**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-Q**





x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934****FOR
                  THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
                  2007**





**OR**





o
                **TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934****FOR
                    THE TRANSITION PERIOD FROM**_______**to
                    _______**





**COMMISSION
      FILE NO.** **0-25020**





**HERITAGE
      OAKS BANCORP**


(Exact
      name of registrant as specified in charter)





**STATE
                OF CALIFORNIA**
            
            ******77-0388249**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer Identification No.)





**545
      12th STREET, PASO ROBLES, CA 93446**


(Address
      of principal office)





**(805)
      239-5200**


(Registrant's
      telephone number, including area code)





**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 twelve (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 ninety (90) days.**





**YES xNO o**





**Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or is a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one.)**





**Large
      Accelerated filer oAccelerated filer
xNon-accelerated filer o**





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





**YES
      oNO x**





**Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date:**





**As
      of October 22, 2007** **** **there
      were approximately 7,319,866 shares outstanding of the Registrant’s common
      stock.**










**TABLE
      OF CONTENTS**





Part
                1. Financial InformationItem
                1. Consolidated Financial Statements (Un-audited, except for Balance
                Sheet
                as of 12/31/2006)
            3Consolidated
                Balance Sheets
            4Consolidated
                Statements of Income
            5Consolidated
                Statements of Stockholders’ Equity
            6Consolidated
                Statements of Comprehensive Income
            7Consolidated
                Statements of Cash Flows
            8Notes
                to Consolidated Financial Statements
            9Item
                2. Management’s Discussion and Analysis of Financial
                Condition and Results of Operations
            17Item
                3. Quantitative and Qualitative Disclosure about Market
                Risk
            40Item
                4. Controls and Procedures
            42Part
                2. Other InformationItem
                1. Legal Proceedings
            43Item
                1.A. Risk Factors
            43Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            43Item
                3. Defaults Upon Senior Securities
            44Item
                4. Submission of Matters to a Vote of Security Holders
            44Item
                5. Other Information
            44Item
                6. Exhibits
            45Signatures
            46ExhibitsCertifications




-
          2 -





PART
      1.
      FINANCIAL INFORMATION





**Item
      1. Financial Statements**





The
      financial statements and notes begin on next page.


-
          3 -





**HERITAGE
      OAKS BANCORP**


**CONSOLIDATED
      BALANCE SHEETS**


*(dollar
      amounts in thousands)*





**(Unaudited)**
            
            **(1)****September 30,**
            
            **December 31,****2007**
            
            **2006****ASSETS**Cash
                and due from banks
            
            $
            20,316
            
            $
            19,164Federal
                funds sold
            
            
            14,260
            
            
            3,870Total
                cash and cash equivalents
            
            
            34,576
            
            
            23,034Interest
                bearing deposits with other banks
            
            
            1,718
            
            
            318Securities
                available for sale
            
            
            34,854
            
            
            38,445Federal
                Home Loan Bank stock, at cost
            
            
            2,171
            
            
            2,350Loans
                held for sale
            
            
            902
            
            
            1,764Loans,
                net (2)
            
            
            468,966
            
            
            439,277Property,
                premises and equipment, net
            
            
            5,017
            
            
            14,581Cash
                surrender value of life insurance
            
            
            9,716
            
            
            9,435Deferred
                tax assets
            
            
            4,964
            
            
            2,414Goodwill
            
            
            4,865
            
            
            4,865Core
                deposit intangible
            
            
            883
            
            
            1,148Other
                assets
            
            
            4,058
            
            
            4,143**TOTAL
                ASSETS**
            
            $
            572,690
            
            $
            541,774**LIABILITIES**Deposits:Demand,
                non-interest bearing
            
            $
            130,221
            
            $
            153,005Savings,
                NOW, and money market deposits
            
            
            215,576
            
            
            146,110Time
                deposits of $100 or more
            
            
            50,666
            
            
            30,630Time
                deposits under $100
            
            
            99,847
            
            
            90,776Total
                deposits
            
            
            496,310
            
            
            420,521FHLB
                advances and other borrowed money
            
            
            -
            
            
            50,000Securities
                sold under agreement to repurchase
            
            
            1,464
            
            
            1,364Junior
                subordinated debentures
            
            
            13,403
            
            
            16,496Other
                liabilities
            
            
            7,663
            
            
            3,921Total
                liabilities
            
            
            518,840
            
            
            492,302Commitments
                and contingencies
            
            
            -
            
            
            -**STOCKHOLDERS'
                EQUITY**Common
                stock, no par value; 20,000,000 shares authorized; issued and outstanding
                6,469,653 and 6,345,639 as of September 30, 2007 and December 31,
                2006,
                respectively.
            
