loans, Loans Held for Sale, and Accrued Interest Receivable

For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate loans and loans that possess a rate variable other than daily) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.

Bank Owned Life Insurance

Fair values are based on current cash surrender values at each reporting date provided by the underlying insurers.

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Notes to Consolidated Financial Statements

Federal Home Loan Bank Advances

The fair value disclosed for FHLB advances is determined by discounting contractual cash flows at current market interest rates for similar instruments.

Interest Bearing Deposits and Accrued Interest Payable

The fair values disclosed for interest bearing deposits (for example, interest-bearing checking accounts and passbook accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates its fair value.

Junior Subordinated Debentures

The fair value disclosed for junior subordinated debentures is based on contractual cash flows at current market interest rates for similar instruments.

Off-Balance Sheet Instruments

Fair values of commitments to extend credit and standby letters of credit are based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the counterparties' credit standing.

Note 11. Preferred Stock

U.S Treasury’s Capital Purchase Program (“CPP”)

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

On March 20, 2009, the Company issued 21,000 shares of Series A Senior Preferred Stock to the U.S. Treasury under the terms of the CPP for $21.0 million with a liquidation preference of $1,000 per share. The preferred stock carries a coupon of 5% for five years and 9% thereafter. Senior preferred stock issued to the U.S. Treasury is non-voting, cumulative, and perpetual and may be redeemed at 100% of their liquidation preference plus accrued and unpaid dividends following three years from the date of issue. In addition, the Company issued a warrant to the U.S. Treasury to purchase shares of the Company’s common stock in an amount equal to 15% of the preferred equity issuance or approximately $3.2 million (611,650 shares). The warrant is exercisable immediately at a price of $5.15 per share, will expire after a period of 10 years from issuance and is transferable by the U.S. Treasury. The warrant may be dilutive to earnings per common share during reporting periods in which the warrant is not anti-dilutive.

The U.S. Treasury may transfer a portion or portions of the warrant, and/or exercise the warrant at any time. The U.S. Treasury has agreed not to exercise voting power with respect to any common shares issued to it upon exercise of the warrant. At June 30, 2010, there had been no changes to the number of common shares covered by the warrant nor had the U.S. Treasury exercised any portion of the warrant.

The proceeds received from the U.S. Treasury were allocated to the Series A Senior Preferred Stock and the warrant based on their relative fair values. The fair value of the Series A Senior Preferred Stock was determined through a discounted future cash flow model at a discount rate of 10%. The fair value of the warrant was calculated using the Black-Scholes option pricing model, which includes assumptions regarding the Company’s dividend yield, stock price volatility, and the risk-free interest rate. As a result the Company recorded the Series A Senior Preferred Stock and the warrant at approximately $19.2 million and $1.8 million, respectively. The Company will accrete the discount on the Series A Senior Preferred Stock over a period of five years with corresponding charges to retained earnings.

It is also important to note that net income available to common shareholders will be impacted to the extent the Company charges retained earnings for the accretion of the discount on the Series A Senior Preferred Stock and any dividends accrued and paid from retained earnings on the Series A Senior Preferred Stock. For the three and six months ended June 30, 2010, dividends and accretion on the Series A Senior Preferred Stock totaled approximately $0.7 million. Additionally, the Company is subject to certain limitations during its participation in the CPP including:

The requirement to obtain consent from the U.S. Treasury for any proposed increases in common stock dividends prior to the third anniversary date of the preferred equity issuance.

Heritage Oaks Bancorp | - 27 -

Notes to Consolidated Financial Statements

The Series A Senior Preferred Stock cannot be redeemed for three years unless the Company obtains proceeds to replace the Series A Senior Preferred Stock through a qualified equity offering.

The U.S. Treasury must consent to any buy back of our common stock.

The Company must adhere to restrictions placed on the amount of and type of compensation paid to its executives while participating in the CPP, pursuant to section 111 of the Emergency Economic Stabilization Act of 2008, as amended (“EESA”).

In the second quarter of 2010 the Company was required to defer dividend payments on its Series A Senior Preferred Stock to comply with the terms of the Written Agreement entered into between the Company and the Federal Reserve Bank of San Francisco. As a result the Company accrued for but did not pay approximately $0.3 million in dividends on its Series A Senior Preferred Stock. If the Company fails to pay dividends on Series A Senior Preferred Stock for a total of six quarters, whether or not consecutive, the U.S. Treasury will have the right to elect two members of the Company’s Board of Directors, voting together with any other holders of preferred shares ranking pari passu with the Series A Senior Preferred Stock. These directors would serve on the Company’s Board of Directors until such time as the Company has paid in full all dividends not previously paid, at which time these directors’ terms of office would immediately terminate.

For more information concerning the Written Agreement, please refer to Note 12. Regulatory Order and Written Agreement of these consolidated financial statements.

Private Placement and Preferred Stock Conversion

In June 2010, the Company received shareholder approval to convert all outstanding shares of Series B Preferred Stock to common stock and as a result the Company issued 17,279,995 shares of common stock in June 2010.

