FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

This First Amendment to the Employment Agreement (the “First Amendment”) is made
and is effective as of August 26, 2009, by and between Heritage Oaks Bank, a
California state chartered bank (“Bank”) and Joanne Funari (“Executive”).

RECITALS

This First Amendment is made with regard to the following facts:

F.    
Executive is currently employed by the Bank pursuant to that certain Employment
Agreement dated on May 29, 2007 by and between the Bank and the Executive (the
“Agreement”).

G.    
Heritage Oaks Bancorp (the “Company”), the Bank’s holding company, closed a
transaction with the United States Department of Treasury (the “Treasury”) and
as a result, became a participant in the Capital Purchase Program (“CPP”), as
authorized under the Troubled Asset Relief Program (“TARP”).

H.    
As a result of the Company’s participation in the CPP, the Company and its
subsidiaries, including the Bank, are subject to executive compensation and
other restrictions as set forth in the CPP, as modified by the American Recovery
and Reinvestment Act of 2009 (“ARRA”) and the Interim Final Rule on TARP
Standards for Compensation and Corporate Governance published in the Federal
Register on June 15, 2009 (the “Interim Final Rule”).

I.    
Executive and Bank desire to amend the terms of the Agreement in the manner set
forth herein for the purpose of complying with TARP.

TERMS

In consideration of the premises and the respective covenants and agreements of
the parties herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:

12.    
Section 1(c) of the Agreement is hereby removed in its entirety and amended to
read as follows:

 
(c)
“Cause” means:

(i)    
Executive’s failing to perform her duties and obligations as an employee of the
Company and failing to cure such breach within 15 days following delivery to
Executive of written notice specifying in reasonable detail the failures to
perform;

(ii)    
Executive’s engaging in either grossly negligent conduct or willful misconduct
in connection with the performance of her duties as an employee of the Company;

(iii)    
The conviction of Executive for any crime which constitutes a felony (other than
a vehicular violation not involving theft or fraud) in the jurisdiction in which
committed and which involves an act of theft or fraud, or the entry by Executive
of a plea of guilty or nolo contendre to such a felony in any jurisdiction;

(iv)    
Any violation by Executive of her fiduciary duty to the Company which has the
effect of unlawfully converting for Executive’s own personal benefit, any
material property or prospect of the Company;

(v)    
The repeated consumption of alcohol or drugs in a manner that materially impairs
Executive abilities to perform her duties under this Agreement;

(vi)    
Executive’s personal dishonesty;

 
 

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(vii)    
Executive engages, or is alleged to have engaged, in activity which, in the
opinion of the Board or the Bank’s Chief Executive Officer, could materially
adversely affect the Bank’s reputation in the community or which evidences the
lack of Executive’s fitness or ability to perform Executive’s duties as
determined by the Board or the Bank’s Chief Executive Officer, as the case may
be, in good faith, after Executive has been given written warning specifically
advising her that she has engaged in such activity, and after Executive has been
given a reasonable time period (not to exceed 15 days) after such warning to
provide assurance to the Board or the Bank of her continuing fitness and ability
to perform her duties; or

(viii)  
Executive’s material breach of any provision of the Agreement or the Employment
Agreement.

13.    
Section 7(e) of the Agreement is hereby removed in its entirety and amended to
read as follows:

 
(e)
Resignation for Good Reason.  Either before or following a Change in Control
during the Term hereof, Executive may, under the following circumstances, regard
Executive’s employment as being constructively terminated by the Bank (and in
such case Executive’s employment shall terminate) and may, therefore, Resign for
Good Reason within 90 days of Executive’s discovery of the occurrence of one or
more of the following events, any of which shall constitute “Good Reason” for
such Resignation for Good Reason:

(i)    
If the Company, without the prior written consent of Executive, reduces, by more
than ten percent (10%), Executive’s base salary or any bonus compensation
applicable to her as in effect prior to such reduction other than as part of a
Company-wide reduction in compensation expenses that similarly affects all other
senior members of management at and above Executive’s pay grade or as required
by the United States Department of Treasury for the purpose of compliance with
the restrictions on executive compensation as set forth by the CPP as authorized
under the TARP, and those laws and/or amendments thereto that modify the terms
thereof;

(ii)    
If the Company, without the prior written consent of Funari, deprives Funari of
the title of Executive Vice President of Heritage Oaks Bank and President of
Business First Bank, a division of Heritage Oaks Bank or materially diminishes
the authority delegated to Funari in her capacity as a member of the Executive
Committee of Heritage Oaks Bank and as President of Business First Bank, a
division of Heritage Oaks Bank;

(iii)    
If the Company, without the prior written consent of Funari, requires Funari to
relocate her principal place of business outside of Santa Barbara County;

(iv)    
A  failure by the Company to maintain any of the benefits and perks to which
Funari was entitled at a level substantially equal to or greater than the value
of those benefits and perks in effect immediately prior to such change in
benefits or perks; or the taking of any action by the Company which would
materially affect Funari’s participation in or reduce Funari’s benefits under
any such benefits or ‘perks’ plans, programs or policies, or deprive Funari of
any material fringe benefits enjoyed by her immediately prior to any such
action;

(v)    
Any purported Termination of Funari’s employment by the Company other than those
effected in good faith pursuant to Sections 7(a) and 7(b) of the Agreement;

(vi)    
The failure of the Company to obtain the assumption of the Agreement by any
successor; or

(vii)    
The receipt by Funari of a Notice of Non-Renewal per the Agreement.

