DEF 14A 1 v138954_def14a.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

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¨	Soliciting Material Pursuant to § 240.14a-11(c) of § 240.14a-12

HERITAGE OAKS BANCORP

(Name of Registrant as Specified In Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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February 5, 2009

Dear Shareholder:

The Board of Directors of Heritage Oaks Bancorp (the “Company”) has approved an amendment to the Articles of Incorporation of the Company to authorize the issuance of preferred shares by the Company. The Board’s action to amend the Articles of Incorporation is subject to the approval of our shareholders.

The Board of Directors considers the addition of a class of preferred stock desirable to provide maximum flexibility with respect to our ability to augment our capital in the near future, including the Company’s participation in the U.S. Treasury Department’s Troubled Asset Relief Program Capital Purchase Program, and for other proper corporate purposes in the long term. We urge you to read the accompanying written consent solicitation carefully, as it contains a detailed explanation of the proposed amendment and the reasons for the proposed amendment. The Board of Directors believes the proposed amendment is in the best interest of the Company and its shareholders.

Please complete, date and sign the enclosed written consent solicitation and return it promptly in the enclosed envelope as soon as possible to ensure that your vote is counted with respect to the proposed amendment to the Company’s Articles of Incorporation.

	Sincerely,


	Michael J. Morris
	Chairman of the Board

Mailed to Shareholders

on or about February 5, 2009

HERITAGE OAKS BANCORP

WRITTEN CONSENT SOLICITATION

INFORMATION CONCERNING THE SOLICITATION

This Written Consent Solicitation (“Solicitation”) is being furnished to the shareholders of Heritage Oaks Bancorp, a California corporation (the “Company,” “we,” “us,” or “our”), in connection with the solicitation of written consents by the Board of Directors for approval of an amendment to the Company’s Articles of Incorporation to add a class of 5,000,000 shares of authorized preferred stock (the “Amendment”).

Only shareholders of record on January 27, 2009 (the “Record Date”) will be entitled to receive and consider the Solicitation. At the close of business on the Record Date, the Company had outstanding and entitled to be voted 7,753,078 shares of its no par value Common Stock (the “Common Stock”). Written consents of shareholders representing a majority of the outstanding shares of our Common Stock are required to approve the Amendment.

General

The Board of Directors has elected to obtain shareholder approval of the Amendment by written consent, rather than by calling a special meeting of shareholders. Written consents are being solicited from all of our shareholders pursuant to Section 603 of the California Corporations Code and Section 2.10 of ARTICLE II of our Bylaws.

Receipt of Consents

We are asking that we receive your written consent by 5:00 p.m., Pacific Time, on March 3, 2009 to ensure a timely solicitation process and to be counted in the vote on the Amendment. We will have the right to keep the solicitation period open for as long we determine is necessary. In all events, the solicitation period will terminate when we receive enough written consents to approve the Amendment.

Shareholders who wish to vote “YES” for the Amendment should complete, sign and date the accompanying written consent card and return it to the Company in the enclosed postage prepaid envelope as soon as possible.

A written consent card returned by a shareholder will be counted “consent to,” “does not consent to” or “abstain” with respect to the Amendment, as indicated on the consent card, with respect to all shares shown on the books of the Company as of the record date as being owned by such shareholder. Any shareholder who signs and returns the written consent card but who does not indicate a choice thereon will be deemed to have consented to the approval of the Amendment. Shareholder approval will be effective upon receipt by the Company of affirmative written consents representing a majority of the Company’s outstanding shares

Who May Vote

Only shareholders of record as of the record date of January 27, 2009 may vote. You are entitled to one vote for each share of Company Common Stock you held on the record date. There were 7,753,078 shares of the Company’s Common Stock issued and outstanding on the record date. The Company has no other class of capital stock outstanding. Consent may be given by any person in whose name shares stand on the books of the Company as of the record date, or by his or her duly authorized agent.

If you hold your stock in “street name” and you fail to instruct your broker or nominee as to how to vote your shares, your broker or nominee MAY NOT, pursuant to applicable stock exchange rules, vote your stock with respect to the Amendment.

Vote Required

We must receive written consents representing a majority of the outstanding shares of our common stock for approval of the Amendment. Accordingly, abstentions from voting will have the effect of a vote “against” the Amendment.

Revocation of Consent

You may withdraw or change your written consent before the solicitation period expires. You will need to send a letter to the Company’s corporate secretary stating that you are revoking your previous vote. As noted above, we will terminate the solicitation period as soon as we receive enough written consents to approve the Amendment, after which date you will no longer be able to revoke a previously submitted consent.

Absence of Appraisal Rights

Shareholders who abstain from consenting with respect to the amendment, or who withhold consent to the amendment, do not have the right to an appraisal of their shares of common stock or any similar dissenters’ rights under applicable law.

Expenses of this Solicitation

This Solicitation is being made by the Board of Directors of the Company, and we will bear the costs of such Solicitation, including preparation, printing and mailing costs. Written consents will be solicited principally through the mails, but our directors, officers and employees may solicit written consents personally or by telephone. Arrangements will be made with brokerage firms and other custodians, nominees and fiduciaries to forward these consent solicitation materials to shareholders whose stock in the Company is held of record by such entities, and we will reimburse such brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in connection therewith. In addition, we may pay for and utilize the services of individuals or companies we do not regularly employ in connection with this Solicitation, if management determines it advisable.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS GIVE THEIR WRITTEN CONSENT IN FAVOR OF THE AMENDMENT.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

As of January 14, 2009, no individual known to the Company owned more than five percent (5%) of the outstanding shares of its Common Stock except as described below.

