10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013.

or

[    ] 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	(I.R.S. Employer
incorporation or organization)	Identification No.)

1222 Vine Street,

Paso Robles, California 93446

(Address of principal executive 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 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES [ X ]     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 [X ]   Non-accelerated filer (Do not check if a smaller reporting company)[    ]

Smaller reporting company [   ]

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

YES [    ]    NO [ X ]

As of October 25, 2013 there were 25,391,343 shares outstanding of the registrant’s common stock.

Heritage Oaks Bancorp

Heritage Oaks Bancorp

FORM 10-Q

For the Three and Nine Months Ended September 30, 2013

INDEX

			Page
Part I.		Financial Information
	Item 1.	Financial Statements (unaudited).
		Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012	3
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and September 30, 2012	4
		Condensed Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and September 30, 2012	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and September 30, 2012	6
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	55
	Item 4.	Controls and Procedures.	57
Part II.		Other Information
	Item 1.	Legal Proceedings.	58
	Item 1A.	Risk Factors.	59
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	59
	Item 3.	Defaults Upon Senior Securities.	59
	Item 4.	Mine Safety Disclosures.	59
	Item 5.	Other Information.	59
	Item 6.	Exhibits.	60
		Signatures	61

Heritage Oaks Bancorp |- 2 -

Part I.  Financial Information

Item 1. Financial Statements

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Balance Sheets

	September 30,			December 31,
(dollar amounts in thousands except per share data)	2013			2012
	(unaudited)			(audited)
Assets
Cash and due from banks	$	25,672		$	23,425
Interest bearing deposits in other banks	7,609			10,691
Total cash and cash equivalents	33,281			34,116
Investment securities available for sale	267,179			287,682
Federal Home Loan Bank stock	4,739			4,575
Loans held for sale	5,463			22,549
Gross loans	777,154			689,608
Net deferred loan fees	(1,454		)	(937		)
Allowance for loan losses	(17,468		)	(18,118		)
Net loans held for investment	758,232			670,553
Premises and equipment	24,129			15,956
Deferred tax assets, net	21,361			21,933
Bank owned life insurance	15,710			15,349
Goodwill and other intangible assets	12,681			12,981
Other assets	11,068			11,838
Total assets	$	1,153,843		$	1,097,532
Liabilities
Non-interest bearing deposits	$	285,428		$	273,242
Interest bearing deposits	671,524			597,628
Total deposits	956,952			870,870
Short term FHLB borrowing	5,000			33,000
Long term FHLB borrowing	52,500			33,500
Junior subordinated debentures	8,248			8,248
Other liabilities	6,051			6,385
Total liabilities	1,028,751			952,003
Stockholders’ equity
Preferred stock, 5,000,000 shares authorized:
Series A senior preferred stock; $1,000 per share stated value issued and outstanding: none as of September 30, 2013 and 21,000 shares as of December 31, 2012	-			20,536
Series C preferred stock, $3.25 per share stated value; issued and outstanding: 1,189,538 shares as of September 30, 2013 and December 31, 2012	3,604			3,604
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 25,391,343 shares and 25,307,110 shares as of September 30, 2013 and December 31, 2012, respectively	101,439			101,354
Paid in capital	5,879			7,337
Retained earnings	17,083			8,773
Accumulated other comprehensive (loss) / income, net of tax (benefit) / expense of ($2,037) and $2,745 as of September 30, 2013 and December 31, 2012, respectively	(2,913		)	3,925
Total stockholders’ equity	125,092			145,529
Total liabilities and stockholders’ equity	$	1,153,843		$	1,097,532

The accompanying notes are an integral part of these condensed consolidated financial statements.

Heritage Oaks Bancorp |- 3 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Income

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
(dollar amounts in thousands except per share data)	2013		2012			2013		2012
	(unaudited)		(unaudited)			(unaudited)		(unaudited)
Interest Income
Loans	$	10,064	$	9,716		$	29,448	$	29,289
Investment securities	1,347		1,783			3,993		5,311
Other	98		20			216		72
Total interest income	11,509		11,519			33,657		34,672
Interest Expense
Interest on deposits	731		719			2,101		2,315
Other borrowings	296		215			717		617
Total interest expense	1,027		934			2,818		2,932
Net interest income before provision for loan losses	10,482		10,585			30,839		31,740
Provision for loan losses	-		1,286			-		7,681
Net interest income after provision for loan losses	10,482		9,299			30,839		24,059
Non-Interest Income
Fees and service charges	1,195		1,071			3,330		3,270
Mortgage gain on sale and origination fees	656		1,181			2,519		3,071
Gain on sale of investment securities	344		329			3,935		1,696
Gain on sale of other real estate owned	-		102			-		112
Other income	228		301			1,212		851
Total non-interest income	2,423		2,984			10,996		9,000
Non-Interest Expense
Salaries and employee benefits	4,529		4,532			14,535		13,522
Occupancy	781		728			2,384		2,542
Information technology	658		551			1,925		1,911
Professional services	729		1,002			2,082		2,403
Regulatory	212		371			851		1,238
Equipment	395		395			1,245		1,223
Sales and marketing	170		171			438		432
Foreclosed asset costs and write-downs	23		107			131		303
Provision for mortgage loan repurchases	-		125			570		982
Amortization of intangible assets	100		86			300		258
Other expense	954		727			2,478		1,843
Total non-interest expense	8,551		8,795			26,939		26,657
Income before income tax expense / (benefit)	4,354		3,488			14,896		6,402
Income tax expense / (benefit)	1,593		(2,940		)	5,689		(3,508		)
Net income	2,761		6,428			9,207		9,910
Dividends and accretion on preferred stock	181		357			898		1,113
Net income available to common shareholders	$	2,580	$	6,071		$	8,309	$	8,797
Earnings Per Common Share
Basic	$	0.10	$	0.24		$	0.33	$	0.35
Diluted	$	0.10	$	0.23		$	0.31	$	0.33

The accompanying notes are an integral part of these condensed consolidated financial statements.

Heritage Oaks Bancorp |- 4 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(dollar amounts in thousands)	2013			2012			2013			2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net income	$	2,761		$	6,428		$	9,207		$	9,910
Other comprehensive (loss) / income:
Unrealized security holding (losses) / gains	(1,959		)	2,477			(7,685		)	7,240
Reclassification for net gains on investments included in earnings	(344		)	(329		)	(3,935		)	(1,696		)
Other comprehensive (loss) / income, before income tax (benefit) / expense	(2,303		)	2,148			(11,620		)	5,544
Income tax (benefit) / expense related to items of other comprehensive income	(947		)	883			(4,782		)	2,281
Other comprehensive (loss) / income	(1,356		)	1,265			(6,838		)	3,263
Comprehensive income	$	1,405		$	7,693		$	2,369		$	13,173

The accompanying notes are an integral part of these condensed consolidated financial statements.

Heritage Oaks Bancorp |- 5 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	For The Nine Months
	Ended September 30,
(dollar amounts in thousands)	2013			2012
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income	$	9,207		$	9,910
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,050			1,007
Provision for loan losses	-			7,681
Amortization of premiums / discounts on investment securities, net	3,110			2,488
Amortization of intangible assets	300			258
Share-based compensation expense	391			234
Gain on sale of available for sale securities	(3,935		)	(1,696		)
Originations of loans held for sale	(120,520		)	(132,905		)
Proceeds from sale of loans held for sale	137,606			142,262
Net increase in bank owned life insurance	(361		)	(388		)
Decrease / (increase) in deferred tax asset	5,354			(1,349		)
Deferred tax assets valuation allowance adjustment	-			(5,605		)
Decrease in other assets	770			478
Decrease in other liabilities	(334		)	(2,809		)
Net Cash Provided By Operating Activities	32,638			19,566
Cash flows from investing activities:
Purchase of securities, available for sale	(170,063		)	(150,783		)
Sale of securities, available for sale	144,027			95,786
Maturities and calls of securities, available for sale	544			3
Proceeds from principal paydowns of securities, available for sale	35,200			35,278
(Purchase) / redemption of Federal Home Loan Bank stock	(164		)	110
Increase in loans, net	(90,254		)	(42,710		)
Allowance for loan loss recoveries	1,201			737
Purchase of property, premises and equipment, net	(9,223		)	(10,761		)
Proceeds from sale of property, premises and equipment	-			19
Proceeds from sale of foreclosed collateral	1,374			1,335
Net Cash Used In Investing Activities	(87,358		)	(70,986		)
Cash flows from financing activities:
Increase in deposits, net	86,082			68,824
Proceeds from Federal Home Loan Bank borrowing	183,500			166,500
Repayments of Federal Home Loan Bank borrowing	(192,500		)	(172,000		)
Proceeds from exercise of stock options	85			131
Preferred stock dividends paid	(707		)	(2,751		)
Retirement of Series A preferred stock and related warrants	(22,575		)	-
Net Cash Provided By Financing Activities	53,885			60,704
Net (decrease) / increase in cash and cash equivalents	(835		)	9,284
Cash and cash equivalents, beginning of period	34,116			34,892
Cash and cash equivalents, end of period	$	33,281		$	44,176

(continued)

Heritage Oaks Bancorp |- 6 -

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(continued)

	For The Nine Months
	Ended September 30,
(dollar amounts in thousands)	2013			2012
Cash Flow Information
Interest paid	$	2,791		$	3,176
Income taxes paid	$	2,100		$	2,735
Non-Cash Flow Information
Change in unrealized gain on available for sale securities	$	(11,620	)	$	5,545
Loans transferred to foreclosed collateral	$	1,374		$	769
Accretion of preferred stock discount	$	189		$	281

The accompanying notes are an integral part of these condensed consolidated financial statements.

Heritage Oaks Bancorp |- 7 -

Heritage Oaks Bancorp

And Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1.  Summary of Significant Accounting Policies

Description of Business

Heritage Oaks Bancorp (the “Bancorp”) is a California corporation organized in 1994 to act as the holding company for Heritage Oaks Bank (the “Bank”), which opened for business in 1983.  The Bank operates within San Luis Obispo, Santa Barbara and Ventura counties.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as commercial and consumer loans to customers who are predominately small to medium-sized businesses and individuals.  As such, the Company is subject to a concentration risk associated with its banking operations in San Luis Obispo, Santa Barbara and Ventura Counties. No one customer accounts for more than 10% of revenue or assets in any period presented. The Company has no assets nor does it generate any revenue from outside of the United States. While the chief decision-makers of the Company monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Basis of Presentation

The accompanying unaudited 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 2012 Annual Report filed on Form 10-K, filed with the Securities and Exchange Commission on March 4, 2013, file number 000-25020.

The condensed consolidated financial statements include the accounts of Heritage Oaks Bancorp and its wholly-owned financial subsidiary, Heritage Oaks Bank.  All significant inter-company balances and transactions have been eliminated. Heritage Oaks Capital Trust II, which was formed solely for the purpose of issuing trust preferred securities, is an unconsolidated subsidiary as the Company is not the primary beneficiary of the trust. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Certain amounts in the consolidated financial statements for the year ended December 31, 2012 and for the three and nine months ended September 30, 2012 may have been reclassified to conform to the presentation of the condensed consolidated financial statements in 2013.

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.  Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of real estate acquired through foreclosure, the carrying value of the Company’s deferred tax assets and estimates used in the determination of the fair value of certain financial instruments.

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s Annual Report filed on Form 10-K.  There have been no changes to these policies or their application other than as noted below, related to the adoption of standard updates issued by the Financial Accounting Standards Board (“FASB”).

Heritage Oaks Bancorp |- 8 -

Note 1.  Summary of Significant Accounting Policies – continued

Recent Accounting Guidance Adopted

On July 27, 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This update, like ASU 2011-08 which the Company adopted in 2011, allows companies the option to first evaluate qualitative factors to determine if events or circumstances exist that indicate that it is more likely than not that an indefinite-lived intangible asset is impaired.  If based on this assessment, a company concludes that there are no indicators that suggest an indefinitely-lived asset is more likely than not of having been impaired, then no further quantitative analysis is required.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company currently does not have any indefinite-lived intangible assets, other than goodwill, therefore adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On October 1, 2012, the FASB issued ASU No. 2012-04, Technical Corrections and Improvements.  The amendments in ASU 2012-04 cover a wide range of Topics in the Codification and address technical corrections and improvements and conforming amendments related to fair value measurements.  For public entities, the amendments that are subject to the transition guidance are effective for fiscal periods beginning after December 15, 2012.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On February 15, 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The update requires companies to present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts of reclassifications from each component of accumulated other comprehensive income based on its source and the income statement lines affected by the reclassification.  For public entities, the amendments that are subject to the transition guidance are effective for fiscal periods beginning after December 15, 2012.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

There has been no recently released accounting guidance that is directly applicable to the Company, which is not yet effective.

Heritage Oaks Bancorp |- 9 -

Note 2.  Fair Value of Assets and Liabilities

Recurring Basis

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At
September 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Obligations of U.S. government agencies	$	-	$	7,728	$	-	$	7,728
Mortgage backed securities:
Agency	-		175,432		-		175,432
Non-agency	-		13,390		-		13,390
Obligations of state and municipal securities	-		44,060		-		44,060
Asset backed securities	-		26,569		-		26,569
Total assets measured on a recurring basis	$	-	$	267,179	$	-	$	267,179
December 31, 2012
Assets
Obligations of U.S. government agencies	$	-	$	7,567	$	-	$	7,567
Mortgage backed securities:
Agency	-		145,768		-		145,768
Non-agency	-		44,795		-		44,795
Obligations of state and municipal securities	-		68,968		-		68,968
Asset backed securities			20,584		-		20,584
Total assets measured on a recurring basis	$	-	$	287,682	$	-	$	287,682

In determining the fair value of Level 3 instruments on a recurring basis the Company takes into consideration several variables, including but not limited to:  expectations about interest rate movements, prepayment speeds of the underlying mortgages for mortgage backed securities, expected default rates, and credit spreads over the risk free rate.  Of these variables, default rates and credit spreads are perhaps the least observable and most impactful on the long-term value of a Level 3 security.  Since a bond’s value is represented by its yield which reflects the risk-free yield curve plus compensation for various risks incurred in buying the bond, changes to the risk assumptions including probability of default and timing of future cash flows can materially impact the market value.

Heritage Oaks Bancorp |- 10 -

Note 2.  Fair Value of Assets and Liabilities – continued

As of September 30, 2013 and December 31, 2012, there were no Level 3 instruments. There were also no changes in the balance sheet carrying value associated with recurring Level 3 financial instruments for the three and nine months ended September 30, 2013.  The following table provides a summary of the 2012 changes in balance sheet carrying values associated with recurring Level 3 financial instruments:

						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the three months ended
September 30, 2012
Obligations of state and municipal securities	$	262	$	-		$	-	$	-	$	(262	)	$	-
						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the nine months ended
September 30, 2012
Obligations of state and municipal securities	$	259	$	3		$	-	$	-	$	(262	)	$	-
Agency mortgage baked securities	$	-	$	(191	)	$	4,674	$	-	$	(4,483	)	$	-
Non-agency mortgage backed securities	$	3,074	$	-		$	-	$	-	$	(3,074	)	$	-

(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, which are classified as obligations of state and municipal 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.

Non-recurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost.   Certain impaired loans measured at fair value at December 31, 2012 are no longer recorded at fair value due to borrower payments reducing the carrying value of these loans to less than fair value and due to other impaired loans now being evaluated under the discounted cash flow method versus the collateral method.  The discounted cash flow method as prescribed by ASC 310 Receivables,  is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate, which is not a market rate. The discounted cash flow approach was determined to be the most appropriate impairment method to use for these impaired loans based on their significant payment history and the global cash flow analysis performed on each borrower.

The following table provides a summary of assets the Company measures at fair value on a non-recurring basis:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant				Year to
	Active Markets for		Observable		Unobservable				Date
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At		Total Losses/
September 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value		(Recoveries)
Assets
Impaired loans
Residential 1 to 4 family	$	-	$	-	$	348	$	348	$	-
Commercial real estate	-		-		521		521		88
Commercial and industrial	-		-		76		76		959
Land	-		-		3,023		3,023		(8		)
Total assets measured on a non-recurring basis	$	-	$	-	$	3,968	$	3,968	$	1,039
December 31, 2012
Assets
Impaired loans
Commercial and industrial	$	-	$	820	$	213	$	1,033	$	1,941
Agriculture	-		72		-		72		28
Construction	-		1,656		-		1,656		460
Land	-		-		2,048		2,048		3,802
Total assets measured on a non-recurring basis	$	-	$	2,548	$	2,261	$	4,809	$	6,231

Heritage Oaks Bancorp |- 11 -

Note 2.  Fair Value of Assets and Liabilities – continued

There were no transfers in or out of Level 1 and Level 2 for assets reported at fair value on either a recurring and non-recurring basis during the three and nine months ended September 30, 2013 and 2012.

Fair Value of Financial Instruments

The following table provides a summary of the estimated fair value of financial instruments:

			Fair Value Measurements Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Carrying		Identical Assets		Inputs		Inputs
September 30, 2013	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Cash and cash equivalents	$	33,281	$	33,281	$	-	$	-	$	33,281
Investment securities available for sale	267,179		-		267,179		-		267,179
Federal Home Loan Bank stock	4,739		-		-		-		N/A
Loans receivable, net of deferred fees and costs	775,700		-		-		779,769		779,769
Loans held for sale	5,463		-		5,463		-		5,463
Accrued interest receivable	3,629		-		1,194		2,435		3,629
Liabilities
Non-interest bearing deposits	285,428		285,428		-		-		285,428
Interest bearing deposits	671,524		-		673,207		-		673,207
Federal Home Loan Bank advances	57,500		-		55,803		-		55,803
Junior subordinated debentures	8,248		-		-		7,062		7,062
Accrued interest payable	177		-		177		-		177
December 31, 2012
Assets
Cash and cash equivalents	$	34,116	$	34,116	$	-	$	-	$	34,116
Investments and mortgage-backed securities	287,682		-		287,682		-		287,682
Federal Home Loan Bank stock	4,575		-		-		-		N/A
Loans receivable, net of deferred fees and costs	688,671		-		2,548		701,144		703,692
Loans held for sale	22,549		-		22,549		-		22,549
Accrued interest receivable	3,915		-		1,497		2,418		3,915
Liabilities
Non interest-bearing deposits	273,242		273,242		-		-		273,242
Interest-bearing deposits	597,628		-		598,664		-		598,664
Federal Home Loan Bank advances	66,500		-		67,059		-		67,059
Junior subordinated debentures	8,248		-		-		7,078		7,078
Accrued interest payable	192		-		192		-		192

Information on off-balance sheet instruments follows:

	September 30, 2013				December 31, 2012
	Notional		Cost to Cede		Notional		Cost to Cede
(dollar amounts in thousands)	Amount		or Assume		Amount		or Assume
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	170,047	$	1,700	$	178,432	$	1,784

Heritage Oaks Bancorp |- 12 -

Note 3.  Investment Securities

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are reported as available for sale:

(dollar amounts in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized
September 30, 2013	Cost		Gains		Losses			Fair Value
Obligations of U.S. government agencies	$	7,738	$	37	$	(47	)	$	7,728
Mortgage backed securities
U.S. government sponsored entities and agencies	178,856		446		(3,870		)	175,432
Non-agency	13,266		168		(44		)	13,390
State and municipal securities	45,333		385		(1,658		)	44,060
Asset backed securities	26,936		-		(367		)	26,569
Total	$	272,129	$	1,036	$	(5,986	)	$	267,179
December 31, 2012
Obligations of U.S. government agencies	$	7,307	$	262	$	(2	)	$	7,567
Mortgage backed securities
U.S. government sponsored entities and agencies	145,430		1,136		(798		)	145,768
Non-agency	43,402		1,578		(185		)	44,795
State and municipal securities	64,824		4,240		(96		)	68,968
Asset backed securities	20,049		568		(33		)	20,584
Total	$	281,012	$	7,784	$	(1,114	)	$	287,682

Other than Temporary Impairment (“OTTI”)

At the end of the first quarter of 2013, the Company sold the two private labeled mortgage backed securities in which OTTI losses had been recognized, as part of its repositioning of the longer duration portion of the investment portfolio, thereby eliminating all securities in the portfolio for which OTTI losses had been incurred. These securities had an aggregate recorded fair value of $0.7 million ($1.0 million historical cost) at December 31, 2012. The following tables provide information related to these two securities:

	For the Three Months Ended September 30, 2013						For the Three Months Ended September 30, 2012
			OTTI Related						OTTI Related
	OTTI Related		to All Other		Total		OTTI Related		to All Other			Total
(dollars in thousands)	to Credit Loss		Factors		OTTI		to Credit Loss		Factors			OTTI
Balance, beginning of the period	$	-	$	-	$	-	$	109	$	283		$	392
Change in value attributable to other factors	-		-		-		-		(140		)	(140		)
Balance, end of the period	$	-	$	-	$	-	$	109	$	143		$	252

	For the Nine Months Ended September 30, 2013									For the Nine Months Ended September 30, 2012
				OTTI Related								OTTI Related
	OTTI Related			to All Other			Total			OTTI Related		to All Other			Total
(dollars in thousands)	to Credit Loss			Factors			OTTI			to Credit Loss		Factors			OTTI
Balance, beginning of the period	$	109		$	170		$	279		$	109	$	361		$	470
Less: losses related to OTTI securities sold	(109		)	(170		)	(279		)	-		-			-
Change in value attributable to other factors	-			-			-			-		(218		)	(218		)
Balance, end of the period	$	-		$	-		$	-		$	109	$	143		$	252

Heritage Oaks Bancorp | - 13 -

Note 3.  Investment Securities – continued

The following table provides a summary of investment securities in an unrealized loss position:

	Securities In A Loss Position For
(dollar amounts in thousands)	Less Than Twelve Months					Twelve Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2013	Value		Loss			Value		Loss			Value		Loss
Obligations of U.S. government agencies	$	3,100	$	(46	)	$	41	$	(1	)	$	3,141	$	(47	)
Mortgage backed securities
U.S. government sponsored entities and agencies	111,209		(3,566		)	5,749		(304		)	116,958		(3,870		)
Non-agency	1,218		(44		)	-		-			1,218		(44		)
State and municipal securities	25,638		(1,658		)	-		-			25,638		(1,658		)
Asset backed securities	17,700		(367		)	-		-			17,700		(367		)
Total	$	158,865	$	(5,681	)	$	5,790	$	(305	)	$	164,655	$	(5,986	)
December 31, 2012
Obligations of U.S. government agencies	$	-	$	-		$	44	$	(2	)	$	44	$	(2	)
Mortgage backed securities
U.S. government sponsored entities and agencies	83,092		(798		)	-		-			83,092		(798		)
Non-agency	7,204		(15		)	719		(170		)	7,923		(185		)
State and municipal securities	9,813		(96		)	-		-			9,813		(96		)
Asset backed securities	9,828		(33		)	-		-			9,828		(33		)
Total	$	109,937	$	(942	)	$	763	$	(172	)	$	110,700	$	(1,114	)

As of September 30, 2013, the Company believes that unrealized losses on its investment securities are not attributable to credit quality, but rather fluctuations in market prices for these investments.  In the case of the agency mortgage related securities, they have contractual cash flows guaranteed by agencies of the U.S. Government.  While the Company’s investment security holdings have contractual maturity dates that range from 1 to 40 years, they have a much shorter effective duration dependent on the instrument’s priority in the overall cash flow structure and the characteristics of the loans underlying the investment security. Management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery.  As of September 30, 2013, the Company does not believe unrealized losses related to any of its securities are other than temporary.

The proceeds from the sales and calls of securities and the associated gains and losses are listed below:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(dollar amounts in thousands)	2013			2012			2013			2012
Proceeds	$	38,930		$	41,899		$	144,571		$	95,789
Gross gains	970			448			5,349			2,160
Gross losses	(626		)	(119		)	(1,414		)	(464		)

The income tax expense related to these net realized gains was $0.1 million, for both the three months ended September 30, 2013 and 2012 and $1.6 million and $0.7 million for the nine months ended September 30, 2013 and 2012, respectively.

Heritage Oaks Bancorp | - 14 -

Note 3.  Investment Securities – continued

The amortized cost and fair value maturities of available for sale investment securities at September 30, 2013 are shown below. The table reflects the expected lives of mortgage backed securities, based on the Company’s historical prepayment experience, because borrowers have the right to prepay obligations without prepayment penalties. Contractual maturities are reflected for all other security types. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollar amounts in thousands)
September 30, 2013	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
Obligations of U.S. government agencies	$	100	$	3,481	$	1,729	$	2,418	$	7,728
Mortgage backed securities
U.S. government sponsored entities and agencies	24,910		75,551		29,616		45,355		175,432
Non-agency	5,426		6,443		1,521		-		13,390
State and municipal securities	40		6,516		34,300		3,204		44,060
Asset backed securities	-		-		14,569		12,000		26,569
Total available for sale securities	$	30,476	$	91,991	$	81,735	$	62,977	$	267,179
Amortized cost	$	30,658	$	93,028	$	83,805	$	64,638	$	272,129
Weighted average yield	2.35%		2.26%		2.54%		2.67%		2.45%

Securities having an amortized cost and a fair value of $42.8 million and $41.7 million, respectively at September 30, 2013, and $8.7 million and $9.0 million, respectively at December 31, 2012 were pledged to secure public deposits. As of September 30, 2013 and December 31, 2012, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of total securities.

The following table summarizes earnings on both taxable and tax-exempt investment securities:

	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
(dollar amounts in thousands)	2013		2012		2013		2012
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	33	$	25	$	86	$	79
Mortgage backed securities	847		973		2,470		2,971
State and municipal securities	-		5		5		183
Corporate debt securities	-		181		-		504
Asset backed securities	113		72		350		146
Non-taxable earnings on investment securities
State and municipal securities	354		527		1,082		1,428
Total	$	1,347	$	1,783	$	3,993	$	5,311

Heritage Oaks Bancorp | - 15 -

Note 4.  Loans

The following table provides a summary of outstanding loan balances:

	September 30,			December 31,
(dollar amounts in thousands)	2013			2012
Real Estate Secured
Multi-family residential	$	25,782		$	21,467
Residential 1 to 4 family	57,016			41,444
Home equity lines of credit	32,388			31,863
Commercial	442,322			372,592
Farmland	45,573			25,642
Total real estate secured	603,081			493,008
Commercial
Commercial and industrial	103,540			125,340
Agriculture	28,523			21,663
Other	44			61
Total commercial	132,107			147,064
Construction
Single family residential	4,619			8,074
Single family residential - Spec.	1,114			535
Multi-family	747			778
Commercial	6,694			10,329
Total construction	13,174			19,716
Land	25,042			24,664
Installment loans to individuals	3,495			4,895
All other loans (including overdrafts)	255			261
Total gross loans	777,154			689,608
Net deferred loan fees	(1,454		)	(937		)
Allowance for loan losses	(17,468		)	(18,118		)
Total net loans	$	758,232		$	670,553
Loans held for sale	$	5,463		$	22,549

Loans held for sale are primarily single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this category are sold within thirty to sixty days.  Under the terms of the mortgage purchase agreements, the purchaser has the right to require the Company to either repurchase the mortgage or reimburse losses incurred by the purchaser, which are determined to have been directly caused by borrower fraud or misrepresentation.  Although the Company intends to vigorously challenge these and any future claims, the Company has a reserve of $0.5 million for these potential repurchases at September 30, 2013.  The Company has incurred losses of $1.4 million related to the settlement of nine loans since the beginning of 2011, the majority of which were associated with a group of related loans to a borrower found guilty of financial fraud that were originated and sold in 2007.

Concentration of Credit Risk

The Company held loans that were collateralized by various forms of real estate of $641.3 million and $537.4 million at September 30, 2013 and December 31, 2012, respectively.  Such loans are generally made to borrowers located in the counties of San Luis Obispo, Santa Barbara and Ventura.  The Company attempts to reduce its concentration of credit risk by making loans which are diversified by product type.  While Management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that further deterioration in the California real estate market would not expose the Company to significantly greater credit risk.

Heritage Oaks Bancorp | - 16 -

Note 4.  Loans – continued

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 $20.1 million at September 30, 2013 and $7.1 million at December 31, 2012.

From time to time, the Company also originates SBA loans for sale for which it retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2013 and December 31, 2012, the unpaid principal balance of SBA loans serviced for others totaled $6.8 million and $3.1 million, respectively.  The Company recognized $0.4 million in gains related to the sale of SBA loans in both the three and nine months ended September 30, 2013, respectively, as compared to no gains from the sale of SBA loans in the first three and nine months of 2012.  The gain on sale of SBA loans was included as a component of other income in non-interest income.

Impaired Loans

The following tables provide a summary of the Company’s investment in impaired loans:

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
September 30, 2013	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	812	$	965	$	109	$	703	$	17
Commercial	1,194		1,925		642		552		91
Commercial
Commercial and industrial	4,671		5,196		3,463		1,208		2,826
Agriculture	810		848		65		745		27
Land	8,063		12,093		7,050		1,013		3,854
Installment loans to individuals	26		71		26		-		10
Totals	$	15,576	$	21,098	$	11,355	$	4,221	$	6,825

(1)The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
December 31, 2012	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	831	$	1,035	$	246	$	585	$	18
Home equity lines of credit	58		152		58		-		7
Commercial	933		1,799		42		891		-
Farmland	1,077		1,089		-		1,077		-
Commercial
Commercial and industrial	4,337		4,813		3,410		927		2,172
Agriculture	907		1,235		30		877		13
Construction
Commercial	1,380		2,508		-		1,380		-
Land	7,504		11,307		6,106		1,398		3,829
Installment loans to individuals	285		333		285		-		22
Totals	$	17,312	$	24,271	$	10,177	$	7,135	$	6,061

(1)The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

Heritage Oaks Bancorp | - 17 -

Note 4.  Loans – continued

The average recorded investment in impaired loans and the interest income recognized on impaired loans was:

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013				2012				2013				2012
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
(dollar amounts in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Real Estate Secured
Residential 1 to 4 family	$	783	$	-	$	801	$	-	$	750	$	-	$	756	$	-
Home equity lines of credit	28		-		384		-		43		-		378		-
Commercial	745		-		3,492		-		781		-		3,757		-
Farmland	-		-		363		-		269		-		272		-
Commercial
Commercial and industrial	4,342		8		4,129		-		4,223		11		3,644		4
Agriculture	1,064		-		1,905		-		966		-		2,010		-
Construction
Single family residential	-		-		-		-		-		-		234		-
Commercial	-		-		1,257		-		345		-		943		-
Land	7,760		4		7,189		-		7,605		4		5,863		-
Installment loans to individuals	28		-		89		-		111		-		82		-
Totals	$	14,750	$	12	$	19,609	$	-	$	15,093	$	15	$	17,939	$	4

The Company did not record income from the receipt of cash payments related to non-accruing loans during the three and nine month periods ended September 30, 2013 and 2012. If interest on non-accruing loans had been recognized at the original interest rates stipulated in the respective loan agreements, interest income would have increased $0.2 million and $0.3 million for the three months ended September 30, 2013 and 2012, respectively, and $0.6 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively.  Interest income recognized on impaired loans in the table above, if any, represents interest the Company recognized on accruing troubled debt restructurings (“TDRs”). Because the loans currently identified as impaired have unique risk characteristics, the Company determined the related valuation allowances for such loans on a loan-by-loan basis.

At September 30, 2013 and December 31, 2012, $9.8 million and $11.6 million, respectively, in loans were classified as TDRs.  Of those balances, $2.9 million and $17 thousand were accruing as of September 30, 2013 and December 31, 2012, respectively and the remaining balance of TDRs were non-accruing loans.  In a majority of these loans, the Company has granted concessions regarding interest rates, payment structure and maturity.  During the three and nine months ended September 30, 2013 and 2012, the terms of certain loans were modified as troubled debt restructurings. These term modifications included a combination of a partial charge-off of principal along with extensions of the maturity date at the loan’s original interest rate, which was lower than the current market rate for new debt with similar risk.  The maturity date extensions granted were for periods ranging from 12 months to 18 months.  Forgone interest related to concessions granted on TDRs totaled $43 thousand and $46 thousand for the three months ended September 30, 2013 and 2012, respectively, and $131 thousand and $85 thousand for the nine months ended September 30, 2013 and 2012, respectively.  As of September 30, 2013, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.

The following tables present loan modifications by class which resulted in TDRs:

	For the Three Months Ended September 30, 2013					For the Nine Months Ended September 30, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment		TDRs	Investment		Investment
Trouble Debt Restructurings
Real Estate Secured
Commercial real estate	1	$	227	$	227	1	$	227	$	227
Commercial
Commercial and industrial	-	-		-		3	91		91
Agriculture	1	49		49		2	67		67
Totals	2	$	276	$	276	6	$	385	$	385

Heritage Oaks Bancorp |- 18 -

Note 4.  Loans – continued

	For the Three Months Ended September 30, 2012					For the Nine Months Ended September 30, 2012
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment		TDRs	Investment		Investment
Trouble Debt Restructurings
Real Estate Secured
Residential 1 to 4 family	-	$	-	$	-	1	$	439	$	439
Farmland	1	1,089		1,089		1	1,089		1,089
Commercial
Commercial and industrial	6	1,120		1,099		9	2,115		2,094
Construction
Land	1	63		63		3	8,433		7,063
Totals	8	$	2,272	$	2,251	14	$	12,076	$	10,685

The following tables present loans by class modified as troubled debt restructurings, for which there was a payment default within twelve months following the modification:

	For the Three Months Ended September 30, 2013			For the Nine Months Ended September 30, 2013
(dollar amounts in thousands)	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Real Estate Secured
Residential 1 to 4 family	-	$	-	1	$	97
Commercial
Commercial and industrial	-	-		3	843
Agriculture	1	18		1	18
Totals	1	$	18	5	$	958

	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012
(dollar amounts in thousands)	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Commercial
Commercial and industrial	-	$	-	3	$	254
Totals	-	$	-	3	$	254

The Bank is actively working with the borrowers to resolve their delinquencies.

Heritage Oaks Bancorp |- 19 -

Note 4.  Loans – continued

Credit Quality

The following tables stratify the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio:

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
September 30, 2013	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	25,782	$	25,198	$	-	$	584	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	57,016		56,080		4		932		-		-		-		-		452		361
Home equity lines of credit	32,388		32,230		-		158		-		-		-		-		-		-
Commercial	442,322		414,892		3,710		23,720		-		-		-		-		964		226
Farmland	45,573		44,388		980		205		-		-		-		-		-		-
Commercial
Commercial and industrial	103,540		93,743		820		7,991		986		61		35		-		3,224		1,430
Agriculture	28,523		26,947		280		1,296		-		-		-		-		811		-
Other	44		44		-		-		-		-		-		-		-		-
Construction
Single family residential	4,619		4,619		-		-		-		-		-		-		-		-
Single family residential - Spec.	1,114		1,114		-		-		-		-		-		-		-		-
Multi-family	747		747		-		-		-		-		-		-		-		-
Commercial	6,694		6,694		-		-		-		-		-		-		-		-
Land	25,042		15,583		131		9,328		-		-		-		-		7,194		866
Installment loans to individuals	3,495		3,397		-		98		-		-		-		-		27		-
All other loans (including overdrafts)	255		255		-		-		-		-		-		-		-		-
Totals	$	777,154	$	725,931	$	5,925	$	44,312	$	986	$	61	$	35	$	-	$	12,672	$	2,883

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
December 31, 2012	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	21,467	$	20,869	$	-	$	598	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	41,444		40,234		6		1,204		-		199		-		-		835		-
Home equity lines of credit	31,863		30,808		-		1,055		-		-		47		-		58		-
Commercial	372,592		332,968		14,235		25,389		-		-		-		-		928		-
Farmland	25,642		20,492		3,260		1,890		-		-		-		-		1,077		-
Commercial
Commercial and industrial	125,340		114,126		2,245		8,969		-		446		104		15		4,657		17
Agriculture	21,663		19,771		106		1,786		-		-		-		-		907		-
Other	61		61		-		-		-		-		-		-		-		-
Construction
Single family residential	8,074		8,074		-		-		-		-		-		-		-		-
Single family residential - Spec.	535		535		-		-		-		-		-		-		-		-
Multi-family	778		778		-		-		-		-		-		-		-		-
Commercial	10,329		8,469		-		1,860		-		-		-		-		1,380		-
Land	24,664		12,461		4,124		8,079		-		50		-		-		7,182		-
Installment loans to individuals	4,895		4,365		230		300		-		-		-		-		285		-
All other loans (including overdrafts)	261		261		-		-		-		-		-		-		-		-
Totals	$	689,608	$	614,272	$	24,206	$	51,130	$	-	$	695	$	151	$	15	$	17,309	$	17

Heritage Oaks Bancorp |- 20 -

Note 5.  Allowance for Loan Losses (“ALLL”)

The following tables summarize the activity in the allowance attributed to various segments in the loan portfolio:

	Real Estate															All Other
(dollar amounts in thousands)	Secured			Commercial			Construction			Land			Installment			Loans			Total
Balance, June 30, 2013	$	6,509		$	6,618		$	198		$	4,465		$	108		$	36		$	17,934
Charge-offs	(41		)	(736		)	-			-			(207		)	-			(984		)
Recoveries	19			475			1			11			12			-			518
Provisions for loan losses	(180		)	(207		)	44			170			174			(1		)	-
Balance, September 30, 2013	$	6,307		$	6,150		$	243		$	4,646		$	87		$	35		$	17,468
Balance, June 30, 2012	$	6,897		$	6,261		$	381		$	4,483		$	91		$	36		$	18,149
Charge-offs	(106		)	(1,511		)	(92		)	-			(9		)	-			(1,718		)
Recoveries	12			246			1			5			5			1			270
Provisions for loan losses	1,184			75			268			(225		)	(15		)	(1		)	1,286
Balance, September 30, 2012	$	7,987		$	5,071		$	558		$	4,263		$	72		$	36		$	17,987

	Real Estate															All Other
(dollar amounts in thousands)	Secured			Commercial			Construction			Land			Installment			Loans			Total
Balance, December 31, 2012	$	6,879		$	6,154		$	313		$	4,670		$	64		$	38		$	18,118
Charge-offs	(131		)	(1,137		)	(169		)	(34		)	(380		)	-			(1,851		)
Recoveries	143			947			2			45			64			-			1,201
Provisions for loan losses	(584		)	186			97			(35		)	339			(3		)	-
Balance, September 30, 2013	$	6,307		$	6,150		$	243		$	4,646		$	87		$	35		$	17,468
Balance, December 31, 2011	$	9,645		$	6,549		$	488		$	2,416		$	175		$	41		$	19,314
Charge-offs	(2,471		)	(4,272		)	(668		)	(2,168		)	(29		)	(137		)	(9,745		)
Recoveries	74			623			1			18			18			3			737
Provisions for loan losses (1)	739			2,171			737			3,997			(92		)	129			7,681
Balance, September 30, 2012	$	7,987		$	5,071		$	558		$	4,263		$	72		$	36		$	17,987

(1) The provision for loan losses includes the transfer of $3.9 million from C&I to Land related to the re-characterization of a loan as part of a TDR in the second quarter of 2012, as the restructured loan became collateral dependent on a parcel of land.

