The following is an analysis of the results of operations and financial condition of the Company as of and for the three month periods ending March 31, 2009 and 2008. 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.

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 is 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.

Management's Discussion and Analysis

Executive Summary

For the three month period ended March 31, 2009, the Company earned approximately $1.1 million or $0.14 per diluted share. This, when compared to the $1.7 million or $0.21 per diluted share the Company earned in the same period ended a year earlier, represents a decline in net income of approximately $0.6 million. The primary reason behind the year over year decline in net income can be attributed in large part to provisions the Bank made to the allowance for loan losses during the first quarter of 2009. For the three month period ended March 31, 2009, provisions to the allowance for loan losses were $2.1 million. This represents and increase of approximately $1.9 million when compared to the same period ended a year earlier. See also "Provision for Loan Losses" under "Results of Operations" of this discussion and analysis for additional information regarding provisions the Bank made to the allowance for loan losses during the first quarter of 2009.

The underlying business performance for the quarter was solid, with significant demand deposit growth and moderate loan growth. Total gross loans grew 8.1% year-over-year and were up 1.7% from that reported at December 31, 2008. Demand deposits were up 5.6% year-over-year, and up 11.7% from that reported at December 31, 2008. Despite the increase in loan loss provision the Company was still profitable in the first quarter and held its net interest margin above 5%.

The Bank continues diligent oversight of the loan portfolio and has been extremely proactive in monitoring credit quality. Management has been and will continue to perform internal credit reviews on a quarterly basis and has concluded that an independent loan review will be conducted semi-annually in an effort to more quickly identify any additional problem assets and mitigate any potential loss to the Bank.

The housing and general economic slowdown has led to an increase in non-performing loans during the first quarter, which makes it prudent to write-down loans to their current fair market value. The Bank is not waiting for regulators to tell us when to write-down or charge off loans. The Bank has been diligent in recognizing deficiencies inherent in impaired loans and proactively bringing the balances in line with current values. The collateral securing the loans charged-off during the first quarter consists of real estate and various forms of business assets. We are currently working with borrowers and collateral is being actively marketed to minimize future charge-offs.

The Company's liquidity has increased substantially as a result of strong deposit growth during the quarter. The Company continues to benefit from new core deposits from the inflow from the larger banks in our market area. The liquidity ratio was 11.50% at March 31, 2009, compared to 6.79% at December 31, 2008. Additional sources of liquidity remain strong, as the Bank has additional borrowing lines with the Federal Home Loan Bank ("FHLB") as well as credit arrangements with correspondent banks to provide liquidity for a variety of reasons, including the day to day demands of depositors. At March 31, 2009, the Bank's remaining capacity to borrow against these lines was approximately $118.2 million. Additionally, the Bank has established borrowing capacity at the Federal Reserve Bank but has yet to provide collateral for the use of the line. The Bank still has the ability to purchase brokered funds from a variety of sources, providing for yet an additional source of secondary funding.

The following provides a summary of operating results for the periods ended March 31, 2009 and 2008:

· Interest income for the three month period ended March 31, 2009 was approximately $11.9 million. This, when compared to the $12.8 million reported for the same period ended a year earlier, represents a decline of approximately $0.9 million or 7.2%. The year over year decline is primarily attributable to the actions taken by the Federal Reserve to lower the overnight Fed Funds rate from 4.25% to within a range of 0.00% and 0.25%.

· Interest expense for the three month period ended March 31, 2009 was approximately $2.3 million. This, when compared to the $3.7 million reported for the same period ended a year earlier, represents a decline of approximately $1.4 million or 37.0%. The year over year decline is mainly attributable to the dramatic declines in the overnight Fed Funds rate previously referred to above.

· Net interest income for the first quarter of 2009 was approximately $0.5 million or 4.9% higher than the $9.1 million reported for the same period ended a year earlier. An $83.5 million year over year increase in average interest earning assets contributed significantly to the year over year increase in net interest income.

· The net interest margin for the first quarter of 2009 was 5.03% or 30 basis points lower than the 5.33% reported for the same period ended a year earlier. Higher earning assets on a year over year basis in conjunction with a significant drop in interest rates placed pressure on the net interest margin. However, since significant portions of the Bank's interest bearing liabilities possess a floating rate, the Bank was able to mitigate substantial declines in the margin during a time where we saw the overnight Fed Funds rate decline by over 400 basis points.