Name and Address of	Amount and Nature of			Percent of
Beneficial Owner	Beneficial Owner			Class

Banc Funds Co LLC		562,845			7.26	%
208 South LaSalle Street
Suite 1680
Chicago, IL 6064

Ole K Viborg		422,509	1		5.45	%
2470 El Pomar Dr.
Templeton, CA 93465

Lawrence P Ward		413,464	1		5.33	%
Heritage Oaks Bancorp
545 12th Street
Paso Robles, CA 93446

Merle F Miller		397,375			5.13	%
Heritage Oaks Bancorp
545 12th Street
Paso Robles, CA 93446

1/	Including shares of Common Stock subject to stock options exercisable within 60 days of the record date.

Security Ownership of Management

The following table sets forth, as of January 14, 2009, information as to the shares concerning the equity ownership of the Company's directors/nominees and named executive officers1/, and directors and named executive officers as a group. All of the shares shown in the following table are owned both of record and beneficially except as indicated in the notes to the table. The Company has only one class of shares outstanding, Common Stock.

Name and Address

Relationship with

Amount and Nature

Percent

of Beneficial Owner 2/

Company

of Beneficial Owner 3/

Class 4/

Michael J. Morris

Chairman

275,074

3.55

Donald H. Campbell

Vice-Chairman

48,780

Michael Behrman

Director

46,869

Kenneth L. Dewar

Director

17,918

Mark C. Fugate

Director

96,656

1.25

Dee Lacey

Director

49,106

Merle F. Miller

Director

397,376

5.13

Daniel J. O'Hare

Director

35,568

Michael Pfau

Director

14,721

Alexander F. Simas

Director

33,205

Lawrence P. Ward

President, Chief Executive Officer and Director

413,464

5.33

Margaret A. Torres

Executive Vice President / Chief Financial Officer

26,335

Joanne Funari

Executive Vice President/President Business First, a division of Heritage Oaks Bank

39,641

Paul Tognazzini

Executive Vice President / Chief Lending Officer

77,210

1.00

Mark W. Stasinis

Executive Vice President / Southern Regional Manager

44,155

All directors, nominees, and named executive officers of the Company as a group (15 persons)

1,616,078

20.84

* Less than 1%.

As used in this Solicitation, the term “named executive officer” means the President and Chief Executive Officer, Executive Vice President and President, Business First, a division of Heritage Oaks Bank, Executive Vice President and Chief Lending Officer, Executive Vice President and Chief Financial Officer, and the Executive Vice President and Southern Regional Manager. The Chairman of the Board, the Vice Chairman of the Board, and the Company’s other officers are not treated as executive officers of the Company.

2/	The address for all persons listed is c/o Heritage Oaks Bancorp, 545 12th Street, Paso Robles, California, 93446.

Except as otherwise indicated in these notes, and subject to applicable community property laws and shared voting and investment, includes shares held by each person’s spouse (except where legally separated) and minor children; shares held by a family trust as to which such person is a trustee with sole voting and investment power (or shares power with a spouse); or shares held in an Individual Retirement Account as to which such person has pass-through voting rights and investment power.

4/	Includes shares of Common Stock subject to stock options exercisable within 60 days of record date.

Includes 214,780 shares held as Trustee of Heritage Oaks Bancorp Employee Stock Ownership Plan. Mr. Morris and Mr. Ward are co-trustees of the Stock Ownership Plan and under applicable rules the entire number of shares owned by such Plan is attributed to each of the trustees and the effect of the attributions rules results in the number of shares being double counted. Also, includes shares of Common Stock subject to stock options exercisable within 60 days of record date and restricted stock awards.

6/	Includes shares of Common Stock subject to stock options exercisable within 60 days of record date and restricted stock awards.

Includes shares held as a trustee of Andre, Morris and Buttery 401K and includes shares of Common Stock subject to stock options exercisable within 60 days of record date. Also, includes 214,780 shares held as Trustee of Heritage Oaks Bancorp Employee Stock Ownership Plan. Mr. Morris and Mr. Ward are co-trustees of the Stock Ownership Plan and under applicable rules the entire number of shares owned by such Plan is attributed to each of the trustees and the effect of the attributions rules results in the number of shares being double counted.

8/	Includes shares held as a trustee of Glenn, Burdette, Phillips and Bryson Tax and Business Services, Inc. 401K , shares held in his own 401K, shares held in his family trust and included shares of Common Stock subject to stock options exercisable within 60 days of record date.

PROPOSAL FOR

AMENDMENT OF THE ARTICLES OF INCORPORATION TO AUTHORIZE THE

CREATION OF AUTHORIZED SHARES OF PREFERRED STOCK FOR FUTURE ISSUANCE

Description of and Reasons for the Proposal

The Board of Directors has approved, subject to receiving shareholder approval, an amendment to the Company’s Articles of Incorporation to authorize a class of 5,000,000 shares of preferred stock, no par value. The Articles of Incorporation currently authorize only 20,000,000 shares of common stock, no par value. The amendment will vest in the Board the authority to determine the terms of one or more series of preferred stock, including the preferences, rights, and limitations of each series.

