Heritage Oaks Bancorp Earns $1.7 Million in Third Quarter, With Excellent Loan Growth and Expanding Net Interest Margin

Heritage Oaks Bancorp (Nasdaq:HEOP), the parent company of Heritage Oaks Bank, today reported third quarter profits fueled by exceptional loan growth and an expanding net interest margin. For the third quarter of 2006, net income was $1.7 million, or $0.27 per diluted share, compared to $1.8 million, or $0.28 per diluted share, in the third quarter of 2005. For the first nine months of 2006, net income increased 4% to $5.0 million, or $0.77 per diluted share, compared to $4.8 million, or $0.74 per diluted share, for the first nine months of 2005.

"We are focused on growing our franchise, maintaining a strong balance sheet and matching assets and liabilities closely as we build our presence along the California Central Coast," said Lawrence P. Ward, president and CEO. "We have invested significant time and resources in 2006 putting the infrastructure in place to handle a much larger institution. At the end of 2005 we began a branding initiative, which included an extensive assessment, both internally and externally of all bank delivery channels. These plans have been put into place and are adding efficiencies to all areas of the bank. We believe these initiatives will cease being an expense item early next year and contribute to future profitability, build our franchise value and enhance shareholder value."

Earlier this quarter the board initiated a regular quarterly cash dividend program and also paid a special cash dividend of $0.25 per share in May. The board also authorized a repurchase plan of up to 40,000 shares of common stock. "We have already repurchased 15,000 shares, and will continue to look for ways to manage our capital while benefiting shareholders," Ward added.

Third Quarter 2006 Highlights (compared to 3Q05):

-- Net interest margin improved 27 basis points to 6.07%.

-- Revenues increased 3% to $8.2 million.

-- Return on average equity was 14.5% and return on average assets was

1.35%.

-- Net loans increased 15% to $419 million.

-- Asset quality remained strong, non-performing assets were just 0.04%

of total assets.

-- Initiated regular quarterly cash dividends.

Operating Results

Third quarter revenues, consisting of net interest income before the provision for loan losses and non-interest income, increased 3% to $8.2 million, compared to $8.0 million in the third quarter of 2005. For the quarter, net interest income before the provision for loan losses increased 7% to $7.0 million, compared to $6.6 million in the third quarter of 2005. Non-interest income decreased slightly to $1.2 million in the third quarter of 2006, compared to $1.4 million for the same period in 2005, primarily due to the slowdown in single family mortgage origination fees.

For the first nine months of the year, revenues increased 7% to $23.8 million, compared to $22.2 million in the same period a year ago. Net interest income before the provision for loan losses increased 9% to $20.1 million in the first nine months of the year, compared to $18.4 million in the same period of 2005. Year-to-date, non-interest income was $3.7 million, unchanged from the first nine months a year ago.

"We continue to fund our loans with low cost deposits, which aids in lowering our interest rate risk. As a result, we are able to benefit from a rising or stable short term interest rate environment and expand our margin. Our net interest margin increased 27 basis points to 6.07% for the third quarter, from 5.80% in the third quarter last year," said Ward. Heritage Oaks' net interest margin was 6.04% in the second quarter this year. Net interest margin for the first nine months of 2006 expanded 32 basis points to 6.00% from 5.68% a year earlier.

Non-interest expense in the third quarter was $5.4 million, compared to $4.9 million in the third quarter a year ago. Year-to-date, non-interest expenses increased to $15.4 million, compared to $13.9 million in the same period a year ago. The increase was primarily a result of increased expenses related to the branding project, the addition of an EVP / Human Resources and full service branch expansion within the bank's existing footprint in Templeton, California. "We have invested significant resources in these new initiatives in 2006 in an effort to improve our service delivery and image. We expect our expenses to return to more normal levels at the beginning of next year," said Ward.

As a result of the increase in expenses, the efficiency ratio increased to 65.31% for the third quarter compared to 61.07% for the third quarter of 2005. Year-to-date, the efficiency ratio was 64.90% compared to 62.55% in the same period a year ago. The efficiency ratio measures operating expenses as a percent of revenues.