The Series B Preferred Stock was mandatorily convertible into common stock, upon the approval by shareholders of the Company’s common stock at a conversion price of $3.25 per common share. As indicated above, shareholder approval occurred during the second quarter of 2010. The conversion price of $3.25 per common share was less than the fair market value of the Company’s common stock on March 10, 2010, (the “commitment date”) the date the Company made a firm commitment to issue the Series B Preferred Stock. The fair market value of the Company’s common stock on the commitment date was $3.45 per share. Therefore, the Series B Preferred Stock was issued with a contingent beneficial conversion feature that had an intrinsic value equal to the $0.20 per share difference between the share price on the commitment date and the conversion price of the Series B Preferred Stock. The intrinsic value of the beneficial conversion feature related to the entire Series B Preferred Stock issuance was $3.5 million. The recognition of the beneficial conversion feature was contingent upon the approval of the Company’s shareholders of the conversion of the Series B Preferred Stock to common stock and thus was recognized in June 2010 when such approval was received at the Company’s annual meeting of shareholders.

Upon conversion of the Series B Preferred Stock the related beneficial conversion feature was recorded in conjunction with the establishment of a discount on the Series B Preferred Stock and a corresponding increase in additional paid in capital. The immediate accretion of the entire Series B Preferred Stock discount occurred through a charge to retained earnings on June 11, 2010, the date the Company converted the outstanding Series B Preferred Stock to common stock.

Series C Preferred Stock is a non-voting class of stock substantially similar in priority to the common stock of the Company, except for a liquidation preference over the Company’s common stock. The Series C Preferred Stock will convert to shares of common stock on a one share for one share basis if the original holder of such shares transfers them to an unaffiliated third party. The Series C Preferred Stock will not be redeemable by either the Company or by the holders. Holders of the Series C Preferred Stock do not have any voting rights, including the right to elect any directors, other than the customary limited voting rights with respect to matters significantly and adversely affecting the rights and privileges of the Series C Preferred Stock.

It should be noted that two investors in the Company’s March 2010 private placement have Board observation rights, while one of the two investors also has Board nomination rights.

Heritage Oaks Bancorp | - 28 -

Notes to Consolidated Financial Statements

As is the case with the Series B Preferred Stock, the fair market value of the Company’s common stock was higher than the conversion price of $3.25 per share of the Series C Preferred Stock on the date the Company made a firm commitment to issue the Series C Preferred Stock. Therefore, the Series C Preferred Stock also has a contingent beneficial conversion feature associated with it. However, since the conversion of the Series C Preferred Stock remains contingent upon the holder’s transfer of the securities to an unaffiliated third party with no specified date for its conversion to common stock, the Company will record the contingent beneficial conversion feature as an initial discount on Series C Preferred Stock and additional paid in capital, with a concurrent immediate accretion of the established discount and corresponding charge to retained earnings on the date the Series C Preferred Stock converts to common stock. The amount of the contingent beneficial conversion feature is approximately $0.2 million and will be recorded as described upon the original holder’s transfer of Series C Preferred Stock to an unaffiliated third party.

Note 12. Regulatory Order and Written Agreement

On March 4, 2010, the FDIC and the DFI issued a Consent Order (the "Order") to the Bank that requires, among other things, the Bank to increase its capital ratios, reduce its classified assets and increase Board oversight of Management. The Board and Management are aggressively responding to the Order to ensure full compliance and have taken actions necessary to comply with the Order within the required time frames. Such actions include the completion of the capital raise discussed above which, following a contribution of a portion of the proceeds to the Bank, brought the Bank into compliance with the capital requirements of the Order. Additionally, a Written Agreement was entered into between the Company and the Federal Reserve Bank of San Francisco on March 4, 2010.

The following provides a summary of certain provisions in the Order as well as the Written Agreement. Please also refer to the Company’s current reports filed on Form 8-K with the SEC on March 10, 2010 and March 8, 2010, for a more complete description of the provisions of the Order and Written Agreement, respectively.

Consent Order

On February 26, 2010, the Bank stipulated to the issuance of the Order by the FDIC, its principal federal banking regulator, and the California Department of Financial Institutions (“DFI”) which requires the Bank to take certain measures to improve its safety and soundness. The Order was subsequently issued by the FDIC and DFI on March 4, 2010. The Bank’s stipulation to the issuance by the FDIC and the DFI of the Order resulted from certain findings in a report of examination resulting from an examination of the Bank conducted in September 2009 based upon financial and lending data measured as of June 30, 2009. In entering into the stipulation to entry of the Order, the Bank did not concede the findings or admit to any of the assertions in the report of examination (“ROE”).

Under the Order, the Bank is required to take certain measures as more fully discussed below. At June 30, 2010, the Bank believes it is in compliance with all components of the Order.

Among the corrective actions required are for the Bank to develop and adopt a plan to maintain the minimum capital requirements for a “well-capitalized” bank, and to reach and maintain a Tier 1 leverage ratio of at least 10% and a total risked based capital ratio of 11.5% at the Bank level beginning 90 days from the issuance of the Order. Following the Company’s March 2010 private placement, $48.0 million was down-streamed to the Bank in the form of Tier I capital, bringing the Bank’s regulatory capital ratios above the required minimums set forth in the Order.