Provisions in a corporation’s articles of incorporation authorizing preferred stock in this manner are often referred to as “blank check” provisions because they give a board of directors the flexibility, at any time or from time to time, without further shareholder approval (except as may be required by applicable laws, regulatory authorities, or the rules of any stock exchange on which the corporation’s securities are then listed), to create one or more series of preferred stock and to determine the terms of each such series. The authority of the board of directors with respect to each series, without limitation, includes a determination of the following: (a) the number of shares to constitute the series, (b) the liquidation rights, if any, (c) the dividend rights and rates, if any, (d) the rights and terms of redemption, (e) the voting rights, if any, which may be full, special, conditional, or limited, (f) whether the shares will be convertible or exchangeable into securities of the company, and the rates thereof, if any, (g) any limitations on the payment of dividends on the common stock while any series is outstanding, (h) any other provisions that are not inconsistent with the articles of incorporation, and (i) any other preference, limitations, or rights that are permitted by law.

If the shareholders approve this proposal, Article 4 of the Articles of Incorporation would be amended in its entirety to read as follows:

“FOURTH. The Corporation shall have authority to issue twenty five million (25,000,000) shares, divided into two classes, as follows: twenty million (20,000,000) shares of common stock having no par value per share (“Common Stock”); and five million (5,000,000) shares of preferred stock, no par value per share (“Preferred Stock”).

The Preferred Stock may be issued from time to time in one or more series. The board of directors is authorized to designate and to fix the number of shares of any such series of Preferred Stock and to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock. The board of directors, within the limits stated in any resolution of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series.

The corporation shall from time to time in accordance with the laws of the State of California increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred Stock.”

The Board of Directors approved the Amendment to the Company’s Articles of Incorporation on January 20, 2009, subject to shareholder approval.

The Board believes that the flexibility to issue preferred stock can enhance the Board’s arm’s-length bargaining capability on behalf of the Company’s shareholders in a takeover situation. However, under some circumstances, the ability to designate the rights of, and issue, preferred stock could be used by the Board to make a change in control of the Company more difficult. The Board of Directors has no present intention of issuing any preferred stock for any defensive or anti-takeover purpose, for the purpose of implementing any shareholder rights plan, or with features specifically intended to make any attempted acquisition of the Company more difficult or costly. The Board of Directors could, in the exercise of its fiduciary duties, determine to issue preferred stock for such purposes in the future. The Board of Directors may also issue preferred stock for capital-raising activities or other corporate purposes that have the effect of making an acquisition of the Company materially more difficult or costly, as could be the case if the Board of Directors were to issue additional common stock for such purposes. At this time, the only issuance of preferred stock contemplated by the Board of Directors is the potential issuance of preferred stock in the United States Treasury Department’s Troubled Asset Relief Program Capital Purchase Program (the “CPP”) described below, which is intended for capital raising purposes only. For additional information on anti-takeover provisions associated with our capital stock, see “ - Anti-Takeover Effects of the Proposed Amendment.”

The rights of the holders of the Company’s common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. To the extent that dividends will be payable on any issued shares of preferred stock, the result would be to reduce the amount otherwise available for payment of dividends on outstanding shares of common stock and there might be restrictions placed on the Company’s ability to declare dividends on the common stock or to repurchase shares of common stock. The issuance of preferred stock having voting rights would dilute the voting power of the holders of common stock.

To the extent that preferred stock is made convertible into shares of common stock, the effect, upon such conversion, would also be to dilute the voting power and ownership percentage of the holders of common stock. In addition, holders of preferred stock would normally receive superior rights in the event of any dissolution, liquidation, or winding-up of the Company, thereby diminishing the rights of the holders of common stock to distribution of the Company’s assets. To the extent that preferred stock is granted preemptive rights, it would entitle the holder to a preemptive right to purchase or subscribe for additional shares of The Company.

The Board does not have any plans calling for the issuance of preferred stock at the present time, other than the sale of preferred stock to the United States Department of the Treasury (the “Treasury”) in connection with the CPP described below.

As described in more detail below, the Company’s application to participate in CPP was approved by the Treasury on January 9, 2009. While the Treasury’s approval of our application does not obligate us to participate in the program, the Board of Directors anticipates that it will elect to do so. The Company cannot participate in the CPP if the Amendment is not approved. The Treasury’s requirements regarding the terms of the preferred stock and warrants essentially are non-negotiable. Accordingly, in order to participate in the CPP, the Board of Directors must have the flexibility to issue preferred stock, which the proposed Amendment would provide. Moreover, the Board believes that the authorization to issue preferred stock would provide the Company with greater flexibility in meeting future capital requirements by creating series of preferred stock customized to meet the needs of particular transactions and prevailing market conditions. Series of preferred stock would also be available for issuance from time to time for any other proper corporate purposes, including in connection with strategic alliances, joint ventures, or acquisitions. The Board of Directors remains committed to the long term enhancement of common shareholder value.

The Troubled Asset Relief Program Capital Purchase Program

On October 14, 2008, the Treasury announced the CPP. This program was instituted by the Treasury pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides up to $700 billion to the Treasury to, among other things, take equity ownership positions in financial institutions. The minimum investment amount is 1% of an institution’s risk-weighted assets. The maximum amount is the lesser of $25 billion or 3% of its risk-weighted assets. The CPP is intended to encourage financial institutions in the United States to build capital and thereby increase the flow of financing to businesses and consumers.

Under the CPP, the Treasury will purchase shares of senior preferred stock from banks, bank holding companies, and other financial institutions (“TARP Preferred Shares”). TARP Preferred Shares will qualify as Tier 1 capital for regulatory purposes and rank senior to a participating institution’s common stock. TARP Preferred Shares will pay a cumulative dividend of 5% per annum for the first five years they are outstanding and thereafter at a rate of 9% per annum. TARP Preferred Shares generally will be non-voting, but will have limited voting rights on matters that could adversely affect the shares. After three years, TARP Preferred Shares will be callable at 100% of the issue price plus any accrued and unpaid dividends. Prior to the end of three years, the TARP Preferred Shares may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. The Treasury’s consent will be required for any increase in dividends on common stock or certain repurchases of common stock until the third anniversary of the date of the Treasury’s investment unless prior to such third anniversary either the TARP Preferred Shares are redeemed in whole or the Treasury has transferred all the TARP Preferred Shares to third parties.