The following tables summarize comparative metrics about the allowance attributed to various segments of the loan portfolio:

	September 30, 2013
	Real Estate										All Other
(dollar amounts in thousands)	Secured		Commercial		Construction		Land		Installment		Loans		Total
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	108	$	2,853	$	-	$	3,854	$	10	$	-	$	6,825
General portfolio allocation	$	6,199	$	3,297	$	243	$	792	$	77	$	35	$	10,643
Loans individually evaluated for impairment	$	2,003	$	5,465	$	-	$	8,060	$	27	$	-	$	15,555
Loans collectively evaluated for impairment	$	601,078	$	126,642	$	13,174	$	16,982	$	3,468	$	255	$	761,599
General reserves to total loans collectively evaluated for impairment	1.03%		2.60%		1.84%		4.66%		2.22%		13.73%		1.40%
Total gross loans	$	603,081	$	132,107	$	13,174	$	25,042	$	3,495	$	255	$	777,154
Total allowance to gross loans	1.05%		4.66%		1.84%		18.55%		2.49%		13.73%		2.25%

Heritage Oaks Bancorp |- 21 -

Note 5.  Allowance for Loan Losses (“ALLL”) – continued

	December 31, 2012
	Real Estate										All Other
(dollar amounts in thousands)	Secured		Commercial		Construction		Land		Installment		Loans		Total
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	25	$	2,185	$	-	$	3,829	$	22	$	-	$	6,061
General portfolio allocation	$	6,854	$	3,969	$	313	$	841	$	42	$	38	$	12,057
Loans individually evaluated for impairment	$	2,898	$	5,596	$	1,380	$	7,182	$	285	$	-	$	17,341
Loans collectively evaluated for impairment	$	490,110	$	141,468	$	18,336	$	17,482	$	4,610	$	261	$	672,267
General reserves to total loans collectively evaluated for impairment	1.40%		2.81%		1.71%		4.81%		0.91%		14.56%		1.79%
Total gross loans	$	493,008	$	147,064	$	19,716	$	24,664	$	4,895	$	261	$	689,608
Total allowance to gross loans	1.40%		4.18%		1.59%		18.93%		1.31%		14.56%		2.63%

Note 6.  Deferred Tax Assets and Income Taxes

The table below summarizes the Company’s net deferred tax asset:

	September 30,		December 31,
(dollar amounts in thousands)	2013		2012
Deferred tax assets
Provision for loan losses	$	8,669	$	14,348
Forgone interest on non-accrual loans	855		884
Fixed assets	459		405
Accruals	929		792
Alternative minimum tax credit	2,855		2,153
Deferred income	2,129		1,838
Deferred compensation	1,602		1,477
Net operating loss carryforward	6		907
Investment securities valuation	2,037		-
Other than temporary impairment	-		45
Realized built-in loss subject to § 382	2,433		3,234
Charitable contribution	-		61
State deferred tax	781		59
Total deferred tax assets	22,755		26,203
Deferred tax liabilities
Fair value adjustment for purchased assets	362		455
Investment securities valuation	-		2,745
Deferred costs, prepaids and FHLB advances	1,032		1,070
Total deferred tax liabilities	1,394		4,270
Net deferred tax assets	$	21,361	$	21,933

Deferred Tax Assets Valuation Allowance

U.S. GAAP requires that companies assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence, both positive and negative, that can be objectively verified.  U.S. GAAP provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable, and also limits projections of future taxable income to that which can be estimated over a reasonable amount of time.

Heritage Oaks Bancorp |- 22 -

Note 6.  Deferred Tax Assets and Income Taxes – continued

The pre-tax losses the Company reported in 2010 and 2009 resulted in a three year cumulative loss position, which provided significant negative evidence about the Company’s ability to realize a portion of its deferred tax assets as of December 31, 2011 and 2010. Due to the three year cumulative pre-tax loss position as of December 31, 2010, management believed that it was no longer more likely than not that the Company would generate enough future taxable income over the projection period in order for all of its deferred tax assets to be realized. As a result of this negative evidence, the Company recorded a partial valuation allowance of approximately $7.1 million for its deferred tax assets in 2010 through a charge to income tax expense. The Company’s determination of the valuation allowance for a portion of its deferred tax assets was based on a determination that the recovery of the entire deferred tax asset was no longer more likely than not due to: (1) an analysis of cumulative pre-tax losses over a three year horizon, through December 31, 2010; (2) a projection of future taxable income over a period of time the Company believed to be reasonably estimable (“the projection period”); and (3) a detailed analysis to determine the amount of the deferred tax asset expected to be realized over the projection period of five years.

The ultimate realization of the Company’s deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences reverse.  The deferred tax assets for which there is no valuation allowance relate to amounts that are expected to be realized through subsequent reversals of existing taxable temporary differences over the projection period.  The accounting for deferred taxes is based on an estimate of future results. Differences between anticipated and actual outcomes of these future tax consequences could have an impact on the Company’s consolidated results of operations or financial position.

The Company’s return to profitability in 2011 and continued profits in 2012 substantially eliminated the three year cumulative loss position.  In addition, declines in the level of deferred tax assets and changes in their composition, along with projections of profitability for the foreseeable future and an improvement in the credit quality of the Company’s loan portfolio have combined to improve the outlook for the recovery of the valuation allowance provided for in 2010.  As a result of this improved outlook, the Company reduced the level of valuation allowance in the fourth quarter of 2011 by $1.5 million and then reversed the remaining $5.6 million valuation allowance in 2012, of which amount $4.1 million was reversed in the third quarter of 2012 and a total of $1.5 million was reduced in the first half of 2012, based on the Company’s determination that it was more likely than not that its entire deferred tax asset position would be realized.

Income Taxes

The Company is subject to income taxation by both federal and state taxing authorities.  Income tax returns for the years ended December 31, 2011, 2010, 2009 and 2008 are open to audit by federal and state taxing authorities.  The Company does not have any uncertain income tax positions and has not accrued for any interest or penalties as of September 30, 2013 and December 31, 2012. The following table provides a summary for the current and deferred amounts of the Company’s income tax expense / (benefit):

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2013			2012			2013		2012
Current:
Federal	$	495		$	936		$	306	$	2,489
State	(249		)	485			29		957
Total current (benefit) / expense	246			1,421			335		3,446
Deferred:
Federal	630			(141		)	3,777		(1,061		)
State	717			(115		)	1,577		(288		)
Total deferred expense / (benefit)	1,347			(256		)	5,354		(1,349		)
Deferred Tax Valuation Allowance:
Federal	-			(2,552		)	-		(3,662		)
State	-			(1,553		)	-		(1,943		)
Total deferred tax valuation allowance change	-			(4,105		)	-		(5,605		)
Total income tax expense / (benefit)	$	1,593		$	(2,940	)	$	5,689	$	(3,508	)

Heritage Oaks Bancorp |- 23 -

Note 6.  Deferred Tax Assets and Income Taxes – continued

The following table reconciles the statutory federal income tax expense / (benefit) and rate to the Company’s effective income tax expense / (benefit) and rate:

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013				2012				2013				2012
(dollar amounts in thousands)	Amount			Percent	Amount			Percent	Amount			Percent	Amount			Percent
Tax expense at federal statutory tax rate	$	1,525		35.0%	$	1,221		35.0%	$	5,214		35.00%	$	2,241		35.0	%
State income taxes, net of federal income tax benefit	304			7.0%	241			6.9%	1,044			7.0%	435			6.8	%
Change in deferred tax asset valuation allowance	-			0.0%	(4,105		)	-117.7%	-			0.0%	(5,605		)	-87.6	%
Bank owned life insurance	(38		)	-0.9%	(56		)	-1.6%	(115		)	-0.8%	(109		)	-1.7	%
Tax exempt income, net of interest expense	(176		)	-4.0%	(217		)	-6.2%	(402		)	-2.7%	(415		)	-6.5	%
Other, net	(22		)	-0.5%	(24		)	-0.7%	(52		)	-0.3%	(55		)	-0.8	%
Total income tax expense / (benefit)	$	1,593		36.6%	$	(2,940	)	-84.3%	$	5,689		38.2%	$	(3,508	)	-54.8	%

Note 7.  Other Real Estate Owned (“OREO”)

The Company had no OREO activity for the quarter ended September 30, 2013. The following table provides a summary of the third quarter 2012 change in the balance of OREO:

	Balance										Balance
	June 30,										September 30,
(dollar amounts in thousands)	2012		Additions		Disposals			Writedowns			2012
Real Estate Secured
Residential 1 to 4 family	$	431	$	-	$	-		$	(31	)	$	400
Commercial	215		-		-			-			215
Construction
Single family residential - Spec.	397		-		(397		)	-			-
Land	32		-		-			(32		)	-
Totals	$	1,075	$	-	$	(397	)	$	(63	)	$	615

The following tables provide a summary of the year to date change in the balance of OREO:

	Balance									Balance
	December 31,									September 30,
(dollar amounts in thousands)	2012		Additions		Disposals			Writedowns		2013
Real Estate Secured
Commercial	$	-	$	1,374	$	(1,374	)	$	-	$	-
Totals	$	-	$	1,374	$	(1,374	)	$	-	$	-

	Balance										Balance
	December 31,										September 30,
(dollar amounts in thousands)	2011		Additions		Disposals			Writedowns			2012
Real Estate Secured
Residential 1 to 4 family	$	-	$	607	$	(176	)	$	(31	)	$	400
Commercial	215		-		-			-			215
Construction
Single family residential - Spec.	423		-		(397		)	(26		)	-
Tract	100		-		(100		)	-			-
Land	179		162		(300		)	(41		)	-
Totals	$	917	$	769	$	(973	)	$	(98	)	$	615

The Company did not realize any gains or losses related to disposal of OREO during the three or nine months ended September 30, 2013.

Heritage Oaks Bancorp |- 24 -

Note 8. Deposits

The following table provides a summary of deposits by product type:

	September 30,		December 31,
(dollar amounts in thousands)	2013		2012
Non-interest bearing deposits	$	285,428	$	273,242
Interest bearing deposits:
NOW accounts	83,961		76,728
Money market deposit accounts	324,990		293,525
Other savings deposits	43,089		41,021
Time certificates of $100 or more	145,315		97,105
Other time deposits	74,169		89,249
Total deposits	$	956,952	$	870,870

Note 9.  Capital

The following table sets forth the Company’s and the Bank’s actual regulatory ratios and the regulatory standard:

	Regulatory Standard	September 30, 2013		December 31, 2012
	Well	Heritage Oaks		Heritage Oaks
Ratio	Capitalized	Bancorp	Bank	Bancorp	Bank
Leverage ratio	5.00%	10.58%	10.05%	12.32%	11.93%
Tier I capital to risk weighted assets	6.00%	13.27%	12.59%	15.55%	15.02%
Total risk based capital to risk weighted assets	10.00%	14.53%	13.85%	16.81%	16.28%

Note 10.  Share-Based Compensation Plans

As of September 30, 2013, the Company had two share-based employee compensation plans, which are more fully described in Note 14. Share-Based Compensation Plans, of the consolidated financial statements in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2012.  These plans include the “1997 Stock Option Plan” and the “2005 Equity Based Compensation Plan.”

The following table provides a summary of the expenses the Company has recognized related to share-based compensation for the periods indicated below:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(dollar amounts in thousands)	2013		2012		2013		2012
Share-based compensation expense:
Stock option expense	$	68	$	39	$	183	$	92
Restricted stock expense	80		67		208		142
Total expense	$	148	$	106	$	391	$	234
Unrecognized compensation expense:
Stock option expense	$	762	$	620
Restricted stock expense	775		624
Total unrecognized expense	$	1,537	$	1,244

At September 30, 2013, there was a total of $0.8 million of unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 3.3 years.

Heritage Oaks Bancorp |- 25 -

Note 10.  Share-Based Compensation Plans – continued

The Company periodically grants restricted share awards to employees and directors. These restricted shares generally vest over a period of one to five years depending on the terms of the grant.  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 September 30, 2013 was $0.8 million.  That expense is expected to be recognized over the next 2.9 years.

The following table provides a summary of activity related to options granted, exercised, and forfeited:

	Options Outstanding				Options
	Number		Weighted Average		Available for
	of Shares		Exercise Price		Grant
Balance, December 31, 2012	523,129		$	6.11	1,715,616
Granted	167,415		6.30
Forfeited	(65,356	)	5.81
Expired	(4,275	)	4.62
Exercised	(20,339	)	3.90
Balance, September 30, 2013	600,574		$	6.28	1,565,670

The following table provides a summary of activity related to restricted stock granted, vested and forfeited:

	Number of		Average Grant
	Shares		Date Fair Value
Balance December 31, 2012	196,850		$	4.27
Granted	72,786		6.26
Vested	(57,508	)	4.40
Forfeited	(8,892	)	5.17
Balance September 30, 2013	203,236		$	4.91

The aggregate intrinsic value in the following table represents the total pre-tax intrinsic value, which is subject to change based on the fair market value of the Company’s stock.  The aggregate intrinsic value of options exercised was $42 thousand for the year to date period ended September 30, 2013.  The following table provides a summary of the aggregate intrinsic value of options vested and expected to vest and exercisable:

				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	572,450	$	6.29	7.46	$	720,971
Exercisable at September 30, 2013	304,409	$	6.62	5.84	$	572,600

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted:

	For the Nine Months Ended
	September 30,
	2013		2012
Expected volatility	55.32%		52.26%
Expected term (years)	6		7
Dividend yield	0.00%		0.00%
Risk free rate	1.55%		1.11%
Weighted-average grant date fair value	$	3.31	$	2.87

Heritage Oaks Bancorp |- 26 -

Note 11.  Preferred Stock

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.

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

On March 20, 2009, the Company issued 21,000 shares of Series A Senior Preferred Stock to the United States Department of Treasury (“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 was exercisable immediately at a price of $5.15 per share, would have expired after a period of 10 years from issuance and is transferable by the U.S. Treasury.  The warrant would have been dilutive to earnings per common share during reporting periods in which the market price of the Company’s common stock was above the warrant’s exercise price.

In July 2013, the Company received approval to dividend $25.0 million from the Bank to the Company, to facilitate the repurchase of the 21,000 shares of Series A Preferred Stock and the related warrant to purchase 611,650 shares of the Company’s common stock.  The Company completed the repurchase of the Series A Preferred Stock at par, including accrued but unpaid dividends, for $21.2 million on July 17, 2013.  On July 29, 2013, the Company made a bid to repurchase the warrant to purchase 611,650 shares of the Company’s common stock for $1.6 million.  On July 30, 2013, the United States Department of Treasury accepted the Company’s bid.  The repurchase of the warrant occurred on August 7, 2013.

Series C Convertible Perpetual Preferred Stock

On March 12, 2010, the Company sold 1,189,538 shares of its Series C Convertible Perpetual Preferred Stock (“Series C Preferred Stock”) for $3.6 million as part of the overall $60 million private placement of securities completed at that time.  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 or otherwise makes a “Permissible Transfer”, as defined in the terms of the Series C Preferred Stock. 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.  There is no stated dividend rate for shares of Series C Preferred Stock.  However, in the event that a common stock dividend is declared, holders of Series C Preferred Stock are entitled to a per share dividend equivalent to that declared for each common share into which Series C Preferred Stock is then convertible.

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 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 through a Permissible Transfer.  Such transfer has not occurred as of September 30, 2013.

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 |- 27 -

Note 12.  Earnings Per Share

Basic earnings 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 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, which was retired unexercised in August 2013, or the Series C Perpetual Preferred Stock the Company issued during 2010.  The computation of diluted earnings per common share excludes the impacts of the assumed exercise or issuance of securities that would have an anti-dilutive effect, which can occur when the Company reports a net loss or when the market price for the Company’s stock falls below the exercise price of equity awards issued by the Company.  For the three months ended September 30, 2013 and 2012, common stock equivalents, primarily options, totaling approximately 418,000 shares and 299,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.  For the nine months ended September 30, 2013 and 2012, common stock equivalents, primarily options, totaling approximately 358,000 shares and 278,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.

The following tables set forth the number of shares used in the calculation of both basic and diluted earnings per common share:

	For the Three Months Ended September 30,
		2013				2012
		Net				Net
(dollar amounts in thousands except per share data)		Income			Shares	Income			Shares
Net income		$	2,761			$	6,428
Dividends and accretion on preferred stock		(181		)		(357		)
Net income  available to common shareholders		$	2,580			$	6,071
Weighted average shares outstanding					25,172,929				25,089,325
Basic earnings per common share		$	0.10			$	0.24
Dilutive effect of share-based compensation awards, common stock warrants, and convertible perpetual preferred stock					1,376,639				1,341,392
Weighted average diluted shares outstanding					26,549,568				26,430,717
Diluted earnings per common share		$	0.10			$	0.23

	For the Nine Months Ended September 30,
	2013				2012
	Net				Net
(dollar amounts in thousands except per share data)	Income			Shares	Income			Shares
Net income	$	9,207			$	9,910
Dividends and accretion on preferred stock	(898		)		(1,113		)
Net applicable to common shareholders	$	8,309			$	8,797
Weighted average shares outstanding				25,138,410				25,074,405
Basic earnings per common share	$	0.33			$	0.35
Dilutive effect of share-based compensation awards, common stock warrant, and convertible perpetual preferred stock				1,401,694				1,280,238
Weighted average diluted shares outstanding				26,540,104				26,354,643
Diluted earnings per common share	$	0.31			$	0.33

Heritage Oaks Bancorp |- 28 -

Note 13.  Regulatory Matters

Memorandums of Understanding

Since April 2012, the Bank has operated under a Memorandum of Understanding (“MOU”) with the FDIC and California Department of Financial Institutions (“DFI”), which replaced the Consent Order entered into in 2010. In the MOU, the Company committed to, among other things; continue to make progress in improving credit quality and processes as well as to continue to comply with the 10% Leverage Ratio as originally established by the Order.

Effective April 24, 2013, the FDIC and DFI terminated their MOU with the Bank, signifying full resolution of all open matters raised as part of their examination in 2010 and recognition of the improved financial health of the Bank.  As such the Bank will no longer be subject to the MOU’s 10% Leverage Ratio requirement, as well as the other provisions of the MOU.

Since July 2012, the Company has operated under a MOU with the FRB, which replaced the Written Agreement entered into in 2010.  In the MOU the Company committed among other things, to continue to seek FRB approval prior to: paying any dividends on its common and preferred stock; paying interest, principal or other sums on subordinated debt or trust preferred securities; or incurring, increasing, or guaranteeing any debt. On September 4, 2013, the Federal Reserve Bank of San Francisco terminated the MOU with the Bank.

Note 14.  Subsequent Events

On October 21, 2013, the Company signed a definitive agreement and plan of merger (the “Merger Agreement”) whereby the Company will acquire Mission Community Bancorp and merge their respective banks, Heritage Oaks Bank and Mission Community Bank.  Under the terms of the Merger Agreement, holders of Mission Community Bancorp’s common stock, warrants and options will receive aggregate cash consideration of $8.0 million and aggregate stock consideration of 7,541,353 shares of the Company’s common stock.  The total value of the merger consideration is $56.4 million, based on a $6.42 closing price of the Company’s common stock on October 18, 2013.  The transaction is currently expected to close in the first quarter of 2014, subject to customary conditions, including the approval of bank regulatory authorities and the shareholders of both companies.

Heritage Oaks Bancorp |- 29 -

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

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  You can find many but not all of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q.  The Company claims the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995, as amended.  The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the Company’s beliefs, and on assumptions made by, and information available to management at the time such statements are first made.  The actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control or ability to predict.  Although the Company believes that management’s assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect.  As a result, the Company’s actual future results can be expected to differ from management’s expectations, and those differences may be material and adverse to the Company’s business, results of operations and financial condition.  Accordingly, investors should use caution in relying on forward-looking statements to anticipate future results or trends.

Some of the risk and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include the following: the uncertainty as to whether the financial crisis in the United States has fully been resolved, including the continuing relative softness in the California real estate market, and the response of federal and state government and our regulators thereto; credit quality deterioration or a reduction in real estate values causing an increase in the allowance for credit losses and a reduction in net earnings; a decline in general economic conditions in those areas in which the Company operates; competitive pressure among depository institutions; fluctuations in interest rates and the possibility that a change in the interest rate environment may reduce net interest margins; changes in the Company’s business strategy or development plans; the Company’s ability to gain regulatory and shareholder approval for the recently announced acquisition of Mission Community Bancorp; changes in governmental regulation; economic, political and global changes arising from the war on terrorism, social unrest and other civil disturbances; the Company’s ability to increase profitability and sustain growth; asset/liability re-pricing risks and liquidity risks; the Company’s beliefs as to the adequacy of its existing and anticipated allowance for loan and lease losses; the threat and impact of cyber-attacks on our Company and our third party vendors information technology infrastructure; environmental conditions, including natural disasters such as earthquakes, landslides and wildfires, may disrupt business, impede operations, or negatively impact the values of collateral securing loans;  and financial policies of the United States government.

Additional information on these risks and other factors that could affect operating results and financial condition are detailed in reports filed by the Company with the U.S. Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed by the Company with the U.S. Securities and Exchange Commission on March 4, 2013. Forward looking statements speak only as of the date they are made, and the Company does not undertake to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made, whether as a result of new information, future developments or otherwise, and specifically disclaims any obligation to revise or update such forward looking statements for any reason, except as may be required by law.

Overview

The Company

Heritage Oaks Bancorp (the “Company”) is a California corporation organized in 1994 to act as a holding company for Heritage Oaks Bank (“Bank”), a bank founded in 1983 that serves San Luis Obispo, Santa Barbara and Ventura Counties.  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 whose sole purpose was to issue trust preferred securities.

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 that are deemed closely related to the business of banking. The Company has also formed a subsidiary, CCMS Systems, Inc., which is currently inactive and has not been capitalized. The Company has no present plans to utilize CCMS Systems, Inc.

Heritage Oaks Bancorp |- 30 -

Between March 2010 and April 2012, the Bank operated under a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Institutions (“DFI”).  In April 2012, the Bank’s Consent Order was terminated and replaced with an informal Memorandum of Understanding (“MOU”).  Effective April 24, 2013, the FDIC and DFI terminated the MOU with the Bank, signifying resolution of all open matters raised as part of their examination in 2010.  As such, the Bank is no longer subject to the MOU’s 10% leverage ratio requirement, or any of the other provisions of the MOU.

Between March 2010 and July 2012, the Company operated under a Written Agreement with the Federal Reserve Bank of San Francisco (“SF FRB”).  In July 2012, the Company’s Written Agreement with the SF FRB was terminated and replaced with an informal MOU.  The Company operated under the terms of the MOU until it was terminated in September 2013.

Financial Highlights

Net income for the three months ended September 30, 2013 was $2.8 million, or $0.10 per diluted common share as compared with $6.4 million, or $0.23 per diluted common share for the three months ended September 30, 2012.  Net income for the nine months ended September 30, 2013 was $9.2 million, or $0.31 per diluted common share as compared with $9.9 million, or $0.33 per diluted common share for the nine months ended September 30, 2012.

Significant factors impacting the Company’s net income during the first nine months of 2013 were:

¡Net interest income declined for both the three and nine months ended September 30, 2013 as compared to the same periods in 2012 largely due to the continued impact of net interest margin compression associated with a decline in yields on our investment and loan portfolios attributable to the historically low interest rate environment and increasing competition in our lending market.  Net interest income was $10.5 million, or 4.04% of average interest earning assets (“net interest margin”), for the third quarter of 2013 compared with $10.6 million, or a 4.36% net interest margin, for the same period a year earlier.  For the first nine months of 2013, net interest income was $30.8 million, or a 4.07% net interest margin, compared with $31.7 million, or a 4.49% net interest margin from the same period a year ago.

¡No provision for loan losses was recorded in either the three and nine months ended September 30, 2013.  This lack of provisioning is due to continued improvements in the overall credit quality of the loan portfolio, an improvement in historical loan charge-off experience and a change in the mix of loans to products with lower credit risk.

¡For the first nine months of 2013, non-interest income increased $2.0 million to $11.0 million from $9.0 million for the same period a year ago.  However, non-interest income decreased $0.6 million to $2.4 million for the third quarter of 2013 from $3.0 million for the same period a year earlier. Higher non-interest income during the first nine months of 2013 compared with the same period a year ago is primarily the result of $3.9 million of gains on the sale of investment securities, which gains were largely due to the sale of $89.3 million of securities in the first quarter of 2013. These securities were sold to reduce the overall duration of the investment securities portfolio to limit interest rate risk and to provide a funding source for our growing loan demand. Total duration of the investment securities portfolio declined from 3.1 years prior to the sale of the investment securities to 2.4 years after the sale.  The increase in the gain on sale of investment securities was partially offset by a reduction in gains on mortgage sales of $0.6 million due to a decline in the level of refinancing activity attributable to the increase in the long-term mortgage rates over the last two quarters. This decline was the primary cause of the decline in non-interest income for the third quarter of 2013 as compared to the corresponding period in 2012.

¡Non-interest expense decreased to $8.6 million for the three months ended September 30, 2013 from $8.8 million for the same period a year earlier.  However, for the first nine months of 2013, non-interest expense increased to $26.9 million from $26.7 million for the same period a year ago.  The decline in non-interest expense for the third quarter of 2013 was the result of reductions in professional fees attributable to the efficiency study that was undertaken in the latter half of 2012 and completed in the first quarter of 2013. We also experienced a decline in regulatory costs attributable to the termination of the MOUs with the FDIC, DFI and FRB during the second and third quarters of 2013. These declines were partially offset by an increase in other expense due to increased lending costs to support the growth in the loan portfolio and settlement costs attributable to resolution of a legal matter.  The increase for the first nine months of 2013 was primarily the result of higher employee compensation costs due to the reintroduction of incentive compensation plans in the second half of 2012, merit increases and higher variable compensation. Non-interest expense was also impacted by an increase in other expense for the same reasons as previously discussed.  These increases were substantially offset by a reduction in mortgage loan repurchase provision, professional services fees, regulatory and occupancy costs.

Heritage Oaks Bancorp |- 31 -

Critical Accounting Policies and Estimates

Our accounting policies are integral to understanding the Company’s financial condition and results of operations.  Accounting policies that management considers to be significant, including newly issued standards to be adopted in future periods, are disclosed in Note 1. Summary of Significant Accounting Policies, of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially and adversely from those estimates.

Estimates that are particularly susceptible to significant change relate to the determination of the ALLL, the valuation of real estate acquired through foreclosure, the carrying value of the Company’s deferred tax assets and estimates used in the determination of the fair value of certain financial instruments.

Allowance for Loan Losses and Valuation of Foreclosed Real Estate

In connection with the determination of the specific credit component of the ALLL for non-performing loans in the loan portfolio and the value of foreclosed real estate, management obtains independent appraisals at least once a year for significant properties.  While management uses available information to recognize losses on non-performing loans and foreclosed real estate, future additions to the ALLL may be necessary based on changes in local economic conditions or other factors outside our control.

The general portfolio component of the allowance is determined by pooling performing loans by collateral type and purpose.  These loans are then further segmented by an internal loan grading system that classifies loans as: pass, special mention, substandard and doubtful.  Estimated loss rates are then applied to each segment according to loan grade to determine the amount of the general portfolio allocation.  Estimated loss rates are determined through an analysis of historical loss rates for each segment of the loan portfolio, based on the Company’s prior experience with such loans.  In addition, qualitatively determined adjustments are made to the historical loss history to give effect to certain internal and external factors that may have either a positive or negative impact on the overall credit quality of the loan portfolio.

Because of all the variables that go into the determination of both the specific and general allocation components of the ALLL, as well as the valuation of foreclosed real estate, it is reasonably possible that the ALLL and foreclosed real estate values may change in future periods and those changes could be material and have an adverse effect on our financial condition and results of operations.  See also Note 5. Allowance for Loan Losses, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.

Realizability of Deferred Tax Assets

The Company uses an estimate of its future earnings in determining if it is more likely than not that the carrying value of its deferred tax assets will be realized over the period they are expected to reverse.  If based on all available evidence, the Company believes that a portion or all of its deferred tax assets will not be realized, a valuation allowance must be established.  During 2010, the Company established a valuation allowance against a portion of its deferred tax assets. Based on the Company’s ongoing assessment of the realizability of its deferred tax assets, management reduced the level of the valuation allowance in 2011 and ultimately reversed the remaining valuation allowance during 2012, based upon management’s determination that it was more likely than not that the entire balance of the deferred tax assets will ultimately be realized.  See also Note 6. Deferred Tax Assets and Income Taxes, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.

Heritage Oaks Bancorp |- 32 -

Fair Value of Financial Instruments

The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of observable pricing.  Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment is utilized in measuring the fair value of such instruments.  Observable pricing is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and the characteristics specific to the financial instrument, including but not limited to credit and duration profiles.  See also Note 2. Fair Value of Assets and Liabilities, of the Condensed Consolidated Financial Statements filed in this Form 10-Q.

Where You Can Find More Information

Under Section 13 of the Securities Exchange Act of 1934, as amended, periodic and current reports must be filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company electronically files the following documents with the SEC: Annual Reports on Form 10-K; Quarterly Reports on Form 10-Q; Current Reports on Form 8-K; and Definitive Proxy Statements on Form DEF 14A. The Company may file additional documents from time to time. The SEC maintains an internet site, www.sec.gov, from which all documents filed or furnished electronically may be accessed. Additionally, all documents 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 and other filings to its website as soon as reasonably practicable after filing them with or furnishing them to the SEC.  None of the information on or hyperlinked from the Company’s website is incorporated into this Quarterly Report on Form 10-Q.

Heritage Oaks Bancorp |- 33 -

Selected Financial Data

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

	At or For The Three Months Ended,
(dollar amounts in thousands, except per share data)	9/30/2013		6/30/2013		3/31/2013		12/31/2012		9/30/2012		6/30/2012		3/31/2012		12/31/2011		9/30/2011
Consolidated Income Data:
Interest income	$	11,509	$	11,075	$	11,073	$	11,649	$	11,519	$	11,401	$	11,752	$	12,012	$	12,072
Interest expense	1,027		926		865		886		934		995		1,003		1,106		1,217
Net interest income	10,482		10,149		10,208		10,763		10,585		10,406		10,749		10,906		10,855
Provision for loan losses	-		-		-		-		1,286		3,064		3,331		693		1,086
Net interest income after provision for loan losses	10,482		10,149		10,208		10,763		9,299		7,342		7,418		10,213		9,769
Non-interest income	2,423		2,912		5,661		3,548		2,984		3,494		2,522		3,213		2,557
Non-interest expense	8,551		8,640		9,748		9,474		8,795		9,133		8,729		9,221		9,050
Income before income tax expense / (benefit)	4,354		4,421		6,121		4,837		3,488		1,703		1,211		4,205		3,276
Income tax expense / (benefit)	1,593		1,705		2,391		1,710		(2,940)		(194)		(374)		75		1,157
Net income	2,761		2,716		3,730		3,127		6,428		1,897		1,585		4,130		2,119
Dividends and accretion on preferred stock	181		359		358		357		357		375		381		250		373
Net income available to common shareholders	$	2,580	$	2,357	$	3,372	$	2,770	$	6,071	$	1,522	$	1,204	$	3,880	$	1,746
Share Data:
Earnings per common share - basic	$	0.10	$	0.09	$	0.13	$	0.11	$	0.24	$	0.06	$	0.05	$	0.16	$	0.07
Earnings per common share - diluted	$	0.10	$	0.09	$	0.13	$	0.10	$	0.23	$	0.06	$	0.05	$	0.15	$	0.07
Dividend payout ratio (1)	0.00%		0.00%		0.00%		0.00%		0.00%		0.00%		0.00%		0.00%		0.00%
Common book value per share	$	4.78	$	4.80	$	4.82	$	4.78	$	4.65	$	4.36	$	4.29	$	4.17	$	4.04
Tangible common book value per share	$	4.29	$	4.30	$	4.31	$	4.27	$	4.16	$	3.86	$	3.79	$	3.67	$	3.53
Actual shares outstanding at end of period	25,391,343		25,342,560		25,331,541		25,307,110		25,288,430		25,234,262		25,163,571		25,145,717		25,081,819
Weighted average shares outstanding - basic	25,172,929		25,130,299		25,112,004		25,101,083		25,089,325		25,076,226		25,057,664		25,054,204		25,054,027
Weighted average shares outstanding - diluted	26,549,568		26,543,268		26,527,457		26,485,728		26,430,717		26,399,117		26,290,370		26,261,179		26,254,045
Consolidated Balance Sheet Data:
Total cash and cash equivalents	$	33,281	$	38,539	$	38,517	$	34,116	$	44,176	$	32,558	$	26,702	$	34,892	$	26,722
Total investments and other securities	$	267,179	$	237,540	$	247,890	$	287,682	$	261,451	$	260,786	$	266,996	$	236,982	$	248,854
Total gross loans	$	777,154	$	746,611	$	704,880	$	689,608	$	678,348	$	663,670	$	645,468	$	646,286	$	648,194
Allowance for loan losses	$	(17,468)	$	(17,934)	$	(17,743)	$	(18,118)	$	(17,987)	$	(18,149)	$	(19,801)	$	(19,314)	$	(20,409)
Total assets	$	1,153,843	$	1,096,882	$	1,064,684	$	1,097,532	$	1,058,679	$	1,023,774	$	1,008,780	$	987,138	$	983,117
Total deposits	$	956,952	$	883,329	$	862,815	$	870,870	$	855,032	$	833,913	$	806,360	$	786,208	$	801,733
Federal Home Loan Bank borrowings	$	57,500	$	52,500	$	36,500	$	66,500	$	46,000	$	40,000	$	52,500	$	51,500	$	36,500
Junior subordinated debt	$	8,248	$	8,248	$	8,248	$	8,248	$	8,248	$	8,248	$	8,248	$	8,248	$	8,248
Total stockholders’ equity	$	125,092	$	146,288	$	146,739	$	145,529	$	142,285	$	134,690	$	132,623	$	129,554	$	126,031
Selected Other Balance Sheet Data:
Average assets	$	1,123,875	$	1,091,746	$	1,079,615	$	1,062,595	$	1,039,773	$	1,017,030	$	979,855	$	984,565	$	984,096
Average earning assets	$	1,028,879	$	1,007,673	$	1,000,072	$	985,326	$	965,100	$	948,095	$	916,269	$	925,894	$	922,614
Average stockholders’ equity	$	129,517	$	148,023	$	146,902	$	144,843	$	137,457	$	134,788	$	132,384	$	127,315	$	126,002
Selected Financial Ratios:
Return on average assets	0.97%		1.00%		1.40%		1.17%		2.46%		0.75%		0.65%		1.66%		0.85%
Return on average equity	8.46%		7.36%		10.30%		8.59%		18.60%		5.66%		4.82%		12.87%		6.67%
Return on average tangible common equity	9.04%		8.55%		12.51%		10.23%		24.08%		6.28%		5.10%		17.12%		7.82%
Net interest margin (2)	4.04%		4.04%		4.14%		4.35%		4.36%		4.41%		4.72%		4.67%		4.67%
Efficiency ratio (3)	67.10%		65.00%		78.10%		70.36%		65.47%		69.75%		65.70%		66.17%		66.52%
Non-interest expense to average assets	3.02%		3.17%		3.66%		3.55%		3.37%		3.61%		3.58%		3.72%		3.65%
Capital Ratios:
Average equity to average assets	11.52%		13.56%		13.61%		13.40%		13.22%		13.25%		13.51%		12.93%		12.80%
Leverage Ratio	10.58%		12.60%		12.72%		12.32%		12.15%		11.88%		12.17%		12.06%		11.56%
Tier 1 Risk-Based Capital ratio	13.27%		15.77%		16.50%		15.55%		14.92%		14.50%		14.60%		14.81%		14.37%
Total Risk-Based Capital ratio	14.53%		17.03%		17.76%		16.81%		16.19%		15.76%		15.87%		16.07%		15.63%
Selected Asset Quality Ratios:
Non-performing loans to total gross loans (4)	1.63%		1.87%		1.73%		2.51%		3.02%		3.15%		2.58%		1.91%		2.02%
Non-performing assets to total assets (5)	1.10%		1.27%		1.16%		1.58%		1.99%		2.14%		1.74%		1.35%		1.56%
Allowance for loan losses to total gross loans	2.25%		2.40%		2.52%		2.63%		2.65%		2.73%		3.07%		2.99%		3.15%
Net charge-offs (recoveries) to average loans	0.24%		-0.10%		0.22%		-0.07%		0.85%		2.86%		1.75%		1.08%		1.43%

(1) No cash dividends were paid during the periods presented.