Pursuant to the Order, the Bank must retain qualified management, must notify the FDIC and the DFI in writing when it proposes to add any individual to its Board of Directors or to employ any new senior executive officer, and must conduct an independent study of management and personnel structure of the Bank. A consultant was retained to complete the required management study. The Bank is in compliance with the Order’s timelines for completion of such study and implementation by the Board of a plan to address the findings of such study. As part of the capital raise, the Company and Bank received regulatory approval to add as a director of both the Bank and Company one of the principals of the investor in the transaction that owns approximately 14.4% of the outstanding voting shares of the Company. The addition of a director to the Company’s Board of Directors required an amendment to the Company’s bylaws to increase the range of the size of the board. The Company’s shareholders approved such an amendment at the June 10, 2010 Shareholder Meeting and the director was added to the Company’s Board effective June 23, 2010.

Heritage Oaks Bancorp | - 29 -

Notes to Consolidated Financial Statements

Under the Order the Bank’s Board of Directors must also increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank’s activities. The Board of Directors believes it has always provided appropriate oversight of the Bank, but has recently taken steps to reevaluate such oversight and enhance where appropriate the frequency and duration and the scope and depth of matters covered at its Board meetings in response to the current economic environment and concerns raised in the ROE. In direct response to the ROE, a new joint regulatory compliance committee was formed at both the Bank and Company levels to oversee the Bank’s and Company’s response to all regulatory matters, including the Order and the Written Agreement, discussed below. Detailed tracking of the Order’s requirements, and the Bank’s progress in responding thereto, is reviewed and reported at all such committee meetings, with regular reports then being provided by the committee to the full Board. Further, and prior to the issuance of the Order, the Board directed its Chairman, Michael Morris, to significantly increase his direct oversight of Management and involvement in Bank and Company affairs to ensure an appropriate response at both the Bank and Company to the concerns raised in the recent examination of the Bank.

The Order further requires the Bank to increase its Allowance for Loan Losses (“ALLL”), as of the date of the ROE, by $3.5 million and to review and revise its ALLL methodology. The Bank subsequently made provisions of approximately $19.3 million in the third and fourth quarters of 2009 and increased the ALLL by a net $4.2 million in the first quarter of 2010. The Bank has revised its policy for determining the adequacy of the ALLL to include an assessment of market conditions and other qualitative factors. The Bank’s policy otherwise continues to provide for a comprehensive determination of the adequacy of its ALLL which is to be reviewed promptly and regularly at least once each calendar quarter and be properly reported, and any deficiency in the allowance must be remedied in the calendar quarter it is discovered, by a charge to current operating earnings.

With respect to classified assets as of the date of the ROE, the Order also requires the Bank to charge-off or collect all assets classified as “Loss” and one-half of the assets classified as “Doubtful,” and within 180 days of the Order to reduce its level of assets classified as “Substandard” to no more than the greater of $50.0 million or 50% of Tier 1 capital plus the ALLL. As of December 31, 2009, the Bank met the requirement to charge-off or collect all assets classified as “Loss” and one-half of the assets classified as “Doubtful” as of the date of the ROE. At June 30, 2010, the Bank has met the requirement to reduce assets classified as “Substandard” as of the date of the ROE to no more than the greater of $50.0 million or 50% of Tier 1 capital plus the ALLL.

The Order requires that the Bank develop or revise, adopt and implement a plan, which must be approved by the FDIC and DFI, to reduce the amount of Commercial Real Estate loans extended, particularly focusing on reducing loans for construction and land development. At June 30, 2010, the Bank has reduced its concentrations for Commercial Real Estate and construction and land development to within guidelines acceptable by the Order. In addition, the Bank is to develop a plan for reducing the number of “watch list” credits to an acceptable level, and develop or revise its written lending and collection policies to provide more effective guidance and control over the Bank’s lending function. At June 30, 2010, the Bank has in place a plan to comply with this provision of the Order.

The Order restricts the Bank from taking certain actions without the prior written consent of the FDIC and the DFI, including paying cash dividends, and from extending additional credit to certain types of borrowers. The Bank has not paid cash dividends since the first quarter of 2008. In addition, the Bank has put processes and controls in place to ensure extensions of credit, directly or indirectly, are not granted to those who are related to borrowers of loans charged-off or classified as “Loss”, “Substandard” or “Doubtful” in the ROE. The Bank has also acknowledged that neither the loan committee nor the Board of Directors will approve any extension to a borrower classified “Substandard” or “Doubtful” in the ROE without first collecting all past due interest in cash.

The Order further requires the Bank to develop or revise, adopt and implement a revised liquidity policy, and to adopt a contingency funding plan to adequately address contingency funding sources and appropriately reduce contingency funding reliance on off-balance sheet sources. The Bank has revised its current liquidity policy and contingency funding plan.

The Order also requires that the Bank prepare and submit a revised business plan, that is to include a comprehensive budget, and a 3 year strategic plan, and to further revise its investment policy. The Bank has since prepared a comprehensive budget and revised the investment policy and is in the process of developing a revised business plan and 3 year strategic plan.