SEC reporting companies whose common stock is traded on a national securities exchange, like the Company, participate in the “public” version of the CPP. Public institutions that participate in the program must issue to the Treasury warrants to purchase additional shares of common stock with an aggregate market price equal to 15% of the TARP Preferred Shares purchased by the Treasury. The exercise price of the warrants will be a per share price equal to the 20 trading-day average closing price for shares of the participating institution’s common stock for the 20 trading-days ending the day prior to Treasury’s approval of the institution’s CPP application. The warrants will have a term of 10 years and will be transferable by Treasury.

The Company will be required to register the TARP Preferred Shares, the TARP Warrants, and the common stock underlying the TARP Warrants with the SEC following the completion of the transaction.

Institutions that participate in the CPP and their senior executive officers must agree to comply with the standards for executive compensation and corporate governance set forth in Section 111 of EESA for the period during which the Treasury holds preferred stock or warrants issued under the program.

The description above of the TARP Preferred Shares and related elements of the CPP is intended only to summarize the program. See Appendix A for the Summary of Preferred Terms and Summary of Warrant Terms as published by the Treasury for public qualifying financial institutions.

The Company’s TARP Application

The Company filed an application on November 3, 2008 to participate in the “public” company version of the CPP, seeking a $21.0 million investment, the maximum permitted under the program. For the Company, the minimum amount of investment would be approximately $7.0 million. The application was preliminarily approved by the Treasury on January 9, 2009. While the Treasury's approval of our application does not obligate the Company to participate in the program, the Board of Directors anticipates that it will elect to do so at the maximum investment amount. If the Company elects not to participate in the program, reduce the level of its participation, or the Treasury were to reduce the amount of capital available to the Company under the CPP, management does not believe that the Company’s liquidity, capital resources, or results of operations would be materially affected.

Any TARP Preferred Shares issued by the Company will qualify as Tier 1 capital and will rank senior to our common stock, the only class of equity securities we currently have outstanding. The primary effect of a CPP investment in the Company would be to materially increase our regulatory capital ratios. The following tables present our actual capital ratios as of December 31, 2007 and September 30, 2008 and our capital ratios on a pro forma basis to illustrate the effects of issuing TARP Preferred Shares at the maximum and minimum program levels.

	December 31, 2007 (1)
	Bank									Holding Company
	Actual			Minimum			Maximum			Actual			Minimum			Maximum
Tier I leverage ratio		9.02	%		9.88	%		11.60	%		9.60	%		10.60	%		12.62	%
Tier I risk-based capital ratio		9.43	%		10.31	%		12.07	%		10.08	%		11.11	%		13.17	%
Total risk-based capital ratio		10.40	%		11.28	%		13.03	%		11.04	%		12.07	%		14.13	%

	September 30, 2008 (1)
	Bank									Holding Company
	Actual			Minimum			Maximum			Actual			Minimum			Maximum
Tier I leverage ratio		8.78	%		9.56	%		11.10	%		9.01	%		9.92	%		11.73	%
Tier I risk-based capital ratio		9.41	%		10.21	%		11.83	%		9.67	%		10.62	%		12.51	%
Total risk-based capital ratio		10.66	%		11.47	%		13.08	%		10.92	%		11.87	%		13.76	%

(1) Minimums in the tables above represent pro forma capital ratios for both the Bank and the Holding Company had the Company issued $7 million in preferred equity as of the dates presented. Additionally, maximums represent pro forma capital ratios for both the Bank and Holding Company had the Company issued $21 million in preferred equity as of the dates presented.

If the Company participates in the CPP, the preferred shares it would issue to the Treasury would pay a cumulative dividend rate of five percent (5%) per annum for the first five years and reset to a rate of nine percent (9%) per annum after year five. The TARP Preferred Shares would be non-voting, other than class voting rights on matters that could adversely affect the shares, and would be callable at 100% of the issue price after three years. Prior to the end of three years, the TARP Preferred Shares may be redeemed for 100% of their issue price, with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock, the aggregate gross proceeds of which exceed 25% of the issue price. The Company would be prohibited from paying or declaring dividends on any junior preferred shares, preferred shares with equal ranking, or common shares unless all accrued and unpaid dividends for all past dividend periods have been declared and paid in full. The Company also would be prohibited from repurchasing or redeeming any junior or pari passu preferred shares, or common shares during periods dividends on the TARP Preferred Shares are unpaid.

If the TARP Preferred Shares are issued, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of stock junior to the TARP Preferred Shares or pari passu with the TARP Preferred Shares will be subject to restrictions, including the Company’s restrictions against increasing dividends from the last quarterly cash dividend per share ($0.08), the last cash dividend declared on the Company’s common stock prior to October 14, 2008, the date Treasury announced the CPP. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of: (a) the third anniversary of the date of the issuance of the TARP Preferred Shares, and (b) the date on which the TARP Preferred Shares have been redeemed in whole or Treasury has transferred all of the TARP Preferred Shares to third parties.

In addition, the ability of the Company to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of stock junior to the TARP Preferred or ranking pari passu with the TARP Preferred Shares will be subject to further restrictions if the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the TARP Preferred Shares.