Return on average assets was 1.35% for the third quarter and for the first nine months of 2006, compared to 1.44% and 1.35% for the respective periods a year ago. Heritage Oaks generated a return on average equity of 14.54% for the third quarter and 14.27% for the first nine months of the year compared to 17.03% and 15.93% for the respective periods in 2005. The decline was a result of higher capital balances as a percentage of assets in 2006.

Balance Sheet

Net loans grew 15% to $419 million, compared to $366 million a year ago. "Our lending team has done an excellent job in competing for loans while maintaining credit quality, and as a result we saw a significant increase in loan volumes," said Ward. "For the linked quarter, loans were up $33.5 million or 35% annualized, as a result of these efforts."

Total assets were $532 million as of September 30, 2006, compared to $528 million a year earlier. Total deposits were $430 million, compared to $444 million at September 30, 2005. "Our focus and quite frankly, our biggest challenge remains, attracting low cost deposits to fund our loans. We have been experiencing disintermediation of low or no cost deposits into higher yielding certificate of deposits both inside and outside of the Company. At September 30, 2006, total demand deposits decreased by 24% compared to the same period in 2005. The runoff in non interest demand deposits was a direct result of reductions in our volatile accounts. The percent of non-volatile demand deposits remains constant at 26% of total deposits. Although we have seen some shift towards time deposits as interest rates have risen to higher levels, we still have 36% of our deposits in non-interest bearing accounts, and an additional 36% of deposits in savings, money market and NOW accounts. Over 72% of our deposits are no or low-cost, providing us with a very efficient funding source to support our loan growth," said Ward.

Asset quality remains strong with only $183,000 of non-performing loans, or 0.04% of net loans, at September 30, 2006. The allowance for loan losses was $3.9 million, or 0.92% of net loans held for investment at quarter-end compared to $3.8 million or 1.03% of net loans outstanding at the end of the third quarter of 2005.

Shareholders' equity increased 13% to $48.4 million at quarter-end compared to $42.9 million at the end of the third quarter last year. Book value per share was $7.62 at September 30, 2006, compared to $6.89 per share a year earlier. Tangible book value per share was $6.66 at the end of the quarter compared to $5.85 a year earlier.

Heritage Oaks Bancorp is the holding company for Heritage Oaks Bank. Heritage Oaks Bank has its headquarters plus one branch office in Paso Robles, two branch offices in San Luis Obispo, single branch offices in Cambria, Arroyo Grande, Atascadero, Templeton and Morro Bay and three branch offices in Santa Maria. Heritage conducts commercial banking business in San Luis Obispo County and Northern Santa Barbara County. Visit Heritage Oaks Bancorp on the Web at www.heritageoaksbancorp.com.

Statements concerning future performance, developments or events, expectations for growth and income forecasts, and any other guidance on future periods, constitute forward-looking statements that are subject to a number of risks and uncertainties. Actual results may differ materially from stated expectations. Specific factors include, but are not limited to, increased profitability, continued growth, the Bank's beliefs as to the adequacy of its existing and anticipated allowances for loan losses, beliefs and expectations regarding actions that may be taken by regulatory authorities having oversight of the Bank's operations, interest rates and financial policies of the United States government, general economic conditions and California's energy crisis. Additional information on these and other factors that could affect financial results are included in Heritage Oaks Bancorp's Securities and Exchange Commission filings. If any of these risks or uncertainties materialize or if any of the assumptions underlying such forward-looking statements proves to be incorrect, Heritage Oaks Bancorp's results could differ materially from those expressed in, implied or projected by such forward-looking statements. Heritage Oaks Bancorp assumes no obligation to update such forward-looking statements.