Heritage Oaks Bancorp | - 30 -

Notes to Consolidated Financial Statements

Written Agreement

On March 4, 2010, the Company entered into a written agreement with the FRB (the “Written Agreement”), which requires the Company to take certain measures to improve its safety and soundness. Under the Written Agreement, the Company is required to develop and submit for approval, a plan to maintain sufficient capital at the Company and the Bank within 60 days of the date of the Written Agreement. The Written Agreement further provides, among other things, that the Company shall not: declare or pay dividends without prior approval of the FRB, take dividends from the Bank, make any distribution of interest, principal or other sums on subordinated debt or trust preferred securities, incur, increase, or guarantee any debt. The Company believes it is currently in compliance with all requirements of the Written Agreement, including an update to its capital plan. The Company has updated its cash flow projections for 2010 and has provided that information to the FRB.

The forgoing discussion of the Order and Written Agreement are qualified in their entirety by reference to the complete text of the Order and Written Agreement, which can be found on the Current Reports on Form 8-K filed March 10, 2010, and March 8, 2010, respectively.

Note 13. Junior Subordinated Debentures

On June 8, 2010, the Company repurchased $5.0 million in face amount trust preferred securities issued by Heritage Oaks Capital Trust III, and the related $5.2 million junior subordinated debentures issued by the Company. The repurchase resulted in a pre-tax gain of approximately $1.7 million, recognized during the three months ended June 30, 2010. The repurchase was made pursuant to the non-objection of the Federal Reserve Bank of San Francisco and approval of the United States Treasury Department.

In the second quarter of 2010 the Company elected to defer interest payments on $8.2 million junior subordinated debentures to comply with the terms of the Written Agreement entered into between the Company and the Federal Reserve Bank of San Francisco. As a result the Company accrued for but did not pay approximately $42 thousand in interest payments on these debentures. For more information concerning the Written Agreement, please refer to Note 12. Regulatory Order and Written Agreement of these consolidated financial statements. For such time as the Company continues to the deferral of interest, it will be prevented from, among other things, paying dividends on its preferred and common stock.

Note 14. Reclassifications

Certain amounts in the 2009 financial statements have been reclassified to conform to the 2010 presentation.

Heritage Oaks Bancorp | - 31 -

Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q/A (“Quarterly Report”), including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects”, and words of similar impact, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the ongoing financial crisis in the United States, and the response of the federal and state government and our regulators thereto, general economic conditions in those areas in which the Company operates, the recent fluctuations in U.S. markets resulting, in part, from problems related to sub-prime lending, from the national recession and the recent downturn in the California real estate market, general economic and business conditions in those areas in which the Company operates, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the impact of the recent capital raise to support the Company’s business, as well as economic, political and global changes arising from the war on terrorism, increased profitability, continued growth, the Bank’s beliefs as to the adequacy of its existing and anticipated allowance for loan losses, beliefs and expectations about, and requirements to comply with the terms of Consent Order and Written Agreement issued by regulatory authorities having oversight of the Bank’s and Company’s operations, financial policies of the United States government and continued weakness in the real estate markets within which we operate. (Refer to the Company’s December 31, 2009 10-K, ITEM 1A. Risk Factors). The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Heritage Oaks Bancorp | - 32 -

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

The following is an analysis of the results of operations and financial condition of the Company as of and for the three and six month periods ending June 30, 2010 and 2009. The analysis should be read in connection with the consolidated financial statements and notes thereto appearing elsewhere in this report.

The Company

Heritage Oaks Bancorp (the "Company") is a California corporation organized in 1994 to act as a holding company of Heritage Oaks Bank ("Bank"), a 15 branch bank serving San Luis Obispo and Santa Barbara Counties. In 1994, the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction.

In October 2006, the Company formed Heritage Oaks Capital Trust II (“Trust II”). Trust II is a statutory business trust formed under the laws of the State of Delaware and is a wholly-owned, non-financial, non-consolidated subsidiary of the Company.

In September 2007, the Company formed Heritage Oaks Capital Trust III (“Trust III”). Trust III is a statutory business trust formed under the laws of the State of Delaware and is a wholly-owned, non-financial, non-consolidated subsidiary of the Company. In June 2010 the Company re-purchased all the outstanding securities related to Trust III and plans to dissolve Trust III in the second half of 2010.

On October 12, 2007, the Company acquired Business First National Bank (“Business First”). Business First was merged with and into Heritage Oaks Bank, a wholly owned subsidiary of the Company. In connection with the acquisition, two additional branches were added to the Bank’s network. For additional information regarding this acquisition, please see Note 23 to the consolidated financial statements of the Company’s 2008 annual report, which was filed on Form 10-K.

Other than holding the shares of the Bank, the Company conducts no significant activities, although it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Company's principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The Company has also caused to be incorporated a subsidiary, CCMS Systems, Inc. which is currently inactive and has not been capitalized. The Company has no present plans to activate the proposed subsidiary.

Where You Can Find More Information

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Current Report), and Form DEF 14A (Proxy Statement). The Company may file additional forms. The SEC maintains an internet site, www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all forms filed with the SEC and additional shareholder information are available free of charge on the Company’s website: www.heritageoaksbancorp.com.