If the Company participates in the CPP, contemporaneous with the issuance of any TARP Preferred Shares, the Company would be required to issue the Treasury warrants (“Warrants”) to purchase shares of the Company’s common stock equal to 15% of the value of the TARP Preferred Shares. These shares are referred to herein as “TARP Warrant Shares.” The initial exercise price of the Warrants would be the average closing price of the Company’s common stock over the 20 trading days ending the day before Treasury granted preliminary approval for the Company to participate in the CPP. The Company has calculated that average to be $5.15, but any final exercise price for the Warrants will be subject to confirmation by Treasury, if and when the Company elects to participate in the CPP. The Warrants will have a term of 10 years.

The TARP Preferred Shares, TARP Warrant Shares, and Warrants would be freely transferable and the Company would be required to file a registration statement with the SEC covering all of such securities within 30 days of closing the transaction with Treasury.

If the Company fails to pay dividends on the TARP Preferred Shares for a total of six quarters, whether or not consecutive, Treasury will have the right to elect two members of the Company’s Board of Directors, voting together with any other holders of preferred shares ranking pari passu with the TARP Preferred Shares. These directors would serve on the Board of Directors until such time as the Company has paid in full all dividends not previously paid, at which time these directors’ terms of office would immediately terminate.

Management does not believe that acceptance of the CPP investment would have any material impact on the operations of the Company. However, for as long as the Treasury owns any securities of the Company issued under the program, the Company will be required to take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply in all respects with Section 111(b) of the EESA, and the regulations issued and in effect thereunder as of the closing date of the sale of the securities to the Treasury. This means that, among other things, while the Treasury owns equity securities issued by the Company in connection with the program, the Company must:

ensure that the incentive compensation programs for its senior executive officers do not encourage unnecessary and excessive risks that threaten the value of the Company;

implement a required clawback of any bonus or incentive compensation paid to the Company’s senior executive officers based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate;

not make any “golden parachute payment” (as defined in the Internal Revenue Code) to any of the Company’s senior executive officers; and

agree not to deduct for tax purposes executive compensation in excess of $500,000 in any one fiscal year for each of the Company’s senior executive officers.

The Company is currently reviewing its benefit plans and contracts to determine whether any amendments or modifications will be required to comply with the limits on executive compensation established by Section 111 of the EESA. If the Company elects to participate in the program, each of its senior executive officers will sign a waiver for the benefit of Treasury waiving their right to any compensation that would violate the above restrictions. Further, the Company will amend any of its benefit plans or agreements with its senior executive officers to ensure such plans and agreement comply with Section 111 of the EESA.

At September 30, 2008, the Company and its bank subsidiary had capital ratios in excess of those required to be considered “well-capitalized” under banking regulations. Nevertheless, the Board believed it was prudent for the Company to apply for capital available under the CPP because (i) it believes that the cost of capital under this program is significantly lower than the cost of capital otherwise available to the Company at this time, and (ii) despite being well-capitalized, additional capital under the program would provide the Company and its bank subsidiary additional flexibility to meet future capital needs that may arise. Specifically, if the Company receives the $21.0 million of capital that it applied for under the CPP, then the Company presently plans to contribute $18 million to its bank subsidiary and to retain the remainder of the proceeds at the parent company level for general corporate purposes. The Company’s bank subsidiary intends to use the additional capital to fund prudent loan growth in its markets and to further strengthen its capital position.

Pro Forma Financial Statements

The following un-audited pro forma financial information of Heritage Oaks Bancorp as of and for the fiscal year ended December 31, 2007 and the nine months ended September 30, 2008 show the effects of a minimum of $7.0 million and a maximum of $21.0 million of TARP Preferred Shares issued to the U.S. Treasury pursuant to the program. We have presented this financial information under two different scenarios:

The minimum investment, which assumes the issuance under the program of 7,000 shares of TARP Preferred Shares at $1,000 per share and the issuance of a warrant to purchase shares of the Company’s common stock in an amount equal to 15% percent of the preferred issuance or approximately $1.1 million. Our pro forma assumptions estimate the number of shares the Company would be required to issue in the form of a warrant under this scenario to be approximately 206,000.

The minimum investment, which assumes the issuance under the program of 21,000 shares of TARP Preferred Shares at $1,000 per share and the issuance of a warrant to purchase shares of the Company’s common stock in an amount equal to 15% percent of the preferred issuance or approximately $3.2 million. Our pro forma assumptions estimate the number of shares the Company would be required to issue in the form of a warrant under this scenario to be approximately 617,000.

The TARP Preferred Shares will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The cash proceeds from the investment are reflected in the balance sheets as additions to investment securities and the related interest income, net of tax, is included in the income statements. The effective dividend on TARP Preferred Shares in the following pro forma financial information includes amortization of the discount over a five-year period using the effective yield method and dividends on both the TARP Preferred Shares at 5%.

There is the possibility that participation in the program will impact future net income available to our common shareholders due to future dividends and accretion charges related to the preferred stock issued to Treasury. The pro forma financial data presented below may change materially under either the minimum investment or maximum investment scenario based on the actual proceeds received under the program, the timing and utilization of the proceeds, as well as certain other factors including the discount rate used to determine the fair value of the TARP Preferred Shares. Accordingly, we can provide no assurance that the minimum or maximum investment pro forma scenarios included in the consolidated financial data will ever be achieved. We have included the following un-audited pro forma consolidated financial data solely for the purpose of providing shareholders with information that may be useful for purposes of considering and evaluating the proposals to amend our Articles of Incorporation. The Company plans to initially invest the proceeds in investment grade, relatively short in duration (1.5 -5 years) mortgage-backed securities that will provide cash flow for subsequent investment in loans. It is estimated that the Company will earn a pre-tax yield of approximately 6.75% on such investment. The Company anticipates making such an investment in an effort minimize the impact the cost of the preferred equity is expected to have on income available to common shareholders.