HERITAGE OAKS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per share data)

For the three months For the nine months

ended September 30, ended September 30,

2006 2005 2006 2005

---- ---- ---- ----

(Unaudited)(Unaudited) (Unaudited)(Unaudited)

Interest Income:

Interest and fees on loans $ 8,968 $ 7,179 $24,475 $19,794

Investment securities 467 489 1,446 1,586

Federal funds sold and

commercial paper 131 270 513 440

Time certificates of deposit 2 2 6 7

------- ------- ------- -------

Total interest income 9,568 7,940 26,440 21,827

Interest Expense:

NOW accounts 22 25 66 67

MMDA accounts 567 442 1,687 983

Savings accounts 25 29 78 71

Time deposits of $100 or more 172 103 428 276

Other time deposits 1,132 350 2,671 856

Other borrowed funds 628 398 1,406 1,201

------- ------- ------- -------

Total interest expense 2,546 1,347 6,336 3,454

Net Interest Income Before

Prov. for Possible Loan

Losses 7,022 6,593 20,104 18,373

Provision for loan losses 180 170 480 530

------- ------- ------- -------

Net interest income after

provision for loan losses 6,842 6,423 19,624 17,843

Non-interest Income:

Service charges on deposit

accounts 644 655 1,826 1,825

Other income 578 734 1,826 1,962

------- ------- ------- -------

Total Non-interest Income 1,222 1,389 3,652 3,787

Non-interest Expense:

Salaries and employee

benefits 2,965 2,532 8,534 7,188

Occupancy and equipment 633 600 1,901 1,853

Other expenses 1,786 1,743 4,982 4,820

------- ------- ------- -------

Total Non-interest Expenses 5,384 4,875 15,417 13,861

Income before provision for

income taxes 2,680 2,937 7,859 7,769

Provision for applicable

income taxes 947 1,132 2,846 2,940

------- ------- ------- -------

Net Income $ 1,733 $ 1,805 $ 5,013 $ 4,829

======= ======= ======= =======

Earnings per share:

Basic $ 0.27 $ 0.29 $ 0.79 $ 0.79

Fully Diluted $ 0.27 $ 0.28 $ 0.77 $ 0.74

HERITAGE OAKS BANCORP

CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

30-Sep-06 31-Dec-05 30-Sep-05

--------- --------- ---------

ASSETS Unaudited (1) Unaudited

Cash and due from banks $ 17,972 $ 18,279 $ 23,033

Federal funds sold 14,195 26,280 53,035

Money market funds -- -- --

--------- --------- ---------

Total cash and cash

equivalents 32,167 44,559 76,068

Interest bearing deposits

other banks 318 298 298

Securities Available for

sale 40,294 44,402 46,462

Federal Home Loan Bank

Stock, at cost 1,955 1,885 1,864

Loans Held For Sale 2,069 3,392 7,694

Loans, net 419,314 362,635 366,158

Property, premises and

equipment, net 14,801 11,905 10,730

Cash surrender value life

insurance 9,344 7,706 7,635

Deferred Tax Assets 2,515 2,358 2,121

Goodwill 4,864 4,865 4,865

Core Deposit Intangible 1,223 1,448 1,590

Other assets 3,517 3,048 2,884

TOTAL ASSETS $ 532,381 $ 488,501 $ 528,369

========= ========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Deposits:

Demand, non-interest

bearing $ 157,180 $ 164,014 $ 206,965

Savings, NOW, and money

market deposits 152,033 170,106 167,827

Time deposits of $100 or more 31,782 17,414 18,098

Time deposits under $100 89,277 66,263 50,879

--------- --------- ---------

Total deposits 430,272 417,797 443,769

FHLB advances and other

borrowed money 40,000 10,000 28,000

Securities Sold under

Agreement to Repurchase 1,219 3,847 2,057

Notes Payable -- -- --

Junior subordinated

debentures 8,248 8,248 8,248

Other liabilities 4,215 3,764 3,423

--------- --------- ---------

Total liabilities 483,954 443,656 485,497

Stockholders' equity

Common stock, no par value;

20,000,000 shares

authorized; issued and

outstanding 6,356,021 and

6,220,404 for

September 30, 2006 and

September 30, 2005,

respectively. 29,648 29,255 28,925

Retained earnings 18,668 15,748 13,944

Accumulated other

comprehensive income 111 (158) 3

--------- --------- ---------

Total stockholders' equity 48,427 44,845 42,872

--------- --------- ---------

TOTAL LIABILITIES &

STOCKHOLDERS' EQUITY $ 532,381 $ 488,501 $ 528,369

========= ========= =========

(1) These numbers have been derived from the audited financial

statements.