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

	For the quarters ended,
(dollars in thousands except per share data)	06/30/10			03/31/10			12/31/09			09/30/09			06/30/09			03/31/09			12/31/08			09/30/08

Return on average assets		-2.32	%		-0.56	%		-1.43	%		-2.30	%		0.23	%		0.54	%		-0.63	%		0.27	%

Return on average equity		-17.35	%		-5.70	%		-15.27	%		-22.54	%		2.20	%		6.04	%		-6.93	%		2.94	%

Return on average common equity		-55.46	%		-10.93	%		-22.05	%		-31.14	%		1.44	%		6.21	%		-6.93	%		2.94	%

Average equity to average assets		13.36	%		9.88	%		9.35	%		10.18	%		10.68	%		8.95	%		9.06	%		9.16	%

Average common equity to average assets		6.91	%		6.57	%		7.14	%		7.87	%		8.26	%		8.61	%		9.06	%		9.16	%

Net interest margin		4.69	%		4.43	%		4.81	%		4.34	%		4.91	%		5.03	%		5.04	%		5.18	%

Efficiency ratio*		68.86	%		76.88	%		70.84	%		95.12	%		70.02	%		66.71	%		66.43	%		64.40	%

Average loans to average deposits		91.82	%		93.67	%		93.45	%		98.20	%		103.58	%		112.39	%		109.95	%		111.54	%

Net (loss) / income	$	(5,835	)	$	(1,339	)	$	(3,416	)	$	(5,242	)	$	507		$	1,102		$	(1,254	)	$	534

Net (loss) / income available to common shareholders	$	(9,644	)	$	(1,690	)	$	(3,767	)	$	(5,594	)	$	257		$	1,091		$	(1,254	)	$	534

(Loss) / Earnings Per Common Share:
Basic	$	(0.86	)	$	(0.22	)	$	(0.48	)	$	(0.73	)	$	0.03		$	0.14		$	(0.16	)	$	0.07
Diluted	$	(0.86	)	$	(0.22	)	$	(0.48	)	$	(0.73	)	$	0.03		$	0.14		$	(0.16	)	$	0.07
Outstanding Shares:
Basic		11,250,989			7,717,194			7,704,060			7,699,377			7,696,027			7,689,317			7,660,342			7,709,600
Diluted		11,250,989			7,717,194			7,704,060			7,699,377			7,866,962			7,824,377			7,660,342			7,798,321

	For the three months ending								For the three months ending
	June 30, 2010								June 30, 2009
				Yield/			Income/					Yield/			Income/
(dollars in thousands)	Balance			Rate (4)			Expense		Balance			Rate (4)			Expense
Interest Earning Assets:
Investments with other banks	$	119			3.37	%	$	1	$	119			3.37	%	$	1
Interest bearing due from banks		42,234			0.23	%		24		-			0.00	%		-
Federal funds sold		4,203			0.10	%		1		20,816			0.19	%		10
Investment securities taxable		157,181			3.66	%		1,434		57,746			4.40	%		634
Investment securities non taxable		26,181			4.40	%		287		19,412			4.30	%		208
Loans (1) (2)		723,800			6.33	%		11,429		705,779			6.49	%		11,416
Total interest earning assets		953,718			5.54	%		13,176		803,872			6.12	%		12,269

Allowance for possible loan losses		(21,869	)							(10,121	)
Other assets		77,766								71,936
Total assets	$	1,009,615							$	865,687

Interest Bearing Liabilities:
Interest bearing demand	$	72,013			0.31	%	$	56	$	61,084			0.69	%	$	105
Savings		27,231			0.38	%		26		23,819			0.19	%		11
Money market		275,395			1.05	%		718		177,585			1.48	%		656
Time deposits		232,490			1.89	%		1,095		185,078			2.52	%		1,161
Brokered money market funds		1,000			0.80	%		2		32,893			0.82	%		67
Brokered time deposits		543			0.74	%		1		36,907			1.46	%		134
Total interest bearing deposits		608,672			1.25	%		1,898		517,366			1.65	%		2,134
Federal funds purchased		-			0.00	%		-		109			1.10	%		-
Other secured borrowing		829			5.32	%		11		-			0.00	%		-
Federal Home Loan Bank borrowing		65,000			0.62	%		101		68,956			0.83	%		143
Junior subordinated debentures		12,100			0.86	%		26		13,403			4.49	%		150
Total borrowed funds		77,929			0.71	%		138		82,468			1.43	%		293
Total interest bearing liabilities		686,601			1.19	%		2,036		599,834			1.62	%		2,427
Non interest bearing demand		179,648								163,994
Total funding		866,249			0.94	%		2,036		763,828			1.27	%		2,427
Other liabilities		8,506								9,372
Total liabilities	$	874,755							$	773,200

Stockholders' Equity:
Preferred stock	$	63,672							$	19,197
Common stock		58,004								48,674
Additional paid in capital		4,132								3,032
Retained earnings		9,219								23,543
Valuation allowance investments		(167	)							(1,959	)
Total stockholders' equity		134,860								92,487
Total liabilities and stockholders' equity	$	1,009,615							$	865,687

Net interest income							$	11,140							$	9,842
Net interest margin (3)					4.69	%							4.91	%