This financial data should be read in conjunction with our audited financial statements and the related notes filed as part of our Annual Report on Form 10-K for the year ended December 31, 2007, and our un-audited consolidated financial statements and the related notes filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.

Consolidated Statements of Condition:

	As of December 31, 2007
(dollar amounts in thousands)	Actual		As Adjusted			As Adjusted
	(audited)		(Minimum)			(Maximum)
Assets
Cash and due from banks	$	23,254	$	23,254		$	23,254
Federal funds sold		23,165		23,165			23,165
Total cash and cash equivalents		46,419		46,419			46,419

Interest-bearing deposits with other financial institutions		330		330			330
Investment securities, available-for-sale (1)		47,556		54,556			68,556
Federal Home Loan Bank stock, at cost		3,045		3,045			3,045
Loans held for sale		902		902			902
Loans, net of deferred fees of $1,732 and allowance for loan losses of $6,143 at December 31, 2007		605,342		605,342			605,342
Property premises and equipment, net		6,390		6,390			6,390
Net deferred tax asset		5,290		5,290			5,290
Bank owned life insurance		9,923		9,923			9,923
Goodwill		10,911		10,911			10,911
Core deposit intangible		4,551		4,551			4,551
Other real estate owned		-		-			-
Other assets		4,895		4,895			4,895

Total assets	$	745,554	$	752,554		$	766,554

Liabilities
Deposits:
Demand, non-interest bearing	$	153,684	$	153,684		$	153,684
Savings, NOW and money market deposits		317,911		317,911			317,911
Time deposits of $100 or more		75,966		75,966			75,966
Time deposits under $100		97,247		97,247			97,247
Total deposits		644,808		644,808			644,808

Short term FHLB borrowing		-		-			-
Long term FHLB borrowing		8,000		8,000			8,000
Securities sold under agreement to repurchase		1,936		1,936			1,936
Junior subordinated debentures		13,403		13,403			13,403
Other liabilities		7,957		7,957			7,957

Total liabilities		676,104		676,104			676,104

Commitments and contingencies		-		-			-

Stockholders' Equity
Senior preferred stock, $1,000 par value; 5,000,000 shares authorized (2)		-		7,000			21,000
Discount on senior preferred stock (3)		-		(645	)		(1,936	)
Warrant to purchase common stock (4)		-		645			1,936
Common stock, no par value; 20,000,000 shares authorized; 7,683,829 shares issued and outstanding at December 31, 2007		43,996		43,996			43,996
Additional paid in capital		672		672			672
Retained earnings		24,598		24,598			24,598
Accumulated other comprehensive income,		184		184			184

Total stockholders' equity		69,450		76,450			90,450

Total liabilities and stockholders' equity	$	745,554	$	752,554		$	766,554

	As of September 30, 2008
(dollar amounts in thousands)	Actual			As Adjusted			As Adjusted
	(un-audited)			(Minimum)			(Maximum)
Assets
Cash and due from banks	$	18,914		$	18,914		$	18,914
Federal funds sold		8,835			8,835			8,835
Total cash and cash equivalents		27,749			27,749			27,749

Interest-bearing deposits with other financial institutions		119			119			119
Investment securities, available-for-sale (1)		52,634			59,634			73,634
Federal Home Loan Bank stock, at cost		5,006			5,006			5,006
Loans held for sale		2,955			2,955			2,955
Loans, net of deferred fees of $1,647 and allowance for loan losses of $10,350 at September 30, 2008		654,403			654,403			654,403
Property premises and equipment, net		6,769			6,769			6,769
Net deferred tax asset		7,085			7,085			7,085
Bank owned life insurance		10,631			10,631			10,631
Goodwill		11,541			11,541			11,541
Core deposit intangible		3,906			3,906			3,906
Other real estate owned		197			197			197
Other assets		4,940			4,940			4,940

Total assets	$	787,935		$	794,935		$	808,935

Liabilities
Deposits:
Demand, non-interest bearing		155,267			155,267			155,267
Savings, NOW and money market deposits		269,744			269,744			269,744
Time deposits of $100 or more		75,657			75,657			75,657
Time deposits under $100		88,583			88,583			88,583
Total deposits		589,251			589,251			589,251

Short term FHLB borrowing		96,500			96,500			96,500
Long term FHLB borrowing		10,000			10,000			10,000
Securities sold under agreement to repurchase		1,235			1,235			1,235
Junior subordinated debentures		13,403			13,403			13,403
Other liabilities		6,592			6,592			6,592

Total liabilities		716,981			716,981			716,981

Commitments and contingencies		-			-			-

Stockholders' Equity
Senior preferred stock, $1,000 par value; 5,000,000 shares authorized (2)		-			7,000			21,000
Discount on senior preferred stock (3)		-			(645	)		(1,936	)
Warrant to purchase common stock (4)		-			645			1,936
Common stock, no par value; 20,000,000 shares authorized; 7,709,600 shares issued and outstanding at September 30, 2008		48,456			48,456			48,456
Additional paid in capital		947			947			947
Retained earnings		22,675			22,675			22,675
Accumulated other comprehensive income		(1,124	)		(1,124	)		(1,124	)

Total stockholders' equity		70,954			77,954			91,954

Total liabilities and stockholders' equity	$	787,935		$	794,935		$	808,935

(1)

The pro forma financial information above assumes the proceeds from the issuance of the preferred stock will be used to purchase investment securities. The Company initially plans to invest the proceeds in investment grade, relatively short in duration (1.5 -5 years) mortgage-backed securities that will provide cash flow for subsequent investment in loans. It is estimated that the Company will earn a pre-tax yield of approximately 6.75% on such investment.