            
            29,976
            
            
            29,247Additional
                paid in capital
            
            
            600
            
            
            336Retained
                earnings
            
            
            23,205
            
            
            19,809Accumulated
                other comprehensive income
            
            
            69
            
            
            80Total
                stockholders' equity
            
            
            53,850
            
            
            49,472**TOTAL
                LIABILITIES & STOCKHOLDERS' EQUITY**
            
            $
            572,690
            
            $
            541,774





(1)
      These
      numbers have been derived from the audited financial statements.


(2)
      Loans
      net of deferred fees of $1,941 and $1,625 and allowance for loan losses of
      $4,720 and $4,081 at September 30, 2007 and December 31, 2006,
      respectively.




See
      notes
      to condensed consolidated financial statements.


-
          4 -





**HERITAGE
      OAKS BANCORP**


**CONSOLIDATED
      STATEMENTS OF INCOME (UNAUDITED)**


*(dollar
      amounts in thousands except per share data)*





**For the three months**
            
            **For the nine months****ended September 30,**
            
            **ended September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Interest
                Income:Interest
                and fees on loans
            
            $
            10,058
            
            $
            8,968
            
            $
            30,087
            
            $
            24,475Investment
                securities
            
            
            426
            
            
            467
            
            
            1,324
            
            
            1,446Federal
                funds sold and commercial paper
            
            
            385
            
            
            131
            
            
            577
            
            
            513Time
                certificates of deposit
            
            
            1
            
            
            2
            
            
            7
            
            
            6Total
                interest income
            
            
            10,870
            
            
            9,568
            
            
            31,995
            
            
            26,440Interest
                Expense:Now
                accounts
            
            
            55
            
            
            22
            
            
            126
            
            
            66MMDA
                accounts
            
            
            1,216
            
            
            567
            
            
            2,830
            
            
            1,687Savings
                accounts
            
            
            21
            
            
            25
            
            
            69
            
            
            78Time
                deposits of $100 or more
            
            
            610
            
            
            172
            
            
            1,120
            
            
            428Other
                time deposits
            
            
            1,229
            
            
            1,132
            
            
            3,716
            
            
            2,671Other
                borrowed funds
            
            
            411
            
            
            628
            
            
            2,516
            
            
            1,406Total
                interest expense
            
            
            3,542
            
            
            2,546
            
            
            10,377
            
            
            6,336Net
                interest income before provision for possible loan losses
            
            
            7,328
            
            
            7,022
            
            
            21,618
            
            
            20,104Provision
                for loan losses
            
            
            210
            
            
            180
            
            
            520
            
            
            480Net
                interest income after provision for loan losses
            
            
            7,118
            
            
            6,842
            
            
            21,098
            
            
            19,624Non-Interest
                Income:Service
                charges on deposit accounts
            
            
            645
            
            
            644
            
            
            1,944
            
            
            1,826Other
                income
            
            
            664
            
            
            578
            
            
            1,988
            
            
            1,826Total
                non-interest income
            
            
            1,309
            
            
            1,222
            
            
            3,932
            
            
            3,652Non-Interest
                Expense:Salaries
                and employee benefits
            
            
            3,238
            
            
            2,965
            
            
            9,681
            
            
            8,534Occupancy
                and equipment
            
            
            830
            
            
            633
            
            
            2,251
            
            
            1,901Other
                expenses
            
            
            1,709
            
            
            1,786
            
            
            5,101
            
            
            4,982Total
                non-interest expenses
            
            
            5,777
            
            
            5,384
            
            
            17,033
            
            
            15,417Income
                before provision for income taxes
            
            
            2,650
            
            
            2,680
            
            
            7,997
            
            
            7,859Provision
                for applicable income taxes
            
            
            1,022
            
            
            947
            
            
            3,058
            
            
            2,846Net
                Income
            
            $
            1,628
            
            $
            1,733
            
            $
            4,939
            
            $
            5,013Earnings
                per share:Basic
            
            $
            0.25
            
            $
            0.27
            
            $
            0.77
            
            $
            0.79Fully
                Diluted
            
            $
            0.24
            
            $
            0.26
            
            $
            0.74
            
            $
            0.76





See
      notes
      to condensed consolidated financial statements


-
          5 -





**HERITAGE
      OAKS BANCORP**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)**


**September
      30, 2007 and 2006**


*(amounts
      in thousands except shares outstanding)*





**Accumulated****Common Stock**
            
            **Additional**
            
            
            