Management's Discussion and Analysis

· Non-interest income for the three months ended March 31, 2009 was approximately $1.6 million. This, when compared to the $1.4 million reported for the same period ended a year earlier, represents an increase of approximately $0.2 million or 15.4%. Increases in mortgage origination income as well as gains recognized on the sale of investment securities contributed to the year over year increase.

· Non-interest expenses for the three months ended March 31, 2009 were approximately $7.4 million. This, when compared to the $7.6 million reported for the same period ended a year earlier, represents a decline in the approximate amount of $0.2 million or 2.6%. Efficiencies gained with respect to staffing as well as the implementation of additional expense controls have proved to be beneficial in reducing non-interest expenses on a year over year basis.

The following provides a summary for significant year to date changes in balances as of March 31, 2009:

· At March 31, 2009, net loan balances were approximately $679.7 million or $11.7 million and 1.7% higher than the $668.0 million reported at December 31, 2008. See also "Loans" under "Financial Condition" of this discussion and analysis for additional information regarding the Bank's loan portfolio.

· At March 31, 2009, total deposits were approximately $664.8 million or $61.3 million and 10.2% higher than the $603.5 million reported at December 31, 2008. Deposits, exclusive of brokered were approximately $580.3 million or $25.4 million higher than the $554.9 million reported at December 31, 2008. See also "Deposits and Borrowed Funds" under "Financial Condition" of this discussion and analysis for information regarding the Bank's deposit liabilities.

· At March 31, 2009, borrowings with the FHLB were $95.0 million or approximately $14.0 million lower than the $109.0 million reported at December 31, 2008. Higher deposit balances and Management's intent to ensure an appropriate mix of secondary funding resulted in fewer borrowings with the FHLB.

The following provides an overview of asset quality as of March 31, 2009:

· At March 31, 2009, the balance of non-accruing loans was approximately $20.3 million or $2.0 million higher than the $18.3 million reported at December 31, 2008.

· As of March 31, 2009, the allowance for loan losses represented 1.51% of total gross loans and 1.53% of total gross loans as of December 31, 2008.

· As previously mentioned, during the three months ended March 31, 2008, the Bank made provisions to the allowance for loan losses in the approximate amount of $2.1 million and charged-off approximately $2.1 million in loan balances.

· For the three months ended March 31, 2009, net charge-off's to average gross loans were 0.30%. When compared to the 0.01% reported for the same period ended a year earlier, represents an increase of approximately 29 basis points.

· During the first quarter of 2009, the Bank moved approximately $1.7 million related to one loan to OREO status. As of March 31, 2009, the balance of OREO was $2.9 million.

In spite of the year to date increase in non-performing assets, the Bank is encouraged to see sale activity for $3 million in non-performing assets that is expected to close during the second quarter of 2009. There also appears to be increased bona fide interest in properties as reflected in the commitment to purchase letter the Bank recently received for another $1 million property.

See also "Non Performing Assets" under "Financial Condition" of this discussion analysis for additional information related asset quality.