	For the six months ending								For the six months ending
	June 30, 2010								June 30, 2009
				Yield/			Income/					Yield/			Income/
(dollars in thousands)	Balance			Rate (4)			Expense		Balance			Rate (4)			Expense
Interest Earning Assets:
Investments with other banks	$	119			1.69	%	$	1	$	119			3.39	%	$	2
Interest bearing due from banks		45,541			0.23	%		52		-			0.00	%		-
Federal funds sold		3,344			0.12	%		2		16,852			0.20	%		17
Investment securities taxable		130,496			3.80	%		2,457		51,507			4.66	%		1,189
Investment securities non taxable		24,579			4.46	%		544		18,293			4.34	%		394
Loans (1) (2)		728,001			6.25	%		22,570		700,804			6.49	%		22,563
Total interest earning assets		932,080			5.54	%		25,626		787,575			6.19	%		24,165

Allowance for possible loan losses		(19,624	)							(10,370	)
Other assets		75,039								69,431
Total assets	$	987,495							$	846,636

Interest Bearing Liabilities:
Interest bearing demand	$	76,089			0.72	%	$	270	$	62,845			0.61	%	$	189
Savings		27,637			0.31	%		43		22,949			0.18	%		20
Money market		272,158			1.16	%		1,567		175,378			1.51	%		1,316
Time deposits		229,947			1.97	%		2,242		164,228			2.60	%		2,116
Brokered money market funds		1,000			0.81	%		4		36,854			0.72	%		131
Brokered time deposits		3,791			2.29	%		43		33,169			1.74	%		287
Total interest bearing deposits		610,622			1.38	%		4,169		495,423			1.65	%		4,059
Federal funds purchased		-			0.00	%		-		378			1.07	%		2
Securities sold under agreement to repurchase		-			0.00	%		-		1,312			0.31	%		2
Other secured borrowing		897			4.95	%		22		-			0.00	%		-
Federal Home Loan Bank borrowing		65,000			0.60	%		193		89,105			0.88	%		388
Junior subordinated debentures		12,748			2.45	%		155		13,403			4.59	%		305
Total borrowed funds		78,645			0.95	%		370		104,198			1.35	%		697
Total interest bearing liabilities		689,267			1.33	%		4,539		599,621			1.60	%		4,756
Non interest bearing demand		174,428								154,971
Total funding		863,695			1.06	%		4,539		754,592			1.27	%		4,756
Other liabilities		8,586								8,733
Total liabilities	$	872,281							$	763,325

Stockholders' Equity:
Preferred stock	$	47,494							$	10,921
Common stock		53,405								48,661
Additional paid in capital		3,709								2,190
Retained earnings		10,918								23,162
Valuation allowance investments		(312	)							(1,623	)
Total stockholders' equity		115,214								83,311
Total liabilities and stockholders' equity	$	987,495							$	846,636

Net interest income							$	21,087							$	19,409
Net interest margin (3)					4.56	%							4.97	%

	Average Balance										Average Yield
	for the three months ending										for the three months ending
	June 30,				Variance						June 30,
(dollars in thousands)	2010		2009		dollar			percentage			2010			2009			Variance
Investments with other banks	$	119	$	119	$	-			0.00	%		3.37	%		3.37	%		0.00	%
Interest bearing due from banks		42,234		-		42,234			100.00	%		0.23	%		0.00	%		0.23	%
Federal funds sold		4,203		20,816		(16,613	)		-79.81	%		0.10	%		0.19	%		-0.09	%
Investment securities taxable		157,181		57,746		99,435			172.19	%		3.66	%		4.40	%		-0.74	%
Investment securities non taxable		26,181		19,412		6,769			34.87	%		4.40	%		4.30	%		0.10	%
Loans (1) (2)		723,800		705,779		18,021			2.55	%		6.33	%		6.49	%		-0.16	%

Total interest earning assets	$	953,718	$	803,872	$	149,846			18.64	%		5.54	%		6.12	%		-0.58	%

	Average Balance										Average Rate
	for the three months ending										for the three months ending
	June 30,				Variance						June 30,
(dollars in thousands)	2010		2009		dollar			percentage			2010			2009			Variance
Interest bearing demand	$	72,013	$	61,084	$	10,929			17.89	%		0.31	%		0.69	%		-0.38	%
Savings		27,231		23,819		3,412			14.32	%		0.38	%		0.19	%		0.19	%
Money market		275,395		177,585		97,810			55.08	%		1.05	%		1.48	%		-0.43	%
Time deposits		232,490		185,078		47,412			25.62	%		1.89	%		2.52	%		-0.63	%
Brokered money market funds		1,000		32,893		(31,893	)		-96.96	%		0.80	%		0.82	%		-0.02	%
Brokered time deposits		543		36,907		(36,364	)		-98.53	%		0.74	%		1.46	%		-0.72	%
Federal funds purchased		-		109		(109	)		-100.00	%		0.00	%		1.10	%		-1.10	%
Other secured borrowing		829		-		829			100.00	%		5.32	%		0.00	%		5.32	%
Federal Home Loan Bank borrowing		65,000		68,956		(3,956	)		-5.74	%		0.62	%		0.83	%		-0.21	%
Junior subordinated debentures		12,100		13,403		(1,303	)		-9.72	%		0.86	%		4.49	%		-3.63	%