(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3) 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 security sales, other than temporary impairment losses, gains and losses on sale of OREO and other OREO related costs and gains and losses on sale of fixed assets.

(4) Non-performing loans are defined as loans that are past due 90 days or more as well as loans placed in non-accrual status.

(5) Non-performing assets are defined as loans that are past due 90 days or more and loans placed in non-accrual status plus other real estate owned.

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Results of Operations

Net Interest Income and Margin

Net interest income, the primary component of the net earnings of a financial institution, refers to the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings.  The net interest margin is the amount of net interest income expressed as a percentage of average interest earning assets.  Factors considered in the analysis of net interest income are the composition and volume of interest-earning assets and interest-bearing liabilities, the amount of non-interest bearing liabilities and non-accrual loans, and changes in market interest rates.

For the three months ended September 30, 2013 and 2012, net interest margin was 4.04% and 4.36%, respectively. For the nine months ended September 30, 2013 and 2012, net interest margin was 4.07% and 4.49%, respectively. The tables below set forth the details that make up net interest margin including, average balance sheet information, interest income and expense, average yields and rates and net interest income and margin:

	For the Three Months Ended						For the Three Months Ended
	September 30, 2013						September 30, 2012
				Yield/	Income/					Yield/	Income/
(dollar amounts in thousands)	Balance			Rate (4)	Expense		Balance			Rate (4)	Expense
Interest Earning Assets
Interest bearing deposits in other banks	$	11,729		0.27%	$	8	$	13,042		0.15%	$	5
Investment securities taxable	214,347			1.84%	994		204,291			2.45%	1,256
Investment securities non taxable	40,650			3.45%	353		62,634			3.35%	527
Other investments	6,642			5.38%	90		6,478			0.92%	15
Loans (1) (2)	755,511			5.28%	10,064		678,655			5.70%	9,716
Total interest earning assets	1,028,879			4.44%	11,509		965,100			4.75%	11,519
Allowance for loan losses	(18,055		)				(18,207		)
Other assets	113,051						92,880
Total assets	$	1,123,875					$	1,039,773
Interest Bearing Liabilities
Interest bearing demand	$	80,523		0.10%	$	21	$	70,664		0.13%	$	23
Savings	41,563			0.10%	10		36,454			0.10%	9
Money market	303,842			0.34%	257		295,792			0.34%	256
Time deposits	201,670			0.87%	443		182,138			0.94%	431
Total interest bearing deposits	627,598			0.46%	731		585,048			0.49%	719
Federal Home Loan Bank borrowing	62,598			1.61%	254		45,527			1.48%	169
Junior subordinated debentures	8,248			2.02%	42		8,248			2.22%	46
Total borrowed funds	70,846			1.66%	296		53,775			1.59%	215
Total interest bearing liabilities	698,444			0.58%	1,027		638,823			0.58%	934
Non interest bearing demand	288,380						255,241
Total funding	986,824			0.41%	1,027		894,064			0.42%	934
Other liabilities	7,534						8,252
Total liabilities	994,358						902,316
Stockholders’ Equity
Total stockholders’ equity	129,517						137,457
Total liabilities and stockholders’ equity	$	1,123,875					$	1,039,773
Net interest margin (3)				4.04%						4.36%
Interest rate spread				3.86%	$	10,482				4.17%	$	10,585

(1) Non-accruing loans have been included in total loans.

(2) Loan fees have been included in interest income computation.

(3) Net interest margin has been calculated by dividing the net interest income by total average earning assets.

(4) Yield / Rate is annualized using actual number of days in period.

Heritage Oaks Bancorp |- 35 -

	For the Nine Months Ended September 30, 2013						For the Nine Months Ended September 30, 2012
				Yield/	Income/					Yield/	Income/
(dollar amounts in thousands)	Balance			Rate (4)	Expense		Balance			Rate (4)	Expense
Interest Earning Assets:
Interest bearing deposits in other banks	$	15,007		0.22%	$	25	$	14,920		0.16%	$	18
Investment securities taxable	212,005			1.84%	2,912		201,517			2.57%	3,883
Investment securities non taxable	44,457			3.25%	1,081		54,901			3.47%	1,428
Other investments	6,573			3.89%	191		6,532			1.10%	54
Loans (1) (2)	734,271			5.36%	29,448		665,365			5.88%	29,289
Total interest earning assets	1,012,313			4.45%	33,657		943,235			4.91%	34,672
Allowance for loan losses	(17,986		)				(19,227		)
Other assets	104,247						88,317
Total assets	$	1,098,574					$	1,012,325
Interest Bearing Liabilities:
Interest bearing demand	$	75,153		0.10%	$	59	$	66,474		0.11%	$	55
Savings	40,322			0.10%	30		35,251			0.10%	27
Money market	294,123			0.33%	722		286,040			0.37%	792
Time deposits	193,502			0.89%	1,290		186,264			1.03%	1,442
Total interest bearing deposits	603,100			0.47%	2,101		574,029			0.54%	2,316
Federal Home Loan Bank borrowing	57,866			1.37%	592		50,115			1.25%	468
Junior subordinated debentures	8,248			2.03%	125		8,248			2.40%	148
Total borrowed funds	66,114			1.45%	717		58,363			1.41%	616
Total interest bearing liabilities	669,214			0.56%	2,818		632,392			0.62%	2,932
Non interest bearing demand	276,499						235,588
Total funding	945,713			0.40%	2,818		867,980			0.45%	2,932
Other liabilities	11,444						9,454
Total liabilities	957,157						877,434
Stockholders’ Equity:
Total stockholders’ equity	141,417						134,891
Total liabilities and stockholders’ equity	$	1,098,574					$	1,012,325
Net interest margin (3)				4.07%						4.49%
Interest rate spread				3.89%	$	30,839				4.29%	$	31,740

(1) Non-accruing loans have been included in total loans.

(2) Loan fees have been included in interest income computation.

(3) Net interest margin has been calculated by dividing net interest income by total average earning assets.

(4) Yield / Rate is annualized using actual number of days in period.

Heritage Oaks Bancorp | - 36 -

The volume and rate variance tables below set forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities as compared to the corresponding periods a year earlier, and the amount of such change attributable to changes in average balances (volume), changes in average yields and rates (rate) and the interplay of the impacts of the changes in rates and volumes (rate/volume):

	For The Three Months Ended,												For The Nine Months Ended,
	September 30, 2013 over 2012												September 30, 2013 over 2012
(dollar amounts in thousands)	Volume			Rate			Rate/Volume			Total			Volume			Rate			Rate/Volume			Total
Interest income:
Interest bearing deposits in other banks	$	-		$	3		$	-		$	3		$	-		$	7		$	-		$	7
Investment securities taxable	62			(309		)	(15		)	(262		)	202			(1,115		)	(58		)	(971		)
Investment securities non-taxable (1)	(282		)	26			(8		)	(264		)	(411		)	(141		)	26			(526		)
Taxable equivalent adjustment (1)	96			(9		)	3			90			140			48			(9		)	179
Other investments	-			73			2			75			-			136			1			137
Loans	1,104			(676		)	(80		)	348			3,030			(2,604		)	(267		)	159
Net increase / (decrease)	980			(892		)	(98		)	(10		)	2,961			(3,669		)	(307		)	(1,015		)
Interest expense:
Savings, NOW, money market	16			(15		)	(1		)	-			49			(106		)	(6		)	(63		)
Time deposits	46			(31		)	(3		)	12			56			(200		)	(8		)	(152		)
Federal Home Loan Bank borrowing	64			15			6			85			72			45			7			124
Long term borrowings	-			(4		)	-			(4		)	-			(23		)	-			(23		)
Net (decrease) / increase	126			(35		)	2			93			177			(284		)	(7		)	(114		)
Total net increase / (decrease)	$	854		$	(857	)	$	(100	)	$	(103	)	$	2,784		$	(3,385	)	$	(300	)	$	(901	)

(1) Adjusted to a fully taxable equivalent basis using a tax rate of 34%.

For the three and nine months ended September 30, 2013 as compared to the corresponding periods in 2012, the impact of the continued current low interest rate environment has had an adverse impact on yields on new and renewing loans. In addition, the low interest rate environment and relative flatness of interest yield curves have  had a two-fold impact on securities’ yields as new investments are typically providing lower yields, and existing investments in mortgage backed securities are realizing increased levels of refinancing of the underlying mortgages during most of 2013, which resulted in acceleration of the amortization of premiums paid on these securities.  These factors have combined to reduce the yield on earning assets for the three and nine months ended September 30, 2013 by 31 basis points and 46 basis points, respectively, as compared to the corresponding periods in 2012. While the loan portfolio has continued to grow since the third quarter of 2012 and continues to contribute to a more favorable earning asset mix, we continue to hold a large portion of our earning assets in lower yielding investment securities.  These securities have experienced a significant decline in yields both in real terms and as a percentage of the 2012 rates.  Decreases in funding costs related to shifts in the composition of deposits from interest bearing accounts to more liquid non-interest bearing deposit accounts, along with reduced rates of interest paid on interest bearing deposits, have resulted in a lower cost of funds that has partially offset the reduced yields on interest-earning assets.

Forgone interest on non-accrual loans continued to negatively impact interest income for the three and nine months ended September 30, 2013, but to a lesser degree than during the same periods a year earlier. Total forgone interest related to non-accrual loans, which includes (1) the initial accrued interest reversal when a loan is transferred to non-accrual status, (2) interest lost prospectively for the period of time a loan is on non-accrual status and (3) lost interest due to restructuring terms below original note terms or below current market-rate terms, was approximately $0.2 million and $0.3 million during the three months ended September 30, 2013 and 2012, respectively, and $0.6 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively.

Our earnings are influenced by changes in interest rates.  The Company is in a net asset sensitive position. A large percentage of our interest sensitive assets and liabilities re-price with changes in market interest rates.  A significant portion of the variable rate component of the Company’s loan portfolio has had the interest rates set to their respective contractual interest rate floors.  To the extent that overall interest rates rise, the Company will not experience the benefit of rising interest rates until such rates rise above such interest rate floors.  See Item 3. Qualitative and Quantitative Disclosures About Market Risk, included in this Quarterly Report on Form 10-Q, for further discussion of the Company’s sensitivity to interest rate movements based on our current net asset sensitive profile, as well as the impact of interest rate floors on the variable rate component of our loan portfolio.

Heritage Oaks Bancorp | - 37 -

For the three and nine months ended September 30, 2013, average interest-earning assets increased $63.8 million, or 6.6% and $69.1 million, or 7.3%, respectively, over that reported in the corresponding periods in 2012.  Growth in average earning assets for both the three and nine months ended September 30, 2013 was largely driven by growth in the average loan balances of $76.9 million and $68.9 million, respectively, as compared to the corresponding periods in 2012.  The Company’s average investment in its securities portfolio decreased by $11.9 million for the quarter ended September 30, 2013 but increased by $44 thousand for the nine months ended September 30, 2013 as compared to the corresponding periods in 2012.

The yield on the loan portfolio decreased 42 basis points for the three months ended September 30, 2013 to 5.28% and 52 basis points for the nine months ended September 30, 2013, to 5.36%, from the corresponding periods in 2012.  These declines were largely attributable to declines in interest rates on new loans issued and loans renewed in the last year, which were driven by increased competition in the Company’s primary market area and the historically low interest rates being set by the government to spur economic recovery.  The adjustments to interest income for the pay-off of non-accrual loans and prepayment penalties contributed approximately 7 basis points to the yield on the loan portfolio in the three months ended September 30, 2013 and zero basis points for the corresponding period in 2012, and 3 basis points and 2 basis points to the yield on the loan portfolio in the nine months ended September 30, 2013 and 2012, respectively.  Total forgone interest on non-accrual loans reduced the yield on the loan portfolio by 14 basis points for the three months ended September 30, 2013 as compared to 21 basis points for the corresponding period in 2012 and 14 basis points for the nine months ended September 30, 2013 compared to 16 basis points for the corresponding period in 2012.

The Company invests excess liquidity primarily in agency mortgage backed securities and municipal securities, in an effort to maximize the yield on interest earning assets pending investment in new loan originations.  Purchases made during the latter part of 2012, along with the impacts of recent efforts to shorten the duration of the securities portfolio by selling some of our longer-lived investments and replacing them with shorter duration instruments has contributed to the decline in the overall yield on investment securities as the recently acquired investment securities currently yield considerably less than other investments in the portfolio.  Beginning in the second quarter of 2012, we began to experience renewed loan demand and growth in our loan portfolio.  Assuming this loan growth continues over the next several quarters, we should begin to realize an improved mix in interest earning assets, which should help improve our net interest margin, but no assurances can be given with respect to any of the foregoing.

The average balance of interest bearing liabilities was $59.6 million and $36.8 million higher for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding periods a year earlier.  Growth in average interest bearing deposits was the primary contributor to the growth in average interest bearing liabilities for both the three and nine months ended September 30, 2013. Average interest bearing deposits were $42.6 million and $29.1 million higher for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding periods a year earlier.   Growth in interest bearing deposits has been primarily the result of the ongoing efforts to gather deposits across the Bank’s service territory, as well as the impacts of the Morro Bay branch acquisition completed in December 2012.  Much of the growth in interest bearing deposits has been in lower cost deposit types, which has helped to control our overall cost of funds.

The rate paid on interest bearing deposits declined by 3 basis points, to 0.46%, for the three months ended September 30, 2013 and 7 basis points, to 0.47%, for the nine months ended September 30, 2013 as compared to the same periods a year earlier.  These declines are in part due to the historically low interest rate environment that has existed for the last few years, but is also due to our efforts to systematically lower our cost of deposits over this same time period.  Although such efforts have contributed to a moderate decline in time deposits, the overall deposit mix and cost of our deposit portfolio has greatly improved as a result of these efforts.  In addition to the favorable effects realized from these changes in our interest bearing deposits, our average non-interest bearing demand deposit balances have increased by $33.1 million, to $288.4 million, for the three months ended September 30, 2013 and $40.9 million, to $276.5 million, for the nine months ended September 30, 2013.  These increases in non-interest bearing demand deposit balances have served to reduce our total funding cost by 17 basis points for the three months ended September 30, 2013 and 16 basis points for the nine months ended September 30, 2013 as compared to the cost of our interest bearing liabilities alone. Management believes that the increase in non-interest bearing demand deposits is indicative of money being held in highly liquid accounts pending the customer’s determination of how best to invest the funds in light of today’s low returns on traditional investments.  Total cost of funds for the three and nine months ended September 30, 2013 was 0.41% and 0.40%, respectively, decreases of 1 basis point and 5 basis points, respectively, as compared to the corresponding periods in 2012.

For the three and nine months ended September 30, 2013 the average rate paid on interest bearing liabilities was 0.58% and 0.56%, respectively, as compared to 0.58% and 0.62%, respectively, for the corresponding periods in 2012.  The benefits from the deposit portfolio rate reductions previously discussed were substantially offset by an increase in funding costs for Federal Home Loan Bank (“FHLB”) borrowings as the Company has strategically decided to lock in historically low fixed rates to match fund longer term fixed rate loans.

Heritage Oaks Bancorp | - 38 -

Provision for Loan Losses

As more fully discussed in Note 5. Allowance for Loan Losses, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q, the ALLL has been established for probable incurred credit losses inherent in the loan portfolio.  The allowance is maintained at a level considered by management to be adequate to provide for probable credit losses inherent in the loan portfolio as of the balance sheet date and is based on methodologies applied on a consistent basis with the prior year.  Management’s review of the adequacy of the allowance includes, among other things, an analysis of past loan loss experience and management’s evaluation of the loan portfolio under current economic conditions.

The ALLL is based on estimates, and actual losses may vary from current estimates, which variances could be material and could have an adverse effect on the Company’s performance.  The Company recognizes that the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the creditworthiness of the borrower over the term of the loan and in the case of a collateralized loan, the quality of the collateral for such loans.  The ALLL represents the Company’s best estimate of the allowance necessary to provide for probable losses inherent in the portfolio as of the balance sheet date.

The Company did not record a provision for loan losses during the three and nine months ended September 30, 2013, as compared to $1.3 million and $7.7 million, respectively, for the same periods a year earlier.  The lack of a loan loss provision in 2013 is reflective of the continuing improvements in the overall credit quality of the loan portfolio, the overall improvement in the charge-off history over the last year, the improvement in property values that serve as collateral for a large portion of our loans, as well as the limited amount of new loans moving into non-accrual status and therefore requiring specific reserves.   As of September 30, 2013, the Company’s ALLL represented 2.25% of total gross loans.  For additional information see the “Allowance for Loan Losses” discussion in the Financial Condition section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Non-Interest Income

The table below sets forth changes in non-interest income as compared to the corresponding period a year earlier:

	For the Three Months Ended				For the Nine Months Ended				Variances				Variances
	September 30,				September 30,				For the Three Months				For the Nine Months
(dollar amounts in thousands)	2013		2012		2013		2012		dollar			percentage	dollar			percentage
Fees and service charges	$	1,195	$	1,071	$	3,330	$	3,270	$	124		11.6%	$	60		1.8%
Mortgage gain on sale and origination fees	656		1,181		2,519		3,071		(525		)	-44.5%	(552		)	-18.0%
Gain on sale of investment securities	344		329		3,935		1,696		15			4.6%	2,239			132.0%
Gain on sale of other real estate owned	-		102		-		112		(102		)	-100.0%	(112		)	-100.0%
Other Income	228		301		1,212		851		(73		)	-24.3%	361			42.4%
Total	$	2,423	$	2,984	$	10,996	$	9,000	$	(561	)	-18.8%	$	1,996		22.2%

Non-interest income decreased by $0.6 million for the three months ended September 30, 2013 but increased $2.0 million for the nine months ended September 30, 2013, from that reported for the corresponding periods in 2012.  The decline for the three month period was largely due to a decline in mortgage gain on sale attributable to the impacts of rising mortgage interest rates on the mortgage refinance market and no other real estate owned sales activity in the third quarter of 2013.  The primary driver for the higher non-interest income for the nine months ended September 30, 2013 was a $2.2 million increase in the gains realized on sale of investment securities and a $0.4 million increase in the gain realized on the sale of SBA loans, which is reflected in other income.   Gains on sales of investment securities during the first nine months of 2013 were driven by increased sales activity in the first quarter of 2013, as the Company repositioned portions of its investment portfolio to shorten their effective duration, to reduce exposure to future unfavorable moves in interest rates, and to reduce further exposure to interest rate volatility due to unexpected changes in prepayment speeds on certain mortgage backed securities.  Specifically, during the first quarter of 2013, the Company sold securities with a carrying value of $89.3 million that resulted in gains of $3.6 million. The increase in gains on the sale of investment securities was offset by a $0.6 million reduction in mortgage gain on sale, largely due to a decline in refinance activity during the third quarter of 2013, previously discussed, and a $0.1 million reduction in gain on sale of other real estate owned due to the limited sales activity in 2013 not yielding any gains.

Heritage Oaks Bancorp | - 39 -

Non-Interest Expenses

The table below sets forth changes in non-interest expenses as compared to the corresponding period last year:

	For the Three Months Ended				For the Nine Months Ended				Variances				Variances
	September 30,				September 30,				For the Three Months				For the Nine Months
(dollar amounts in thousands)	2013		2012		2013		2012		dollar			percentage	dollar			percentage
Salaries and employee benefits	$	4,529	$	4,532	$	14,535	$	13,522	$	(3	)	-0.1%	$	1,013		7.5%
Occupancy	781		728		2,384		2,542		53			7.3%	(158		)	-6.2%
Information technology	658		551		1,925		1,911		107			19.4%	14			0.7%
Professional services	729		1,002		2,082		2,403		(273		)	-27.2%	(321		)	-13.4%
Regulatory	212		371		851		1,238		(159		)	-42.9%	(387		)	-31.3%
Equipment	395		395		1,245		1,223		-			0.0%	22			1.8%
Sales and marketing	170		171		438		432		(1)			-0.6%	6			1.4%
Foreclosed asset costs and write-downs	23		107		131		303		(84		)	-78.5%	(172		)	-56.8%
Provision for mortgage loan repurchases	-		125		570		982		(125		)	-100.0%	(412		)	-42.0%
Amortization of intangible assets	100		86		300		258		14			16.3%	42			16.3%
Other expense	954		727		2,478		1,843		227			31.2%	635			34.5%
Total	$	8,551	$	8,795	$	26,939	$	26,657	$	(244	)	-2.8%	$	282		1.1%

The decrease in non-interest expense for the three months ended September 30, 2013 as compared to the same period a year ago was largely driven by a $0.3 million decline in professional services attributable to the efficiency studies that the Company performed in the second half of 2012 and completed in the first quarter of 2013, as well as a $0.2 million decline in regulatory costs related to improved FDIC assessment costs resulting from the termination of the MOUs with the FDIC, DFI and FRB in the second and third quarters of 2013.  The third quarter of 2013 was also favorably impacted by the lack of any provisions for mortgage repurchases as the remaining identified repurchase exposure was reserved for in prior quarters.  The improvements in non-interest expense were partially offset by an increase in other expense due to increases in other loan costs due to increased loan production in 2013, as compared to 2012 and settlement costs attributable to resolution of a legal matter.   

For the nine months ended September 30, 2013, non-interest expense increased $0.3 million as compared to the same period a year ago primarily due to a $1.0 million increase in salary and employee benefit costs, partially offset by a decrease in provisions for mortgage repurchases, occupancy costs and regulatory costs.  The increased salary and benefit costs for the nine months ended September 30, 2013, as compared to the corresponding periods in 2012, were primarily due to increased costs related to variable bonus plans in 2013, for which there was no comparable plan in 2012.  Salaries and employee benefits were also impacted by merit increases across the organization in 2013.  The decrease in the provision for potential mortgage repurchases in 2013 was largely driven by 2012 including increased provisioning for estimated losses related to a step up in claims activity in the second quarter of 2012 due to a group of related mortgages funded and sold in 2007.  The Company provided for the remaining three loans in the group of related mortgages in the first quarter of 2013 and management does not expect there to be any further material provisions required for this group of related loans.  Repurchase requests like these are relatively rare for the Bank.  Total cash paid in settlement for mortgage repurchases has been $1.4 million in the prior 8 years.  We do not believe the requests are in any way indicative of systemic problems with the Bank’s underwriting or origination process or that there is significant exposure to repurchase requests other than those arising from the group of related loans to the borrowers in question, which totaled $2.8 million inclusive of the approximately $0.6 million of mortgage repurchases provided for in the first quarter of 2013.    Occupancy costs declined for the nine months ended September 30, 2013 as a result of the branch consolidation efforts that were completed in the second quarter of 2012 and the favorable impacts realized from the purchase of four buildings at the end of the first quarter of 2012, which were previously leased.  These savings in occupancy costs were partially offset by increased lease costs for our two new loan production offices, as the Company expanded into new markets for the Bank.  The decline in the level of regulatory costs is reflective of the favorable impacts on FDIC assessment costs due to the termination of the Consent Order and the Written Agreement in the second and third quarters of 2012, respectively, and the termination of the MOUs with the FDIC, DFI and FRB in the second and third quarters of 2013.

Heritage Oaks Bancorp | - 40 -

Provision for Income Taxes

For the three and nine months ended September 30, 2013, the Company recorded income tax expense of approximately $1.6 million and $5.7 million, respectively.  This compares to an income tax benefit of $2.9 million and $3.5 million for the same periods in 2012.  The changes in the provision for income taxes for the three and nine months ended September 30, 2013, as compared to the corresponding periods in 2012, can be attributed to the Company’s reversal of $4.1 million and $5.6 million of deferred tax asset valuation allowance in the three and nine months ended September 30, 2012, respectively, for which there was no corresponding valuation allowance reversal in 2013, as the valuation allowance was fully reversed in the third quarter of 2012. In addition, income tax expense increased in 2013 due to the overall increase in earnings before taxes. The Company’s effective tax rate was 36.6% and 38.2% for the three and nine months ended September 30, 2013, respectively.  The effective tax rate for the corresponding periods in 2012 was (84.3)% and (54.8)%, respectively, reflective of the impact of the reversal of deferred tax asset valuation allowance.  Excluding the impact of the valuation allowance reversal in 2012, the effective tax rate would have been 33.4% and 32.8% for the three and nine months ended September 30, 2012, which rates reflect a disproportionately larger benefit of tax free municipal bond income due to the lower pre-tax income levels in the first nine months of 2012 as compared to the same periods in 2013.

The determination as to whether a valuation allowance should be established against deferred tax assets is based on the consideration of all available evidence using a “more likely than not” standard.  Management evaluates the realizability of the deferred tax assets on a quarterly basis.  Please see Note 6. Deferred Tax Assets and Income Taxes, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q for additional information concerning the Company’s deferred tax assets.

Financial Condition

At September 30, 2013, total assets were approximately $1.2 billion.  This represents an increase of approximately $0.1 billion or 5% from that reported at December 31, 2012.  The increase in total assets is primarily attributable to the growth in the loan portfolio, partially offset by a decline in the investment portfolio.

At September 30, 2013, total deposits were approximately $957.0 million or approximately $86.1 million more than that reported at December 31, 2012.  This 9.9% increase in the level of deposits is reflective of the Bank’s continuing focus to bring new deposit relationships into the Bank and expand our existing customer relationships.

Total Cash and Cash Equivalents

Total cash and cash equivalents were $33.3 million and $34.1 million at September 30, 2013 and December 31, 2012, respectively. This line item will vary depending on daily cash settlement activities, the amount of highly liquid assets needed based on known events such as the repayment of borrowings or loans expected to be funded in the near future, and actual cash on hand in the branches.

Investment Securities and Other Earning Assets

Other earning assets are comprised of Interest Bearing Due from Federal Reserve, Federal Funds Sold (funds the Company lends on a short-term basis to other banks), investments in securities and short-term interest bearing deposits at other financial institutions.  These assets are maintained for the liquidity needs of the Company, collateralization of public deposits, and diversification of the earning asset mix.

Securities Available for Sale

The Company manages its securities portfolio to provide a source of both liquidity and earnings.  The Company has invested in a mix of securities including obligations of U.S government agencies, mortgage backed securities and state and municipal securities. The Company has an Asset/Liability Committee that has developed investment policies based upon the Company’s operating needs and market circumstances.  The Company’s investment policy is formally reviewed and approved annually by the Board of Directors.  The Asset/Liability Committee is responsible for reporting and monitoring compliance with the investment policy.  Reports are provided to the Company’s Board of Directors on a regular basis.

Heritage Oaks Bancorp |- 41 -

The following table provides a summary of investment securities by securities type:

	September 30, 2013				December 31, 2012
	Amortized				Amortized
(dollar amounts in thousands)	Cost		Fair Value		Cost		Fair Value
Obligations of U.S. government agencies	$	7,738	$	7,728	$	7,307	$	7,567
Mortgage backed securities
U.S. government sponsored entities and agencies	178,856		175,432		145,430		145,768
Non-agency	13,266		13,390		43,402		44,795
State and municipal securities	45,333		44,060		64,824		68,968
Asset backed securities	26,936		26,569		20,049		20,584
Total	$	272,129	$	267,179	$	281,012	$	287,682

At September 30, 2013, the fair value of the investment portfolio was approximately $267.2 million or $20.5 million lower than that reported at December 31, 2012.  The change in the balance of the portfolio can be attributed in large part to a reduction level of net investments in securities in the first three months of 2013, in part to fund growth in the loan portfolio, as well as to reduce the level of short-term FHLB borrowings. The balance of the decline is a reflection of a decline in market value in the first nine months of 2013, due to rising long term interest rates. These declines were partially offset by the investment of funds generated from the growth in the deposit base in 2013, pending investment in future loan demand.

Securities available for sale are carried at fair value with related unrealized net gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital.  At September 30, 2013, the securities portfolio had unrealized losses, net of taxes, of approximately $2.9 million, a decrease of approximately $6.8 million from that reported at December 31, 2012.  Fluctuations in the fair value of the investment portfolio in the last three years can be attributed to market turbulence and volatility in overall interest rates, stemming in part from economic conditions. All fixed and adjustable rate mortgage pools contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages, which prepayments are directly impacted by interest rate changes.  The Company uses computer simulation models to test the average life, duration, market volatility and yield volatility of adjustable rate mortgage pools under various interest rate assumptions to monitor volatility.

The majority of the Company’s mortgage securities were issued by: The Government National Mortgage Association (“Ginnie Mae”); The Federal National Mortgage Association (“Fannie Mae”); and The Federal Home Loan Mortgage Corporation (“Freddie Mac”).  These securities carry the guarantee of the issuing agencies.  At September 30, 2013, approximately $178.9 million or 93.1% of the Company’s mortgage related securities were issued by a government agency and government sponsored entities.

The following table sets forth the maturity distribution of available for sale securities in the investment portfolio and the weighted average yield for each category:

(dollar amounts in thousands)

September 30, 2013	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
Obligations of U.S. government agencies	$	100	$	3,481	$	1,729	$	2,418	$	7,728
Mortgage backed securities
U.S. government sponsored entities and agencies	24,910		75,551		29,616		45,355		175,432
Non-agency	5,426		6,443		1,521		-		13,390
State and municipal securities	40		6,516		34,300		3,204		44,060
Asset backed securities	-		-		14,569		12,000		26,569
Total available for sale securities	$	30,476	$	91,991	$	81,735	$	62,977	$	267,179
Amortized cost	$	30,658	$	93,028	$	83,805	$	64,638	$	272,129
Weighted average yield	2.35%		2.26%		2.54%		2.67%		2.45%

Heritage Oaks Bancorp |- 42 -

Federal Home Loan Bank (“FHLB”) Stock

As a member of the FHLB of San Francisco, the Company is required to hold a specified amount of FHLB capital stock based on the level of borrowings the Company has obtained from the FHLB.  As such, the amount of FHLB stock the Company carries can vary from one period to another based on, among other things, the current liquidity needs of the Company.  At September 30, 2013 and December 31, 2012, the Company held approximately $4.7 million and $4.6 million, respectively, in FHLB stock.

Loans

Summary of Market Conditions

Despite signs of stabilization in the local economies in which the Company operates, loan demand remained tepid for much of 2011 and into the first quarter of 2012.  However, with the addition of a new sales team who are focused on our region’s largest industry, agriculture, as well as the commercial and small business segments of the market, and single-family mortgages, the Bank has been able to generate quarter over quarter net loan growth in each quarter since the second quarter of 2012.  We continue to see improving borrower activity and we anticipate that this increased activity in our existing markets, coupled with our new sales team and our expansion into Ventura County with the opening of a loan production office in August 2012, and expansion in Santa Barbara County with the opening of a loan production office in Goleta in early 2013, should contribute to continued growth in our loan portfolio.  Although the Company believes that it may be starting to see some signs of stabilization in the local economies in which it operates, the Company realizes that a renewed decline in the global, national, state or local economies may further negatively impact local borrowers, as well as negatively impact values of real estate within our market footprint. As such, management continues to closely monitor credit trends and leading indicators for renewed signs of deterioration. The Bank employs stringent lending standards and remains very selective with regard to loan originations, including commercial real estate, real estate construction, land and commercial loans that it chooses to originate, in an effort to effectively manage risk in this difficult credit environment. The Company is focused on monitoring credit in order to take proactive steps, when and if necessary, to mitigate any material adverse impacts on the Company.

Credit Quality

The Company’s primary business is the extension of credit to individuals and businesses and safekeeping of customers’ deposits. The Company’s policies concerning the extension of credit require risk analyses including an extensive evaluation of the purpose for the loan request and the borrower’s ability and willingness to repay the Bank as agreed. The Company also considers other factors when evaluating whether or not to extend new credit to a potential borrower. These factors include the current level of diversification in the loan portfolio and the impact that funding a new loan will have on that diversification, legal lending limit constraints and any regulatory limitations concerning the extension of certain types of credit.

The credit quality of the loan portfolio is impacted by numerous factors including the economic environment in the markets in which the Company operates, which can have a direct impact on the value of real estate securing collateral dependent loans. Weak economic conditions in recent years have also impacted certain borrowers the Company has extended credit to, making it difficult for those borrowers to continue to make timely repayment of their loans. An inability of certain borrowers to continue to perform under the original terms of their respective loan agreements in conjunction with declines in real estate collateral values may result in increases in provisions for loan losses that have an adverse impact on the Company’s operating results.  See also Note 4. Loans, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q for a more detailed discussion concerning credit quality, including the Company’s related policy.

Loans Held for Sale

Loans held for sale primarily consist of mortgage originations that have already been specifically designated for sale pursuant to correspondent mortgage loan investor agreements. There is minimal interest rate risk associated with these loans as purchase commitments are entered into with investors at the time the Company funds loans. Settlement from the correspondents is typically within 30 to 60 days of funding the mortgage.  At September 30, 2013, mortgage correspondent loans (loans held for sale) totaled approximately $5.5 million, $17.1 million less than that reported at December 31, 2012.  The decrease in mortgage correspondent loans is reflective of a reduction in funding levels in the last few months due to higher mortgage interest rates as well as the timing of mortgage originations during the last month of the quarter.

Heritage Oaks Bancorp |- 43 -

Summary of Loan Portfolio

At September 30, 2013, total gross loan balances were $777.2 million.  This represents an increase of approximately $87.6 million, or 12.7%, from the $689.6 million reported at December 31, 2012 and marks the sixth quarter of consecutive quarterly loan growth.

The following table provides total gross loans by product type:

	September 30,				December 31,
	2013				2012				Variance
(dollar amounts in thousands)	amount			percentage	amount			percentage	dollar			percentage
Real Estate Secured
Multi-family residential	$	25,782		3.3%	$	21,467		3.1%	$	4,315		20.10%
Residential 1 to 4 family	57,016			7.3%	41,444			6.0%	15,572			37.57%
Home equity line of credit	32,388			4.2%	31,863			4.6%	525			1.65%
Commercial	442,322			57.0%	372,592			54.1%	69,730			18.71%
Farmland	45,573			5.9%	25,642			3.7%	19,931			77.73%
Total real estate secured	603,081			77.7%	493,008			71.5%	110,073			22.33%
Commercial
Commercial and industrial	103,540			13.3%	125,340			18.2%	(21,800		)	-17.39%
Agriculture	28,523			3.7%	21,663			3.1%	6,860			31.67%
Other	44			0.0%	61			0.0%	(17		)	-27.87%
Total commercial	132,107			17.0%	147,064			21.3%	(14,957		)	-10.17%
Construction
Single family residential	4,619			0.6%	8,074			1.2%	(3,455		)	-42.79%
Single family residential - Spec.	1,114			0.1%	535			0.1%	579			108.22%
Multi-family	747			0.1%	778			0.1%	(31		)	-3.98%
Commercial	6,694			0.9%	10,329			1.5%	(3,635		)	-35.19%
Total construction	13,174			1.7%	19,716			2.9%	(6,542		)	-33.18%
Land	25,042			3.2%	24,664			3.6%	378			1.53%
Installment loans to individuals	3,495			0.4%	4,895			0.7%	(1,400		)	-28.60%
All other loans (including overdrafts)	255			0.0%	261			0.0%	(6		)	-2.30%
Total gross loans	777,154			100.0%	689,608			100.0%	87,546			12.70%
Deferred loan fees	(1,454		)		(937		)		(517		)	55.18%
Reserve for loan losses	(17,468		)		(18,118		)		650			-3.59%
Total net loans	$	758,232			$	670,553			$	87,679		13.08%

Heritage Oaks Bancorp |- 44 -

Real Estate Secured

The following table provides a break-down of the real estate secured segment of the Company’s loan portfolio by type of real estate:

		September 30, 2013							Percent of Bank			Single
			Undisbursed		Total Bank		Percent		Total Risk		Number	Largest
(dollar amounts in thousands)		Balance	Commitment		Exposure		Composition		Based Capital		of Loans	Loan (1)
Real Estate Secured
Retail	$	41,966	$	254	$	42,220	6.6	%	34.4	%	49	$	4,614
Professional		38,266	874		39,140		6.2	%	31.9	%	76	4,200
Hospitality		128,837	4,346		133,183		21.0	%	108.7	%	51	10,209
Multi-family		25,782	298		26,080		4.1	%	21.3	%	30	5,144
Home equity lines of credit		32,388	23,028		55,416		8.7	%	45.2	%	378	1,200
Residential 1 to 4 family		57,017	134		57,151		9.0	%	46.6	%	151	2,760
Farmland		45,572	1,570		47,142		7.4	%	38.5	%	34	5,350
Healthcare / medical		32,308	-		32,308		5.1	%	26.4	%	35	7,500
Restaurants and other food services		9,937	-		9,937		1.6	%	8.1	%	16	2,393
Other commercial		127,072	875		127,947		20.1	%	104.4	%	127	9,200
Other		63,936	564		64,500		10.2	%	52.6	%	33	13,713
Total real estate secured	$	603,081	$	31,943	$	635,024	100.0	%	518.1	%	980	$	13,713

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2013.

