Heritage Oaks Bancorp (HEOP) 8-K With Excellent Loan Growth and Expanding Net Interest Margin

NOTE: Transmitted on Prime Zone on October 16, 2006 at 3:30 a.m. PDT.

HERITAGE OAKS BANCORP EARNS $1.7 MILLION IN THIRD QUARTER,

WITH EXCELLENT LOAN GROWTH AND EXPANDING NET INTEREST MARGIN

Paso Robles, CA – October 16, 2006 — 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.

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HEOP 3Q06 results

October 16, 2006

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“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.

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HEOP 3Q06 results

October 16, 2006

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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 date)
	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 Noninterest 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
See notes to condensed consolidated financial statements

HEOP 3Q06 results

October 16, 2006

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HERITAGE OAKS BANCORP

CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

	30-Sep-06		31-Dec-05			30-Sep-05
ASSETS	Un-audited		(1)			Un-audited
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.
See notes to condensed financial statements

HEOP 3Q06 results

October 16, 2006

Page 5

HERITAGE OAKS BANCORP

	QTD			QTD						YTD			YTD
	Sep-06			Sep-05			Variance			Sep-06			Sep-05			Variance
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<		21	%		11	%		91	%
CD>		7	%		4	%		3	%