Management's Discussion and Analysis

Recent Developments

During the third and fourth quarters of 2008, the credit and equity markets came under significant duress as confidence by many in the U.S. financial system began to wane. During the later part of 2007 and throughout 2008, many U.S. financial institutions were forced to significantly write-down the values of certain classes of assets in response to the weakened real estate market. These losses lead to strained capital levels, impairing the confidence of many depositors and others providing funding to the nation's banks, which in turn lead to a crisis of liquidity. With liquidity levels of many financial institutions significantly weakened, borrowing costs began to rise considerably and the flow of credit to consumers and between banks all but came to a halt. In response to this, the weakened economy and other factors, the U.S. Congress passes the Emergency Economic Stabilization Act of 2008 (the "EESA") in October of 2008. Under the EESA, the Department of the U.S. Treasury formed the Troubled Asset Relief Program (the "TARP"). The TARP gives the U.S. Treasury the power to make purchases of certain troubled assets as well as the direct purchase of equity from U.S. financial institutions under the CPP. Although the Company's liquidity levels remained adequate and the Bank and Company were well capitalized throughout 2008, the Company applied to participate in the CPP to keep all capital raising options available. On February 27, 2009, the Company received shareholder approval to add an authorized class of preferred stock to the Company's Articles of Incorporation that allowed the Company to participate in the CPP and will also allow for more flexibility in capital raising efforts in general. On March 20, 2009, the Company issued 21,000 shares of Senior Preferred Stock to the U.S. Treasury under the terms of the CPP for $21.0 million. Additionally, the Company issued a warrant to the U.S. Treasury to purchase 611,650 shares of our common stock at a price of $5.15 per share, representing 15% of the preferred issuance or approximately $3.2 million. For a more detailed discussion regarding the Company's participation in the CPP, see Note 8. Preferred Stock, to the consolidated financial statements filed on this Form 10-Q.

On February 27, 2009, the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") voted to amend the restoration plan for the Deposit Insurance Fund ("DIF"). To ensure the continued strength of the DIF, the FDIC will impose a special assessment on all insured institutions of 20 basis points on June 30, 2009 to be collected on September 30, 2009. Under the ruling, the FDIC may impose an additional assessment of 10 basis points after June 30, 2009 if deemed by the FDIC to be necessary. Although the exact dollar amount of this assessment will not be known until the assessment date, the Company anticipates this ruling will have a material impact on its results of operations during the second quarter of 2009.

Dividends and Stock Repurchases

On April 24, 2008, the Board of Directors declared a 5% stock divided to be paid on May 16, 2008 to shareholders of record on May 2, 2008. This stock dividend represented a change in the form of dividend payment to the Company's shareholders away from cash dividends in order to retain the Company's capital for future growth.

On January 24, 2008, the Board of Directors declared a quarterly cash dividend of $0.08 per share to be paid on February 15, 2008 to shareholders of record on February 1, 2008.

The Company made no repurchases of its common stock during the three months ended March 31, 2009 or for all of 2008.

Management's Discussion and Analysis
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Selected Financial Data

The table below provides selected financial data that highlights the Company's
quarterly performance results:

                                                                                                 For the quarters ended,
(dollars in thousands except per share data)    03/31/09        12/31/08        09/30/08        06/30/08        03/31/08        12/31/07        09/30/07        06/30/07

Return on average assets                              0.54 %         -0.63 %          0.27 %          0.35 %          0.91 %          1.11 %          1.12 %          1.25 %

Return on average equity                              6.04 %         -6.93 %          2.94 %          3.84 %          9.55 %         11.65 %         12.09 %         13.84 %

Return on average common equity                       6.19 %         -6.93 %          2.94 %          3.84 %          9.55 %         11.65 %         12.09 %         13.84 %

Average equity to average assets                      8.95 %          9.06 %          9.16 %          9.14 %          9.48 %          9.49 %          9.27 %          9.02 %

Average common equity to average assets               8.64 %          9.06 %          9.16 %          9.14 %          9.48 %          9.49 %          9.27 %          9.02 %

Net interest margin                                   5.03 %          5.04 %          5.18 %          5.28 %          5.33 %          5.33 %          5.44 %          5.56 %

Efficiency ratio*                                    66.71 %         66.43 %         64.40 %         66.31 %         72.17 %         67.26 %         66.89 %         64.32 %

Average loans to average deposits                   112.39 %        109.95 %        111.54 %        109.26 %        103.64 %         96.40 %         95.79 %        103.52 %

Net Income                                     $     1,102     $    (1,254 )   $       534     $       691     $     1,675     $     1,978     $     1,628     $     1,800

Net income available to common shareholders    $     1,091     $    (1,254 )   $       534     $       691     $     1,675     $     1,978     $     1,628     $     1,800

Earnings Per Common Share:
   Basic                                       $      0.14     $     (0.16 )   $      0.07     $      0.09     $      0.22     $      0.26     $      0.24     $      0.27
   Diluted                                     $      0.14     $     (0.16 )   $      0.07     $      0.09     $      0.21     $      0.25     $      0.23     $      0.26
Outstanding Shares:
  Basic                                          7,689,317       7,660,342       7,709,600       7,705,174       7,694,546       7,682,730       6,796,286       6,754,321
  Diluted                                        7,824,377       7,721,460       7,798,321       7,830,390       7,851,831       7,887,206       7,013,070       7,027,090

* The efficiency ratio is defined as total non-interest expense as a percent of the combined net interest income plus non-interest income, exclusive of gains and losses on the sale of investment securities.