As of September 30, 2013, real estate secured balances represented approximately $603.1 million or 77.7% of total gross loans.  When compared to that reported at December 31, 2012, this represents an increase of approximately $110.1 million or 22.3%.  The primary factor behind the year to date increase can be attributed to increases across substantially all real estate components, but most significantly in the commercial real estate, farmland and residential real estate components.  The $69.7 million increase in the commercial real estate component is primarily tied to new loan originations and advances on existing loans during 2013, which exceeded payments on existing loans by $68.6 million.  The balance of the increase in commercial real estate loans was largely due to the transfer of completed commercial real estate construction projects from the construction loan segment to the commercial real estate segment.  The farmland and residential real estate components increased $19.9 million and $15.6 million, respectively, in the first nine months of 2013 as a result of continued traction from the respective lending teams hired in 2012 resulting in expanded loan production.

As of September 30, 2013, a total of $30.3 million of the real estate secured balance was risk graded as special mention or substandard, with the largest single component being the commercial segment which represented $27.4 million.  This compares to $47.6 million of the real estate secured balance and $39.6 million of commercial real estate being risk graded special mention or substandard as of December 31, 2012.  The improvement in both the real estate segment in total and more specifically the commercial real estate segment is attributable to a combination of loan pay-offs, pay-downs and upgrades during the first nine months of 2013, which outpaced the level of new loans being down-graded into special mention or substandard.  In the first week of October 2013, the single largest substandard commercial real estate loan relationship paid-off its outstanding balance of $6.4 million, in full, which absent any material, unanticipated downgrades in the fourth quarter should contribute to a further improvement in the level of special mention and substandard real estate loans in the fourth quarter.  At September 30, 2013 and December 31, 2012, real estate secured balances, including undisbursed commitments, represented 518% and 389% of the Bank’s total risk-based capital. The increase in this percentage not only reflects the increase in real estate lending over the first nine months of the year but also the reduction in capital resulting from the retirement of the Series A Preferred Stock, which is discussed in more detail later in the Capital section of Management’s Discussion and Analysis.

At September 30, 2013, approximately $228.5 million, or 37.9%, of the real estate secured segment of the loan portfolio was considered owner occupied.

Heritage Oaks Bancorp |- 45 -

Commercial

The following table provides a break-down of the commercial and industrial (“C&I”) segment of the Company’s commercial loan portfolio by business type:

		September 30, 2013							Percent of Bank			Single
			Undisbursed		Total Bank		Percent		Total Risk		Number	Largest
(dollar amounts in thousands)		Balance	Commitment		Exposure		Composition		Based Capital		of Loans	Loan (1)
Commercial and Industrial
Agriculture	$	4,926	$	4,059	$	8,985	5.1	%	7.3	%	30	$	2,000
Oil gas and utilities		888	1,550		2,438		1.4	%	2.0	%	5	988
Construction		13,661	19,355		33,016		18.5	%	27.0	%	142	5,000
Manufacturing		12,705	7,100		19,805		11.2	%	16.2	%	85	2,000
Wholesale and retail		11,798	7,054		18,852		10.6	%	15.4	%	120	1,250
Transportation and warehousing		2,353	221		2,574		1.5	%	2.1	%	33	596
Media and information services		3,698	2,321		6,019		3.4	%	4.9	%	24	1,700
Financial services		3,911	3,363		7,274		4.1	%	5.9	%	39	1,000
Real estate / rental and leasing		11,219	7,500		18,719		10.6	%	15.3	%	88	1,800
Professional services		12,871	11,303		24,174		13.6	%	19.7	%	141	2,600
Healthcare / medical		6,136	5,646		11,782		6.6	%	9.6	%	97	11,464
Restaurants / hospitality		12,144	2,855		14,999		8.5	%	12.2	%	80	6,000
All other		7,230	1,392		8,622		4.9	%	7.0	%	88	2,800
Commercial and industrial	$	103,540	$	73,719	$	177,259	100.0	%	144.6	%	972	$	11,464

(1) Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2013.

At September 30, 2013, C&I loans represented approximately $103.5 million or 13.3% of total gross loan balances.  This represents a decline of approximately $21.8 million, or 17.4%, from December 31, 2012.  The year to date decline is primarily attributed to payment activity, including $16.8 million of commercial loan pay-offs, exceeding advances on new and existing commercial loans.  As a result of these factors, the ratio of total C&I loan balances, including undisbursed commitments, to risk-based capital declined from 149% at December 31, 2012 to 145% at September 30, 2013. The decrease in this percentage reflects the decrease in C&I loans outstanding at September 30, 2013 partially offset by the reduction in capital resulting from the retirement of the Series A Preferred Stock, which is discussed in more detail later in the Capital section of Management’s Discussion and Analysis.

The Company’s credit exposure within the C&I segment remains diverse with respect to the industries to which credit has been extended.  As of September 30, 2013, a total of $9.8 million of the C&I balance was risk graded as special mention or substandard.  This compares to $11.2 million of the C&I balance being risk graded special mention or substandard as of December 31, 2012.  The decrease in the special mention and substandard risk grades of C&I is attributable an overall net favorable migration of loans out of special mention and substandard during the first nine months of 2013 as well as ongoing payment activity on loans reported in these risk grades.

Heritage Oaks Bancorp |- 46 -

Agriculture

The following table provides a break-down of the agriculture segment of the Company’s commercial loan portfolio by business type:

		September 30, 2013							Percent of Bank			Single
			Undisbursed		Total Bank		Percent		Total Risk		Number	Largest
(dollar amounts in thousands)		Balance	Commitment		Exposure		Composition		Based Capital		of Loans	Loan (1)
Agriculture
Vegetable and mellon farming	$	9,083	$	4,770	$	13,853	28.9	%	11.3	%	16	$	4,000
Fruit and tree nut farming		9,235	2,274		11,509		24.1	%	9.4	%	17	4,000
Other crop farming		184	1,040		1,224		2.6	%	1.0	%	4	650
Animal production		2,159	3,598		5,757		12.0	%	4.7	%	32	1,112
Support activities for agriculture		1,932	1,581		3,513		7.3	%	2.9	%	11	1,150
Food manufacturing		1,634	1,936		3,570		7.5	%	2.9	%	13	2,000
Wholesale merchants		2,358	4,028		6,386		13.4	%	5.2	%	10	1,800
Transportation and warehousing		25	-		25		0.1	%	0.0	%	1	25
All other		1,913	49		1,962		4.1	%	1.6	%	6	1,600
Agriculture	$	28,523	$	19,276	$	47,799	100.0	%	39.0	%	110	$	4,000

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2013.

At September 30, 2013, agriculture balances totaled approximately $28.5 million, or 3.7%, of total gross loan balances, which represents an increase of $6.9 million, or 31.7%, when compared to that reported at December 31, 2012.  The increase in the balance is associated with advances against new and existing loans originated by our new agriculture lending team outpacing loan payment activity.  At September 30, 2013 and December 31, 2012, agriculture balances, including undisbursed commitments, represented 39% and 32%, respectively, of the Bank’s total risk-based capital.  The increase in this percentage not only reflects the increase in agriculture lending over the first nine months of the year but also the reduction in capital resulting from the retirement of the Series A Preferred Stock, which is discussed in more detail later in the Capital section of Management’s Discussion and Analysis.

As of September 30, 2013, a total of $1.6 million of the agriculture balance was risk graded as special mention or substandard.  This compares to $1.9 million of the agriculture balance being risk graded special mention or substandard as of December 31, 2012.  The improvement in the credit risk grade profile of agriculture is largely attributable to a payment and charge-off activity exceeding new loans being added to the substandard and special mention risk grades during the first nine months of 2013.

Construction

At September 30, 2013, construction balances represented approximately $13.2 million, or 1.7%, of total gross loan balances, a decrease of $6.5 million, or 33.2%, from that reported at December 31, 2012. This decrease is largely due to the transfer of completed commercial real estate projects to the commercial real estate component of the secured real estate segment and the transfer of a $1.4 million commercial real estate project to OREO, after the impacts of a $0.2 million charge-off.  These transfers were partially offset by construction advances on new and existing loans out-pacing payment activity during the first nine months of 2013. Construction loans are typically granted for a one year period and then refinanced into permanent loans with varying maturities at the completion of the construction project.  The ratio of total construction loan balances, including undisbursed commitments, to risk-based capital declined from 17.0% at December 31, 2012 to 14.9% at September 30, 2013. The decrease in this percentage reflects the decrease in construction loans outstanding at September 30, 2013, partially offset by the reduction in capital resulting from the retirement of the Series A Preferred Stock, which is discussed in more detail later in the Capital section of Management’s Discussion and Analysis.

As of September 30, 2013, there were no construction loans risk graded as special mention or substandard.  This compares to $1.9 million of the construction balance at December 31, 2012, which was also all related to commercial real estate construction. The improvements in both the construction segment in total and more specifically the commercial real estate segment is entirely attributable to the transfer of a single project to OREO in the first quarter of 2013.

Heritage Oaks Bancorp |- 47 -

Land

The following table provides a break-down of the land segment of the Company’s loan portfolio by property type:

		September 30, 2013							Percent of Bank				Single
			Undisbursed		Total Bank		Percent		Total Risk		Number		Largest
(dollar amounts in thousands)		Balance	Commitment		Exposure		Composition		Based Capital		of Loans		Loan (1)
Land
Single family residential	$	3,215	$	-	$	3,215	12.4	%	2.6	%	$	22	$	867
Single family residential - Spec.		551	-		551		2.1	%	0.4	%	5		379
Tract		10,276	-		10,276		39.6	%	8.5	%	9		10,673
Land - Multifamily		2,066	923		2,989		11.5	%	2.4	%	1		3,100
Commercial		8,342	-		8,342		32.1	%	6.8	%	18		1,369
Hospitality		592	-		592		2.3	%	0.5	%	1		599
Total land	$	25,042	$	923	$	25,965	100.0	%	21.2	%	56		$	10,673

(1)Amount reported reflects the original loan amount for the single largest loan that remains outstanding as of September 30, 2013.

At September 30, 2013, land balances represented approximately $25.0 million, or 3.2%, of total gross loan balances, an increase of $0.4 million, or 1.5%, from the corresponding balance reported at December 31, 2012.  The modest increase is largely tied to land loans entered into, primarily in the third quarter, exceeding payment activity during the first nine months of 2013.  The ratio of total land loan balances, including undisbursed commitments, to risk-based capital increased from 20.2% at December 31, 2012 to 21.2% at September 30, 2013.  The increase in this percentage not only reflects the increase in land lending over the first nine months of the year but also the reduction in capital resulting from the retirement of the Series A Preferred Stock, which is discussed in more detail later in the Capital section of Management’s Discussion and Analysis.

As of September 30, 2013, a total of $9.5 million of the land balance was risk graded as special mention or substandard.  This compares to $12.2 million of the land balance being risk graded special mention or substandard as of December 31, 2012.  The improvement in the land segment is largely attributable to payment activity and loan upgrades during the first nine months of 2013.  As of September 30, 2013, over half of the risk graded special mention or worse balance is attributable to a single credit relationship, which continues to perform in accordance with the terms of its restructured note.

Installment

At September 30, 2013, installment loan balances were approximately $3.5 million compared to the $4.9 million reported at December 31, 2012.  Installment loans include revolving credit plans, consumer loans and credit card balances.

Heritage Oaks Bancorp |- 48 -

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table provides a summary of the approximate maturities and sensitivity to changes in interest rates for the loan portfolio as well as information about fixed and variable rate loans.  A large portion of the growth in the loan portfolio is for loans with maturities of over 5 years, which is consistent  with the fact that much of the loan growth has been in the real estate secured segment. Variable rate loans currently at or below their floor are classified as variable in the table below:

					Due Over		Due Over		Due Over
(dollar amounts in thousands)	Due Less		Due		12 Months		3 Years		5 Years
	Than 3		3 To 12		Through		Through		Through		Due Over
September 30, 2013	Months		Months		3 Years		5 Years		15 Years		15 Years		Total
Real Estate Secured
Multi-family residential	$	4,085	$	655	$	2,650	$	706	$	15,613	$	2,073	$	25,782
Residential 1 to 4 family	1,085		1,816		4,032		1,700		40,694		7,689		57,016
Home equity line of credit	21,037		73		290		-		820		10,168		32,388
Commercial	12,628		20,686		46,610		42,120		317,608		2,670		442,322
Farmland	1,445		1,237		995		11,751		30,038		107		45,573
Commercial
Commercial and industrial	27,620		30,093		15,683		16,265		13,621		258		103,540
Agriculture	14,941		6,320		3,204		1,093		2,965		-		28,523
Other	-		-		44		-		-		-		44
Construction
Single family residential	2,020		1,896		703		-		-		-		4,619
Single family residential - Spec.	806		116		192		-		-		-		1,114
Multi-family	-		-		-		747		-		-		747
Commercial	4,999		-		892		803		-		-		6,694
Land	14,349		3,962		5,399		1,332		-		-		25,042
Installment loans to individuals	794		89		544		283		785		1,000		3,495
All other loans (including overdrafts)	255		-		-		-		-		-		255
Total loans, gross	$	106,064	$	66,943	$	81,238	$	76,800	$	422,144	$	23,965	$	777,154
Variable rate loans (1)	93,406		44,893		48,591		23,038		246,589		17,493		474,010
Fixed rate loans	12,658		22,050		32,647		53,762		175,555		6,472		303,144
Total loans, gross	$	106,064	$	66,943	$	81,238	$	76,800	$	422,144	$	23,965	$	777,154

(1)Variable rate loans include $361.9 million of variable rate loans that are at or below their contractual floor rates.  To the extent that overall interest rates rise, the Company will not experience the benefit of rising interest rates until such rates rise above such interest rate floors.

Allowance for Loan Losses

The Company maintains an ALLL at a level considered by management to be adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. The allowance is comprised of two components: specific credit allocation and general portfolio allocation, which includes a quantitatively determined adjustment. The allowance is increased by provisions for loan losses charged to earnings and decreased by loan charge-offs, net of recovered balances. Please see Note 5. Allowance for Loan Losses of the Consolidated Financial Statements filed as part of the Annual Report on Form 10-K for the year ended December 31, 2012, for a detailed discussion concerning the Company’s methodology for determining an adequate allowance. Please also see Note 1. Summary of Significant Accounting Policies of the Consolidated Financial Statements filed as part of the Annual Report on Form 10-K for the year ended December 31, 2012, for additional discussion concerning the ALLL, loan charge-offs, and credit risk management.

Heritage Oaks Bancorp |- 49 -

The Company allocates the ALLL across product types within the loan portfolio. The following table provides a summary of the ALLL and its allocation to each major product type of the loan portfolio, as well as the percentage that each major category’s allowance represents as a percentage of the gross loan balances in the category:

	September 30,						December 31,
	2013			2012			2012
			Percent			Percent			Percent
	Amount		of Loan	Amount		of Loan	Amount		of Loan
(dollars amounts in thousands)	Allocated		Segment	Allocated		Segment	Allocated		Segment
Real Estate Secured
Multi-family residential	$	157	0.6%	$	108	0.7%	$	115	0.5%
Residential 1 to 4 family	681		1.2%	378		1.0%	290		0.7%
Home equity line of credit	140		0.4%	450		1.4%	443		1.4%
Commercial	4,805		1.1%	6,691		1.8%	5,659		1.5%
Farmland	524		1.1%	360		1.5%	372		1.5%
Commercial
Commercial and industrial	5,172		5.0%	4,316		3.6%	5,297		4.2%
Agriculture	978		3.4%	755		4.2%	857		4.0%
Construction
Single family residential	52		1.1%	144		1.3%	65		0.8%
Single family residential - Spec.	17		1.5%	-		0.0%	6		1.1%
Multi-family	17		2.3%	18		2.3%	6		0.8%
Commercial	157		2.3%	396		2.7%	236		2.3%
Land	4,646		18.6%	4,263		18.0%	4,670		18.9%
Installment loans to individuals	87		2.5%	72		1.4%	64		1.3%
All other loans (including overdrafts)	35		13.7%	36		12.8%	38		14.6%
Total allowance for loan losses	$	17,468	2.2%	$	17,987	2.7%	$	18,118	2.6%

The ALLL decreased in the first nine months of 2013 both in real terms and as a percentage of gross loans as compared to the corresponding period in 2012 by $0.5 million, or 3.0%, due in large part to continuing improvement in the overall credit quality of the loan portfolio, as well as improvements in historical charge-off experience. The improvement in the credit quality is reflected in a number of indicators all of which have trended favorably over the last year, and virtually all of which are at or near their lowest levels since the credit crisis peaked in 2010.  The indicators we believe are most indicative of the improving credit quality of the portfolio include: the level of special mention and worse loans, which have declined $36.4 million or 41.51% since the third quarter of 2012; the level of non-accrual loans, which have declined $7.8 million, or 38.1% since the third quarter of 2012; and the ratio of classified assets to Tier 1 capital plus the ALLL, which has improved from 41.6%, to 33.6% since the third quarter of 2012.   These favorable trends in the credit quality of the portfolio, when combined with the favorable impacts of declining charge-off activity over the last several quarters have contributed to a reduction in the level of general reserves required.  The general reserve requirements have also been favorably impacted by a continued strengthening outlook on the local, state and national economies and their interplay with our local lending base, which has resulted in a downward adjustment in the qualitative component of the general reserve calculation.  These positive factors were partially offset by the Company extending the look back period used to establish the loss history for the quantitative portion of the ALLL beginning in the first quarter of 2013 in an effort to continue to factor in the higher loss experience that resulted from the credit crisis. Changes in the mix of historical losses in the look back period resulted in a reallocation of the general reserve component of the allowance amount within the various loan segments as compared to December 31, 2012, as loss experience by segment has fluctuated over time.  As such, the above analysis reflects a decrease in commercial real estate that was solely the result of the change in the loss mix over the look back period, and a modest net overall decline in the level of allowance since December 31, 2012.  The increase in the level of reserve requirement for residential 1 to 4 family is largely a result of growth in this loan component but also the changes in the loss mix due to the extended look back period, as previously noted.

Net charge-offs during the three and nine months ended September 30, 2013 totaled $0.5 million and $0.7 million, respectively.  This compares to net charge-offs of approximately $1.4 million and $9.0 million, respectively, reported for the corresponding periods last year.  The decrease in charge-offs during the three and nine months ended September 30, 2013 is largely due to 2012 charge-offs being elevated as a result of a few large loan relationships that were placed on non-accrual in the first two quarters of 2012, which resulted in charge-offs based on their specific reserve calculations.  Loan charge-offs for the three and nine months ended September 30, 2013 were driven by charge-offs on a number of small loan relationships, as well as a $0.2 million loss realized on the sale of collateral for the loan transferred into OREO in the first quarter of 2013.

Heritage Oaks Bancorp |- 50 -

Annualized net charge-offs to average loans for the three and nine months ended September 30, 2013 were 0.24% and 0.12%, respectively.  This compares to 0.85% and 1.81%, respectively, reported for the corresponding periods in 2012.  At September 30, 2013, the ALLL represented 2.25% of total gross loans compared to the 2.63% reported at December 31, 2012.

As of September 30, 2013, management believes that the ALLL was sufficient to cover current estimable losses in the Company’s loan portfolio.

Non-Performing Assets

Non-performing assets are comprised of loans placed on non-accrual status and foreclosed assets (OREO and other repossessed assets). Generally, the Company places loans on non-accruing status when (1) the full and timely collection of all amounts due become uncertain, (2) a loan becomes 90 days or more past due (unless well-secured and in the process of collection) or (3) any portion of outstanding principal has been charged-off.  See Note 4. Loans of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q for additional discussion concerning non-performing loans, as well as a discussion concerning credit quality.

The following table provides a summary of non-performing loans and foreclosed assets:

	September 30,			December 31,
(dollar amounts in thousands)	2013			2012
Non-Performing Loans:
Residential 1-4 family	$	452		$	835
Home equity lines of credit	-			58
Commercial real estate	964			928
Farmland	-			1,077
Commercial and industrial	3,224			4,657
Agriculture	811			907
Construction	-			1,380
Land	7,194			7,182
Installment	27			285
Total non-performing loans	$	12,672		$	17,309
Total non-performing assets	$	12,672		$	17,309
Ratio of allowance for loan losses to total gross loans	2.25		%	2.63%
Ratio of non-performing loans to total gross loans	1.63		%	2.51%
Ratio of non-performing assets to total assets	1.10		%	1.58%

At September 30, 2013, the balance of non-accruing loans was approximately $12.7 million or $4.6 million less than that reported at December 31, 2012.  The decrease in non-accruing loans is due to a combination of $3.3 million of non-accrual loans that paid down or paid off, $1.5 million that transferred to foreclosed collateral and $3.1 million that returned to accrual status after prolonged performance under their current payment plans.  These improvements in the level of non-accruing loans were partially offset by $5.1 million of loans transferring to non-accrual status net of $1.8 million of charge-offs.  A large percentage of additions to non-accrual were due to loans being newly designated as TDRs in the first nine months of 2013.  Substantially all of the decrease in non-performing assets can be attributed to the changes in the non-accruing loans, discussed above, as there was no OREO outstanding at September 30, 2013 or December 31, 2012.

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The following tables reconcile the change in total non-accruing balances:

	Balance		Additions to				Transfers to		Returns to				Balance
	June 30,		Non-Accruing		Net		Foreclosed		Performing		Net		September 30,
(dollar amounts in thousands)	2013		Balances		Paydowns		Collateral		Status		Charge-offs		2013
Real Estate Secured
Residential 1 to 4 family	$	753	$	-	$	(301)	$	-	$	-	$	-	$	452
Home equity line of credit	56		-		(1)		-		(55)		-		-
Commercial	299		721		(15)		-		-		(41)		964
Commercial
Commercial and industrial	4,030		183		(185)		-		(435)		(369)		3,224
Agriculture	1,316		50		(188)		-		-		(367)		811
Land	7,460		-		(144)		-		(122)		-		7,194
Installment loans to individuals	29		206		(1)		-		-		(207)		27
Totals	$	13,943	$	1,160	$	(835)	$	-	$	(612)	$	(984)	$	12,672

	Balance		Additions to				Transfers to		Returns to				Balance
	December 31,		Non-Accruing		Net		Foreclosed		Performing		Net		September 30,
(dollar amounts in thousands)	2012		Balances		Paydowns		Collateral		Status		Charge-offs		2013
Real Estate Secured
Residential 1 to 4 family	$	835	$	659	$	(537)	$	-	$	(482)	$	(23)	$	452
Home equity line of credit	58		-		(3)		-		(55)		-		-
Commercial	928		721		(230)		(222)		(192)		(41)		964
Farmland	1,077		-		(1,077)		-		-		-		-
Commercial
Commercial and industrial	4,657		1,525		(828)		-		(1,360)		(770)		3,224
Agriculture	907		537		(255)		-		(11)		(367)		811
Construction
Commercial	1,380		-		-		(1,211)		-		(169)		-
Land	7,182		1,303		(381)		-		(876)		(34)		7,194
Installment loans to individuals	285		335		(8)		(101)		(117)		(367)		27
Totals	$	17,309	$	5,080	$	(3,319)	$	(1,534)	$	(3,093)	$	(1,771)	$	12,672

Other Real Estate Owned (“OREO”)

At September 30, 2013 and December 31, 2012, the Company held no OREO.  As was previously noted, the Company did foreclose on a single loan in the first quarter of 2013, and sold the underlying collateral within the same quarter at a loss of $0.2 million, which was reflected as a charge-off against the ALLL in accordance with U.S. GAAP.  See also Note 7. Other Real Estate Owned, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q for additional discussion concerning OREO.

Deposits and Borrowed Funds

Deposits

The following table provides a summary for the year to date change in various categories of deposit balances:

	September 30,		December 31,		Variance
(dollar amounts in thousands)	2013		2012		dollar		percentage
Non-interest bearing deposits	$	285,428	$	273,242	$	12,186	4.46%
Interest bearing deposits:
NOW accounts	83,961		76,728		7,233		9.43%
Other savings deposits	43,089		41,021		2,068		5.04%
Money market deposit accounts	324,990		293,525		31,465		10.72%
Time deposits	219,484		186,354		33,130		17.78%
Total deposits	$	956,952	$	870,870	$	86,082	9.88%

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As indicated in the table above total deposit balances at September 30, 2013 were approximately $957.0 million.  This represents an increase of approximately $86.1 million, or 9.9%, when compared to that reported at December 31, 2012.  This level of increase is consistent with historical experience as many customers utilize cash near the end of the calendar year and into the early part of the first quarter to pay tax obligations and then begin to rebuild their deposit balances.  During the third quarter of 2013, the Company added $25.0 million in new public fund time deposits, which contributed to the growth.

The Company continues to focus on gathering and retaining core relationships, which has helped to reduce the overall cost of funding.  At September 30, 2013, core deposits, which are defined as total deposits exclusive of time deposits over $100,000, represented 84.8% of total deposits, down approximately 4% from that reported at December 31, 2012, due largely to growth in time deposits greater than $100,000, which are excluded from core deposits. Management’s continued focus on lower cost core deposit gathering helped to reduce overall cost of funds by 1 basis point to 0.41% for the three months ended September 30, 2013 from 0.42% reported for the corresponding period in 2012 and by 5 basis points to 0.40% for the nine months ended September 30, 2013 from 0.45% for the corresponding period in 2012.

Borrowed Funds

The Bank has a variety of sources from which it may obtain secondary funding beyond deposit balances.  These sources include, among others, the FHLB, the FRB and credit lines established with correspondent banks.  At September 30, 2013, FHLB borrowings were $57.5 million or $9.0 million lower than that reported at December 31, 2012.  Borrowings are obtained for a variety of reasons which include, but are not limited to: asset-liability management; funding loan growth; and to provide additional liquidity. The decrease in the level of FHLB borrowings in 2013 was primarily the result of utilizing cash proceeds from deposit growth and investment security sales during the year to pay down short-term FHLB borrowings.

Capital

At September 30, 2013, the balance of stockholders’ equity was approximately $125.1 million.  This represents a decrease of approximately $20.4 million over that reported at December 31, 2012.  The year to date change is attributed to retirement of the Series A Preferred Stock and the related warrant that were previously held by the U.S. Department of the Treasury for $22.8 million. Stockholders’ equity also declined due to a decrease in the balance of accumulated other comprehensive income in the amount of $6.8 million related to the realization of gains on the sale of securities during the period and the decline in the fair value of our investment securities due to increasing long-term interest rates.  These declines were partially offset by an $8.3 million improvement in retained earnings attributable to net income for the year less dividends paid on Series A Senior Preferred stock prior to its redemption.

Dividends

The Company, pursuant to the Written Agreement between it and FRB, was required to defer dividend payments on the Series A Preferred Stock issued to the U.S. Department of the Treasury under the Capital Purchase Program through the first quarter of 2012.    During the second quarter of 2012, the Company’s request to the FRB to allow it to pay all dividends in arrears on the Series A Preferred Stock, as well as the $0.3 million of interest in arrears on the junior subordinated debentures was approved and the Company brought both the dividends on its Series A Preferred Stock and the interest on its junior subordinated debentures current. While the Written Agreement was terminated in July 2012 and replaced with a Memorandum of Understanding, the Company continued to receive approval from the FRB to pay dividends on the Series A Preferred Stock and interest on the junior subordinated debentures through the third quarter of 2013, resulting in the Company being current on its obligations under these instruments.

Regulatory Capital

The Company and the Bank seek to maintain strong levels of capital in order to be considered generally “well-capitalized” as determined by regulatory agencies.  The Company’s potential sources of capital include retained earnings and the issuance of equity.  Although the Company and the Bank rely primarily on earnings from its operations to generate capital, the absence of earnings in 2009 and 2010 required the Company to obtain additional capital through the issuance of preferred and common equity in 2010.

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At September 30, 2013, the Company had $8.2 million in Junior Subordinated Deferrable Interest Debentures (the “debt securities”) issued and outstanding.  These debt securities were issued to Heritage Oaks Capital Trust II.  At September 30, 2013, the Company included $8.0 million of the debt securities in its Tier I Capital for regulatory reporting purposes.  For a more detailed discussion regarding these debt securities, see Note 11. Borrowings, in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Beginning in April 2012 and through its termination in April 2013, the Bank operated subject to the terms of a MOU with the FDIC and the DFI, which replaced the Consent Order stipulated to in March 2010.  Under the MOU the Bank agreed to continue to adhere to the 10.0% Tier 1 leverage ratio previously set by the Consent Order.  With the termination of the MOU in April 2013, the need to continue to adhere to the 10% leverage ratio was lifted.  See also Note 19. Regulatory Matters, in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information related to the Consent Order and Written Agreement as they pertain to these requirements and Note 13. Regulatory Matters, of the Condensed Consolidated Financial Statements, filed with this Quarterly Report on Form 10-Q.

The following table provides the general minimum regulatory capital ratios and a summary of Company and Bank regulatory capital ratios, which reflect that both the Company and Bank should be generally considered “well capitalized”:

	Regulatory Standard	September 30, 2013		December 31, 2012		September 30, 2012
	Well	Heritage Oaks		Heritage Oaks		Heritage Oaks
Ratio	Capitalized	Bancorp	Bank	Bancorp	Bank	Bancorp	Bank
Leverage ratio	5.00%	10.58%	10.05%	12.32%	11.93%	12.15%	11.75%
Tier I capital to risk weighted assets	6.00%	13.27%	12.59%	15.55%	15.02%	14.92%	14.40%
Total risk based capital to risk weighted assets	10.00%	14.53%	13.85%	16.81%	16.28%	16.19%	15.66%

As previously discussed, on July 17, 2013 the Company repurchased all 21,000 outstanding shares of the Series A Preferred Stock that was held by the U.S. Department of the Treasury under the TARP CPP program.  The shares were repurchased at par plus accrued but unpaid dividends for a total of $21.2 million.  Further, on July 30, 2013 the Company reached an agreement with the U.S. Department of the Treasury to repurchase the related warrant to purchase 611,650 shares of the Company’s common stock for $1.6 million.  The decision to repurchase the Preferred Stock and the outstanding warrant was made to mitigate the dilutive effect these instruments had on common shareholders.  The funds for this purchase were made available through a one-time dividend from the Bank to Company.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.

In the ordinary course of business, the Company has entered into off-balance sheet arrangements consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.  For a more detailed discussion of these financial instruments, refer to Note 18. Commitments and Contingencies in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

In the ordinary course of business, the Company is a party to various operating leases.  For a more detailed discussion of these financial instruments, refer to Note 18. Commitments and Contingencies in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

The Company is contingently liable for letters of credit made to its customers in the ordinary course of business totaling $14.1 million at both September 30, 2013 and December 31, 2012.  For a more detailed discussion of these financial instruments refer to Note 18. Commitments and Contingencies in the Company’s Consolidated Financial Statements under Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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Additionally at September 30, 2013 and December 31, 2012, the Company had undisbursed loan commitments made in the ordinary course of business totaling $170.0 million and $164.4 million, respectively.  At September 30, 2013 and December 31, 2012, the balance of the Company’s allowance for losses on unfunded commitments was $0.3 million.

In connection with the $8.2 million in debt securities issued to Heritage Oaks Capital Trust II the Company issued a full and unconditional payment guarantee of certain accrued distributions by Heritage Oaks Capital Trust II.  There are no special purpose entity trusts, corporations, or other legal entities established by the Company which reside off-balance sheet.  Management is not aware of any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Liquidity

The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers.  Asset liquidity is primarily derived from loan payments and the maturity of other earning assets.  Liquidity from liabilities is obtained primarily from the receipt of new deposits.  The Company’s Asset Liability Committee (“ALCO”) is responsible for managing the on and off-balance sheet commitments to meet the needs of customers while achieving the Company’s financial objectives.  ALCO meets regularly to assess the projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual customer funding needs.  Deposits generated from the Company’s customers serve as the primary source of liquidity.  The Bank has credit arrangements with correspondent banks that serve as a secondary liquidity source.  At September 30, 2013, these credit lines totaled $37.0 million and are unsecured.  Additionally, the Bank has a borrowing facility with the FRB. The amount of available credit under the FRB facility is determined by the collateral provided by the Bank.  As of September 30, 2013, the borrowing availability related to this facility was $9.8 million. At September 30, 2013, the Bank had no borrowings against the credit lines or the FRB facility.  As previously mentioned, the Bank is a member of the FHLB and has available collateralized borrowing capacity of $223.2 million at September 30, 2013, in addition to the $57.5 million currently outstanding.

The Bank also manages liquidity by maintaining an investment portfolio of readily marketable and liquid securities. These investments include mortgage backed securities and obligations of state and political subdivisions (municipal bonds) that provide a stream of cash flows.  As of September 30, 2013, the Company believes investments in the portfolio can be liquidated at their current fair values in the event they are needed to provide liquidity.  The ratio of liquid assets not pledged for collateral and other purposes to deposits and other liabilities was 27.5% at September 30, 2013 compared to 36.4% at December 31, 2012.  The ratio of gross loans to deposits, another key liquidity ratio, increased to 81.2% at September 30, 2013 compared to 79.2% at December 31, 2012, as loan growth in the first nine months of 2013 outpaced deposit growth.

Management believes the level of liquid assets and available credit facilities are sufficient to meet current and anticipated funding needs.  In addition, the Bank’s ALCO oversees the Company’s liquidity position by reviewing a monthly liquidity report.  Management is not aware of any trends, demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material change in the Company’s liquidity.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

The assets and liabilities of a financial institution are primarily monetary in nature.  As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices.  Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay their obligations and upward pressure on operating expenses.  Although inflationary pressures are not considered to be of any particular hindrance in the current economic environment, they may have an impact on the Company’s future earnings in the event those pressures become more prevalent.

As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level.

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Thus, virtually all of the Company’s interest rate risk exposure lies at the Bank level other than $8.2 million in subordinated debentures issued by the Company’s subsidiary grantor trust. As a result, all significant interest rate risk procedures are performed at the Bank level. In addition to risk related to interest rate changes, the Bank’s real estate loan portfolio, concentrated primarily within Santa Barbara and San Luis Obispo Counties, California, is subject to risks of changes in the underlying value of collateral as a result of changes in the local economy.

The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest earning assets re-price differently than its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.

The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure.  Management believes historically it has effectively managed the effect of changes in interest rates on its operating results and believes that it can continue to manage the short-term effect of interest rate changes under various interest rate scenarios.

Management employs asset and liability management software to measure the Company’s exposure to potential future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of September 30, 2013.  This means that the Company would expect (all other things being equal) to experience a limited change in its net interest income if rates rise or fall.  The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s ALCO policies.  Management will continue to perform this analysis each quarter.

The hypothetical impact of sudden interest rate movements applied to the Company’s asset and liability balances are modeled quarterly.  The results of these models indicate how much of the Company’s net interest income is “at risk” from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. Management believes the results for the Company’s September 30, 2013 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (“bp”) and 200bp rate increase and a 100bp decrease is acceptable to management and within policy guidelines at this time.  Given the low interest rate environment, a 200bp decrease is not considered a realistic possibility and is therefore not modeled.

The results in the table below indicate the change in net interest income the Company would expect to see, if interest rates were to change in the amounts set forth:

(dollar amounts in thousands)	Rate Shock Scenarios
September 30, 2013	-100bp		Base		+100bp		+200bp
Net interest income	$	43,424	$	43,186	$	43,439	$	44,052
$ Change from base	$	238	$	-	$	253	$	866
% Change from base	0.55%		0.00%		0.59%		2.01%

It is important to note that the above table is a summary of several forecasts and actual results may vary from any of the forecasted amounts and such difference may be material and adverse. The forecasts are based on estimates and assumptions made by management that may turn out to be different and may change over time. Factors affecting these estimates and assumptions include, but are not limited to: 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses to each of the foregoing. Factors that vary significantly from the assumptions and estimates may have material and adverse effects on the Company’s net interest income; therefore, the results of this analysis should not be relied upon as indicative of actual future results.

Heritage Oaks Bancorp | - 56 -

The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily and fixed rate loans:

(dollar amounts in thousands)
September 30, 2013			Percent of
Rate Type	Balance		Total
Variable - daily	$	134,389	17.3	%
Variable other than daily	336,420		43.3	%
Fixed rate	306,345		39.4	%
Total gross loans	$	777,154	100.0	%

The table above identifies approximately 17.3% of the loan portfolio that will re-price immediately in a changing rate environment.  At September 30, 2013, approximately $470.8 million or 60.6% of the Company’s loan portfolio is considered variable.