            
            
            **Other**
            
            **Total****Number
                of**
            
            **Paid-In**
            
            **Comprehensive**
            
            **Retained**
            
            **Comprehensive**
            
            **Stockholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Income**
            
            **Earnings**
            
            **Income/(Loss)**
            
            **Equity****Balance,
                December 31, 2006**
            
            
            6,345,639
            
            $
            29,247
            
            $
            336
            
            
            
            
            $
            19,809
            
            $
            80
            
            $
            49,472Exercise
                of stock options(including
                  $440 excess tax benefit from exercise of stock
                  options)
            
            
            129,764
            
            
            825
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            825Cash
                dividend of $0.08 per share paid on February 16, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (510
            )
            
            
            
            
            (510
            )Cash
                dividend of $0.08 per share paid on May 18, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (514
            )
            
            
            
            
            (514
            )Cash
                dividend of $0.08 per share paid on August 17, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (519
            )
            
            
            
            
            (519
            )Share-based
                compensation expense
            
            
            
            
            
            
            
            
            264
            
            
            
            
            
            
            
            
            
            
            
            264Issuance
                of restricted stock awards
            
            
            1,500
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Retirement
                of restricted share awards
            
            
            (1,250
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Repurchases
                of common stock
            
            
            (6,000
            )
            
            (96
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (96
            )Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            4,939
            
            
            4,939
            
            
            
            
            
            4,939Unrealized
                security holding losses (net of $5 tax benefit)
            
            
            
            
            
            
            
            
            
            
            
            (11
            )
            
            
            
            
            (11
            )
            
            (11
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            $
            4,928**Balance,
                September 30, 2007**
            
            
            6,469,653
            
            $
            29,976
            
            $
            600
            
            
            
            
            $
            23,205
            
            $
            69
            
            $
            53,850**Balance,
                December 31, 2005**
            
            
            6,231,982
            
            $
            29,255
            
            $
            -
            
            
            
            
            $
            15,748
            
            $
            (158
            )
            $
            44,845Exercise
                of stock options(including
                  $160 excess tax benefit from exercise of stock
                  options)
            
            
            72,989
            
            
            559
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            559Cash
                dividend of $0.25 per share paid on May 19, 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,585
            )
            
            
            
            
            (1,585
            )Cash
                dividend of $0.08 per share paid on August 25, 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (508
            )
            
            
            
            
            (508
            )Share-based
                compensation expense
            
            
            
            
            
            83
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            83Issuance
                of restricted stock awards
            
            
            66,050
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Repurchases
                of common stock
            
            
            (15,000
            )
            
            (249
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (249
            )Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            5,013
            
            
            5,013
            
            
            
            
            
            5,013Unrealized
                security holding gains (net of $179 tax)
            
            
            
            
            
            
            
            
            
            
            
            269
            
            
            
            
            
            269
            
            
            269Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            $
            5,282**Balance,
                September 30, 2006**
            
            
            6,356,021
            
            $
            29,648
            
            $
            -
            
            
            
            
            $
            18,668
            
            $
            111
            
            $
            48,427




See
      notes
      to condensed consolidated financial statements


-
          6 -




**HERITAGE
      OAKS BANCORP**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**


*(dollar
      amounts in thousands)*





**For the three months**
            
            **For the nine months****ended September 30,**
            
            **ended September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Net
                Income**
            
            $
            1,628
            
            $
            1,733
            
            $
            4,939
            
            $
            5,013**Other
                comprehensive income / (loss) before taxes:**Unrealized
                gains / (losses) on securities available for sale:Unrealized
                holding gains / (losses) arising during the period
            
            
            395
            
            
            (1,043
            )
            
            (16
            )
            
            448Other
                comprehensive income / (loss) before taxes
            
            
            395
            
            
            (1,043
            )
            
            (16
            )
            
            448Income
                tax (expense) / benefit related to items in comprehensive
                income
            