Local Economy

The economy in the Company's service area is based primarily on agriculture, tourism, light industry, oil and retail trade. Services supporting these industries have also developed in the areas of medical, financial and educational services. The population of San Luis Obispo County, the City of Santa Maria (in Northern Santa Barbara County), and the City of Santa Barbara totaled approximately 262,000, 86,000, and 86,000 respectively, according to the most recent economic data provided by the U.S. Census Bureau. The moderate climate allows a year round growing season for numerous vegetables and fruits. Vineyards and cattle ranches also contribute largely to the local economy. The Central Coast's leading agricultural industry is the production of wine grapes and production of premium quality wines. Vineyards in production have grown significantly over the past several years throughout the Company's service area. Access to numerous recreational activities including lakes, mountains and beaches, provide a relatively stable tourist industry from many areas including the Los Angeles/Orange County basin, the San Francisco Bay area and the San Joaquin Valley. While the economy in our primary markets of San Luis Obispo and Santa Barbara counties have not been immune to the negative impacts of both the national and state economies, the abundant tourism that has developed over the past decade in our market area, especially in the wine industry and coastal communities, has helped sustain our local economy in previous economic downturns.

2008 proved to be a challenging year not only on the national level, but within the state of California and more specifically our primary market area. As the U.S. housing market continued to wane throughout 2008 and economic growth began to significantly slow, the ability of borrowers to satisfy their obligations to the financial sector began to languish. These among other factors placed severe stress on the U.S. financial system, leading to a crisis of confidence, further downturn in economic growth and unprecedented volatility in the U.S. equity and credit markets. As mentioned, our primary market area has historically enjoyed a more stable level of economic activity; however we believe these more macro level concerns have started to become more evident within our market area. Recent indications show the unemployment rate within California to be approximately 11.2%. Within our primary market area, recent indications show the unemployment rate within San Luis Obispo and Santa Barbara major metropolitan areas to be approximately 8.1% and 8.3%, respectively. Additionally, housing prices have fallen significantly year over year within California, showing an approximate 42% year over year decline as of December 2008. Within the Company's primary market, we have seen housing prices fall in San Luis Obispo and Santa Barbara counties from year ago levels by approximately 29% and 34%, respectively. However, sales have been relatively strong within the Company's primary market area, climbing approximately 32% during 2008, the majority of which can be attributed to sales of foreclosed properties. That said, the lack of oversupply in our market, desirable climate, close proximity to beaches, lakes and the wine industry, for both San Luis Obispo and Santa Barbara Counties have to some degree provided support for the real-estate market in our area.

Management's Discussion and Analysis

Critical Accounting Policies

The Company's significant accounting policies are set forth in the 2008 Annual Report, Note 1 of the consolidated financial statements, which was filed on Form 10-K.

The following is a brief description of the Company's current accounting policies involving significant Management valuation judgments.

Loans and Interest on Loans

Loans receivable that Management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs of specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.

Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment in yield of the related loan.

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on contractual terms of the loan or when, in the opinion of Management, there is reasonable doubt as to collectibility. When loans are placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction to the loan principal balance. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to all principal and interest.

The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Measurement of impairment is based on the expected future cash flows of an impaired loan which are to be discounted at the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. The Bank recognizes interest income on impaired loans based on its existing methods of recognizing interest income on non-accrual loans. All loans are generally charged off at such time the loan is classified as a loss.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in Management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on Management's evaluation of the collectibility of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, the level of certain classified balances and specific impaired loans, and economic conditions and the related impact on specific borrowers and industry groups. The allowance is increased by a provision for loan losses, which is charged to earnings and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, Management's estimate of credit losses inherent in the loan portfolio and the related allowance may change.

Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, Management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

. . .