(2)

Reflects the issuance of the preferred stock under both the minimum and maximum scenarios.

(3)

The Company will allocate the estimated proceeds from the issuance based on the relative fair value of the warrants as compared to the fair value of the preferred stock. The fair value of the warrants is determined under a Black-Scholes model (as described in note 4). The fair value of the preferred stock is determined based on assumptions regarding the discount rate (market rate) on the preferred stock (currently estimated at 10%). The Company will then accrete the discount over a period of 5 years with corresponding charges to retained earnings using the effective yield method (approximately 7%).

(4)

Reflects the Company’s estimate of the relative fair value of the warrants to be issued to Treasury. As mentioned in note 3, the Company used the Black-Scholes pricing model. This model includes assumptions regarding Heritage Oaks Bancorp’s common stock price, estimated dividend yield, stock price volatility, as well as assumptions regarding a risk-free interest rate. Additionally, based on this pro forma, it is estimated that the warrants will have an exercise price equal to $5.15 per share, which is expected to result in approximately $1.1 million and $3.2 million in proceeds to the Company upon exercise under the minimum and maximum scenarios, respectively. Under the minimum and maximum scenarios, it is estimated the Company will issue a warrant to Treasury to purchase approximately 206,000 and 617,000 shares of its common stock, respectively.

Consolidated Statements of Operations:

	For the year ended December 31, 2007
(dollar amounts in thousands except per share data)	Actual		As Adjusted		As Adjusted
	(audited)		(Minimum)		(Maximum)
Interest Income:
Interest and fees on loans	$	42,425	$	42,425	$	42,425
Investment securities (1)		1,956		2,429		3,374
Federal funds sold and commercial paper		785		785		785
Time certificates of deposit		8		8		8

Total interest income		45,174		45,647		46,592

Interest Expense:
Savings, NOW and money market accounts		4,911		4,911		4,911
Interest on time deposits in denominations of $100 or more		2,046		2,046		2,046
Interest on all other time deposits		4,914		4,914		4,914
Other borrowed funds		2,880		2,880		2,880

Total interest expense		14,751		14,751		14,751

Net interest income before provision for possible loan losses		30,423		30,896		31,841

Provision for loan losses		660		660		660

Net interest income after provision for loan losses		29,763		30,236		31,181

Non-Interest Income:
Fees and service charges		2,774		2,774		2,774
Gain on sale of investment securities		6		6		6
Gain on sale of SBA loans		36		36		36
Other income		2,533		2,533		2,533

Total non-interest income		5,349		5,349		5,349

Non-Interest Expense:
Salaries and employee benefits		13,501		13,501		13,501
Occupancy and equipment		3,381		3,381		3,381
Other expenses		7,026		7,026		7,026

Total non-interest expenses		23,908		23,908		23,908

Income before provision for income taxes		11,204		11,677		12,622

Provision for applicable income taxes (2)		4,287		4,482		4,871

Net income	$	6,917	$	7,195	$	7,751

Dividends on preferred stock (3)		-		350		1,050
Amortization of discount on preferred stock (4)		-		124		372

Net income available to common	$	6,917	$	6,721	$	6,329

Shares:
Basic		6,984,174		6,984,174		6,984,174
Fully diluted (5)		7,228,804		7,320,173		7,502,911
Earnings Per Share:
Basic	$	0.99	$	0.96	$	0.91
Fully diluted (5)	$	0.96	$	0.92	$	0.84

	For the nine months ended September 30, 2008
(dollar amounts in thousands except per share data)	Actual		As Adjusted		As Adjusted
	(un-audited)		(Minimum)		(Maximum)
Interest Income:
Interest and fees on loans	$	35,554	$	35,554	$	35,554
Investment securities (1)		2,236		2,591		3,300
Federal funds sold and commercial paper		130		130		130
Time certificates of deposit		7		7		7

Total interest income		37,927		38,282		38,991

Interest Expense:
Savings, NOW and money market accounts		3,412		3,412		3,412
Interest on time deposits in denominations of $100 or more		1,825		1,825		1,825
Interest on all other time deposits		2,276		2,276		2,276
Other borrowed funds		2,180		2,180		2,180

Total interest expense		9,693		9,693		9,693

Net interest income before provision for possible loan losses		28,234		28,589		29,298

Provision for loan losses		6,215		6,215		6,215

Net interest income after provision for loan losses		22,019		22,374		23,083

Non-Interest Income:
Fees and service charges		2,487		2,487		2,487
Gain on sale of investment securities		37		37		37
Gain on sale of SBA loans		-		-		-
Other income		2,184		2,184		2,184

Total non-interest income		4,708		4,708		4,708

Non-Interest Expense:
Salaries and employee benefits		11,897		11,897		11,897
Occupancy and equipment		3,344		3,344		3,344
Other expenses		6,985		6,985		6,985

Total non-interest expenses		22,226		22,226		22,226

Income before provision for income taxes		4,501		4,856		5,565

Provision for applicable income taxes (2)		1,601		1,747		2,039

Net income	$	2,900	$	3,109	$	3,526

Dividends on preferred stock (3)		-		263		788
Amortization of discount on preferred stock (4)		-		93		279

Net income available to common	$	2,900	$	2,753	$	2,459

Shares:
Basic		7,703,107		7,703,107		7,703,107
Fully diluted (5)		7,832,815		7,935,169		8,139,876
Earnings Per Share:
Basic	$	0.38	$	0.36	$	0.32
Fully diluted (5)	$	0.37	$	0.35	$	0.30

(1)

Reflects estimated additional interest income resulting from the investment of proceeds the Company may receive under the TARP program. The Company initially plans to invest the proceeds from the issuance of the preferred equity in investment grade, relatively short in duration (1.5 to 5 years) mortgage-backed securities that will provide cash flow for subsequent investment in loans. It is estimated that the Company will earn a pre-tax yield of approximately 6.75% on such investment. The Company anticipates making such an investment in an effort to minimize the impact the cost of the preferred equity is expected to have on income available to common shareholders.