Total interest bearing liabilities	$	686,601	$	599,834	$	86,767			14.47	%		1.19	%		1.62	%		-0.43	%

	For the three months ended									For the six months ended
	June 30, 2010 over 2009									June 30, 2010 over 2009
(dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest Income:
Investments with other banks	$	-		$	-		$	-		$	-		$	(1	)	$	(1	)
Interest bearing due from Federal Reserve		24			-			24			52			-			52
Federal funds sold		(6	)		(3	)		(9	)		(10	)		(5	)		(15	)
Investment securities taxable		924			(124	)		800			1,523			(255	)		1,268
Investment securities non-taxable (2)		112			-			112			210			-			210
Taxable equivalent adjustment (2)		(38	)		5			(33	)		(71	)		11			(60	)
Loans (1)		288			(275	)		13			859			(852	)		7

Net increase / (decrease)		1,304			(397	)		907			2,563			(1,102	)		1,461

Interest expense
Savings, NOW, money market		274			(246	)		28			598			(243	)		355
Time deposits		259			(325	)		(66	)		719			(593	)		126
Brokered funds		(149	)		(49	)		(198	)		(537	)		166			(371	)
Federal funds purchased		-			-			-			(1	)		(1	)		(2	)
Other secured borrowings		11			-			11			22			-			22
Securities sold under agreement to repurchase		-			-			-			(1	)		(1	)		(2	)
Federal Home Loan Bank borrowing		(8	)		(34	)		(42	)		(90	)		(105	)		(195	)
Long term debt		(14	)		(110	)		(124	)		(14	)		(136	)		(150	)

Net increase / (decrease)		373			(764	)		(391	)		696			(913	)		(217	)

Total net increase / (decrease)	$	931		$	367		$	1,298		$	1,867		$	(189	)	$	1,678

	For the three months ended June 30,
(dollars in thousands)	2010		2009		Variance
Dollar volume	$	38,829	$	46,622		-16.7	%
Number of loans		110		149		-26.2	%

	For the six months ended June 30,
(dollars in thousands)	2010		2009		Variance
Dollar volume	$	68,515	$	88,687		-22.7	%
Number of loans		199		278		-28.4	%

	June 30, 2010									Percent of					Single
			Undisbursed		Total Bank		Percent			Bank's Risk			Number		Largest
(dollars in thousands)	Balance		Commitment		Exposure		Composition			Based Capital			of Loans		Loan
Retail	$	44,249	$	2,308	$	46,557		9.9	%		36.6	%		62	$	5,000
Professional		77,053		144		77,197		16.5	%		63.7	%		96		10,000
Hospitality		91,855		220		92,075		19.7	%		75.9	%		48		10,692
Multi-family		18,911		-		18,911		4.0	%		15.6	%		18		4,066
Home equity lines of credit		30,541		19,643		50,184		10.7	%		25.2	%		321		1,680
Residential 1 to 4 family		29,476		690		30,166		6.4	%		24.4	%		76		2,893
Farmland		13,032		502		13,534		2.9	%		10.8	%		25		1,937
Healthcare / medical		18,192		59		18,251		3.9	%		15.0	%		34		2,155
Restaurants / food establishments		7,419		-		7,419		1.6	%		6.1	%		14		2,541
Commercial		98,050		715		98,765		21.2	%		81.0	%		124		5,000
Other		14,780		247		15,027		3.2	%		12.2	%		27		2,100

Total real estate secured	$	443,558	$	24,528	$	468,086		100.0	%		366.5	%		845	$	48,064

	For the six months
	ended June 30,
(dollars amounts in thousands)	2010			2009

Balance, beginning of period	$	14,372		$	10,412
Charge-offs
Real Estate Secured
Multi-family residential		-			-
Residential 1 to 4 family		282			-
Home equity line of credit		-			-
Commercial		2,583			-
Farmland		235			-
Commercial
Commercial and industrial		8,818			1,225
Agriculture		1,209			-
Other		-			-
Construction		988			1,821
Land		956			991
Installment loans to individuals		49			-
All other loans		58			101

Total charge-offs		15,178			4,138
Recoveries
Real Estate Secured
Multi-family residential		-			-
Residential 1 to 4 family		75			4
Home equity line of credit		-			-
Commercial		21			-
Farmland		-			-
Commercial
Commercial and industrial		209			2
Agriculture		54			-
Other		-			-
Construction		27			16
Land		1,245			-
Installment loans to individuals		6			-
All other loans		3			-