The following table shows the repricing categories of the Company’s loan portfolio:

(dollars in thousands)
September 30, 2013			Percent of
Re-Pricing	Balance		Total
< 1 Year	$	278,767	35.8	%
1-3 Years	144,458		18.6	%
3-5 Years	185,558		23.9	%
> 5 Years	168,371		21.7	%
Total gross loans	$	777,154	100.0	%

The following table provides a summary of the loans the Company can expect to see adjust above floor rates based on given movements in the Prime Rate:

(dollar amounts in thousands)	Move in Prime Rate (bps)
September 30, 2013	+200		+250		+300		+350
Variable daily	$	33,676	$	49,257	$	72,585	$	92,471
Variable other than daily	134,137		170,187		202,887		240,593
Cumulative total variable at floor	$	167,813	$	219,444	$	275,472	$	333,064

Given the significant decline in prime rate over the last two years, many loans in the portfolio possess floors significantly higher than the current prime rate.  As indicated in the table above, the Company will need to see rates increase by 250 to 350 basis points before the majority of variable rate loans in the portfolio experience a rise in their interest rates above their floors, thereby ending their fixed-rate interest rate risk profile and returning them to a fully variable interest rate risk profile.  When such event occurs, holding all other interest rate risk variables constant, the Company will become more net asset sensitive.  During the last several years, the Company moved to protect net interest margin by implementing floors on new loan originations.  Management believes this strategy proved successful in insulating net interest margin in the declining interest rate environment experienced over the last several years.  However in a rising rate environment, management believes that these loan floors could result in compression of net interest margin and potentially a decline in net interest income.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Heritage Oaks Bancorp | - 57 -

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management, with the participation of the Principal Executive Officer and the Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting in the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.  Other Information

Item 1.  Legal Proceedings

The Bank is party to the following litigation:

Alpert, et al v. Cuesta Title Company, et al.  San Luis Obispo County Sup. Ct. case no. CV 098220; 3rd. amended complaint filed 8/3/2010.  Plaintiffs sued a title company, a title insurer, Hurst Financial and related individuals on a variety of claims related to Hurst Financial’s lending practices.  The Bank, which made a commercial loan to a developer who also borrowed from Hurst Financial, was named in two causes of action alleging (1) negligence and (2) aiding and abetting Hurst Financial’s allegedly illegal lending practices.  The Bank did not lend to any of the plaintiffs or to Hurst Financial, nor did the Bank have any contact whatsoever with the plaintiffs in relation to their transactions with Hurst Financial.  The Bank foreclosed upon and subsequently sold some of the properties Hurst Financial purportedly financed for the developer using funds raised from the plaintiffs.  The matter was tendered to the Bank’s insurance carrier, the Bank successfully demurred to one cause of action, and settled the remaining cause of action on July 22, 2013 with the support of its insurance carrier for an immaterial amount, to avoid incurring the expense of trial.

Corona Fruits & Veggies, Inc., et al v. Heritage Oaks Bank, et al, Santa Barbara County Sup. Ct. case no. 1390870, filed 2/8/2012. Corona Fruits & Veggies, Inc. (“Corona”) and related entities are seeking an unspecified amount in excess of $2,000,000 in damages for a variety of claims including breach of contract, misrepresentation, interference with contractual relations and promissory estoppel.  The alleged factual basis underlying the claims is that the Bank promised to extend agricultural and equipment financing to the plaintiffs and ultimately failed to do so, causing the plaintiffs’ damages. The Bank denies that it acted improperly in any respect toward plaintiffs or that it breached a loan commitment to the plaintiffs and is vigorously defending the matter. The case has been consolidated for trial with a related action by Robert Mann Packing, a supplier to and creditor of the plaintiffs, which alleges that the Bank breached an inter-creditor agreement between the Bank and Robert Mann Packing while collecting proceeds from Corona’s crop sales. The case is in the discovery phase and trial is set in May 2014. However, the Bank does not expect the litigation to have a material impact on the Bank.

Heritage Oaks Bancorp | - 58 -

Sandra Keller v. Heritage Oaks Bank, et al, U.S. District Court, Central District of California case no. CV-13-2049 CAS, filed 3/21/13.  Sandra Keller, as guardian ad litem for Mary Mastagni, filed suit in federal court against the Bank and numerous other parties alleging damages from a conspiracy to commit elder financial abuse.  The Bank is aware of the action but has not been served with legal process.  The complaint is unclear as to the basis for the alleged damages against the Bank, and the Bank believes the complaint lacks any merit whatsoever.  The federal court has dismissed the case. The Bank has also learned that the plaintiff has filed an identical action in the Superior Court of San Luis Obispo County. The Bank was served with process in September 2013 and is responding.  The Bank does not expect the litigation to have a material impact on the Bank.

Except as indicated above, neither the Company nor the Bank is involved in any legal proceedings other than routine litigation incidental to the business of the Company or the Bank.

Item 1A.  Risk Factors

Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2012.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2012, which could materially and adversely affect the Company’s business, financial condition and results of operations. The risks described in the Annual Report on Form 10-K, are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management currently believes to be immaterial may also materially and adversely affect the Company’s business, financial condition or results of operations.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Purchases of Equity Securities

None.

Item 3.  Defaults upon Senior Securities

(a)None.

(b)None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information

None.

Heritage Oaks Bancorp | - 59 -

Item 6.  Exhibits

(a) Exhibits:

Exhibit 31.1 Rule 13a-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 31.2 Rule 13a-14(a)  Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.1 Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.2 Section 1350  Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012 (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows, for the nine months ended September 30, 2013 and 2012 (unaudited), and (v) Notes to Condensed Consolidated Financial Statements (unaudited).

* Filed herewith.

Heritage Oaks Bancorp | - 60 -

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Heritage Oaks Bancorp

Date: November 4, 2013

/s/ Simone Lagomarsino	/s/ Mark Olson
Simone Lagomarsino	Mark Olson
President and Chief Executive Officer	Executive Vice President, Chief Financial Officer
(Principal Executive Officer)	(Principal Financial Officer)

Heritage Oaks Bancorp | - 61 -

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Simone Lagomarsino, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Heritage Oaks Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.I have disclosed, based on my most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent function);

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 4, 2013

/s/ Simone Lagomarsino

Simone Lagomarsino

President and Chief Executive Officer

(Principal Executive Officer)

Heritage Oaks Bancorp | - 62 -

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Mark Olson, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Heritage Oaks Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.I have disclosed, based on my most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent function);

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 4, 2013

/s/ Mark Olson

Mark Olson

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Heritage Oaks Bancorp | - 63 -

EX-32.1

EXHIBIT 32.1

HERITAGE OAKS BANCORP

Quarterly report on Form 10-Q

for the quarter ended September 30, 2013

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, who is the President and Chief Executive Officer of Heritage Oaks Bancorp (the “Company”), hereby certifies, pursuant to 18 USC Section 1350, that to my knowledge, (i) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, as filed by the Company with the Securities and Exchange Commission (the “Quarterly Report”), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 4, 2013	/s/ Simone Lagomarsino
	Simone Lagomarsino
	President and Chief Executive Officer
	(Principal Executive Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Heritage Oaks Bancorp, and will be retained by Heritage Oaks Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

Heritage Oaks Bancorp | - 64 -

EX-32.2

EXHIBIT 32.2

HERITAGE OAKS BANCORP

Quarterly report on Form 10-Q

for the quarter ended September 30, 2013

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, who is the Chief Financial Officer of Heritage Oaks Bancorp (the “Company”), hereby certifies, pursuant to 18 USC Section 1350, that to my knowledge, (i) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, as filed by the Company with the Securities and Exchange Commission (the “Quarterly Report”), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 4, 2013	/s/ Mark Olson
	Mark Olson
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Heritage Oaks Bancorp, and will be retained by Heritage Oaks Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

Heritage Oaks Bancorp | - 65 -

XML

Preferred Stock

9 Months Ended

Sep. 30, 2013

Preferred Stock

Preferred Stock

Note 11.  Preferred Stock

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.

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

On March 20, 2009, the Company issued 21,000 shares of Series A Senior Preferred Stock to the United States Department of Treasury (“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 was exercisable immediately at a price of $5.15 per share, would have expired after a period of 10 years from issuance and is transferable by the U.S. Treasury.  The warrant would have been dilutive to earnings per common share during reporting periods in which the market price of the Company’s common stock was above the warrant’s exercise price.

In July 2013, the Company received approval to dividend $25.0 million from the Bank to the Company, to facilitate the repurchase of the 21,000 shares of Series A Preferred Stock and the related warrant to purchase 611,650 shares of the Company’s common stock.  The Company completed the repurchase of the Series A Preferred Stock at par, including accrued but unpaid dividends, for $21.2 million on July 17, 2013.  On July 29, 2013, the Company made a bid to repurchase the warrant to purchase 611,650 shares of the Company’s common stock for $1.6 million.  On July 30, 2013, the United States Department of Treasury accepted the Company’s bid.  The repurchase of the warrant occurred on August 7, 2013.

Series C Convertible Perpetual Preferred Stock

On March 12, 2010, the Company sold 1,189,538 shares of its Series C Convertible Perpetual Preferred Stock (“Series C Preferred Stock”) for $3.6 million as part of the overall $60 million private placement of securities completed at that time.  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 or otherwise makes a “Permissible Transfer”, as defined in the terms of the Series C Preferred Stock. 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.  There is no stated dividend rate for shares of Series C Preferred Stock.  However, in the event that a common stock dividend is declared, holders of Series C Preferred Stock are entitled to a per share dividend equivalent to that declared for each common share into which Series C Preferred Stock is then convertible.

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 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 through a Permissible Transfer.  Such transfer has not occurred as of September 30, 2013.

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.

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Subsequent Events (Details) (Subsequent Events, Mission Community Bancorp, USD $) In Millions, except Share data, unless otherwise specified	0 Months Ended
	Oct. 21, 2013	Oct. 18, 2013
Subsequent Events | Mission Community Bancorp
Subsequent events
Aggregate cash consideration	$ 8.0
Aggregate stock consideration (in shares)	7,541,353
Total value of merger consideration	$ 56.4
Closing price (in dollars per share)		$ 6.42

XML

Condensed Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Interest Income
Loans	$ 10,064	$ 9,716	$ 29,448	$ 29,289
Investment securities	1,347	1,783	3,993	5,311
Other	98	20	216	72
Total interest income	11,509	11,519	33,657	34,672
Interest Expense
Interest on deposits	731	719	2,101	2,315
Other borrowings	296	215	717	617
Total interest expense	1,027	934	2,818	2,932
Net interest income before provision for loan losses	10,482	10,585	30,839	31,740
Provision for loan losses		1,286		7,681
Net interest income after provision for loan losses	10,482	9,299	30,839	24,059
Non-Interest Income
Fees and service charges	1,195	1,071	3,330	3,270
Mortgage gain on sale and origination fees	656	1,181	2,519	3,071
Gain on sale of investment securities	344	329	3,935	1,696
Gain on sale of other real estate owned		102		112
Other income	228	301	1,212	851
Total non-interest income	2,423	2,984	10,996	9,000
Non-Interest Expense
Salaries and employee benefits	4,529	4,532	14,535	13,522
Occupancy	781	728	2,384	2,542
Information technology	658	551	1,925	1,911
Professional services	729	1,002	2,082	2,403
Regulatory	212	371	851	1,238
Equipment	395	395	1,245	1,223
Sales and marketing	170	171	438	432
Foreclosed asset costs and write-downs	23	107	131	303
Provision for mortgage loan repurchases		125	570	982
Amortization of intangible assets	100	86	300	258
Other expense	954	727	2,478	1,843
Total non-interest expense	8,551	8,795	26,939	26,657
Income before income tax expense / (benefit)	4,354	3,488	14,896	6,402
Income tax expense / (benefit)	1,593	(2,940)	5,689	(3,508)
Net income	2,761	6,428	9,207	9,910
Dividends and accretion on preferred stock	181	357	898	1,113
Net income available to common shareholders	$ 2,580	$ 6,071	$ 8,309	$ 8,797
Earnings Per Common Share
Basic (in dollars per share)	$ 0.10	$ 0.24	$ 0.33	$ 0.35
Diluted (in dollars per share)	$ 0.10	$ 0.23	$ 0.31	$ 0.33

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Loans

9 Months Ended

Sep. 30, 2013

Loans

Loans

Note 4.  Loans

The following table provides a summary of outstanding loan balances:

	September 30,			December 31,
(dollar amounts in thousands)	2013			2012
Real Estate Secured
Multi-family residential	$	25,782		$	21,467
Residential 1 to 4 family	57,016			41,444
Home equity lines of credit	32,388			31,863
Commercial	442,322			372,592
Farmland	45,573			25,642
Total real estate secured	603,081			493,008
Commercial
Commercial and industrial	103,540			125,340
Agriculture	28,523			21,663
Other	44			61
Total commercial	132,107			147,064
Construction
Single family residential	4,619			8,074
Single family residential - Spec.	1,114			535
Multi-family	747			778
Commercial	6,694			10,329
Total construction	13,174			19,716
Land	25,042			24,664
Installment loans to individuals	3,495			4,895
All other loans (including overdrafts)	255			261
Total gross loans	777,154			689,608
Net deferred loan fees	(1,454		)	(937		)
Allowance for loan losses	(17,468		)	(18,118		)
Total net loans	$	758,232		$	670,553
Loans held for sale	$	5,463		$	22,549

Loans held for sale are primarily single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this category are sold within thirty to sixty days.  Under the terms of the mortgage purchase agreements, the purchaser has the right to require the Company to either repurchase the mortgage or reimburse losses incurred by the purchaser, which are determined to have been directly caused by borrower fraud or misrepresentation.  Although the Company intends to vigorously challenge these and any future claims, the Company has a reserve of $0.5 million for these potential repurchases at September 30, 2013.  The Company has incurred losses of $1.4 million related to the settlement of nine loans since the beginning of 2011, the majority of which were associated with a group of related loans to a borrower found guilty of financial fraud that were originated and sold in 2007.

Concentration of Credit Risk

The Company held loans that were collateralized by various forms of real estate of $641.3 million and $537.4 million at September 30, 2013 and December 31, 2012, respectively.  Such loans are generally made to borrowers located in the counties of San Luis Obispo, Santa Barbara and Ventura.  The Company attempts to reduce its concentration of credit risk by making loans which are diversified by product type.  While Management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that further deterioration in the California real estate market would not expose the Company to significantly greater credit risk.

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 $20.1 million at September 30, 2013 and $7.1 million at December 31, 2012.

From time to time, the Company also originates SBA loans for sale for which it retains the servicing of the guaranteed portion of the loan sold.  At September 30, 2013 and December 31, 2012, the unpaid principal balance of SBA loans serviced for others totaled $6.8 million and $3.1 million, respectively.  The Company recognized $0.4 million in gains related to the sale of SBA loans in both the three and nine months ended September 30, 2013, respectively, as compared to no gains from the sale of SBA loans in the first three and nine months of 2012.  The gain on sale of SBA loans was included as a component of other income in non-interest income.

Impaired Loans

The following tables provide a summary of the Company’s investment in impaired loans:

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
September 30, 2013	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	812	$	965	$	109	$	703	$	17
Commercial	1,194		1,925		642		552		91
Commercial
Commercial and industrial	4,671		5,196		3,463		1,208		2,826
Agriculture	810		848		65		745		27
Land	8,063		12,093		7,050		1,013		3,854
Installment loans to individuals	26		71		26		-		10
Totals	$	15,576	$	21,098	$	11,355	$	4,221	$	6,825

(1) The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
December 31, 2012	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	831	$	1,035	$	246	$	585	$	18
Home equity lines of credit	58		152		58		-		7
Commercial	933		1,799		42		891		-
Farmland	1,077		1,089		-		1,077		-
Commercial
Commercial and industrial	4,337		4,813		3,410		927		2,172
Agriculture	907		1,235		30		877		13
Construction
Commercial	1,380		2,508		-		1,380		-
Land	7,504		11,307		6,106		1,398		3,829
Installment loans to individuals	285		333		285		-		22
Totals	$	17,312	$	24,271	$	10,177	$	7,135	$	6,061

(1) The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

The average recorded investment in impaired loans and the interest income recognized on impaired loans was:

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013				2012				2013				2012
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
(dollar amounts in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Real Estate Secured
Residential 1 to 4 family	$	783	$	-	$	801	$	-	$	750	$	-	$	756	$	-
Home equity lines of credit	28		-		384		-		43		-		378		-
Commercial	745		-		3,492		-		781		-		3,757		-
Farmland	-		-		363		-		269		-		272		-
Commercial
Commercial and industrial	4,342		8		4,129		-		4,223		11		3,644		4
Agriculture	1,064		-		1,905		-		966		-		2,010		-
Construction
Single family residential	-		-		-		-		-		-		234		-
Commercial	-		-		1,257		-		345		-		943		-
Land	7,760		4		7,189		-		7,605		4		5,863		-
Installment loans to individuals	28		-		89		-		111		-		82		-
Totals	$	14,750	$	12	$	19,609	$	-	$	15,093	$	15	$	17,939	$	4

The Company did not record income from the receipt of cash payments related to non-accruing loans during the three and nine month periods ended September 30, 2013 and 2012. If interest on non-accruing loans had been recognized at the original interest rates stipulated in the respective loan agreements, interest income would have increased $0.2 million and $0.3 million for the three months ended September 30, 2013 and 2012, respectively, and $0.6 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively.  Interest income recognized on impaired loans in the table above, if any, represents interest the Company recognized on accruing troubled debt restructurings (“TDRs”). Because the loans currently identified as impaired have unique risk characteristics, the Company determined the related valuation allowances for such loans on a loan-by-loan basis.

At September 30, 2013 and December 31, 2012, $9.8 million and $11.6 million, respectively, in loans were classified as TDRs.  Of those balances, $2.9 million and $17 thousand were accruing as of September 30, 2013 and December 31, 2012, respectively and the remaining balance of TDRs were non-accruing loans.  In a majority of these loans, the Company has granted concessions regarding interest rates, payment structure and maturity.  During the three and nine months ended September 30, 2013 and 2012, the terms of certain loans were modified as troubled debt restructurings. These term modifications included a combination of a partial charge-off of principal along with extensions of the maturity date at the loan’s original interest rate, which was lower than the current market rate for new debt with similar risk.  The maturity date extensions granted were for periods ranging from 12 months to 18 months.  Forgone interest related to concessions granted on TDRs totaled $43 thousand and $46 thousand for the three months ended September 30, 2013 and 2012, respectively, and $131 thousand and $85 thousand for the nine months ended September 30, 2013 and 2012, respectively.  As of September 30, 2013, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.

The following tables present loan modifications by class which resulted in TDRs:

	For the Three Months Ended September 30, 2013					For the Nine Months Ended September 30, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment		TDRs	Investment		Investment
Trouble Debt Restructurings
Real Estate Secured
Commercial real estate	1	$	227	$	227	1	$	227	$	227
Commercial
Commercial and industrial	-	-		-		3	91		91
Agriculture	1	49		49		2	67		67
Totals	2	$	276	$	276	6	$	385	$	385

	For the Three Months Ended September 30, 2012					For the Nine Months Ended September 30, 2012
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment		TDRs	Investment		Investment
Trouble Debt Restructurings
Real Estate Secured
Residential 1 to 4 family	-	$	-	$	-	1	$	439	$	439
Farmland	1	1,089		1,089		1	1,089		1,089
Commercial
Commercial and industrial	6	1,120		1,099		9	2,115		2,094
Construction
Land	1	63		63		3	8,433		7,063
Totals	8	$	2,272	$	2,251	14	$	12,076	$	10,685

The following tables present loans by class modified as troubled debt restructurings, for which there was a payment default within twelve months following the modification:

	For the Three Months Ended September 30, 2013			For the Nine Months Ended September 30, 2013
(dollar amounts in thousands)	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Real Estate Secured
Residential 1 to 4 family	-	$	-	1	$	97
Commercial
Commercial and industrial	-	-		3	843
Agriculture	1	18		1	18
Totals	1	$	18	5	$	958

	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012
(dollar amounts in thousands)	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Commercial
Commercial and industrial	-	$	-	3	$	254
Totals	-	$	-	3	$	254

The Bank is actively working with the borrowers to resolve their delinquencies.

Credit Quality

The following tables stratify the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio:

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
September 30, 2013	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	25,782	$	25,198	$	-	$	584	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	57,016		56,080		4		932		-		-		-		-		452		361
Home equity lines of credit	32,388		32,230		-		158		-		-		-		-		-		-
Commercial	442,322		414,892		3,710		23,720		-		-		-		-		964		226
Farmland	45,573		44,388		980		205		-		-		-		-		-		-
Commercial
Commercial and industrial	103,540		93,743		820		7,991		986		61		35		-		3,224		1,430
Agriculture	28,523		26,947		280		1,296		-		-		-		-		811		-
Other	44		44		-		-		-		-		-		-		-		-
Construction
Single family residential	4,619		4,619		-		-		-		-		-		-		-		-
Single family residential - Spec.	1,114		1,114		-		-		-		-		-		-		-		-
Multi-family	747		747		-		-		-		-		-		-		-		-
Commercial	6,694		6,694		-		-		-		-		-		-		-		-
Land	25,042		15,583		131		9,328		-		-		-		-		7,194		866
Installment loans to individuals	3,495		3,397		-		98		-		-		-		-		27		-
All other loans (including overdrafts)	255		255		-		-		-		-		-		-		-		-
Totals	$	777,154	$	725,931	$	5,925	$	44,312	$	986	$	61	$	35	$	-	$	12,672	$	2,883

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
December 31, 2012	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	21,467	$	20,869	$	-	$	598	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	41,444		40,234		6		1,204		-		199		-		-		835		-
Home equity lines of credit	31,863		30,808		-		1,055		-		-		47		-		58		-
Commercial	372,592		332,968		14,235		25,389		-		-		-		-		928		-
Farmland	25,642		20,492		3,260		1,890		-		-		-		-		1,077		-
Commercial
Commercial and industrial	125,340		114,126		2,245		8,969		-		446		104		15		4,657		17
Agriculture	21,663		19,771		106		1,786		-		-		-		-		907		-
Other	61		61		-		-		-		-		-		-		-		-
Construction
Single family residential	8,074		8,074		-		-		-		-		-		-		-		-
Single family residential - Spec.	535		535		-		-		-		-		-		-		-		-
Multi-family	778		778		-		-		-		-		-		-		-		-
Commercial	10,329		8,469		-		1,860		-		-		-		-		1,380		-
Land	24,664		12,461		4,124		8,079		-		50		-		-		7,182		-
Installment loans to individuals	4,895		4,365		230		300		-		-		-		-		285		-
All other loans (including overdrafts)	261		261		-		-		-		-		-		-		-		-
Totals	$	689,608	$	614,272	$	24,206	$	51,130	$	-	$	695	$	151	$	15	$	17,309	$	17

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Loans (Tables)

9 Months Ended

Sep. 30, 2013

Loans

Summary of outstanding loan balances

	September 30,			December 31,
(dollar amounts in thousands)	2013			2012
Real Estate Secured
Multi-family residential	$	25,782		$	21,467
Residential 1 to 4 family	57,016			41,444
Home equity lines of credit	32,388			31,863
Commercial	442,322			372,592
Farmland	45,573			25,642
Total real estate secured	603,081			493,008
Commercial
Commercial and industrial	103,540			125,340
Agriculture	28,523			21,663
Other	44			61
Total commercial	132,107			147,064
Construction
Single family residential	4,619			8,074
Single family residential - Spec.	1,114			535
Multi-family	747			778
Commercial	6,694			10,329
Total construction	13,174			19,716
Land	25,042			24,664
Installment loans to individuals	3,495			4,895
All other loans (including overdrafts)	255			261
Total gross loans	777,154			689,608
Net deferred loan fees	(1,454		)	(937		)
Allowance for loan losses	(17,468		)	(18,118		)
Total net loans	$	758,232		$	670,553
Loans held for sale	$	5,463		$	22,549

Summary of the Company's investment in impaired loans

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
September 30, 2013	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	812	$	965	$	109	$	703	$	17
Commercial	1,194		1,925		642		552		91
Commercial
Commercial and industrial	4,671		5,196		3,463		1,208		2,826
Agriculture	810		848		65		745		27
Land	8,063		12,093		7,050		1,013		3,854
Installment loans to individuals	26		71		26		-		10
Totals	$	15,576	$	21,098	$	11,355	$	4,221	$	6,825

(1) The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
December 31, 2012	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	831	$	1,035	$	246	$	585	$	18
Home equity lines of credit	58		152		58		-		7
Commercial	933		1,799		42		891		-
Farmland	1,077		1,089		-		1,077		-
Commercial
Commercial and industrial	4,337		4,813		3,410		927		2,172
Agriculture	907		1,235		30		877		13
Construction
Commercial	1,380		2,508		-		1,380		-
Land	7,504		11,307		6,106		1,398		3,829
Installment loans to individuals	285		333		285		-		22
Totals	$	17,312	$	24,271	$	10,177	$	7,135	$	6,061

(1) The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

Schedule of average recorded investment in impaired loans and the interest income recognized on impaired loans

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013				2012				2013				2012
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
(dollar amounts in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Real Estate Secured
Residential 1 to 4 family	$	783	$	-	$	801	$	-	$	750	$	-	$	756	$	-
Home equity lines of credit	28		-		384		-		43		-		378		-
Commercial	745		-		3,492		-		781		-		3,757		-
Farmland	-		-		363		-		269		-		272		-
Commercial
Commercial and industrial	4,342		8		4,129		-		4,223		11		3,644		4
Agriculture	1,064		-		1,905		-		966		-		2,010		-
Construction
Single family residential	-		-		-		-		-		-		234		-
Commercial	-		-		1,257		-		345		-		943		-
Land	7,760		4		7,189		-		7,605		4		5,863		-
Installment loans to individuals	28		-		89		-		111		-		82		-
Totals	$	14,750	$	12	$	19,609	$	-	$	15,093	$	15	$	17,939	$	4

Schedule of loan modifications by class which resulted in TDRs

	For the Three Months Ended September 30, 2013					For the Nine Months Ended September 30, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment		TDRs	Investment		Investment
Trouble Debt Restructurings
Real Estate Secured
Commercial real estate	1	$	227	$	227	1	$	227	$	227
Commercial
Commercial and industrial	-	-		-		3	91		91
Agriculture	1	49		49		2	67		67
Totals	2	$	276	$	276	6	$	385	$	385

	For the Three Months Ended September 30, 2012					For the Nine Months Ended September 30, 2012
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded		Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment		TDRs	Investment		Investment
Trouble Debt Restructurings
Real Estate Secured
Residential 1 to 4 family	-	$	-	$	-	1	$	439	$	439
Farmland	1	1,089		1,089		1	1,089		1,089
Commercial
Commercial and industrial	6	1,120		1,099		9	2,115		2,094
Construction
Land	1	63		63		3	8,433		7,063
Totals	8	$	2,272	$	2,251	14	$	12,076	$	10,685

Summary of loans by class modified as troubled debt restructurings

	For the Three Months Ended September 30, 2013			For the Nine Months Ended September 30, 2013
(dollar amounts in thousands)	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Real Estate Secured
Residential 1 to 4 family	-	$	-	1	$	97
Commercial
Commercial and industrial	-	-		3	843
Agriculture	1	18		1	18
Totals	1	$	18	5	$	958

	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012
(dollar amounts in thousands)	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Commercial
Commercial and industrial	-	$	-	3	$	254
Totals	-	$	-	3	$	254

Schedule of loan portfolio by the Company's internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
September 30, 2013	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	25,782	$	25,198	$	-	$	584	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	57,016		56,080		4		932		-		-		-		-		452		361
Home equity lines of credit	32,388		32,230		-		158		-		-		-		-		-		-
Commercial	442,322		414,892		3,710		23,720		-		-		-		-		964		226
Farmland	45,573		44,388		980		205		-		-		-		-		-		-
Commercial
Commercial and industrial	103,540		93,743		820		7,991		986		61		35		-		3,224		1,430
Agriculture	28,523		26,947		280		1,296		-		-		-		-		811		-
Other	44		44		-		-		-		-		-		-		-		-
Construction
Single family residential	4,619		4,619		-		-		-		-		-		-		-		-
Single family residential - Spec.	1,114		1,114		-		-		-		-		-		-		-		-
Multi-family	747		747		-		-		-		-		-		-		-		-
Commercial	6,694		6,694		-		-		-		-		-		-		-		-
Land	25,042		15,583		131		9,328		-		-		-		-		7,194		866
Installment loans to individuals	3,495		3,397		-		98		-		-		-		-		27		-
All other loans (including overdrafts)	255		255		-		-		-		-		-		-		-		-
Totals	$	777,154	$	725,931	$	5,925	$	44,312	$	986	$	61	$	35	$	-	$	12,672	$	2,883

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
December 31, 2012	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	21,467	$	20,869	$	-	$	598	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	41,444		40,234		6		1,204		-		199		-		-		835		-
Home equity lines of credit	31,863		30,808		-		1,055		-		-		47		-		58		-
Commercial	372,592		332,968		14,235		25,389		-		-		-		-		928		-
Farmland	25,642		20,492		3,260		1,890		-		-		-		-		1,077		-
Commercial
Commercial and industrial	125,340		114,126		2,245		8,969		-		446		104		15		4,657		17
Agriculture	21,663		19,771		106		1,786		-		-		-		-		907		-
Other	61		61		-		-		-		-		-		-		-		-
Construction
Single family residential	8,074		8,074		-		-		-		-		-		-		-		-
Single family residential - Spec.	535		535		-		-		-		-		-		-		-		-
Multi-family	778		778		-		-		-		-		-		-		-		-
Commercial	10,329		8,469		-		1,860		-		-		-		-		1,380		-
Land	24,664		12,461		4,124		8,079		-		50		-		-		7,182		-
Installment loans to individuals	4,895		4,365		230		300		-		-		-		-		285		-
All other loans (including overdrafts)	261		261		-		-		-		-		-		-		-		-
Totals	$	689,608	$	614,272	$	24,206	$	51,130	$	-	$	695	$	151	$	15	$	17,309	$	17

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Earnings Per Share

9 Months Ended

Sep. 30, 2013

Earnings Per Share

Earnings Per Share

Note 12.  Earnings Per Share

Basic earnings 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 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, which was retired unexercised in August 2013, or the Series C Perpetual Preferred Stock the Company issued during 2010.  The computation of diluted earnings per common share excludes the impacts of the assumed exercise or issuance of securities that would have an anti-dilutive effect, which can occur when the Company reports a net loss or when the market price for the Company’s stock falls below the exercise price of equity awards issued by the Company.  For the three months ended September 30, 2013 and 2012, common stock equivalents, primarily options, totaling approximately 418,000 shares and 299,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.  For the nine months ended September 30, 2013 and 2012, common stock equivalents, primarily options, totaling approximately 358,000 shares and 278,000 shares, respectively, were excluded from the calculation of diluted earnings per share, as their impact would be anti-dilutive.

The following tables set forth the number of shares used in the calculation of both basic and diluted earnings per common share:

	For the Three Months Ended September 30,
		2013				2012
		Net				Net
(dollar amounts in thousands except per share data)		Income			Shares	Income			Shares
Net income		$	2,761			$	6,428
Dividends and accretion on preferred stock		(181		)		(357		)
Net income  available to common shareholders		$	2,580			$	6,071
Weighted average shares outstanding					25,172,929				25,089,325
Basic earnings per common share		$	0.10			$	0.24
Dilutive effect of share-based compensation awards, common stock warrants, and convertible perpetual preferred stock					1,376,639				1,341,392
Weighted average diluted shares outstanding					26,549,568				26,430,717
Diluted earnings per common share		$	0.10			$	0.23

	For the Nine Months Ended September 30,
	2013				2012
	Net				Net
(dollar amounts in thousands except per share data)	Income			Shares	Income			Shares
Net income	$	9,207			$	9,910
Dividends and accretion on preferred stock	(898		)		(1,113		)
Net applicable to common shareholders	$	8,309			$	8,797
Weighted average shares outstanding				25,138,410				25,074,405
Basic earnings per common share	$	0.33			$	0.35
Dilutive effect of share-based compensation awards, common stock warrant, and convertible perpetual preferred stock				1,401,694				1,280,238
Weighted average diluted shares outstanding				26,540,104				26,354,643
Diluted earnings per common share	$	0.31			$	0.33

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Capital (Details)	Sep. 30, 2013	Dec. 31, 2012
Leverage ratio
Regulatory Standard, Well Capitalized Ratio (as a percent)	5.00%
Actual regulatory, Leverage ratio (as a percent)	10.58%	12.32%
Tier I capital to risk weighted assets
Regulatory Standard, Well Capitalized Ratio (as a percent)	6.00%
Actual regulatory, Tier I capital to risk weighted assets (as a percent)	13.27%	15.55%
Total risk based capital to risk weighted assets
Regulatory Standard, Well Capitalized Ratio (as a percent)	10.00%
Actual regulatory, Total risk based capital to risk weighted assets (as a percent)	14.53%	16.81%
Heritage Oaks Bank
Leverage ratio
Actual regulatory, Leverage ratio (as a percent)	10.05%	11.93%
Tier I capital to risk weighted assets
Actual regulatory, Tier I capital to risk weighted assets (as a percent)	12.59%	15.02%
Total risk based capital to risk weighted assets
Actual regulatory, Total risk based capital to risk weighted assets (as a percent)	13.85%	16.28%

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Investment Securities (Details 2) (USD $)	3 Months Ended	9 Months Ended						3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 OTTI Related to Credit Loss	Sep. 30, 2012 OTTI Related to Credit Loss	Jun. 30, 2012 OTTI Related to Credit Loss	Dec. 31, 2011 OTTI Related to Credit Loss	Sep. 30, 2012 OTTI Related to All Other Factors	Sep. 30, 2013 OTTI Related to All Other Factors	Sep. 30, 2012 OTTI Related to All Other Factors	Mar. 31, 2013 Private labeled mortgage backed securities item	Dec. 31, 2012 Private labeled mortgage backed securities
Other than Temporary Impairment
Number of investment securities in which other than temporary impairment losses were recognized											2
Other than temporary impairment investments, fair value												$ 700,000
Other than temporary impairment investments, historical cost												1,000,000
Additional information related to the recognized OTTI losses
Balance, beginning of the period	392,000	279,000	470,000	109,000	109,000	109,000	109,000	283,000	170,000	361,000
Less: losses related to OTTI securities sold		(279,000)		(109,000)					(170,000)
Change in value attributable to other factors	(140,000)		(218,000)					(140,000)		(218,000)
Balance, end of the period	$ 252,000		$ 252,000		$ 109,000	$ 109,000	$ 109,000	$ 143,000		$ 143,000

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Other Real Estate Owned ("OREO") (Tables)

9 Months Ended

Sep. 30, 2013

Other Real Estate Owned ("OREO")

Summary of the changes in the balance of OREO

	Balance										Balance
	June 30,										September 30,
(dollar amounts in thousands)	2012		Additions		Disposals			Writedowns			2012
Real Estate Secured
Residential 1 to 4 family	$	431	$	-	$	-		$	(31	)	$	400
Commercial	215		-		-			-			215
Construction
Single family residential - Spec.	397		-		(397		)	-			-
Land	32		-		-			(32		)	-
Totals	$	1,075	$	-	$	(397	)	$	(63	)	$	615

	Balance									Balance
	December 31,									September 30,
(dollar amounts in thousands)	2012		Additions		Disposals			Writedowns		2013
Real Estate Secured
Commercial	$	-	$	1,374	$	(1,374	)	$	-	$	-
Totals	$	-	$	1,374	$	(1,374	)	$	-	$	-

	Balance										Balance
	December 31,										September 30,
(dollar amounts in thousands)	2011		Additions		Disposals			Writedowns			2012
Real Estate Secured
Residential 1 to 4 family	$	-	$	607	$	(176	)	$	(31	)	$	400
Commercial	215		-		-			-			215
Construction
Single family residential - Spec.	423		-		(397		)	(26		)	-
Tract	100		-		(100		)	-			-
Land	179		162		(300		)	(41		)	-
Totals	$	917	$	769	$	(973	)	$	(98	)	$	615

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Deferred Tax Assets and Income Taxes (Tables)

9 Months Ended

Sep. 30, 2013

Deferred Tax Assets and Income Taxes

Summary of Company's net deferred tax asset

	September 30,		December 31,
(dollar amounts in thousands)	2013		2012
Deferred tax assets
Provision for loan losses	$	8,669	$	14,348
Forgone interest on non-accrual loans	855		884
Fixed assets	459		405
Accruals	929		792
Alternative minimum tax credit	2,855		2,153
Deferred income	2,129		1,838
Deferred compensation	1,602		1,477
Net operating loss carryforward	6		907
Investment securities valuation	2,037		-
Other than temporary impairment	-		45
Realized built-in loss subject to § 382	2,433		3,234
Charitable contribution	-		61
State deferred tax	781		59
Total deferred tax assets	22,755		26,203
Deferred tax liabilities
Fair value adjustment for purchased assets	362		455
Investment securities valuation	-		2,745
Deferred costs, prepaids and FHLB advances	1,032		1,070
Total deferred tax liabilities	1,394		4,270
Net deferred tax assets	$	21,361	$	21,933