            
            (159
            )
            
            418
            
            
            5
            
            
            (179
            )**Other
                comprehensive income / (loss), net of taxes**
            
            
            236
            
            
            (625
            )
            
            (11
            )
            
            269**Comprehensive
                income**
            
            $
            1,864
            
            $
            1,108
            
            $
            4,928
            
            $
            5,282




See
        notes
        to condensed consolidated financial statements
  -
            7 -




**HERITAGE
      OAKS BANCORP**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (UNAUDITED)**


*(dollar
      amounts in thousands)*





**For the nine month periods****ended September 30,****2007**
            
            **2006**Cash
                flows from operating activities:Net
                income
            
            $
            4,939
            
            $
            5,013Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            705
            
            
            690Provision
                for possible loan losses
            
            
            520
            
            
            480Amortization
                of premiums/discounts on investment securities, net
            
            
            (53
            )
            
            (3
            )(Gain)
                on call of available-for-sale securities
            
            
            (3
            )FHLB
                stock dividends received
            
            
            (103
            )
            
            (70
            )Amortization
                of intangible assets
            
            
            265
            
            
            225Share-based
                compensation expense
            
            
            264
            
            
            83Decrease
                in loans held for sale
            
            
            862
            
            
            1,323Net
                (increase) in cash surrender value of life insurance
            
            
            (281
            )
            
            (252
            )(Increase)
                in deferred tax asset
            
            
            (2,545
            )
            
            -Decrease/(increase)
                in other assets
            
            
            85
            
            
            (805
            )Increase
                in other liabilities
            
            
            4,182
            
            
            612Excess
                tax benefit related to share-based compensation expense
            
            
            (440
            )
            
            (160
            )**NET
                CASH PROVIDED BY OPERATING ACTIVITIES**
            
            
            8,397
            
            
            7,136Cash
                flows from investing activities:Net
                change in time deposits with other banks
            
            
            (1,400
            )
            
            (20
            )Purchase
                of available-for-sale securities
            
            
            (605
            )
            
            (1,190
            )Proceeds
                  from principal reductions and maturities of available-for-sale
                  mortgage
                  backed securities
            
            
            3,672
            
            
            5,749Maturities
                and calls of available-for-sale securities
            
            
            564
            
            
            -Sale
                of FHLB stock
            
            
            282
            
            
            -Purchase
                of life insurance policies
            
            
            -
            
            
            (1,386
            )(Increase)
                in loans, net
            
            
            (30,364
            )
            
            (57,180
            )Allowance
                for loan and lease loss recoveries
            
            
            155
            
            
            21Purchase
                of property, premises and equipment, net
            
            
            (542
            )
            
            (3,586
            )Proceeds
                from sale of property, premises and equipment
            
            
            9,401
            
            
            -**NET
                CASH (USED IN) INVESTING ACTIVITIES**
            
            
            (18,837
            )
            
            (57,592
            )Cash
                flows from financing activities:Increase
                in deposits, net
            
            
            75,789
            
            
            12,475(Decrease)/increase
                in FHLB borrowing
            
            
            (50,000
            )
            
            30,000Increase/(decrease)
                in repurchase agreements
            
            
            100
            
            
            (2,628
            )Net
                (decrease) in junior subordinated debentures
            
            
            (3,093
            )
            
            -Excess
                tax benefit related to share-based compensation expense
            
            
            440
            
            
            160Repurchases
                of common stock
            
            
            (96
            )
            
            (249
            )Proceeds
                from exercise of stock options
            
            
            385
            
            
            399Cash
                dividends paid
            
            
            (1,543
            )
            
            (2,093
            )**NET
                CASH PROVIDED BY FINANCING ACTIVITIES**
            
            
            21,982
            
            
            38,064**Net
                increase/(decrease) in cash and cash equivalents**
            
            
            11,542
            
            
            (12,392
            )**Cash
                and cash equivalents, beginning of period**
            
            
            23,034
            
            
            44,559**Cash
                and cash equivalents, end of period**
            
            $
            34,576
            
            $
            32,167Supplemental
                disclosures of cash flow information:Interest
                paid
            
            $
            10,518
            
            $
            5,939Income
                taxes paid
            
            $
            4,980
            
            $
            2,290





See
      notes
      to condensed consolidated financial statements


-
          8 -


**HERITAGE
      OAKS BANCORP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


**SEPTEMBER
      30, 2007**





**Note
      1.**  **CONSOLIDATED FINANCIAL STATEMENTS**





The
      accompanying un-audited 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 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 2006 Annual Report on Form 10-K.