Total recoveries		1,640			22

Net charge-offs		13,538			4,116

Additions to allowance charged to operations		21,300			4,810

Balance, end of period	$	22,134		$	11,106

Gross loans, end of period	$	697,176		$	697,854

Net charge-offs to average loans		1.86	%		0.59	%

Allowance for loan losses to total gross loans		3.17	%		1.59	%

Non-performing loans to allowance for loan losses		158.43	%		110.19	%

	Balance		Additions to					Transfers			Returns to						Balance
	December 31,		Non-Accruing		Net			to Foreclosed			Preforming						June 30,
(dollars in thousands)	2009		Balances		Paydowns			Collateral			Status			Charge-offs			2010
Real Estate Secured
Multi-family residential	$	-	$	-	$	-		$	-		$	-		$	-		$	-
Residential 1 to 4 family		1,147		458		(11	)		-			-			(284	)		1,310
Home equity line of credit		320		-		-			-			-			-			320
Commercial		11,035		11,806		(2,555	)		(234	)		(3,305	)		(2,587	)		14,160
Farmland		-		3,810		(62	)		(577	)		-			(235	)		2,936
Commercial
Commercial and industrial		8,429		6,020		(629	)		(10	)		(381	)		(8,819	)		4,610
Agriculture		3,172		825		(2,082	)		-			-			(1,209	)		706
Other		-		-		-			-			-			-			-
Construction
Single family residential		940		-		-			-			-			(219	)		721
Single family residential - Spec.		683		1,250		-			(538	)		-			(145	)		1,250
Tract		2,215		-		(1,646	)		(363	)		-			(206	)		-
Multi-family		-		900		-			-			-			(417	)		483
Hospitality		-		-		-			-			-			-			-
Commercial		-		-		-			-			-			-			-
Land		10,182		4,949		(2,661	)		(3,226	)		-			(960	)		8,284
Installment loans to individuals		47		387		(5	)		(35	)		-			(108	)		286
All other loans		-		-		-			-			-			-			-

Totals	$	38,170	$	30,405	$	(9,651	)	$	(4,983	)	$	(3,686	)	$	(15,189	)	$	35,066

											Variance Exclusive of
	June 30,		December 31,		Variance						Volatile Balances
(dollars in thousands)	2010		2009		dollar			percentage			dollar			percentage
Non-interest bearing demand	$	182,846	$	174,635	$	8,211			4.70	%	$	15,300			8.76	%
Interest bearing demand		68,295		77,765		(9,470	)		-12.18	%		(9,735	)		-12.52	%
Savings		26,844		27,166		(322	)		-1.19	%		(322	)		-1.19	%
Money market		284,118		259,671		24,447			9.41	%		34,679			13.35	%
Time deposits		232,630		224,998		7,632			3.39	%		7,632			3.39	%

Total retail deposits		794,733		764,235		30,498			3.99	%		47,554			6.22	%

Brokered time deposits		100		10,230		(10,130	)		-99.02	%		(10,130	)		-99.02	%
Brokered money market funds		1,000		1,000		-						-			0.00	%

Total brokered deposits		1,100		11,230		(10,130	)		-90.20	%		(10,130	)		-90.20	%

Total deposits	$	795,833	$	775,465	$	20,368			2.63	%	$	37,424			4.83	%

(dollars in thousands)

Amount		Interest				Maturity
Borrowed		Rate			Advance Type	Date
$	10,000		2.89	%	Fixed	9/16/2010
	35,000		0.21	%	Adjustable	1/31/2011
	20,000		0.27	%	Variable	Open

$	65,000		0.64	%

	Regulatory Standard						June 30, 2010						June 30, 2009
	Adequately			Well			Heritage Oaks						Heritage Oaks
Ratio	Capitalized			Capitalized			Bancorp			Bank			Bancorp			Bank
Leverage ratio		4.00	%		5.00	%		11.89	%		11.34	%		10.87	%		10.33	%
Tier I capital to risk weighted assets		4.00	%		6.00	%		15.19	%		14.44	%		11.95	%		11.23	%
Total risk based capital to risk weighted assets		8.00	%		10.00	%		16.46	%		15.71	%		13.20	%		12.49	%

	Rate Shock Scenarios
(dollars in thousands)	-200bp			-100bp			Base			+100bp			+200bp

Net interest income (NII)	$	42,971		$	43,333		$	43,315		$	43,259		$	43,347

$ Change from base	$	(344	)	$	18		$	-		$	(56	)	$	32

% Change from base		-0.79	%		0.04	%		0.00	%		-0.13	%		0.07	%

(dollars in thousands)
			Percent of
Rate Type	Balance		Total
Variable - daily	$	234,498		33.6	%
Variable other than daily		330,039		47.4	%
Fixed rate		132,639		19.0	%

Total gross loans	$	697,176		100.0	%

(dollars in thousands)
			Percent of
Re-Pricing	Balance		Total
< 1 Year	$	358,265		51.4	%
1-3 Years		188,865		27.1	%
3-5 Years		105,904		15.2	%
> 5 Years		44,142		6.3	%

Total gross loans	$	697,176		100.0	%

	Move in Prime Rate (bps)
(dollars in thousands)	+200		+250		+300		+350
Variable daily	$	850	$	10,366	$	56,457	$	116,342
Variable other than daily		2,440		15,656		62,903		175,816

Cumulative total variable at floor	$	3,290	$	26,022	$	119,360	$	292,158

/s/ Lawrence P. Ward
Lawrence P. Ward
Chief Executive Officer
(Principal Executive and Financial Officer)

HERITAGE OAKS BANCORP - FORM 10-Q/A - September 24, 2010

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