HERITAGE OAKS BANCORP

QTD QTD Vari- YTD YTD Vari-

Sep-06 Sep-05 ance Sep-06 Sep-05 ance

PROFITABILITY

Quarterly Net Income

(in thousands) $ 1,733 $ 1,805 -4% $ 5,013 $ 4,829 4%

Qtr EPS- Diluted $ 0.27 $ 0.28 -4% $ 0.77 $ 0.74 4%

Efficiency Ratio 65.31% 61.08% 7% 64.90% 62.55% 4%

Operating Expenses

compared to Average

Assets 4.18% 3.90% 7% 4.15% 3.88% 7%

ROE- Return on

Average Equity 14.54% 17.03% -15% 14.27% 15.93% -10%

ROTE- Return on

Average Tangible

Equity 16.69% 20.14% -17% 16.44% 19.09% -14%

ROA- Return on

Average Assets 1.35% 1.44% -6% 1.35% 1.35% 0%

NIM- Net Interest

Margin 6.07% 5.80% 5% 6.00% 5.68% 6%

Net Interest Income

compared to Average

Assets 5.45% 5.27% 3% 5.41% 5.15% 5%

Non-Interest Income

compared to Total

Net Revenue 14.82% 17.40% -15% 15.37% 17.09% -10%

ASSET QUALITY

Non-performing Loans

compared to Total

Net Loans 0.04% 0.13% 0.04% 0.13%

ALLL compared to

Total Net Loans 0.92% 1.03% 0.92% 1.03%

Non-performing Loans

as % of ALLL 4.74% 12.69% 4.74% 12.69%

Net Loan Losses

compared to Average

Net Loans 0.002% -0.001% 0.119% 0.005%

Non-performing Loans

compared to Primary

Capital 0.38% 1.11% 0.38% 1.11%

CAPITAL

Leverage Ratio 9.86% 8.78%

Tier I Risk-Based

Capital Ratio 10.35% 10.09%

Total Risk-Based

Capital Ratio 11.18% 10.99%

AVERAGE ASSETS/LIABILITIES

Average Loans $409,897 373,200 10% 387,627 358,233 8%

Average Investments $ 53,117 81,787 -35% 58,901 73,275 -20%

Average Non-Earning

Assets $ 52,306 45,212 16% 48,391 44,497 9%

Average Assets $515,320 500,199 3% 494,919 476,005 4%

Average Interest

Bearing Deposits $273,701 231,784 18% 264,860 227,503 16%

Average Borrowing $ 41,095 37,499 10% 31,130 39,880 -22%

Average Demand

Deposits $148,215 184,756 -20% 147,908 164,940 -10%

Average Non-Interest

Bearing Liabilities $ 4,646 3,774 23% 4,178 3,286 27%

Average Equity $ 47,663 42,386 12% 46,843 40,396 16%

Avg Yield on Loans 8.68% 7.63% 14% 8.44% 7.39% 14%

Avg Yield on Earning

Assets 8.20% 6.92% 18% 7.92% 6.76% 17%

Cost of Interest

Bearing Liabilities 3.21% 1.98% 62% 2.86% 1.73% 65%

Cost of Interest

Bearing Deposits 2.78% 1.62% 72% 2.49% 1.32% 89%

Cost of Funds

(Includes DDA) 2.18% 1.18% 85% 1.91% 1.07% 79%

Net Interest Margin 6.07% 5.80% 5% 6.00% 5.68% 6%

Daily Variable Rate

Loans as % Portfolio 43% 41% 5%

Loans Repricing in

less than 1 year as

% Portfolio 61% 65% -6%

As a % of Loans

---------------

Commercial RE 54% 57% -5%

Comml 18% 18% 0%

Constr/Land 24% 20% 20%

Equity HELOC 3% 4% -25%

Other 1% 1% 0%

As a % of Deposits

------------------

DDA 36% 47% -23%

(Volatile DDA) -10% -21% -52%

DDA Net of Volatile 26% 26% 0%

MM/Sav 25% 26% -4%

NOW 11% 12% -8%

CD less than $100,000 21% 11% 91%

CD greater than $100,000 7% 4% 3%

CONTACT: Heritage Oaks Bancorp

Lawrence P. Ward, CEO

Margaret Torres, CFO

(805) 239-5200

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