Summary for the current and deferred amounts of the Company's income tax provision expense / (benefit)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2013			2012			2013		2012
Current:
Federal	$	495		$	936		$	306	$	2,489
State	(249		)	485			29		957
Total current (benefit) / expense	246			1,421			335		3,446
Deferred:
Federal	630			(141		)	3,777		(1,061		)
State	717			(115		)	1,577		(288		)
Total deferred expense / (benefit)	1,347			(256		)	5,354		(1,349		)
Deferred Tax Valuation Allowance:
Federal	-			(2,552		)	-		(3,662		)
State	-			(1,553		)	-		(1,943		)
Total deferred tax valuation allowance change	-			(4,105		)	-		(5,605		)
Total income tax expense / (benefit)	$	1,593		$	(2,940	)	$	5,689	$	(3,508	)

Schedule of reconciliation of the statutory federal income tax expense / (benefit) rate to the Company's effective income tax expense / (benefit) and rate

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013				2012				2013				2012
(dollar amounts in thousands)	Amount			Percent	Amount			Percent	Amount			Percent	Amount			Percent
Tax expense at federal statutory tax rate	$	1,525		35.0%	$	1,221		35.0%	$	5,214		35.00%	$	2,241		35.0	%
State income taxes, net of federal income tax benefit	304			7.0%	241			6.9%	1,044			7.0%	435			6.8	%
Change in deferred tax asset valuation allowance	-			0.0%	(4,105		)	-117.7%	-			0.0%	(5,605		)	-87.6	%
Bank owned life insurance	(38		)	-0.9%	(56		)	-1.6%	(115		)	-0.8%	(109		)	-1.7	%
Tax exempt income, net of interest expense	(176		)	-4.0%	(217		)	-6.2%	(402		)	-2.7%	(415		)	-6.5	%
Other, net	(22		)	-0.5%	(24		)	-0.7%	(52		)	-0.3%	(55		)	-0.8	%
Total income tax expense / (benefit)	$	1,593		36.6%	$	(2,940	)	-84.3%	$	5,689		38.2%	$	(3,508	)	-54.8	%

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Other Real Estate Owned ("OREO") (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended					3 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2012 Real Estate Secured Residential 1 to 4 family	Sep. 30, 2012 Real Estate Secured Residential 1 to 4 family	Sep. 30, 2013 Real Estate Secured Commercial	Sep. 30, 2012 Real Estate Secured Commercial	Jun. 30, 2012 Real Estate Secured Commercial	Dec. 31, 2011 Real Estate Secured Commercial	Sep. 30, 2012 Construction Single family residential - Spec.	Sep. 30, 2012 Construction Single family residential - Spec.	Sep. 30, 2012 Construction Tract	Sep. 30, 2012 Land	Sep. 30, 2012 Land
Other Real Estate Owned ("OREO")
Other Real Estate Owned, balance at the beginning of the period	$ 1,075		$ 917	$ 431			$ 215	$ 215	$ 215	$ 397	$ 423	$ 100	$ 32	$ 179
Additions		1,374	769		607	1,374								162
Disposals	(397)	(1,374)	(973)		(176)	(1,374)				(397)	(397)	(100)		(300)
Writedowns	(63)		(98)	(31)	(31)						(26)		(32)	(41)
Other Real Estate Owned, balance at the end of the period	$ 615		$ 615	$ 400	$ 400		$ 215	$ 215	$ 215

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Fair Value of Assets and Liabilities (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012
Obligations of state and municipal securities
Changes in balance sheet carrying values associated with recurring Level 3 financial instruments
Beginning balance	$ 262	$ 259
Gain / (Loss) Included in OCI		3
Transfers to / (from) Level III	(262)	(262)
Agency mortgage backed securities
Changes in balance sheet carrying values associated with recurring Level 3 financial instruments
Gain / (Loss) Included in OCI		(191)
Purchases, Issuances, and Settlements		4,674
Transfers to / (from) Level III		(4,483)
Non-agency mortgage backed securities
Changes in balance sheet carrying values associated with recurring Level 3 financial instruments
Beginning balance		3,074
Transfers to / (from) Level III		$ (3,074)

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Loans (Details) (USD $)	3 Months Ended		9 Months Ended		33 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 item	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011
Outstanding loan balances
Total gross loans	$ 777,154,000		$ 777,154,000		$ 777,154,000		$ 689,608,000
Net deferred loan fees	(1,454,000)		(1,454,000)		(1,454,000)		(937,000)
Allowance for loan losses	(17,468,000)	(17,987,000)	(17,468,000)	(17,987,000)	(17,468,000)	(17,934,000)	(18,118,000)	(18,149,000)	(19,314,000)
Net loans held for investment	758,232,000		758,232,000		758,232,000		670,553,000
Loans held for sale	5,463,000		5,463,000		5,463,000		22,549,000
Reserve maintained for the exercise of repurchase option by buyer	500,000		500,000		500,000
Losses incurred on settlement					1,400,000
Number of loans settled					9
Concentration of Credit Risk
Loan portfolio collateralized by various forms of real estate	641,300,000		641,300,000		641,300,000		537,400,000
Loans Serviced for Others
Unpaid principal balance of loans serviced for others, exclusive of SBA loans	20,100,000		20,100,000		20,100,000		7,100,000
Unpaid principal balance of SBA loans serviced for others	6,800,000		6,800,000		6,800,000		3,100,000
Recognized gains from the sale of SBA loans	400,000	0	400,000	0
Minimum
Outstanding loan balances
Period for sale of loans categorized as held for sale			30 days
Maximum
Outstanding loan balances
Period for sale of loans categorized as held for sale			60 days
Real Estate Secured
Outstanding loan balances
Total gross loans	603,081,000		603,081,000		603,081,000		493,008,000
Allowance for loan losses	(6,307,000)	(7,987,000)	(6,307,000)	(7,987,000)	(6,307,000)	(6,509,000)	(6,879,000)	(6,897,000)	(9,645,000)
Real Estate Secured | Multi-family residential
Outstanding loan balances
Total gross loans	25,782,000		25,782,000		25,782,000		21,467,000
Real Estate Secured | Residential 1 to 4 family
Outstanding loan balances
Total gross loans	57,016,000		57,016,000		57,016,000		41,444,000
Real Estate Secured | Home equity lines of credit
Outstanding loan balances
Total gross loans	32,388,000		32,388,000		32,388,000		31,863,000
Real Estate Secured | Commercial
Outstanding loan balances
Total gross loans	442,322,000		442,322,000		442,322,000		372,592,000
Real Estate Secured | Farmland
Outstanding loan balances
Total gross loans	45,573,000		45,573,000		45,573,000		25,642,000
Commercial
Outstanding loan balances
Total gross loans	132,107,000		132,107,000		132,107,000		147,064,000
Allowance for loan losses	(6,150,000)	(5,071,000)	(6,150,000)	(5,071,000)	(6,150,000)	(6,618,000)	(6,154,000)	(6,261,000)	(6,549,000)
Commercial | Commercial and industrial
Outstanding loan balances
Total gross loans	103,540,000		103,540,000		103,540,000		125,340,000
Commercial | Agriculture
Outstanding loan balances
Total gross loans	28,523,000		28,523,000		28,523,000		21,663,000
Commercial | Other
Outstanding loan balances
Total gross loans	44,000		44,000		44,000		61,000
Construction
Outstanding loan balances
Total gross loans	13,174,000		13,174,000		13,174,000		19,716,000
Allowance for loan losses	(243,000)	(558,000)	(243,000)	(558,000)	(243,000)	(198,000)	(313,000)	(381,000)	(488,000)
Construction | Single family residential
Outstanding loan balances
Total gross loans	4,619,000		4,619,000		4,619,000		8,074,000
Construction | Single family residential - Spec.
Outstanding loan balances
Total gross loans	1,114,000		1,114,000		1,114,000		535,000
Construction | Multi-family
Outstanding loan balances
Total gross loans	747,000		747,000		747,000		778,000
Construction | Commercial
Outstanding loan balances
Total gross loans	6,694,000		6,694,000		6,694,000		10,329,000
Land
Outstanding loan balances
Total gross loans	25,042,000		25,042,000		25,042,000		24,664,000
Allowance for loan losses	(4,646,000)	(4,263,000)	(4,646,000)	(4,263,000)	(4,646,000)	(4,465,000)	(4,670,000)	(4,483,000)	(2,416,000)
Installment loans to individuals
Outstanding loan balances
Total gross loans	3,495,000		3,495,000		3,495,000		4,895,000
Allowance for loan losses	(87,000)	(72,000)	(87,000)	(72,000)	(87,000)	(108,000)	(64,000)	(91,000)	(175,000)
All other loans (including overdrafts)
Outstanding loan balances
Total gross loans	255,000		255,000		255,000		261,000
Allowance for loan losses	$ (35,000)	$ (36,000)	$ (35,000)	$ (36,000)	$ (35,000)	$ (36,000)	$ (38,000)	$ (36,000)	$ (41,000)

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Share-Based Compensation Plans (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Share-Based Compensation Plans
Number of share-based employee compensation plans	2		2
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense	$ 148	$ 106	$ 391	$ 234
Unrecognized compensation expense	1,537	1,244	1,537	1,244
Stock option
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense	68	39	183	92
Unrecognized compensation expense	762	620	762	620
Weighted-average period over which expense is expected to be recognized			3 years 3 months 18 days
Number of shares
Options outstanding, at the beginning of the period (in shares)			523,129
Granted (in shares)			167,415
Forfeited (in shares)			(65,356)
Expired (in shares)			(4,275)
Exercised (in shares)			(20,339)
Options outstanding, at the end of the period (in shares)	600,574		600,574
Weighted Average Exercise Price
Options outstanding, at the beginning of the period (in dollars per share)			$ 6.11
Granted (in dollars per share)			$ 6.30
Forfeited (in dollars per share)			$ 5.81
Expired (in dollars per share)			$ 4.62
Exercised (in dollars per share)			$ 3.90
Options outstanding, at the end of the period (in dollars per share)	$ 6.28		$ 6.28
Options Available for Grant (in shares)	1,565,670		1,565,670		1,715,616
Aggregate intrinsic value of options exercised
Aggregate intrinsic value of options exercised			42
Aggregate intrinsic value of options vested or expected to vest
Shares	572,450		572,450
Weighted Average Exercise Price (in dollars per share)	$ 6.29		$ 6.29
Weighted Average Remaining Contractual Life			7 years 5 months 16 days
Aggregate Intrinsic Value	720,971		720,971
Aggregate intrinsic value of options exercisable
Shares	304,409		304,409
Weighted Average Exercise Price (in dollars per share)	$ 6.62		$ 6.62
Weighted Average Remaining Contractual Life			5 years 10 months 2 days
Aggregate Intrinsic Value	572,600		572,600
Assumptions used in the calculation of the weighted average fair value of options granted
Expected volatility (as a percent)			55.32%	52.26%
Expected term			6 years	7 years
Dividend yield (as a percent)			0.00%	0.00%
Risk free rate (as a percent)			1.55%	1.11%
Weighted-average grant date fair value (in dollars per share)			$ 3.31	$ 2.87
Restricted stock
Summary of the expenses the Company has recognized related to share-based compensation
Share-based compensation expense	80	67	208	142
Unrecognized compensation expense	$ 775	$ 624	$ 775	$ 624
Weighted-average period over which expense is expected to be recognized			2 years 10 months 24 days
Number of Shares
Balance at the beginning of the period (in shares)			196,850
Granted (in shares)			72,786
Vested (in shares)			(57,508)
Forfeited (in shares)			(8,892)
Balance at the end of the period (in shares)	203,236		203,236
Average Grant Date fair Value
Balance at the beginning of the period (in dollars per share)			$ 4.27
Granted (in dollars per share)			$ 6.26
Vested (in dollars per share)			$ 4.40
Forfeited (in dollars per share)			$ 5.17
Balance at the end of the period (in dollars per share)	$ 4.91		$ 4.91
Restricted stock | Minimum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting period			1 year
Restricted stock | Maximum
Summary of the expenses the Company has recognized related to share-based compensation
Vesting period			5 years

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings Per Share

Schedule of calculation of both basic and diluted earnings per common share

	For the Three Months Ended September 30,
		2013				2012
		Net				Net
(dollar amounts in thousands except per share data)		Income			Shares	Income			Shares
Net income		$	2,761			$	6,428
Dividends and accretion on preferred stock		(181		)		(357		)
Net income  available to common shareholders		$	2,580			$	6,071
Weighted average shares outstanding					25,172,929				25,089,325
Basic earnings per common share		$	0.10			$	0.24
Dilutive effect of share-based compensation awards, common stock warrants, and convertible perpetual preferred stock					1,376,639				1,341,392
Weighted average diluted shares outstanding					26,549,568				26,430,717
Diluted earnings per common share		$	0.10			$	0.23

	For the Nine Months Ended September 30,
	2013				2012
	Net				Net
(dollar amounts in thousands except per share data)	Income			Shares	Income			Shares
Net income	$	9,207			$	9,910
Dividends and accretion on preferred stock	(898		)		(1,113		)
Net applicable to common shareholders	$	8,309			$	8,797
Weighted average shares outstanding				25,138,410				25,074,405
Basic earnings per common share	$	0.33			$	0.35
Dilutive effect of share-based compensation awards, common stock warrant, and convertible perpetual preferred stock				1,401,694				1,280,238
Weighted average diluted shares outstanding				26,540,104				26,354,643
Diluted earnings per common share	$	0.31			$	0.33

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	$ 777,154	$ 689,608
Days Past Due
30-59	61	695
60-89	35	151
90+ and Still Accruing		15
Non-Accruing	12,672	17,309
Accruing TDR	2,883	17
Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	725,931	614,272
Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	5,925	24,206
Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	44,312	51,130
Credit Risk Grades, Doubtful
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	986
Real Estate Secured
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	603,081	493,008
Real Estate Secured | Multi-family residential
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	25,782	21,467
Real Estate Secured | Multi-family residential | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	25,198	20,869
Real Estate Secured | Multi-family residential | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	584	598
Real Estate Secured | Residential 1 to 4 family
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	57,016	41,444
Days Past Due
30-59		199
Non-Accruing	452	835
Accruing TDR	361
Real Estate Secured | Residential 1 to 4 family | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	56,080	40,234
Real Estate Secured | Residential 1 to 4 family | Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	4	6
Real Estate Secured | Residential 1 to 4 family | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	932	1,204
Real Estate Secured | Home equity lines of credit
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	32,388	31,863
Days Past Due
60-89		47
Non-Accruing		58
Real Estate Secured | Home equity lines of credit | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	32,230	30,808
Real Estate Secured | Home equity lines of credit | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	158	1,055
Real Estate Secured | Commercial
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	442,322	372,592
Days Past Due
Non-Accruing	964	928
Accruing TDR	226
Real Estate Secured | Commercial | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	414,892	332,968
Real Estate Secured | Commercial | Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	3,710	14,235
Real Estate Secured | Commercial | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	23,720	25,389
Real Estate Secured | Farmland
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	45,573	25,642
Days Past Due
Non-Accruing		1,077
Real Estate Secured | Farmland | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	44,388	20,492
Real Estate Secured | Farmland | Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	980	3,260
Real Estate Secured | Farmland | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	205	1,890
Commercial
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	132,107	147,064
Commercial | Commercial and industrial
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	103,540	125,340
Days Past Due
30-59	61	446
60-89	35	104
90+ and Still Accruing		15
Non-Accruing	3,224	4,657
Accruing TDR	1,430	17
Commercial | Commercial and industrial | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	93,743	114,126
Commercial | Commercial and industrial | Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	820	2,245
Commercial | Commercial and industrial | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	7,991	8,969
Commercial | Commercial and industrial | Credit Risk Grades, Doubtful
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	986
Commercial | Agriculture
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	28,523	21,663
Days Past Due
Non-Accruing	811	907
Commercial | Agriculture | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	26,947	19,771
Commercial | Agriculture | Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	280	106
Commercial | Agriculture | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	1,296	1,786
Commercial | Other
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	44	61
Commercial | Other | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	44	61
Construction
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	13,174	19,716
Construction | Single family residential
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	4,619	8,074
Construction | Single family residential | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	4,619	8,074
Construction | Single family residential - Spec.
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	1,114	535
Construction | Single family residential - Spec. | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	1,114	535
Construction | Multi-family
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	747	778
Construction | Multi-family | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	747	778
Construction | Commercial
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	6,694	10,329
Days Past Due
Non-Accruing		1,380
Construction | Commercial | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	6,694	8,469
Construction | Commercial | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans		1,860
Land
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	25,042	24,664
Days Past Due
30-59		50
Non-Accruing	7,194	7,182
Accruing TDR	866
Land | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	15,583	12,461
Land | Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	131	4,124
Land | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	9,328	8,079
Installment loans to individuals
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	3,495	4,895
Days Past Due
Non-Accruing	27	285
Installment loans to individuals | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	3,397	4,365
Installment loans to individuals | Credit Risk Grades, Special Mention
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans		230
Installment loans to individuals | Credit Risk Grades, Substandard
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	98	300
All other loans (including overdrafts)
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	255	261
All other loans (including overdrafts) | Credit Risk Grades, Pass
Loan portfolio by internal risk grading system as well as certain other information concerning the credit quality
Total Gross loans	$ 255	$ 261

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Allowance for Loan Losses ("ALLL") (Tables)

9 Months Ended

Sep. 30, 2013

Allowance for Loan Losses ("ALLL")

Summary of activity in the allowance attributed to various segments in the loan portfolio

	Real Estate															All Other
(dollar amounts in thousands)	Secured			Commercial			Construction			Land			Installment			Loans			Total
Balance, June 30, 2013	$	6,509		$	6,618		$	198		$	4,465		$	108		$	36		$	17,934
Charge-offs	(41		)	(736		)	-			-			(207		)	-			(984		)
Recoveries	19			475			1			11			12			-			518
Provisions for loan losses	(180		)	(207		)	44			170			174			(1		)	-
Balance, September 30, 2013	$	6,307		$	6,150		$	243		$	4,646		$	87		$	35		$	17,468
Balance, June 30, 2012	$	6,897		$	6,261		$	381		$	4,483		$	91		$	36		$	18,149
Charge-offs	(106		)	(1,511		)	(92		)	-			(9		)	-			(1,718		)
Recoveries	12			246			1			5			5			1			270
Provisions for loan losses	1,184			75			268			(225		)	(15		)	(1		)	1,286
Balance, September 30, 2012	$	7,987		$	5,071		$	558		$	4,263		$	72		$	36		$	17,987

	Real Estate															All Other
(dollar amounts in thousands)	Secured			Commercial			Construction			Land			Installment			Loans			Total
Balance, December 31, 2012	$	6,879		$	6,154		$	313		$	4,670		$	64		$	38		$	18,118
Charge-offs	(131		)	(1,137		)	(169		)	(34		)	(380		)	-			(1,851		)
Recoveries	143			947			2			45			64			-			1,201
Provisions for loan losses	(584		)	186			97			(35		)	339			(3		)	-
Balance, September 30, 2013	$	6,307		$	6,150		$	243		$	4,646		$	87		$	35		$	17,468
Balance, December 31, 2011	$	9,645		$	6,549		$	488		$	2,416		$	175		$	41		$	19,314
Charge-offs	(2,471		)	(4,272		)	(668		)	(2,168		)	(29		)	(137		)	(9,745		)
Recoveries	74			623			1			18			18			3			737
Provisions for loan losses (1)	739			2,171			737			3,997			(92		)	129			7,681
Balance, September 30, 2012	$	7,987		$	5,071		$	558		$	4,263		$	72		$	36		$	17,987

(1) The provision for loan losses includes the transfer of $3.9 million from C&I to Land related to the re-characterization of a loan as part of a TDR in the second quarter of 2012, as the restructured loan became collateral dependent on a parcel of land.

Summary of comparative metrics about the allowance attributed to various segments in the loan portfolio

	September 30, 2013
	Real Estate										All Other
(dollar amounts in thousands)	Secured		Commercial		Construction		Land		Installment		Loans		Total
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	108	$	2,853	$	-	$	3,854	$	10	$	-	$	6,825
General portfolio allocation	$	6,199	$	3,297	$	243	$	792	$	77	$	35	$	10,643
Loans individually evaluated for impairment	$	2,003	$	5,465	$	-	$	8,060	$	27	$	-	$	15,555
Loans collectively evaluated for impairment	$	601,078	$	126,642	$	13,174	$	16,982	$	3,468	$	255	$	761,599
General reserves to total loans collectively evaluated for impairment	1.03%		2.60%		1.84%		4.66%		2.22%		13.73%		1.40%
Total gross loans	$	603,081	$	132,107	$	13,174	$	25,042	$	3,495	$	255	$	777,154
Total allowance to gross loans	1.05%		4.66%		1.84%		18.55%		2.49%		13.73%		2.25%

	December 31, 2012
	Real Estate										All Other
(dollar amounts in thousands)	Secured		Commercial		Construction		Land		Installment		Loans		Total
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	25	$	2,185	$	-	$	3,829	$	22	$	-	$	6,061
General portfolio allocation	$	6,854	$	3,969	$	313	$	841	$	42	$	38	$	12,057
Loans individually evaluated for impairment	$	2,898	$	5,596	$	1,380	$	7,182	$	285	$	-	$	17,341
Loans collectively evaluated for impairment	$	490,110	$	141,468	$	18,336	$	17,482	$	4,610	$	261	$	672,267
General reserves to total loans collectively evaluated for impairment	1.40%		2.81%		1.71%		4.81%		0.91%		14.56%		1.79%
Total gross loans	$	493,008	$	147,064	$	19,716	$	24,664	$	4,895	$	261	$	689,608
Total allowance to gross loans	1.40%		4.18%		1.59%		18.93%		1.31%		14.56%		2.63%

XML

Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net income	$ 9,207	$ 9,910
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,050	1,007
Provision for loan losses		7,681
Amortization of premiums / discounts on investment securities, net	3,110	2,488
Amortization of intangible assets	300	258
Share-based compensation expense	391	234
Gain on sale of available for sale securities	(3,935)	(1,696)
Originations of loans held for sale	(120,520)	(132,905)
Proceeds from sale of loans held for sale	137,606	142,262
Net increase in bank owned life insurance	(361)	(388)
Decrease / (increase) in deferred tax asset	5,354	(1,349)
Deferred tax assets valuation allowance adjustment		(5,605)
Decrease in other assets	770	478
Decrease in other liabilities	(334)	(2,809)
Net Cash Provided By Operating Activities	32,638	19,566
Cash flows from investing activities:
Purchase of securities, available for sale	(170,063)	(150,783)
Sale of securities, available for sale	144,027	95,786
Maturities and calls of securities, available for sale	544	3
Proceeds from principal paydowns of securities, available for sale	35,200	35,278
(Purchase) / redemption of Federal Home Loan Bank stock	(164)	110
Increase in loans, net	(90,254)	(42,710)
Allowance for loan loss recoveries	1,201	737
Purchase of property, premises and equipment, net	(9,223)	(10,761)
Proceeds from sale of property, premises and equipment		19
Proceeds from sale of foreclosed collateral	1,374	1,335
Net Cash Used In Investing Activities	(87,358)	(70,986)
Cash flows from financing activities:
Increase in deposits, net	86,082	68,824
Proceeds from Federal Home Loan Bank borrowing	183,500	166,500
Repayments of Federal Home Loan Bank borrowing	(192,500)	(172,000)
Proceeds from exercise of stock options	85	131
Preferred stock dividends paid	(707)	(2,751)
Retirement of Series A preferred stock and related warrants	(22,575)
Net Cash Provided By Financing Activities	53,885	60,704
Net (decrease) / increase in cash and cash equivalents	(835)	9,284
Cash and cash equivalents, beginning of period	34,116	34,892
Cash and cash equivalents, end of period	33,281	44,176
Cash Flow Information
Interest paid	2,791	3,176
Income taxes paid	2,100	2,735
Non-Cash Flow Information
Change in unrealized gain on available for sale securities	(11,620)	5,545
Loans transferred to foreclosed collateral	1,374	769
Accretion of preferred stock discount	$ 189	$ 281

XML

Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2013

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

Note 2.  Fair Value of Assets and Liabilities

Recurring Basis

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At
September 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Obligations of U.S. government agencies	$	-	$	7,728	$	-	$	7,728
Mortgage backed securities:
Agency	-		175,432		-		175,432
Non-agency	-		13,390		-		13,390
Obligations of state and municipal securities	-		44,060		-		44,060
Asset backed securities	-		26,569		-		26,569
Total assets measured on a recurring basis	$	-	$	267,179	$	-	$	267,179
December 31, 2012
Assets
Obligations of U.S. government agencies	$	-	$	7,567	$	-	$	7,567
Mortgage backed securities:
Agency	-		145,768		-		145,768
Non-agency	-		44,795		-		44,795
Obligations of state and municipal securities	-		68,968		-		68,968
Asset backed securities			20,584		-		20,584
Total assets measured on a recurring basis	$	-	$	287,682	$	-	$	287,682

In determining the fair value of Level 3 instruments on a recurring basis the Company takes into consideration several variables, including but not limited to:  expectations about interest rate movements, prepayment speeds of the underlying mortgages for mortgage backed securities, expected default rates, and credit spreads over the risk free rate.  Of these variables, default rates and credit spreads are perhaps the least observable and most impactful on the long-term value of a Level 3 security.  Since a bond’s value is represented by its yield which reflects the risk-free yield curve plus compensation for various risks incurred in buying the bond, changes to the risk assumptions including probability of default and timing of future cash flows can materially impact the market value.

As of September 30, 2013 and December 31, 2012, there were no Level 3 instruments. There were also no changes in the balance sheet carrying value associated with recurring Level 3 financial instruments for the three and nine months ended September 30, 2013.  The following table provides a summary of the 2012 changes in balance sheet carrying values associated with recurring Level 3 financial instruments:

						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the three months ended
September 30, 2012
Obligations of state and municipal securities	$	262	$	-		$	-	$	-	$	(262	)	$	-
						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the nine months ended
September 30, 2012
Obligations of state and municipal securities	$	259	$	3		$	-	$	-	$	(262	)	$	-
Agency mortgage baked securities	$	-	$	(191	)	$	4,674	$	-	$	(4,483	)	$	-
Non-agency mortgage backed securities	$	3,074	$	-		$	-	$	-	$	(3,074	)	$	-

(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, which are classified as obligations of state and municipal 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.

Non-recurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost.   Certain impaired loans measured at fair value at December 31, 2012 are no longer recorded at fair value due to borrower payments reducing the carrying value of these loans to less than fair value and due to other impaired loans now being evaluated under the discounted cash flow method versus the collateral method.  The discounted cash flow method as prescribed by ASC 310 Receivables,  is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate, which is not a market rate. The discounted cash flow approach was determined to be the most appropriate impairment method to use for these impaired loans based on their significant payment history and the global cash flow analysis performed on each borrower.

The following table provides a summary of assets the Company measures at fair value on a non-recurring basis:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant				Year to
	Active Markets for		Observable		Unobservable				Date
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At		Total Losses/
September 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value		(Recoveries)
Assets
Impaired loans
Residential 1 to 4 family	$	-	$	-	$	348	$	348	$	-
Commercial real estate	-		-		521		521		88
Commercial and industrial	-		-		76		76		959
Land	-		-		3,023		3,023		(8		)
Total assets measured on a non-recurring basis	$	-	$	-	$	3,968	$	3,968	$	1,039
December 31, 2012
Assets
Impaired loans
Commercial and industrial	$	-	$	820	$	213	$	1,033	$	1,941
Agriculture	-		72		-		72		28
Construction	-		1,656		-		1,656		460
Land	-		-		2,048		2,048		3,802
Total assets measured on a non-recurring basis	$	-	$	2,548	$	2,261	$	4,809	$	6,231

There were no transfers in or out of Level 1 and Level 2 for assets reported at fair value on either a recurring and non-recurring basis during the three and nine months ended September 30, 2013 and 2012.

Fair Value of Financial Instruments

The following table provides a summary of the estimated fair value of financial instruments:

			Fair Value Measurements Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Carrying		Identical Assets		Inputs		Inputs
September 30, 2013	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Cash and cash equivalents	$	33,281	$	33,281	$	-	$	-	$	33,281
Investment securities available for sale	267,179		-		267,179		-		267,179
Federal Home Loan Bank stock	4,739		-		-		-		N/A
Loans receivable, net of deferred fees and costs	775,700		-		-		779,769		779,769
Loans held for sale	5,463		-		5,463		-		5,463
Accrued interest receivable	3,629		-		1,194		2,435		3,629
Liabilities
Non-interest bearing deposits	285,428		285,428		-		-		285,428
Interest bearing deposits	671,524		-		673,207		-		673,207
Federal Home Loan Bank advances	57,500		-		55,803		-		55,803
Junior subordinated debentures	8,248		-		-		7,062		7,062
Accrued interest payable	177		-		177		-		177
December 31, 2012
Assets
Cash and cash equivalents	$	34,116	$	34,116	$	-	$	-	$	34,116
Investments and mortgage-backed securities	287,682		-		287,682		-		287,682
Federal Home Loan Bank stock	4,575		-		-		-		N/A
Loans receivable, net of deferred fees and costs	688,671		-		2,548		701,144		703,692
Loans held for sale	22,549		-		22,549		-		22,549
Accrued interest receivable	3,915		-		1,497		2,418		3,915
Liabilities
Non interest-bearing deposits	273,242		273,242		-		-		273,242
Interest-bearing deposits	597,628		-		598,664		-		598,664
Federal Home Loan Bank advances	66,500		-		67,059		-		67,059
Junior subordinated debentures	8,248		-		-		7,078		7,078
Accrued interest payable	192		-		192		-		192

Information on off-balance sheet instruments follows:

	September 30, 2013				December 31, 2012
	Notional		Cost to Cede		Notional		Cost to Cede
(dollar amounts in thousands)	Amount		or Assume		Amount		or Assume
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	170,047	$	1,700	$	178,432	$	1,784

XML

Allowance for Loan Losses ("ALLL")

9 Months Ended

Sep. 30, 2013

Allowance for Loan Losses ("ALLL")

Allowance for Loan Losses ("ALLL")

Note 5.  Allowance for Loan Losses (“ALLL”)

The following tables summarize the activity in the allowance attributed to various segments in the loan portfolio:

	Real Estate															All Other
(dollar amounts in thousands)	Secured			Commercial			Construction			Land			Installment			Loans			Total
Balance, June 30, 2013	$	6,509		$	6,618		$	198		$	4,465		$	108		$	36		$	17,934
Charge-offs	(41		)	(736		)	-			-			(207		)	-			(984		)
Recoveries	19			475			1			11			12			-			518
Provisions for loan losses	(180		)	(207		)	44			170			174			(1		)	-
Balance, September 30, 2013	$	6,307		$	6,150		$	243		$	4,646		$	87		$	35		$	17,468
Balance, June 30, 2012	$	6,897		$	6,261		$	381		$	4,483		$	91		$	36		$	18,149
Charge-offs	(106		)	(1,511		)	(92		)	-			(9		)	-			(1,718		)
Recoveries	12			246			1			5			5			1			270
Provisions for loan losses	1,184			75			268			(225		)	(15		)	(1		)	1,286
Balance, September 30, 2012	$	7,987		$	5,071		$	558		$	4,263		$	72		$	36		$	17,987

	Real Estate															All Other
(dollar amounts in thousands)	Secured			Commercial			Construction			Land			Installment			Loans			Total
Balance, December 31, 2012	$	6,879		$	6,154		$	313		$	4,670		$	64		$	38		$	18,118
Charge-offs	(131		)	(1,137		)	(169		)	(34		)	(380		)	-			(1,851		)
Recoveries	143			947			2			45			64			-			1,201
Provisions for loan losses	(584		)	186			97			(35		)	339			(3		)	-
Balance, September 30, 2013	$	6,307		$	6,150		$	243		$	4,646		$	87		$	35		$	17,468
Balance, December 31, 2011	$	9,645		$	6,549		$	488		$	2,416		$	175		$	41		$	19,314
Charge-offs	(2,471		)	(4,272		)	(668		)	(2,168		)	(29		)	(137		)	(9,745		)
Recoveries	74			623			1			18			18			3			737
Provisions for loan losses (1)	739			2,171			737			3,997			(92		)	129			7,681
Balance, September 30, 2012	$	7,987		$	5,071		$	558		$	4,263		$	72		$	36		$	17,987

(1) The provision for loan losses includes the transfer of $3.9 million from C&I to Land related to the re-characterization of a loan as part of a TDR in the second quarter of 2012, as the restructured loan became collateral dependent on a parcel of land.

The following tables summarize comparative metrics about the allowance attributed to various segments of the loan portfolio:

	September 30, 2013
	Real Estate										All Other
(dollar amounts in thousands)	Secured		Commercial		Construction		Land		Installment		Loans		Total
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	108	$	2,853	$	-	$	3,854	$	10	$	-	$	6,825
General portfolio allocation	$	6,199	$	3,297	$	243	$	792	$	77	$	35	$	10,643
Loans individually evaluated for impairment	$	2,003	$	5,465	$	-	$	8,060	$	27	$	-	$	15,555
Loans collectively evaluated for impairment	$	601,078	$	126,642	$	13,174	$	16,982	$	3,468	$	255	$	761,599
General reserves to total loans collectively evaluated for impairment	1.03%		2.60%		1.84%		4.66%		2.22%		13.73%		1.40%
Total gross loans	$	603,081	$	132,107	$	13,174	$	25,042	$	3,495	$	255	$	777,154
Total allowance to gross loans	1.05%		4.66%		1.84%		18.55%		2.49%		13.73%		2.25%

	December 31, 2012
	Real Estate										All Other
(dollar amounts in thousands)	Secured		Commercial		Construction		Land		Installment		Loans		Total
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	25	$	2,185	$	-	$	3,829	$	22	$	-	$	6,061
General portfolio allocation	$	6,854	$	3,969	$	313	$	841	$	42	$	38	$	12,057
Loans individually evaluated for impairment	$	2,898	$	5,596	$	1,380	$	7,182	$	285	$	-	$	17,341
Loans collectively evaluated for impairment	$	490,110	$	141,468	$	18,336	$	17,482	$	4,610	$	261	$	672,267
General reserves to total loans collectively evaluated for impairment	1.40%		2.81%		1.71%		4.81%		0.91%		14.56%		1.79%
Total gross loans	$	493,008	$	147,064	$	19,716	$	24,664	$	4,895	$	261	$	689,608
Total allowance to gross loans	1.40%		4.18%		1.59%		18.93%		1.31%		14.56%		2.63%

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Investment Securities

9 Months Ended

Sep. 30, 2013

Investment Securities

Investment Securities

Note 3.  Investment Securities

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are reported as available for sale:

(dollar amounts in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized
September 30, 2013	Cost		Gains		Losses			Fair Value
Obligations of U.S. government agencies	$	7,738	$	37	$	(47	)	$	7,728
Mortgage backed securities
U.S. government sponsored entities and agencies	178,856		446		(3,870		)	175,432
Non-agency	13,266		168		(44		)	13,390
State and municipal securities	45,333		385		(1,658		)	44,060
Asset backed securities	26,936		-		(367		)	26,569
Total	$	272,129	$	1,036	$	(5,986	)	$	267,179
December 31, 2012
Obligations of U.S. government agencies	$	7,307	$	262	$	(2	)	$	7,567
Mortgage backed securities
U.S. government sponsored entities and agencies	145,430		1,136		(798		)	145,768
Non-agency	43,402		1,578		(185		)	44,795
State and municipal securities	64,824		4,240		(96		)	68,968
Asset backed securities	20,049		568		(33		)	20,584
Total	$	281,012	$	7,784	$	(1,114	)	$	287,682

Other than Temporary Impairment (“OTTI”)

At the end of the first quarter of 2013, the Company sold the two private labeled mortgage backed securities in which OTTI losses had been recognized, as part of its repositioning of the longer duration portion of the investment portfolio, thereby eliminating all securities in the portfolio for which OTTI losses had been incurred. These securities had an aggregate recorded fair value of $0.7 million ($1.0 million historical cost) at December 31, 2012. The following tables provide information related to these two securities:

	For the Three Months Ended September 30, 2013						For the Three Months Ended September 30, 2012
			OTTI Related						OTTI Related
	OTTI Related		to All Other		Total		OTTI Related		to All Other			Total
(dollars in thousands)	to Credit Loss		Factors		OTTI		to Credit Loss		Factors			OTTI
Balance, beginning of the period	$	-	$	-	$	-	$	109	$	283		$	392
Change in value attributable to other factors	-		-		-		-		(140		)	(140		)
Balance, end of the period	$	-	$	-	$	-	$	109	$	143		$	252

	For the Nine Months Ended September 30, 2013									For the Nine Months Ended September 30, 2012
				OTTI Related								OTTI Related
	OTTI Related			to All Other			Total			OTTI Related		to All Other			Total
(dollars in thousands)	to Credit Loss			Factors			OTTI			to Credit Loss		Factors			OTTI
Balance, beginning of the period	$	109		$	170		$	279		$	109	$	361		$	470
Less: losses related to OTTI securities sold	(109		)	(170		)	(279		)	-		-			-
Change in value attributable to other factors	-			-			-			-		(218		)	(218		)
Balance, end of the period	$	-		$	-		$	-		$	109	$	143		$	252

The following table provides a summary of investment securities in an unrealized loss position:

	Securities In A Loss Position For
(dollar amounts in thousands)	Less Than Twelve Months					Twelve Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2013	Value		Loss			Value		Loss			Value		Loss
Obligations of U.S. government agencies	$	3,100	$	(46	)	$	41	$	(1	)	$	3,141	$	(47	)
Mortgage backed securities
U.S. government sponsored entities and agencies	111,209		(3,566		)	5,749		(304		)	116,958		(3,870		)
Non-agency	1,218		(44		)	-		-			1,218		(44		)
State and municipal securities	25,638		(1,658		)	-		-			25,638		(1,658		)
Asset backed securities	17,700		(367		)	-		-			17,700		(367		)
Total	$	158,865	$	(5,681	)	$	5,790	$	(305	)	$	164,655	$	(5,986	)
December 31, 2012
Obligations of U.S. government agencies	$	-	$	-		$	44	$	(2	)	$	44	$	(2	)
Mortgage backed securities
U.S. government sponsored entities and agencies	83,092		(798		)	-		-			83,092		(798		)
Non-agency	7,204		(15		)	719		(170		)	7,923		(185		)
State and municipal securities	9,813		(96		)	-		-			9,813		(96		)
Asset backed securities	9,828		(33		)	-		-			9,828		(33		)
Total	$	109,937	$	(942	)	$	763	$	(172	)	$	110,700	$	(1,114	)

As of September 30, 2013, the Company believes that unrealized losses on its investment securities are not attributable to credit quality, but rather fluctuations in market prices for these investments.  In the case of the agency mortgage related securities, they have contractual cash flows guaranteed by agencies of the U.S. Government.  While the Company’s investment security holdings have contractual maturity dates that range from 1 to 40 years, they have a much shorter effective duration dependent on the instrument’s priority in the overall cash flow structure and the characteristics of the loans underlying the investment security. Management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery.  As of September 30, 2013, the Company does not believe unrealized losses related to any of its securities are other than temporary.