(2)

Provisions for income taxes are adjusted to reflect the estimated additional income tax the Company may have to accrue for given the expected increases in interest income. This pro forma assumes a tax rate of 41.15%.

(3)

Reflect required quarterly dividend payments the Company can expect to make under the terms of the program. Dividends reflected in the pro forma information above are equivalent to 5% of the preferred equity assumed to be issued.

(4)

Amortization related to the discount on the preferred stock is expected to take place over a period of five years. The Company will accrete the value of the discount to preferred equity with corresponding charges made to retained earnings.

(5)

Diluted shares and corresponding earnings per share have been adjusted to reflect the estimated impact that the aforementioned items in notes 3 and 4 as well as the dilutive nature the issuance of the warrants is expected to have. For purposes of this pro forma the Company assumed the warrants were issued and exercisable on January 1, 2007 and 2008. This pro forma also assumes the treasury stock method was used in determining the estimated diluted shares outstanding for the periods presented and corresponding earnings per share. Estimated proceeds from the assumed exercise of the warrants were determined using an estimated exercise price of $5.15 per share.

Anti-Takeover Effects of the Proposed Amendment

This proposal will, if approved, supplement and strengthen the Company’s existing takeover defenses.

The issuance of shares of preferred stock with voting rights could, under certain circumstances, have the effect of delaying or preventing a change of control of the Company by increasing the number of outstanding shares entitled to vote and by increasing the number of votes required to approve a change of control of the Company. Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to make it more difficult to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise. The ability of the Board of Directors to issue such additional shares of preferred stock, with the rights and preferences it deems advisable, could discourage potential acquirors, and could therefore deprive shareholders of benefits they might otherwise obtain from an attempt to acquire ownership or control of the Company, such as selling their shares at a premium over market price. Moreover, the issuance of such additional shares, whether common or of preferred stock, to persons friendly to the Board of Directors could make it more difficult to remove incumbent directors from office in the event such change were to be deemed advisable by the shareholders.

While the proposed amendment to the Articles of Incorporation may have anti-takeover consequences, the Board of Directors believes that the benefits it would confer on the Company outweigh any disadvantages. In addition to the enhanced ability to finance purchases and secure capital, as discussed above, the Company would gain a degree of protection from hostile takeovers that might be contrary to the interests of the Company and the shareholders. The Board of Directors believes it is in the best interest of the Company and the shareholders to encourage potential acquirers to negotiate directly with the board rather than taking unilateral action. Only when empowered to negotiate on behalf of the Company can the board have the best possible opportunity to secure the terms that best serve the interests of the Company and all the shareholders.

Shareholder Approval

The affirmative vote of the holders of not less than a majority of the outstanding shares of common stock is required to approve the proposal

Board of Directors’ Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY GIVE THEIR WRITTEN CONSENT IN FAVOR OF THE AMENDMENT.

FORWARD LOOKING STATEMENTS

This Solicitation contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be made directly in this Solicitation and they may also be made a part of this Solicitation by reference to other information filed with the Securities and Exchange Commission, which is known as “incorporation by reference.”

Words such as “anticipate,” “expect,” “intend,” “plan” and words of and terms of similar substance used in connection with any discussion of future operating or financial performance, or any potential transaction, identify forward looking statements. All forward-looking statements are management’s present estimates of future events and are subject to a number of factors and uncertainties. Such statements involve a number of risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from those anticipated.

Our shareholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Solicitation or as of the date of any document incorporated by reference in this Solicitation, as applicable. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

ADDITIONAL INFORMATION

We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission under the Securities Exchange Act of 1934. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

In addition, our company website can be found on the Internet at www.heritageoaksbancorp.com. The website contains information about us and our operations. Copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K, and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. To view the reports, access the Company’s website, www.heritageoaksbancorp.com, and click on “SEC Filings.”

INCORPORATION BY REFERENCE

The SEC allows us to incorporate by reference information into this Solicitation, which means that we can disclose important information to you by referring you to another document we have filed separately with the SEC. The information incorporated by reference is deemed to be part of this Solicitation.

This Solicitation incorporates by reference the following items of Part II of our annual report on Form 10-K filed with the SEC on March 1, 2008:

Item 6. Selected Financial Data;

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations;

Item 7A. Quantitative Disclosures About Market Risk; and

Item 8. Financial Statements and Supplementary Data.

This Solicitation also incorporates by reference the following items of Part I of our quarterly reports on Form 10-Q filed with the SEC on May 9, August 5, and November 3, 2008, respectively:

Item 1. Unaudited Consolidated Financial Statements;

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

Item 3. Quantitative Disclosures About Market Risk.

Dated: February 5, 2009		Heritage Oaks Bancorp


		Michael J Morris
		Chairman of the Board

Annex A

Term Sheet for “Public” TARP CPP