 
 

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14.    
The following will be added as Section 6(b)(iv) to the Agreement:

 
(c)

 
(iv)
If the Company is subject to the executive compensation limitations under the
TARP at the time Executive receives a bonus under this section, any and all such
bonuses and/or portions thereof shall be subject to forfeiture and/or repayment
by the Executive to the Company if the payment of such bonus was based on
materially inaccurate financial statements or any other materially inaccurate
performance metric criteria.

15.    
Section 8(h) of the Agreement is hereby removed in its entirety and amended to
read as follows:

(h)           Reduction of Payment; IRC Section 409A Compliance.

 
(i)
Notwithstanding anything in the foregoing to the contrary, if the payments made
to Executive following a Termination Without Cause or Resignation For Good
Reason or any of the other payments provided for in this Agreement, together
with any other payments which Executive has the right to receive from the Bank
would constitute a “parachute payment” (as defined in Section 280G of the Code),
the payments pursuant to this Agreement shall be reduced to the largest amount
as will result in no portion of such payments being subject to the excise tax
imposed by Section 4999 of the Code; provided, however, that (A) the parties
acknowledge that the foregoing payment is for services to be rendered in the
event of a Change in Control over and above those normally and reasonably
expected of the Executive, and (B) the determination as to whether any reduction
in the payments under this Agreement pursuant to this proviso is necessary shall
be made in good faith by the Bank’s independent auditors or if such firm is no
longer providing tax services to Bank to such other tax advisor as shall be
mutually acceptable to Bank and Executive, and such determination shall be
conclusive and binding on the Bank and Executive with respect to the treatment
of the payment for tax reporting purposes.

 
(ii)
This Agreement, and any payments or benefits hereunder, are made expressly
subject to and conditioned upon compliance with all federal and state law,
regulations and policies relating to the subject matter of this Agreement,
including but not limited to the provisions of law codified at 12 U.S.C. Section
1828(k), the regulations of the FDIC codified as 12 C.F.R. Part 359, and any
successor or similar federal or state law or regulation applicable to the Bank
or Bancorp.  Employee acknowledges that he understands the sections of law and
regulations cited above and that Bank’s and Bancorp’s obligations to make
payments hereunder are expressly relieved if such payments violate any federal
or state law or regulation applicable to the Bank or Bancorp.

 
(iii)
If the Company is subject to the executive compensation limitations under TARP
at the time the Executive receives payment(s) under sections 8(d) and/or 8(e)
and any such payment(s), together with any other payments which Executive has
the right to receive from the Company, exceed the limits allowed for Executive
established under TARP, then the aggregate payments pursuant to this Agreement,
and any other agreement with Executive, shall be reduced to the largest amount
as will result in no portion of such payments violating the executive
compensation limitations under TARP.

 
 

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(iv)
Notwithstanding any provision existing in this Agreement or any amendment
thereto, it is the intent of the Bank and Executive that any payment or benefit
provided pursuant to this Agreement shall be made and paid in a manner, at a
time and in a form which complies with the applicable requirements of IRC
Section 409A, in order to avoid any unfavorable tax consequences resulting from
any such failure to comply. Furthermore, for the purposes of this Agreement, IRC
Section 409A shall be read to include any related or relevant IRS Notices
(including but not limited to Notice 2007-86).  In the event of any ambiguity in
terms, or in the event further clarification of any term or provision is
necessary, all interpretations and payouts of benefits based thereon shall be in
accordance with IRC 409A and any related notices or guidance thereon.

16.    
Capitalized terms used herein and not otherwise defined shall have the same
meaning as set forth in the Agreement.

17.    
This First Amendment may be entered into in one or more counterparts, all of
which shall be considered one and the same instrument, and it shall become
effective when one or more counterparts have been signed by each of the Parties
and delivered to the other Parties, it being understood that all Parties need
not sign the same counterpart.

18.    
Except as herein amended, the Agreement shall remain in full force and effect.

19.    
This First Amendment shall be governed by and construed in accordance with the
laws of the State of California.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
 

ATTEST:      HERITAGE OAKS BANK  
/s/ Joni Watson
    /s/ Ron Oliveira  
 
    Its:
EVP and COO
 

 
    Print name:
Ron Oliveira
 

 
 

      THE EXECUTIVE               /s/ Denise Sandford                  /s/
Joanne Funari  
Witness
    Joanne Funari  

 
 
 

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