The proceeds from the sales and calls of securities and the associated gains and losses are listed below:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(dollar amounts in thousands)	2013			2012			2013			2012
Proceeds	$	38,930		$	41,899		$	144,571		$	95,789
Gross gains	970			448			5,349			2,160
Gross losses	(626		)	(119		)	(1,414		)	(464		)

The income tax expense related to these net realized gains was $0.1 million, for both the three months ended September 30, 2013 and 2012 and $1.6 million and $0.7 million for the nine months ended September 30, 2013 and 2012, respectively.

The amortized cost and fair value maturities of available for sale investment securities at September 30, 2013 are shown below. The table reflects the expected lives of mortgage backed securities, based on the Company’s historical prepayment experience, because borrowers have the right to prepay obligations without prepayment penalties. Contractual maturities are reflected for all other security types. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollar amounts in thousands)
September 30, 2013	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
Obligations of U.S. government agencies	$	100	$	3,481	$	1,729	$	2,418	$	7,728
Mortgage backed securities
U.S. government sponsored entities and agencies	24,910		75,551		29,616		45,355		175,432
Non-agency	5,426		6,443		1,521		-		13,390
State and municipal securities	40		6,516		34,300		3,204		44,060
Asset backed securities	-		-		14,569		12,000		26,569
Total available for sale securities	$	30,476	$	91,991	$	81,735	$	62,977	$	267,179
Amortized cost	$	30,658	$	93,028	$	83,805	$	64,638	$	272,129
Weighted average yield	2.35%		2.26%		2.54%		2.67%		2.45%

Securities having an amortized cost and a fair value of $42.8 million and $41.7 million, respectively at September 30, 2013, and $8.7 million and $9.0 million, respectively at December 31, 2012 were pledged to secure public deposits. As of September 30, 2013 and December 31, 2012, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of total securities.

The following table summarizes earnings on both taxable and tax-exempt investment securities:

	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
(dollar amounts in thousands)	2013		2012		2013		2012
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	33	$	25	$	86	$	79
Mortgage backed securities	847		973		2,470		2,971
State and municipal securities	-		5		5		183
Corporate debt securities	-		181		-		504
Asset backed securities	113		72		350		146
Non-taxable earnings on investment securities
State and municipal securities	354		527		1,082		1,428
Total	$	1,347	$	1,783	$	3,993	$	5,311

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Loans (Details 2) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Investment in impaired loans
Recorded Investment	$ 15,576,000		$ 15,576,000		$ 17,312,000
Unpaid Principal Balance	21,098,000		21,098,000		24,271,000
Impaired Loans With Specific Allowance	11,355,000		11,355,000		10,177,000
Impaired Loans Without Specific Allowance	4,221,000		4,221,000		7,135,000
Specific Allowance for Impaired Loans	6,825,000		6,825,000		6,061,000
Average Recorded Investment	14,750,000	19,609,000	15,093,000	17,939,000
Interest Income Recognized	12,000		15,000	4,000
Increase in interest income if interest on non-accruing loans had been recognized at original interest rates stipulated in the respective loan agreements	200,000	300,000	600,000	1,000,000
Real Estate Secured | Residential 1 to 4 family
Investment in impaired loans
Recorded Investment	812,000		812,000		831,000
Unpaid Principal Balance	965,000		965,000		1,035,000
Impaired Loans With Specific Allowance	109,000		109,000		246,000
Impaired Loans Without Specific Allowance	703,000		703,000		585,000
Specific Allowance for Impaired Loans	17,000		17,000		18,000
Average Recorded Investment	783,000	801,000	750,000	756,000
Real Estate Secured | Home equity lines of credit
Investment in impaired loans
Recorded Investment					58,000
Unpaid Principal Balance					152,000
Impaired Loans With Specific Allowance					58,000
Specific Allowance for Impaired Loans					7,000
Average Recorded Investment	28,000	384,000	43,000	378,000
Real Estate Secured | Commercial
Investment in impaired loans
Recorded Investment	1,194,000		1,194,000		933,000
Unpaid Principal Balance	1,925,000		1,925,000		1,799,000
Impaired Loans With Specific Allowance	642,000		642,000		42,000
Impaired Loans Without Specific Allowance	552,000		552,000		891,000
Specific Allowance for Impaired Loans	91,000		91,000
Average Recorded Investment	745,000	3,492,000	781,000	3,757,000
Real Estate Secured | Farmland
Investment in impaired loans
Recorded Investment					1,077,000
Unpaid Principal Balance					1,089,000
Impaired Loans Without Specific Allowance					1,077,000
Average Recorded Investment		363,000	269,000	272,000
Commercial | Commercial and industrial
Investment in impaired loans
Recorded Investment	4,671,000		4,671,000		4,337,000
Unpaid Principal Balance	5,196,000		5,196,000		4,813,000
Impaired Loans With Specific Allowance	3,463,000		3,463,000		3,410,000
Impaired Loans Without Specific Allowance	1,208,000		1,208,000		927,000
Specific Allowance for Impaired Loans	2,826,000		2,826,000		2,172,000
Average Recorded Investment	4,342,000	4,129,000	4,223,000	3,644,000
Interest Income Recognized	8,000		11,000	4,000
Commercial | Agriculture
Investment in impaired loans
Recorded Investment	810,000		810,000		907,000
Unpaid Principal Balance	848,000		848,000		1,235,000
Impaired Loans With Specific Allowance	65,000		65,000		30,000
Impaired Loans Without Specific Allowance	745,000		745,000		877,000
Specific Allowance for Impaired Loans	27,000		27,000		13,000
Average Recorded Investment	1,064,000	1,905,000	966,000	2,010,000
Construction | Single family residential
Investment in impaired loans
Average Recorded Investment				234,000
Construction | Commercial
Investment in impaired loans
Recorded Investment					1,380,000
Unpaid Principal Balance					2,508,000
Impaired Loans Without Specific Allowance					1,380,000
Average Recorded Investment		1,257,000	345,000	943,000
Land
Investment in impaired loans
Recorded Investment	8,063,000		8,063,000		7,504,000
Unpaid Principal Balance	12,093,000		12,093,000		11,307,000
Impaired Loans With Specific Allowance	7,050,000		7,050,000		6,106,000
Impaired Loans Without Specific Allowance	1,013,000		1,013,000		1,398,000
Specific Allowance for Impaired Loans	3,854,000		3,854,000		3,829,000
Average Recorded Investment	7,760,000	7,189,000	7,605,000	5,863,000
Interest Income Recognized	4,000		4,000
Installment loans to individuals
Investment in impaired loans
Recorded Investment	26,000		26,000		285,000
Unpaid Principal Balance	71,000		71,000		333,000
Impaired Loans With Specific Allowance	26,000		26,000		285,000
Specific Allowance for Impaired Loans	10,000		10,000		22,000
Average Recorded Investment	$ 28,000	$ 89,000	$ 111,000	$ 82,000

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Deposits (Tables)

9 Months Ended

Sep. 30, 2013

Deposits.

Schedule of interest bearing and non-interest bearing deposits

	September 30,		December 31,
(dollar amounts in thousands)	2013		2012
Non-interest bearing deposits	$	285,428	$	273,242
Interest bearing deposits:
NOW accounts	83,961		76,728
Money market deposit accounts	324,990		293,525
Other savings deposits	43,089		41,021
Time certificates of $100 or more	145,315		97,105
Other time deposits	74,169		89,249
Total deposits	$	956,952	$	870,870

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Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013 item	Dec. 31, 2012
Description of Business
Number of business segments	1
Investment Holdings
Total assets	$ 1,153,843	$ 1,097,532
All Non-United States countries
Investment Holdings
Total assets	0
Revenue	$ 0

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Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Amortized Cost	$ 272,129	$ 281,012
Gross Unrealized Gains	1,036	7,784
Gross Unrealized Losses	(5,986)	(1,114)
Fair Value	267,179	287,682
Obligations of U.S. government agencies
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Amortized Cost	7,738	7,307
Gross Unrealized Gains	37	262
Gross Unrealized Losses	(47)	(2)
Fair Value	7,728	7,567
Mortgage-backed securities - U.S. government sponsored entities and agencies
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Amortized Cost	178,856	145,430
Gross Unrealized Gains	446	1,136
Gross Unrealized Losses	(3,870)	(798)
Fair Value	175,432	145,768
Mortgage-backed securities - Non-agency
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Amortized Cost	13,266	43,402
Gross Unrealized Gains	168	1,578
Gross Unrealized Losses	(44)	(185)
Fair Value	13,390	44,795
State and municipal securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Amortized Cost	45,333	64,824
Gross Unrealized Gains	385	4,240
Gross Unrealized Losses	(1,658)	(96)
Fair Value	44,060	68,968
Asset backed securities
Reconciliation of amortized cost to fair value of investment securities reported as available for sale
Amortized Cost	26,936	20,049
Gross Unrealized Gains		568
Gross Unrealized Losses	(367)	(33)
Fair Value	$ 26,569	$ 20,584

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Preferred Stock (Details) (USD $) In Millions, except Share data, unless otherwise specified	0 Months Ended	9 Months Ended			9 Months Ended	0 Months Ended		9 Months Ended		0 Months Ended	9 Months Ended	0 Months Ended
	Mar. 12, 2010	Sep. 30, 2013 item	Dec. 31, 2012	Jul. 17, 2013 Bank	Sep. 30, 2013 Minimum item	Jul. 17, 2013 Series A senior preferred stock	Mar. 20, 2009 Series A senior preferred stock	Sep. 30, 2013 Series A senior preferred stock	Jul. 31, 2012 Series A senior preferred stock	Mar. 12, 2010 Series C preferred stock	Sep. 30, 2013 Series C preferred stock	Jul. 29, 2013 Common Stock
Preferred Stock
Preferred stock, shares authorized		5,000,000	5,000,000
Number of series of preferred stock					1
Issuance of stock (in shares)							21,000			1,189,538
Repurchase price paid for warrant issued to U.S. Treasury under CPP							$ 21.0					$ 1.6
Liquidation preference per share (in dollars per share)							$ 1,000
Coupon rate for five years (as a percent)								5.00%
Coupon rate thereafter (as a percent)								9.00%
Percentage of liquidation preference amount at which the stock may be redeemed								100.00%
Period of redemption from the date of issue								3 years
Warrants issued as a percentage of preferred equity issuance amount								15.00%
Value of warrants issued to U.S. Treasury to purchase shares of common stock								3.2
Numbers of shares to be exchanged from warrants subject to Company's offer to repurchase (in shares)							611,650					611,650
Exercise price of warrants outstanding (in dollars per share)								$ 5.15
Expiration period of warrants issued								10 years
Amount of dividend approved for repurchase of shares				25.0
Repurchase of shares									21,000
Amount of shares repurchased, including accrued but unpaid dividends						21.2
Gross proceeds from private placement	60.0									3.6
Preferred stock conversion ratio											1
Stated dividend rate (as a percent)											0.00%
Conversion price (in dollars per share)											$ 3.25
Value of contingent beneficial conversion feature to be recognized upon conversion											$ 0.2
Number of investors having board observation rights		2
Number of investors having board nomination rights		1

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Deferred Tax Assets and Income Taxes (Details) (USD $)	3 Months Ended			6 Months Ended	9 Months Ended		12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2011	Jun. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Dec. 31, 2010	Dec. 31, 2009
Deferred tax assets
Provision for loan losses	$ 8,669,000				$ 8,669,000		$ 14,348,000
Forgone interest on non-accrual loans	855,000				855,000		884,000
Fixed assets	459,000				459,000		405,000
Accruals	929,000				929,000		792,000
Alternative minimum tax credit	2,855,000				2,855,000		2,153,000
Deferred income	2,129,000				2,129,000		1,838,000
Deferred compensation	1,602,000				1,602,000		1,477,000
Net operating loss carryforward	6,000				6,000		907,000
Investment securities valuation	2,037,000				2,037,000
Other than temporary impairment							45,000
Realized built-in loss subject to 382	2,433,000				2,433,000		3,234,000
Charitable contribution							61,000
State deferred tax	781,000				781,000		59,000
Total deferred tax assets	22,755,000				22,755,000		26,203,000
Deferred tax liabilities
Fair value adjustment for purchased assets	362,000				362,000		455,000
Investment securities valuation							2,745,000
Deferred costs, prepaids and FHLB advances	1,032,000				1,032,000		1,070,000
Total deferred tax liabilities	1,394,000				1,394,000		4,270,000
Net deferred tax assets	21,361,000				21,361,000		21,933,000
Cumulative loss position period								3 years	3 years
Change in deferred tax asset valuation allowance		(4,100,000)	(1,500,000)	(1,500,000)			(5,600,000)	7,100,000
Determination of the valuation allowance, cumulative pre-tax losses period								3 years
Determination of the valuation allowance, expected deferred tax assets realization period								5 years
Current:
Federal	495,000	936,000			306,000	2,489,000
State	(249,000)	485,000			29,000	957,000
Total current (benefit) / expense	246,000	1,421,000			335,000	3,446,000
Deferred:
Federal	630,000	(141,000)			3,777,000	(1,061,000)
State	717,000	(115,000)			1,577,000	(288,000)
Total deferred expense / (benefit)	1,347,000	(256,000)			5,354,000	(1,349,000)
Deferred Tax Valuation Allowance:
Federal		(2,552,000)				(3,662,000)
State		(1,553,000)				(1,943,000)
Total deferred tax valuation allowance change		(4,105,000)				(5,605,000)
Total income tax expense / (benefit)	1,593,000	(2,940,000)			5,689,000	(3,508,000)
Reconciliation of the statutory federal income tax expense / (benefit) to the Company's effective income tax expense / (benefit)
Tax expense at federal statutory tax rate	1,525,000	1,221,000			5,214,000	2,241,000
State income taxes, net of federal income tax benefit	304,000	241,000			1,044,000	435,000
Change in deferred tax asset valuation allowance		(4,105,000)				(5,605,000)
Bank owned life insurance	(38,000)	(56,000)			(115,000)	(109,000)
Tax exempt income, net of interest expense	(176,000)	(217,000)			(402,000)	(415,000)
Other, net	(22,000)	(24,000)			(52,000)	(55,000)
Total income tax expense / (benefit)	$ 1,593,000	$ (2,940,000)			$ 5,689,000	$ (3,508,000)
Reconciliation of the statutory federal income tax expense / (benefit) rate to the Company's effective income tax expense / (benefit) rate
Tax expense at federal statutory tax rate (as a percent)	35.00%	35.00%			35.00%	35.00%
State income taxes, net of federal income tax benefit (as a percent)	7.00%	6.90%			7.00%	6.80%
Change in deferred tax asset valuation allowance (as a percent)	0.00%	(117.70%)			0.00%	(87.60%)
Bank owned life insurance (as a percent)	(0.90%)	(1.60%)			(0.80%)	(1.70%)
Tax exempt income, net of interest expense (as a percent)	(4.00%)	(6.20%)			(2.70%)	(6.50%)
Other, net (as a percent)	(0.50%)	(0.70%)			(0.30%)	(0.80%)
Total income tax expense / (benefit) (as a percent)	36.60%	(84.30%)			38.20%	(54.80%)

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Preferred stock
Preferred stock, shares authorized	5,000,000	5,000,000
Common stock, no par value (in dollars per share)
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	25,391,343	25,307,110
Common stock, shares outstanding	25,391,343	25,307,110
Accumulated other comprehensive income, tax expense (in dollars)	$ (2,037)	$ 2,745
Series A senior preferred stock
Preferred stock
Preferred stock, per share stated value (in dollars per share)		$ 1,000
Preferred stock, shares issued	0	21,000
Preferred stock, shares outstanding	0	21,000
Series C preferred stock
Preferred stock
Preferred stock, per share stated value (in dollars per share)	$ 3.25	$ 3.25
Preferred stock, shares issued	1,189,538	1,189,538
Preferred stock, shares outstanding	1,189,538	1,189,538

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Deposits

9 Months Ended

Sep. 30, 2013

Deposits.

Deposits

Note 8. Deposits

The following table provides a summary of deposits by product type:

	September 30,		December 31,
(dollar amounts in thousands)	2013		2012
Non-interest bearing deposits	$	285,428	$	273,242
Interest bearing deposits:
NOW accounts	83,961		76,728
Money market deposit accounts	324,990		293,525
Other savings deposits	43,089		41,021
Time certificates of $100 or more	145,315		97,105
Other time deposits	74,169		89,249
Total deposits	$	956,952	$	870,870

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Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Condensed Consolidated Statements of Comprehensive Income
Net income	$ 2,761	$ 6,428	$ 9,207	$ 9,910
Other comprehensive (loss) / income:
Unrealized security holding (losses) / gains	(1,959)	2,477	(7,685)	7,240
Reclassification for net gains on investments included in earnings	(344)	(329)	(3,935)	(1,696)
Other comprehensive (loss) / income, before income tax (benefit) / expense	(2,303)	2,148	(11,620)	5,544
Income tax (benefit) / expense related to items of other comprehensive income	(947)	883	(4,782)	2,281
Other comprehensive (loss) / income	(1,356)	1,265	(6,838)	3,263
Comprehensive income	$ 1,405	$ 7,693	$ 2,369	$ 13,173

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 25,672	$ 23,425
Interest bearing deposits in other banks	7,609	10,691
Total cash and cash equivalents	33,281	34,116
Investment securities available for sale	267,179	287,682
Federal Home Loan Bank stock	4,739	4,575
Loans held for sale	5,463	22,549
Gross loans	777,154	689,608
Net deferred loan fees	(1,454)	(937)
Allowance for loan losses	(17,468)	(18,118)
Net loans held for investment	758,232	670,553
Premises and equipment	24,129	15,956
Deferred tax assets, net	21,361	21,933
Bank owned life insurance	15,710	15,349
Goodwill and other intangible assets	12,681	12,981
Other assets	11,068	11,838
Total assets	1,153,843	1,097,532
Liabilities
Non-interest bearing deposits	285,428	273,242
Interest bearing deposits	671,524	597,628
Total deposits	956,952	870,870
Short term FHLB borrowing	5,000	33,000
Long term FHLB borrowing	52,500	33,500
Junior subordinated debentures	8,248	8,248
Other liabilities	6,051	6,385
Total liabilities	1,028,751	952,003
Stockholders' equity
Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 25,391,343 shares and 25,307,110 shares as of September 30, 2013 and December 31, 2012, respectively	101,439	101,354
Paid in capital	5,879	7,337
Retained earnings	17,083	8,773
Accumulated other comprehensive (loss) / income, net of tax (benefit) / expense of ($2,037) and $2,745 as of September 30, 2013 and December 31, 2012, respectively	(2,913)	3,925
Total stockholders' equity	125,092	145,529
Total liabilities and stockholders' equity	1,153,843	1,097,532
Series A senior preferred stock
Stockholders' equity
Preferred stock		20,536
Series C preferred stock
Stockholders' equity
Preferred stock	$ 3,604	$ 3,604

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Calculation of both basic and diluted earnings per common share
Net income	$ 2,761	$ 6,428	$ 9,207	$ 9,910
Dividends and accretion on preferred stock	(181)	(357)	(898)	(1,113)
Net income available to common shareholders	$ 2,580	$ 6,071	$ 8,309	$ 8,797
Weighted average shares outstanding	25,172,929	25,089,325	25,138,410	25,074,405
Basic earnings per common share (in dollars per share)	$ 0.10	$ 0.24	$ 0.33	$ 0.35
Dilutive effect of share-based compensation awards, common stock warrants, and convertible perpetual preferred stock (in shares)	1,376,639	1,341,392	1,401,694	1,280,238
Weighted average diluted shares outstanding	26,549,568	26,430,717	26,540,104	26,354,643
Diluted earnings per common share (in dollars per share)	$ 0.10	$ 0.23	$ 0.31	$ 0.33
Options
Shares excluded from the calculation of diluted earnings per share
Shares excluded from the calculation of diluted earnings per share	418,000	299,000	358,000	278,000

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Capital (Tables)

9 Months Ended

Sep. 30, 2013

Capital

Schedule of the Company's and the Bank's actual regulatory ratios and the regulatory standards

	Regulatory Standard	September 30, 2013		December 31, 2012
	Well	Heritage Oaks		Heritage Oaks
Ratio	Capitalized	Bancorp	Bank	Bancorp	Bank
Leverage ratio	5.00%	10.58%	10.05%	12.32%	11.93%
Tier I capital to risk weighted assets	6.00%	13.27%	12.59%	15.55%	15.02%
Total risk based capital to risk weighted assets	10.00%	14.53%	13.85%	16.81%	16.28%

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2013

Investment Securities

Schedule of amortized cost and fair values of the Company's investment securities, all of which are reported as available for sale

(dollar amounts in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized
September 30, 2013	Cost		Gains		Losses			Fair Value
Obligations of U.S. government agencies	$	7,738	$	37	$	(47	)	$	7,728
Mortgage backed securities
U.S. government sponsored entities and agencies	178,856		446		(3,870		)	175,432
Non-agency	13,266		168		(44		)	13,390
State and municipal securities	45,333		385		(1,658		)	44,060
Asset backed securities	26,936		-		(367		)	26,569
Total	$	272,129	$	1,036	$	(5,986	)	$	267,179
December 31, 2012
Obligations of U.S. government agencies	$	7,307	$	262	$	(2	)	$	7,567
Mortgage backed securities
U.S. government sponsored entities and agencies	145,430		1,136		(798		)	145,768
Non-agency	43,402		1,578		(185		)	44,795
State and municipal securities	64,824		4,240		(96		)	68,968
Asset backed securities	20,049		568		(33		)	20,584
Total	$	281,012	$	7,784	$	(1,114	)	$	287,682

Schedule of roll forward of the OTTI balances against the investment securities for both credit loss and all other factor components

	For the Three Months Ended September 30, 2013						For the Three Months Ended September 30, 2012
			OTTI Related						OTTI Related
	OTTI Related		to All Other		Total		OTTI Related		to All Other			Total
(dollars in thousands)	to Credit Loss		Factors		OTTI		to Credit Loss		Factors			OTTI
Balance, beginning of the period	$	-	$	-	$	-	$	109	$	283		$	392
Change in value attributable to other factors	-		-		-		-		(140		)	(140		)
Balance, end of the period	$	-	$	-	$	-	$	109	$	143		$	252

	For the Nine Months Ended September 30, 2013									For the Nine Months Ended September 30, 2012
				OTTI Related								OTTI Related
	OTTI Related			to All Other			Total			OTTI Related		to All Other			Total
(dollars in thousands)	to Credit Loss			Factors			OTTI			to Credit Loss		Factors			OTTI
Balance, beginning of the period	$	109		$	170		$	279		$	109	$	361		$	470
Less: losses related to OTTI securities sold	(109		)	(170		)	(279		)	-		-			-
Change in value attributable to other factors	-			-			-			-		(218		)	(218		)
Balance, end of the period	$	-		$	-		$	-		$	109	$	143		$	252

Summary of investment securities in an unrealized loss position

	Securities In A Loss Position For
(dollar amounts in thousands)	Less Than Twelve Months					Twelve Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2013	Value		Loss			Value		Loss			Value		Loss
Obligations of U.S. government agencies	$	3,100	$	(46	)	$	41	$	(1	)	$	3,141	$	(47	)
Mortgage backed securities
U.S. government sponsored entities and agencies	111,209		(3,566		)	5,749		(304		)	116,958		(3,870		)
Non-agency	1,218		(44		)	-		-			1,218		(44		)
State and municipal securities	25,638		(1,658		)	-		-			25,638		(1,658		)
Asset backed securities	17,700		(367		)	-		-			17,700		(367		)
Total	$	158,865	$	(5,681	)	$	5,790	$	(305	)	$	164,655	$	(5,986	)
December 31, 2012
Obligations of U.S. government agencies	$	-	$	-		$	44	$	(2	)	$	44	$	(2	)
Mortgage backed securities
U.S. government sponsored entities and agencies	83,092		(798		)	-		-			83,092		(798		)
Non-agency	7,204		(15		)	719		(170		)	7,923		(185		)
State and municipal securities	9,813		(96		)	-		-			9,813		(96		)
Asset backed securities	9,828		(33		)	-		-			9,828		(33		)
Total	$	109,937	$	(942	)	$	763	$	(172	)	$	110,700	$	(1,114	)

Schedule of proceeds from the sales and calls of securities and the associated gains and losses

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(dollar amounts in thousands)	2013			2012			2013			2012
Proceeds	$	38,930		$	41,899		$	144,571		$	95,789
Gross gains	970			448			5,349			2,160
Gross losses	(626		)	(119		)	(1,414		)	(464		)

Schedule of amortized cost and fair value maturities of available for sale investment securities

(dollar amounts in thousands)
September 30, 2013	One Year Or Less		Over 1 Through 5 Years		Over 5 Years Through 10 Years		Over 10 Years		Total
Obligations of U.S. government agencies	$	100	$	3,481	$	1,729	$	2,418	$	7,728
Mortgage backed securities
U.S. government sponsored entities and agencies	24,910		75,551		29,616		45,355		175,432
Non-agency	5,426		6,443		1,521		-		13,390
State and municipal securities	40		6,516		34,300		3,204		44,060
Asset backed securities	-		-		14,569		12,000		26,569
Total available for sale securities	$	30,476	$	91,991	$	81,735	$	62,977	$	267,179
Amortized cost	$	30,658	$	93,028	$	83,805	$	64,638	$	272,129
Weighted average yield	2.35%		2.26%		2.54%		2.67%		2.45%

Summary of earnings on both taxable and tax-exempt investment securities

	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
(dollar amounts in thousands)	2013		2012		2013		2012
Taxable earnings on investment securities
Obligations of U.S. government agencies	$	33	$	25	$	86	$	79
Mortgage backed securities	847		973		2,470		2,971
State and municipal securities	-		5		5		183
Corporate debt securities	-		181		-		504
Asset backed securities	113		72		350		146
Non-taxable earnings on investment securities
State and municipal securities	354		527		1,082		1,428
Total	$	1,347	$	1,783	$	3,993	$	5,311

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Allowance for Loan Losses ("ALLL") (Details) (USD $)	3 Months Ended			9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Jun. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	$ 17,934,000	$ 18,149,000		$ 18,118,000	$ 19,314,000
Charge-offs	(984,000)	(1,718,000)		(1,851,000)	(9,745,000)
Recoveries	518,000	270,000		1,201,000	737,000
Provisions for loan losses		1,286,000			7,681,000
Balance, at the end of the period	17,468,000	17,987,000	18,149,000	17,468,000	17,987,000
Amount of allowance attributed to:
Specifically evaluated impaired loans	6,825,000			6,825,000		6,061,000
General portfolio allocation	10,643,000			10,643,000		12,057,000
Loans individually evaluated for impairment	15,555,000			15,555,000		17,341,000
Loans collectively evaluated for impairment	761,599,000			761,599,000		672,267,000
General reserves to total loans collectively evaluated for impairment (as a percent)	1.40%			1.40%		1.79%
Total gross loans	777,154,000			777,154,000		689,608,000
Total allowance to gross loans (as a percent)	2.25%			2.25%		2.63%
Provision for loan losses, transfer from C&I to Land related to the re-characterization of a loan as part of a TDR			3,900,000
Real Estate Secured
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	6,509,000	6,897,000		6,879,000	9,645,000
Charge-offs	(41,000)	(106,000)		(131,000)	(2,471,000)
Recoveries	19,000	12,000		143,000	74,000
Provisions for loan losses	(180,000)	1,184,000		(584,000)	739,000
Balance, at the end of the period	6,307,000	7,987,000		6,307,000	7,987,000
Amount of allowance attributed to:
Specifically evaluated impaired loans	108,000			108,000		25,000
General portfolio allocation	6,199,000			6,199,000		6,854,000
Loans individually evaluated for impairment	2,003,000			2,003,000		2,898,000
Loans collectively evaluated for impairment	601,078,000			601,078,000		490,110,000
General reserves to total loans collectively evaluated for impairment (as a percent)	1.03%			1.03%		1.40%
Total gross loans	603,081,000			603,081,000		493,008,000
Total allowance to gross loans (as a percent)	1.05%			1.05%		1.40%
Commercial
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	6,618,000	6,261,000		6,154,000	6,549,000
Charge-offs	(736,000)	(1,511,000)		(1,137,000)	(4,272,000)
Recoveries	475,000	246,000		947,000	623,000
Provisions for loan losses	(207,000)	75,000		186,000	2,171,000
Balance, at the end of the period	6,150,000	5,071,000		6,150,000	5,071,000
Amount of allowance attributed to:
Specifically evaluated impaired loans	2,853,000			2,853,000		2,185,000
General portfolio allocation	3,297,000			3,297,000		3,969,000
Loans individually evaluated for impairment	5,465,000			5,465,000		5,596,000
Loans collectively evaluated for impairment	126,642,000			126,642,000		141,468,000
General reserves to total loans collectively evaluated for impairment (as a percent)	2.60%			2.60%		2.81%
Total gross loans	132,107,000			132,107,000		147,064,000
Total allowance to gross loans (as a percent)	4.66%			4.66%		4.18%
Construction
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	198,000	381,000		313,000	488,000
Charge-offs		(92,000)		(169,000)	(668,000)
Recoveries	1,000	1,000		2,000	1,000
Provisions for loan losses	44,000	268,000		97,000	737,000
Balance, at the end of the period	243,000	558,000		243,000	558,000
Amount of allowance attributed to:
General portfolio allocation	243,000			243,000		313,000
Loans individually evaluated for impairment						1,380,000
Loans collectively evaluated for impairment	13,174,000			13,174,000		18,336,000
General reserves to total loans collectively evaluated for impairment (as a percent)	1.84%			1.84%		1.71%
Total gross loans	13,174,000			13,174,000		19,716,000
Total allowance to gross loans (as a percent)	1.84%			1.84%		1.59%
Land
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	4,465,000	4,483,000		4,670,000	2,416,000
Charge-offs				(34,000)	(2,168,000)
Recoveries	11,000	5,000		45,000	18,000
Provisions for loan losses	170,000	(225,000)		(35,000)	3,997,000
Balance, at the end of the period	4,646,000	4,263,000		4,646,000	4,263,000
Amount of allowance attributed to:
Specifically evaluated impaired loans	3,854,000			3,854,000		3,829,000
General portfolio allocation	792,000			792,000		841,000
Loans individually evaluated for impairment	8,060,000			8,060,000		7,182,000
Loans collectively evaluated for impairment	16,982,000			16,982,000		17,482,000
General reserves to total loans collectively evaluated for impairment (as a percent)	4.66%			4.66%		4.81%
Total gross loans	25,042,000			25,042,000		24,664,000
Total allowance to gross loans (as a percent)	18.55%			18.55%		18.93%
Installment
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	108,000	91,000		64,000	175,000
Charge-offs	(207,000)	(9,000)		(380,000)	(29,000)
Recoveries	12,000	5,000		64,000	18,000
Provisions for loan losses	174,000	(15,000)		339,000	(92,000)
Balance, at the end of the period	87,000	72,000		87,000	72,000
Amount of allowance attributed to:
Specifically evaluated impaired loans	10,000			10,000		22,000
General portfolio allocation	77,000			77,000		42,000
Loans individually evaluated for impairment	27,000			27,000		285,000
Loans collectively evaluated for impairment	3,468,000			3,468,000		4,610,000
General reserves to total loans collectively evaluated for impairment (as a percent)	2.22%			2.22%		0.91%
Total gross loans	3,495,000			3,495,000		4,895,000
Total allowance to gross loans (as a percent)	2.49%			2.49%		1.31%
All Other Loans
Allocation of the allowance to various segments in the loan portfolio
Balance, at the beginning of the period	36,000	36,000		38,000	41,000
Charge-offs					(137,000)
Recoveries		1,000			3,000
Provisions for loan losses	(1,000)	(1,000)		(3,000)	129,000
Balance, at the end of the period	35,000	36,000		35,000	36,000
Amount of allowance attributed to:
General portfolio allocation	35,000			35,000		38,000
Loans collectively evaluated for impairment	255,000			255,000		261,000
General reserves to total loans collectively evaluated for impairment (as a percent)	13.73%			13.73%		14.56%
Total gross loans	$ 255,000			$ 255,000		$ 261,000
Total allowance to gross loans (as a percent)	13.73%			13.73%		14.56%

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Investment Securities (Details 3) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Investment securities
Less Than Twelve Months, Fair Value	$ 158,865,000		$ 158,865,000		$ 109,937,000
Less Than Twelve Months, Unrealized Loss	(5,681,000)		(5,681,000)		(942,000)
Twelve Months or More, Fair Value	5,790,000		5,790,000		763,000
Twelve Months or More, Unrealized Loss	(305,000)		(305,000)		(172,000)
Total, Fair Value	164,655,000		164,655,000		110,700,000
Total, Unrealized Loss	(5,986,000)		(5,986,000)		(1,114,000)
Proceeds from the sales and calls of securities and the associated gains and losses
Proceeds	38,930,000	41,899,000	144,571,000	95,789,000
Gross gains	970,000	448,000	5,349,000	2,160,000
Gross losses	(626,000)	(119,000)	(1,414,000)	(464,000)
Income tax expense related to net realized gains on sales and calls of securities	100,000	100,000	1,600,000	700,000
Available for sale securities
One Year Or Less	30,476,000		30,476,000
Over 1 Through 5 Years	91,991,000		91,991,000
Over 5 Years Through 10 Years	81,735,000		81,735,000
Over 10 Years	62,977,000		62,977,000
Total	267,179,000		267,179,000
Available for sale securities, Amortized cost
One Year Or Less	30,658,000		30,658,000
Over 1 Through 5 Years	93,028,000		93,028,000
Over 5 Years Through 10 Years	83,805,000		83,805,000
Over 10 Years	64,638,000		64,638,000
Total	272,129,000		272,129,000		281,012,000
Weighted average yield
One Year Or Less (as a percent)			2.35%
Over 1 Through 5 Years (as a percent)			2.26%
Over 5 Years Through 10 Years (as a percent)			2.54%
Over 10 Years (as a percent)			2.67%
Total (as a percent)			2.45%
Earnings on both taxable and tax-exempt investment securities
Total	1,347,000	1,783,000	3,993,000	5,311,000
Investment securities | Minimum
Securities in an unrealized loss position
Maturity period of available-for-sale securities			1 year
Investment securities | Maximum
Securities in an unrealized loss position
Maturity period of available-for-sale securities			40 years
Obligations of U.S. government agencies
Investment securities
Less Than Twelve Months, Fair Value	3,100,000		3,100,000
Less Than Twelve Months, Unrealized Loss	(46,000)		(46,000)
Twelve Months or More, Fair Value	41,000		41,000		44,000
Twelve Months or More, Unrealized Loss	(1,000)		(1,000)		(2,000)
Total, Fair Value	3,141,000		3,141,000		44,000
Total, Unrealized Loss	(47,000)		(47,000)		(2,000)
Available for sale securities
One Year Or Less	100,000		100,000
Over 1 Through 5 Years	3,481,000		3,481,000
Over 5 Years Through 10 Years	1,729,000		1,729,000
Over 10 Years	2,418,000		2,418,000
Total	7,728,000		7,728,000
Available for sale securities, Amortized cost
Total	7,738,000		7,738,000		7,307,000
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	33,000	25,000	86,000	79,000
Mortgage backed securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	847,000	973,000	2,470,000	2,971,000
Mortgage-backed securities - U.S. government sponsored entities and agencies
Investment securities
Less Than Twelve Months, Fair Value	111,209,000		111,209,000		83,092,000
Less Than Twelve Months, Unrealized Loss	(3,566,000)		(3,566,000)		(798,000)
Twelve Months or More, Fair Value	5,749,000		5,749,000
Twelve Months or More, Unrealized Loss	(304,000)		(304,000)
Total, Fair Value	116,958,000		116,958,000		83,092,000
Total, Unrealized Loss	(3,870,000)		(3,870,000)		(798,000)
Available for sale securities
One Year Or Less	24,910,000		24,910,000
Over 1 Through 5 Years	75,551,000		75,551,000
Over 5 Years Through 10 Years	29,616,000		29,616,000
Over 10 Years	45,355,000		45,355,000
Total	175,432,000		175,432,000
Available for sale securities, Amortized cost
Total	178,856,000		178,856,000		145,430,000
Mortgage-backed securities - Non-agency
Investment securities
Less Than Twelve Months, Fair Value	1,218,000		1,218,000		7,204,000
Less Than Twelve Months, Unrealized Loss	(44,000)		(44,000)		(15,000)
Twelve Months or More, Fair Value					719,000
Twelve Months or More, Unrealized Loss					(170,000)
Total, Fair Value	1,218,000		1,218,000		7,923,000
Total, Unrealized Loss	(44,000)		(44,000)		(185,000)
Available for sale securities
One Year Or Less	5,426,000		5,426,000
Over 1 Through 5 Years	6,443,000		6,443,000
Over 5 Years Through 10 Years	1,521,000		1,521,000
Total	13,390,000		13,390,000
Available for sale securities, Amortized cost
Total	13,266,000		13,266,000		43,402,000
State and municipal securities
Investment securities
Less Than Twelve Months, Fair Value	25,638,000		25,638,000		9,813,000
Less Than Twelve Months, Unrealized Loss	(1,658,000)		(1,658,000)		(96,000)
Total, Fair Value	25,638,000		25,638,000		9,813,000
Total, Unrealized Loss	(1,658,000)		(1,658,000)		(96,000)
Available for sale securities
One Year Or Less	40,000		40,000
Over 1 Through 5 Years	6,516,000		6,516,000
Over 5 Years Through 10 Years	34,300,000		34,300,000
Over 10 Years	3,204,000		3,204,000
Total	44,060,000		44,060,000
Available for sale securities, Amortized cost
Total	45,333,000		45,333,000		64,824,000
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities		5,000	5,000	183,000
Non-taxable earnings on investment securities	354,000	527,000	1,082,000	1,428,000
Corporate debt securities
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities		181,000		504,000
Asset backed securities
Investment securities
Less Than Twelve Months, Fair Value	17,700,000		17,700,000		9,828,000
Less Than Twelve Months, Unrealized Loss	(367,000)		(367,000)		(33,000)
Total, Fair Value	17,700,000		17,700,000		9,828,000
Total, Unrealized Loss	(367,000)		(367,000)		(33,000)
Available for sale securities
Over 5 Years Through 10 Years	14,569,000		14,569,000
Over 10 Years	12,000,000		12,000,000
Total	26,569,000		26,569,000
Available for sale securities, Amortized cost
Total	26,936,000		26,936,000		20,049,000
Earnings on both taxable and tax-exempt investment securities
Taxable earnings on investment securities	113,000	72,000	350,000	146,000
Securities pledged to secure public deposits
Available for sale securities
Total	41,700,000		41,700,000		9,000,000
Available for sale securities, Amortized cost
Total	$ 42,800,000		$ 42,800,000		$ 8,700,000

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Fair Value of Assets and Liabilities (Details 3) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Recurring basis
Total Losses for assets measured at fair value on a non-recurring basis
Assets transfer from Level 1 to level 2	$ 0		$ 0
Assets transfer from Level 2 to level 1	0		0
Nonrecurring basis
Total Losses for assets measured at fair value on a non-recurring basis
Total Losses/(Recoveries)	1,039	6,231
Assets transfer from Level 1 to level 2	0		0
Assets transfer from Level 2 to level 1	0		0
Nonrecurring basis | Commercial real estate
Total Losses for assets measured at fair value on a non-recurring basis
Total Losses/(Recoveries) on impaired loans	88
Nonrecurring basis | Commercial and industrial
Total Losses for assets measured at fair value on a non-recurring basis
Total Losses/(Recoveries) on impaired loans	959	1,941
Nonrecurring basis | Agriculture
Total Losses for assets measured at fair value on a non-recurring basis
Total Losses/(Recoveries) on impaired loans		28
Nonrecurring basis | Construction
Total Losses for assets measured at fair value on a non-recurring basis
Total Losses/(Recoveries) on impaired loans		460
Nonrecurring basis | Land
Total Losses for assets measured at fair value on a non-recurring basis
Total Losses/(Recoveries) on impaired loans	(8)	3,802
Nonrecurring basis | Significant Other Observable Inputs (Level 2)
Assets
Total assets measured on a non-recurring basis		2,548
Nonrecurring basis | Significant Other Observable Inputs (Level 2) | Commercial and industrial
Assets
Impaired loans		820
Nonrecurring basis | Significant Other Observable Inputs (Level 2) | Agriculture
Assets
Impaired loans		72
Nonrecurring basis | Significant Other Observable Inputs (Level 2) | Construction
Assets
Impaired loans		1,656
Nonrecurring basis | Significant Unobservable Inputs (Level 3)
Assets
Total assets measured on a non-recurring basis	3,968	2,261
Nonrecurring basis | Significant Unobservable Inputs (Level 3) | Residential 1 to 4 family
Assets
Impaired loans	348
Nonrecurring basis | Significant Unobservable Inputs (Level 3) | Commercial real estate
Assets
Impaired loans	521
Nonrecurring basis | Significant Unobservable Inputs (Level 3) | Commercial and industrial
Assets
Impaired loans	76	213
Nonrecurring basis | Significant Unobservable Inputs (Level 3) | Land
Assets
Impaired loans	3,023	2,048
Nonrecurring basis | Assets At Fair Value
Assets
Total assets measured on a non-recurring basis	3,968	4,809
Nonrecurring basis | Assets At Fair Value | Residential 1 to 4 family
Assets
Impaired loans	348
Nonrecurring basis | Assets At Fair Value | Commercial real estate
Assets
Impaired loans	521
Nonrecurring basis | Assets At Fair Value | Commercial and industrial
Assets
Impaired loans	76	1,033
Nonrecurring basis | Assets At Fair Value | Agriculture
Assets
Impaired loans		72
Nonrecurring basis | Assets At Fair Value | Construction
Assets
Impaired loans		1,656
Nonrecurring basis | Assets At Fair Value | Land
Assets
Impaired loans	$ 3,023	$ 2,048

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Fair Value of Assets and Liabilities (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets
Investment securities available for sale	$ 267,179
Liabilities
Non-interest bearing deposits	285,428	273,242
Junior subordinated debentures	8,248	8,248
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Notional Amount	170,047	178,432
Off-balance sheet instruments, commitments to extend credit and standby letters of credit, Cost to Cede or Assume	1,700	1,784
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Cash and cash equivalents	33,281	34,116
Liabilities
Non-interest bearing deposits	285,428	273,242
Significant Other Observable Inputs (Level 2)
Assets
Investment securities available for sale	267,179	287,682
Loans receivable, net of deferred fees and costs		2,548
Loans held for sale	5,463	22,549
Accrued interest receivable	1,194	1,497
Liabilities
Interest bearing deposits	673,207	598,664
Federal Home Loan Bank advances	55,803	67,059
Accrued interest payable	177	192
Significant Unobservable Inputs (Level 3)
Assets
Loans receivable, net of deferred fees and costs	779,769	701,144
Accrued interest receivable	2,435	2,418
Liabilities
Junior subordinated debentures	7,062	7,078
Carrying Amount
Assets
Cash and cash equivalents	33,281	34,116
Investment securities available for sale	267,179	287,682
Federal Home Loan Bank stock	4,739	4,575
Loans receivable, net of deferred fees and costs	775,700	688,671
Loans held for sale	5,463	22,549
Accrued interest receivable	3,629	3,915
Liabilities
Non-interest bearing deposits	285,428	273,242
Interest bearing deposits	671,524	597,628
Federal Home Loan Bank advances	57,500	66,500
Junior subordinated debentures	8,248	8,248
Accrued interest payable	177	192
Fair Value
Assets
Cash and cash equivalents	33,281	34,116
Investment securities available for sale	267,179	287,682
Loans receivable, net of deferred fees and costs	779,769	703,692
Loans held for sale	5,463	22,549
Accrued interest receivable	3,629	3,915
Liabilities
Non-interest bearing deposits	285,428	273,242
Interest bearing deposits	673,207	598,664
Federal Home Loan Bank advances	55,803	67,059
Junior subordinated debentures	7,062	7,078
Accrued interest payable	$ 177	$ 192

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Other Real Estate Owned ("OREO")

9 Months Ended

Sep. 30, 2013

Other Real Estate Owned ("OREO")

Other Real Estate Owned ("OREO")

Note 7.  Other Real Estate Owned (“OREO”)

The Company had no OREO activity for the quarter ended September 30, 2013. The following table provides a summary of the third quarter 2012 change in the balance of OREO:

	Balance										Balance
	June 30,										September 30,
(dollar amounts in thousands)	2012		Additions		Disposals			Writedowns			2012
Real Estate Secured
Residential 1 to 4 family	$	431	$	-	$	-		$	(31	)	$	400
Commercial	215		-		-			-			215
Construction
Single family residential - Spec.	397		-		(397		)	-			-
Land	32		-		-			(32		)	-
Totals	$	1,075	$	-	$	(397	)	$	(63	)	$	615

The following tables provide a summary of the year to date change in the balance of OREO:

	Balance									Balance
	December 31,									September 30,
(dollar amounts in thousands)	2012		Additions		Disposals			Writedowns		2013
Real Estate Secured
Commercial	$	-	$	1,374	$	(1,374	)	$	-	$	-
Totals	$	-	$	1,374	$	(1,374	)	$	-	$	-

	Balance										Balance
	December 31,										September 30,
(dollar amounts in thousands)	2011		Additions		Disposals			Writedowns			2012
Real Estate Secured
Residential 1 to 4 family	$	-	$	607	$	(176	)	$	(31	)	$	400
Commercial	215		-		-			-			215
Construction
Single family residential - Spec.	423		-		(397		)	(26		)	-
Tract	100		-		(100		)	-			-
Land	179		162		(300		)	(41		)	-
Totals	$	917	$	769	$	(973	)	$	(98	)	$	615

The Company did not realize any gains or losses related to disposal of OREO during the three or nine months ended September 30, 2013.

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Share-Based Compensation Plans (Tables)

9 Months Ended

Sep. 30, 2013

Share-Based Compensation Plans

Summary of recognized and unrecognized share based compensation expense

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(dollar amounts in thousands)	2013		2012		2013		2012
Share-based compensation expense:
Stock option expense	$	68	$	39	$	183	$	92
Restricted stock expense	80		67		208		142
Total expense	$	148	$	106	$	391	$	234
Unrecognized compensation expense:
Stock option expense	$	762	$	620
Restricted stock expense	775		624
Total unrecognized expense	$	1,537	$	1,244

Summary of activity related to options granted, exercised, and forfeited

	Options Outstanding				Options
	Number		Weighted Average		Available for
	of Shares		Exercise Price		Grant
Balance, December 31, 2012	523,129		$	6.11	1,715,616
Granted	167,415		6.30
Forfeited	(65,356	)	5.81
Expired	(4,275	)	4.62
Exercised	(20,339	)	3.90
Balance, September 30, 2013	600,574		$	6.28	1,565,670

Summary of activity related to restricted stock granted, vested and forfeited

	Number of		Average Grant
	Shares		Date Fair Value
Balance December 31, 2012	196,850		$	4.27
Granted	72,786		6.26
Vested	(57,508	)	4.40
Forfeited	(8,892	)	5.17
Balance September 30, 2013	203,236		$	4.91

Summary of the aggregate intrinsic value of options vested and expected to vest and exercisable

				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	572,450	$	6.29	7.46	$	720,971
Exercisable at September 30, 2013	304,409	$	6.62	5.84	$	572,600

Schedule of assumptions used in the calculation of weighted average fair value of options granted

	For the Nine Months Ended
	September 30,
	2013		2012
Expected volatility	55.32%		52.26%
Expected term (years)	6		7
Dividend yield	0.00%		0.00%
Risk free rate	1.55%		1.11%
Weighted-average grant date fair value	$	3.31	$	2.87

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Loans (Details 3) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013 item	Sep. 30, 2012 item	Sep. 30, 2013 item	Sep. 30, 2012 item	Dec. 31, 2012
Troubled debt restructurings
Loans classified as TDRs	$ 9,800,000		$ 9,800,000		$ 11,600,000
Accruing loans that were classified as TDRs	2,900,000		2,900,000		17,000
Interest loss related to rate concessions on certain TDRs	43,000	46,000	131,000	85,000
Number of TDRs	2	8	6	14
Pre-Modification Outstanding Recorded Investment	276,000	2,272,000	385,000	12,076,000
Post-Modification Outstanding Recorded Investment	276,000	2,251,000	385,000	10,685,000
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs	1		5	3
Recorded Investment	18,000		958,000	254,000
Minimum
Troubled debt restructurings
Period of maturity date extensions granted			12 months
Maximum
Troubled debt restructurings
Period of maturity date extensions granted			18 months
Real Estate Secured | Residential 1 to 4 family
Troubled debt restructurings
Number of TDRs				1
Pre-Modification Outstanding Recorded Investment				439,000
Post-Modification Outstanding Recorded Investment				439,000
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs			1
Recorded Investment			97,000
Real Estate Secured | Commercial real estate
Troubled debt restructurings
Number of TDRs	1		1
Pre-Modification Outstanding Recorded Investment	227,000		227,000
Post-Modification Outstanding Recorded Investment	227,000		227,000
Real Estate Secured | Farmland
Troubled debt restructurings
Number of TDRs		1		1
Pre-Modification Outstanding Recorded Investment		1,089,000		1,089,000
Post-Modification Outstanding Recorded Investment		1,089,000		1,089,000
Commercial | Commercial and industrial
Troubled debt restructurings
Number of TDRs		6	3	9
Pre-Modification Outstanding Recorded Investment		1,120,000	91,000	2,115,000
Post-Modification Outstanding Recorded Investment		1,099,000	91,000	2,094,000
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs			3	3
Recorded Investment			843,000	254,000
Commercial | Agriculture
Troubled debt restructurings
Number of TDRs	1		2
Pre-Modification Outstanding Recorded Investment	49,000		67,000
Post-Modification Outstanding Recorded Investment	49,000		67,000
Troubled Debt Restructurings That Subsequently Defaulted
Number of TDRs	1		1
Recorded Investment	18,000		18,000
Land
Troubled debt restructurings
Number of TDRs		1		3
Pre-Modification Outstanding Recorded Investment		63,000		8,433,000
Post-Modification Outstanding Recorded Investment		$ 63,000		$ 7,063,000

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Share-Based Compensation Plans

9 Months Ended

Sep. 30, 2013

Share-Based Compensation Plans

Share-Based Compensation Plans

Note 10.  Share-Based Compensation Plans

As of September 30, 2013, the Company had two share-based employee compensation plans, which are more fully described in Note 14. Share-Based Compensation Plans, of the consolidated financial statements in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2012.  These plans include the “1997 Stock Option Plan” and the “2005 Equity Based Compensation Plan.”

The following table provides a summary of the expenses the Company has recognized related to share-based compensation for the periods indicated below:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(dollar amounts in thousands)	2013		2012		2013		2012
Share-based compensation expense:
Stock option expense	$	68	$	39	$	183	$	92
Restricted stock expense	80		67		208		142
Total expense	$	148	$	106	$	391	$	234
Unrecognized compensation expense:
Stock option expense	$	762	$	620
Restricted stock expense	775		624
Total unrecognized expense	$	1,537	$	1,244

At September 30, 2013, there was a total of $0.8 million of unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 3.3 years.

The Company periodically grants restricted share awards to employees and directors. These restricted shares generally vest over a period of one to five years depending on the terms of the grant.  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 September 30, 2013 was $0.8 million.  That expense is expected to be recognized over the next 2.9 years.

The following table provides a summary of activity related to options granted, exercised, and forfeited:

	Options Outstanding				Options
	Number		Weighted Average		Available for
	of Shares		Exercise Price		Grant
Balance, December 31, 2012	523,129		$	6.11	1,715,616
Granted	167,415		6.30
Forfeited	(65,356	)	5.81
Expired	(4,275	)	4.62
Exercised	(20,339	)	3.90
Balance, September 30, 2013	600,574		$	6.28	1,565,670

The following table provides a summary of activity related to restricted stock granted, vested and forfeited:

	Number of		Average Grant
	Shares		Date Fair Value
Balance December 31, 2012	196,850		$	4.27
Granted	72,786		6.26
Vested	(57,508	)	4.40
Forfeited	(8,892	)	5.17
Balance September 30, 2013	203,236		$	4.91

The aggregate intrinsic value in the following table represents the total pre-tax intrinsic value, which is subject to change based on the fair market value of the Company’s stock.  The aggregate intrinsic value of options exercised was $42 thousand for the year to date period ended September 30, 2013.  The following table provides a summary of the aggregate intrinsic value of options vested and expected to vest and exercisable:

				Weighted Average
		Weighted		Remaining	Aggregate
		Average		Contractual Life	Intrinsic
	Shares	Exercise Price		(Years)	Value
Vested or expected to vest	572,450	$	6.29	7.46	$	720,971
Exercisable at September 30, 2013	304,409	$	6.62	5.84	$	572,600

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted:

	For the Nine Months Ended
	September 30,
	2013		2012
Expected volatility	55.32%		52.26%
Expected term (years)	6		7
Dividend yield	0.00%		0.00%
Risk free rate	1.55%		1.11%
Weighted-average grant date fair value	$	3.31	$	2.87

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Deferred Tax Assets and Income Taxes

9 Months Ended

Sep. 30, 2013

Deferred Tax Assets and Income Taxes

Deferred Tax Assets and Income Taxes

Note 6.  Deferred Tax Assets and Income Taxes

The table below summarizes the Company’s net deferred tax asset:

	September 30,		December 31,
(dollar amounts in thousands)	2013		2012
Deferred tax assets
Provision for loan losses	$	8,669	$	14,348
Forgone interest on non-accrual loans	855		884
Fixed assets	459		405
Accruals	929		792
Alternative minimum tax credit	2,855		2,153
Deferred income	2,129		1,838
Deferred compensation	1,602		1,477
Net operating loss carryforward	6		907
Investment securities valuation	2,037		-
Other than temporary impairment	-		45
Realized built-in loss subject to § 382	2,433		3,234
Charitable contribution	-		61
State deferred tax	781		59
Total deferred tax assets	22,755		26,203
Deferred tax liabilities
Fair value adjustment for purchased assets	362		455
Investment securities valuation	-		2,745
Deferred costs, prepaids and FHLB advances	1,032		1,070
Total deferred tax liabilities	1,394		4,270
Net deferred tax assets	$	21,361	$	21,933

Deferred Tax Assets Valuation Allowance

U.S. GAAP requires that companies assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence, both positive and negative, that can be objectively verified.  U.S. GAAP provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable, and also limits projections of future taxable income to that which can be estimated over a reasonable amount of time.

The pre-tax losses the Company reported in 2010 and 2009 resulted in a three year cumulative loss position, which provided significant negative evidence about the Company’s ability to realize a portion of its deferred tax assets as of December 31, 2011 and 2010. Due to the three year cumulative pre-tax loss position as of December 31, 2010, management believed that it was no longer more likely than not that the Company would generate enough future taxable income over the projection period in order for all of its deferred tax assets to be realized. As a result of this negative evidence, the Company recorded a partial valuation allowance of approximately $7.1 million for its deferred tax assets in 2010 through a charge to income tax expense. The Company’s determination of the valuation allowance for a portion of its deferred tax assets was based on a determination that the recovery of the entire deferred tax asset was no longer more likely than not due to: (1) an analysis of cumulative pre-tax losses over a three year horizon, through December 31, 2010; (2) a projection of future taxable income over a period of time the Company believed to be reasonably estimable (“the projection period”); and (3) a detailed analysis to determine the amount of the deferred tax asset expected to be realized over the projection period of five years.

The ultimate realization of the Company’s deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences reverse.  The deferred tax assets for which there is no valuation allowance relate to amounts that are expected to be realized through subsequent reversals of existing taxable temporary differences over the projection period.  The accounting for deferred taxes is based on an estimate of future results. Differences between anticipated and actual outcomes of these future tax consequences could have an impact on the Company’s consolidated results of operations or financial position.

The Company’s return to profitability in 2011 and continued profits in 2012 substantially eliminated the three year cumulative loss position.  In addition, declines in the level of deferred tax assets and changes in their composition, along with projections of profitability for the foreseeable future and an improvement in the credit quality of the Company’s loan portfolio have combined to improve the outlook for the recovery of the valuation allowance provided for in 2010.  As a result of this improved outlook, the Company reduced the level of valuation allowance in the fourth quarter of 2011 by $1.5 million and then reversed the remaining $5.6 million valuation allowance in 2012, of which amount $4.1 million was reversed in the third quarter of 2012 and a total of $1.5 million was reduced in the first half of 2012, based on the Company’s determination that it was more likely than not that its entire deferred tax asset position would be realized.

Income Taxes

The Company is subject to income taxation by both federal and state taxing authorities.  Income tax returns for the years ended December 31, 2011, 2010, 2009 and 2008 are open to audit by federal and state taxing authorities.  The Company does not have any uncertain income tax positions and has not accrued for any interest or penalties as of September 30, 2013 and December 31, 2012. The following table provides a summary for the current and deferred amounts of the Company’s income tax expense / (benefit):

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2013			2012			2013		2012
Current:
Federal	$	495		$	936		$	306	$	2,489
State	(249		)	485			29		957
Total current (benefit) / expense	246			1,421			335		3,446
Deferred:
Federal	630			(141		)	3,777		(1,061		)
State	717			(115		)	1,577		(288		)
Total deferred expense / (benefit)	1,347			(256		)	5,354		(1,349		)
Deferred Tax Valuation Allowance:
Federal	-			(2,552		)	-		(3,662		)
State	-			(1,553		)	-		(1,943		)
Total deferred tax valuation allowance change	-			(4,105		)	-		(5,605		)
Total income tax expense / (benefit)	$	1,593		$	(2,940	)	$	5,689	$	(3,508	)

The following table reconciles the statutory federal income tax expense / (benefit) and rate to the Company’s effective income tax expense / (benefit) and rate:

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013				2012				2013				2012
(dollar amounts in thousands)	Amount			Percent	Amount			Percent	Amount			Percent	Amount			Percent
Tax expense at federal statutory tax rate	$	1,525		35.0%	$	1,221		35.0%	$	5,214		35.00%	$	2,241		35.0	%
State income taxes, net of federal income tax benefit	304			7.0%	241			6.9%	1,044			7.0%	435			6.8	%
Change in deferred tax asset valuation allowance	-			0.0%	(4,105		)	-117.7%	-			0.0%	(5,605		)	-87.6	%
Bank owned life insurance	(38		)	-0.9%	(56		)	-1.6%	(115		)	-0.8%	(109		)	-1.7	%
Tax exempt income, net of interest expense	(176		)	-4.0%	(217		)	-6.2%	(402		)	-2.7%	(415		)	-6.5	%
Other, net	(22		)	-0.5%	(24		)	-0.7%	(52		)	-0.3%	(55		)	-0.8	%
Total income tax expense / (benefit)	$	1,593		36.6%	$	(2,940	)	-84.3%	$	5,689		38.2%	$	(3,508	)	-54.8	%

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1.  Summary of Significant Accounting Policies

Description of Business

Heritage Oaks Bancorp (the “Bancorp”) is a California corporation organized in 1994 to act as the holding company for Heritage Oaks Bank (the “Bank”), which opened for business in 1983.  The Bank operates within San Luis Obispo, Santa Barbara and Ventura counties.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as commercial and consumer loans to customers who are predominately small to medium-sized businesses and individuals.  As such, the Company is subject to a concentration risk associated with its banking operations in San Luis Obispo, Santa Barbara and Ventura Counties. No one customer accounts for more than 10% of revenue or assets in any period presented. The Company has no assets nor does it generate any revenue from outside of the United States. While the chief decision-makers of the Company monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Basis of Presentation

The accompanying unaudited 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 2012 Annual Report filed on Form 10-K, filed with the Securities and Exchange Commission on March 4, 2013, file number 000-25020.

The condensed consolidated financial statements include the accounts of Heritage Oaks Bancorp and its wholly-owned financial subsidiary, Heritage Oaks Bank.  All significant inter-company balances and transactions have been eliminated. Heritage Oaks Capital Trust II, which was formed solely for the purpose of issuing trust preferred securities, is an unconsolidated subsidiary as the Company is not the primary beneficiary of the trust. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Certain amounts in the consolidated financial statements for the year ended December 31, 2012 and for the three and nine months ended September 30, 2012 may have been reclassified to conform to the presentation of the condensed consolidated financial statements in 2013.

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.  Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of real estate acquired through foreclosure, the carrying value of the Company’s deferred tax assets and estimates used in the determination of the fair value of certain financial instruments.

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s Annual Report filed on Form 10-K.  There have been no changes to these policies or their application other than as noted below, related to the adoption of standard updates issued by the Financial Accounting Standards Board (“FASB”).

Recent Accounting Guidance Adopted

On July 27, 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This update, like ASU 2011-08 which the Company adopted in 2011, allows companies the option to first evaluate qualitative factors to determine if events or circumstances exist that indicate that it is more likely than not that an indefinite-lived intangible asset is impaired.  If based on this assessment, a company concludes that there are no indicators that suggest an indefinitely-lived asset is more likely than not of having been impaired, then no further quantitative analysis is required.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company currently does not have any indefinite-lived intangible assets, other than goodwill, therefore adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On October 1, 2012, the FASB issued ASU No. 2012-04, Technical Corrections and Improvements.  The amendments in ASU 2012-04 cover a wide range of Topics in the Codification and address technical corrections and improvements and conforming amendments related to fair value measurements.  For public entities, the amendments that are subject to the transition guidance are effective for fiscal periods beginning after December 15, 2012.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On February 15, 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The update requires companies to present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts of reclassifications from each component of accumulated other comprehensive income based on its source and the income statement lines affected by the reclassification.  For public entities, the amendments that are subject to the transition guidance are effective for fiscal periods beginning after December 15, 2012.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

There has been no recently released accounting guidance that is directly applicable to the Company, which is not yet effective.

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Regulatory Matters (Details) (Heritage Oaks Bank)	1 Months Ended
	Apr. 30, 2012
Heritage Oaks Bank
Company's and the Bank's actual regulatory capital amounts and ratios
Minimum Leverage Ratio (as a percent)	10.00%

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Deposits (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Deposits.
Non-interest bearing deposits	$ 285,428	$ 273,242
Interest bearing deposits:
NOW accounts	83,961	76,728
Money market deposit accounts	324,990	293,525
Other savings deposits	43,089	41,021
Time certificates of $100 or more	145,315	97,105
Other time deposits	74,169	89,249
Total deposits	$ 956,952	$ 870,870

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Fair Value of Assets and Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	$ 267,179
Obligations of U.S. government agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	7,728
Mortgage-backed securities - Agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	175,432
Mortgage-backed securities - Non-agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	13,390
Obligations of state and municipal securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	44,060
Asset backed securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	26,569
Significant Other Observable Inputs (Level 2)
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	267,179	287,682
Significant Unobservable Inputs (Level 3)
Financial instruments of the Company measured at fair value on a recurring basis
Number of Instruments Held	0	0
Recurring basis | Significant Other Observable Inputs (Level 2)
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	267,179	287,682
Recurring basis | Significant Other Observable Inputs (Level 2) | Obligations of U.S. government agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	7,728	7,567
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - Agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	175,432	145,768
Recurring basis | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities - Non-agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	13,390	44,795
Recurring basis | Significant Other Observable Inputs (Level 2) | Obligations of state and municipal securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	44,060	68,968
Recurring basis | Significant Other Observable Inputs (Level 2) | Asset backed securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	26,569	20,584
Recurring basis | Assets At Fair Value
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	267,179	287,682
Recurring basis | Assets At Fair Value | Obligations of U.S. government agencies
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	7,728	7,567
Recurring basis | Assets At Fair Value | Mortgage-backed securities - Agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	175,432	145,768
Recurring basis | Assets At Fair Value | Mortgage-backed securities - Non-agency
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	13,390	44,795
Recurring basis | Assets At Fair Value | Obligations of state and municipal securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	44,060	68,968
Recurring basis | Assets At Fair Value | Asset backed securities
Financial instruments of the Company measured at fair value on a recurring basis
Total assets measured on recurring basis	$ 26,569	$ 20,584

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Regulatory Matters

9 Months Ended

Sep. 30, 2013

Regulatory Matters

Regulatory Matters

Note 13.  Regulatory Matters

Memorandums of Understanding

Since April 2012, the Bank has operated under a Memorandum of Understanding (“MOU”) with the FDIC and California Department of Financial Institutions (“DFI”), which replaced the Consent Order entered into in 2010. In the MOU, the Company committed to, among other things; continue to make progress in improving credit quality and processes as well as to continue to comply with the 10% Leverage Ratio as originally established by the Order.

Effective April 24, 2013, the FDIC and DFI terminated their MOU with the Bank, signifying full resolution of all open matters raised as part of their examination in 2010 and recognition of the improved financial health of the Bank.  As such the Bank will no longer be subject to the MOU’s 10% Leverage Ratio requirement, as well as the other provisions of the MOU.

Since July 2012, the Company has operated under a MOU with the FRB, which replaced the Written Agreement entered into in 2010.  In the MOU the Company committed among other things, to continue to seek FRB approval prior to: paying any dividends on its common and preferred stock; paying interest, principal or other sums on subordinated debt or trust preferred securities; or incurring, increasing, or guaranteeing any debt. On September 4, 2013, the Federal Reserve Bank of San Francisco terminated the MOU with the Bank.

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Capital

9 Months Ended

Sep. 30, 2013

Capital

Capital

Note 9.  Capital

The following table sets forth the Company’s and the Bank’s actual regulatory ratios and the regulatory standard:

	Regulatory Standard	September 30, 2013		December 31, 2012
	Well	Heritage Oaks		Heritage Oaks
Ratio	Capitalized	Bancorp	Bank	Bancorp	Bank
Leverage ratio	5.00%	10.58%	10.05%	12.32%	11.93%
Tier I capital to risk weighted assets	6.00%	13.27%	12.59%	15.55%	15.02%
Total risk based capital to risk weighted assets	10.00%	14.53%	13.85%	16.81%	16.28%

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Fair Value of Assets and Liabilities (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value of Assets and Liabilities

Summary of the financial instruments the Company measures at fair value on a recurring basis

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At
September 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Obligations of U.S. government agencies	$	-	$	7,728	$	-	$	7,728
Mortgage backed securities:
Agency	-		175,432		-		175,432
Non-agency	-		13,390		-		13,390
Obligations of state and municipal securities	-		44,060		-		44,060
Asset backed securities	-		26,569		-		26,569
Total assets measured on a recurring basis	$	-	$	267,179	$	-	$	267,179
December 31, 2012
Assets
Obligations of U.S. government agencies	$	-	$	7,567	$	-	$	7,567
Mortgage backed securities:
Agency	-		145,768		-		145,768
Non-agency	-		44,795		-		44,795
Obligations of state and municipal securities	-		68,968		-		68,968
Asset backed securities			20,584		-		20,584
Total assets measured on a recurring basis	$	-	$	287,682	$	-	$	287,682

Summary of the changes in balance sheet carrying values associated with recurring Level 3 financial instruments

						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the three months ended
September 30, 2012
Obligations of state and municipal securities	$	262	$	-		$	-	$	-	$	(262	)	$	-
						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the nine months ended
September 30, 2012
Obligations of state and municipal securities	$	259	$	3		$	-	$	-	$	(262	)	$	-
Agency mortgage baked securities	$	-	$	(191	)	$	4,674	$	-	$	(4,483	)	$	-
Non-agency mortgage backed securities	$	3,074	$	-		$	-	$	-	$	(3,074	)	$	-

(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.

Summary of assets the Company measures at fair value on a non-recurring basis

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant				Year to
	Active Markets for		Observable		Unobservable				Date
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At		Total Losses/
September 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value		(Recoveries)
Assets
Impaired loans
Residential 1 to 4 family	$	-	$	-	$	348	$	348	$	-
Commercial real estate	-		-		521		521		88
Commercial and industrial	-		-		76		76		959
Land	-		-		3,023		3,023		(8		)
Total assets measured on a non-recurring basis	$	-	$	-	$	3,968	$	3,968	$	1,039
December 31, 2012
Assets
Impaired loans
Commercial and industrial	$	-	$	820	$	213	$	1,033	$	1,941
Agriculture	-		72		-		72		28
Construction	-		1,656		-		1,656		460
Land	-		-		2,048		2,048		3,802
Total assets measured on a non-recurring basis	$	-	$	2,548	$	2,261	$	4,809	$	6,231

Summary of the estimated fair value of financial instruments

			Fair Value Measurements Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Carrying		Identical Assets		Inputs		Inputs
September 30, 2013	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Cash and cash equivalents	$	33,281	$	33,281	$	-	$	-	$	33,281
Investment securities available for sale	267,179		-		267,179		-		267,179
Federal Home Loan Bank stock	4,739		-		-		-		N/A
Loans receivable, net of deferred fees and costs	775,700		-		-		779,769		779,769
Loans held for sale	5,463		-		5,463		-		5,463
Accrued interest receivable	3,629		-		1,194		2,435		3,629
Liabilities
Non-interest bearing deposits	285,428		285,428		-		-		285,428
Interest bearing deposits	671,524		-		673,207		-		673,207
Federal Home Loan Bank advances	57,500		-		55,803		-		55,803
Junior subordinated debentures	8,248		-		-		7,062		7,062
Accrued interest payable	177		-		177		-		177
December 31, 2012
Assets
Cash and cash equivalents	$	34,116	$	34,116	$	-	$	-	$	34,116
Investments and mortgage-backed securities	287,682		-		287,682		-		287,682
Federal Home Loan Bank stock	4,575		-		-		-		N/A
Loans receivable, net of deferred fees and costs	688,671		-		2,548		701,144		703,692
Loans held for sale	22,549		-		22,549		-		22,549
Accrued interest receivable	3,915		-		1,497		2,418		3,915
Liabilities
Non interest-bearing deposits	273,242		273,242		-		-		273,242
Interest-bearing deposits	597,628		-		598,664		-		598,664
Federal Home Loan Bank advances	66,500		-		67,059		-		67,059
Junior subordinated debentures	8,248		-		-		7,078		7,078
Accrued interest payable	192		-		192		-		192

Summary of off-balance sheet commitments

	September 30, 2013				December 31, 2012
	Notional		Cost to Cede		Notional		Cost to Cede
(dollar amounts in thousands)	Amount		or Assume		Amount		or Assume
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	170,047	$	1,700	$	178,432	$	1,784

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Subsequent Events

9 Months Ended

Sep. 30, 2013

Subsequent Events

Subsequent Events

Note 14.  Subsequent Events

On October 21, 2013, the Company signed a definitive agreement and plan of merger (the “Merger Agreement”) whereby the Company will acquire Mission Community Bancorp and merge their respective banks, Heritage Oaks Bank and Mission Community Bank.  Under the terms of the Merger Agreement, holders of Mission Community Bancorp’s common stock, warrants and options will receive aggregate cash consideration of $8.0 million and aggregate stock consideration of 7,541,353 shares of the Company’s common stock.  The total value of the merger consideration is $56.4 million, based on a $6.42 closing price of the Company’s common stock on October 18, 2013.  The transaction is currently expected to close in the first quarter of 2014, subject to customary conditions, including the approval of bank regulatory authorities and the shareholders of both companies.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Oct. 25, 2013
Document and Entity Information
Entity Registrant Name	HERITAGE OAKS BANCORP
Entity Central Index Key	0000921547
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		25,391,343
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Summary of Significant Accounting Policies

Recent Accounting Guidance Adopted

Recent Accounting Guidance Adopted

On July 27, 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This update, like ASU 2011-08 which the Company adopted in 2011, allows companies the option to first evaluate qualitative factors to determine if events or circumstances exist that indicate that it is more likely than not that an indefinite-lived intangible asset is impaired.  If based on this assessment, a company concludes that there are no indicators that suggest an indefinitely-lived asset is more likely than not of having been impaired, then no further quantitative analysis is required.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company currently does not have any indefinite-lived intangible assets, other than goodwill, therefore adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On October 1, 2012, the FASB issued ASU No. 2012-04, Technical Corrections and Improvements.  The amendments in ASU 2012-04 cover a wide range of Topics in the Codification and address technical corrections and improvements and conforming amendments related to fair value measurements.  For public entities, the amendments that are subject to the transition guidance are effective for fiscal periods beginning after December 15, 2012.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On February 15, 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The update requires companies to present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts of reclassifications from each component of accumulated other comprehensive income based on its source and the income statement lines affected by the reclassification.  For public entities, the amendments that are subject to the transition guidance are effective for fiscal periods beginning after December 15, 2012.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

Recent Accounting Guidance Not Yet Effective

There has been no recently released accounting guidance that is directly applicable to the Company, which is not yet effective.