The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly-owned financial subsidiary, Heritage Oaks Bank (the “Bank”). All
      significant inter-company balances and transactions have been eliminated.
      Heritage Oaks Capital Trust II and III are unconsolidated subsidiaries formed
      solely for the purpose of issuing trust preferred securities. Operating results
      for the three and nine months ended September 30, 2007 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2007. Certain amounts in the consolidated financial statements for the year
      ended December 31, 2006 and the three and nine month periods ended September
      30,
      2006 may have been reclassified to conform to the presentation of the
      consolidated financial statements in 2007.





The
      preparation of consolidated financial statements in conformity with the
      accounting principles generally accepted in the United States of America
      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.





**Note
      2.**  **INVESTMENT
      SECURITIES**





In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 115 *“Accounting
      for Certain Investments in Debt and Equity Securities”* ,
      which
      addresses the accounting for investments in equity securities that have readily
      determinable fair values and for investments in all debt securities, securities
      are classified in three categories and accounted for as follows: debt and equity
      securities that the Company has the positive intent and ability to hold to
      maturity are classified as held-to-maturity and are measured at amortized cost;
      debt and equity securities bought and held principally for the purpose of
      selling in the near term are classified as trading securities and are measured
      at fair value, with the unrealized gains and losses included in earnings; debt
      and equity securities not classified as either held-to-maturity or trading
      securities are deemed as available-for-sale and are measured at fair value,
      with
      the unrealized gains and losses, net of applicable taxes, reported in a separate
      component of stockholders’ equity. Any gains and losses on sales of investments
      are computed on a specific identification basis.


-
          9 -


The
      following table sets forth the amortized cost and fair values of investment
      securities available for sale at September 30, 2007 and December 31,
      2006:




*(dollars in thousands)*
              
              
              
              **Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****As of September 30, 2007**
              
              **Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**Obligations
                  of U.S. government agencies and corporations
              
              $
              184
              
              $
              -
              
              $
              (3
              )
              $
              181Mortgage-backed
                  securities
              
              
              18,243
              
              
              9
              
              
              (261
              )
              
              17,991Obligations
                  of state and political subdivisions
              
              
              16,301
              
              
              432
              
              
              (60
              )
              
              16,673Other
                  securities
              
              
              9
              
              
              -
              
              
              -
              
              
              9Total
              
              $
              34,737
              
              $
              441
              
              $
              (324
              )
              $
              34,854




**Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****As of December 31, 2006**
              
              **Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**Obligations
                  of U.S. government agencies and corporations
              
              $
              205
              
              $
              -
              
              $
              (4
              )
              $
              201Mortgage-backed
                  securities
              
              
              21,969
              
              
              16
              
              
              (381
              )
              
              21,604Obligations
                  of state and political subdivisions
              
              
              16,139
              
              
              540
              
              
              (38
              )
              
              16,641Other
                  securities
              
              
              9
              
              
              -
              
              
              -
              
              
              9Total
              
              $
              38,322
              
              $
              556
              
              $
              (423
              )
              $
              38,455




At
      September 30, 2007, the securities portfolio had a net unrealized gain of
      approximately $117 thousand and $69 thousand, net of tax. This, when compared
      to
      the net unrealized gain of approximately $133 thousand and $80 thousand, net
      of
      tax the portfolio had at December 31, 2006 represents a decline in market value
      of approximately $16 thousand and $11 thousand, net of tax. The decline in
      market value during 2007 can be attributed to an increase of approximately
      32bp
      in the 10 year treasury during the first half of 2007 and as a result at June
      30, 2007, the Company reported a net unrealized loss in the securities portfolio
      of approximately $278 thousand and $167 thousand, net of tax. However, during
      the third quarter of 2007, the Company’s securities portfolio saw a significant
      rise in market value as the rates associated with certain fixed income markets
      began to fall in connection with current market conditions. During the third
      quarter, the Company saw a net unrealized gain in the securities portfolio
      of
      approximately $395 thousand and $236 thousand, net of tax.





**Note
      3.**  **LOANS
      AND ALLOWANCE FOR LOAN LOSSES**





**September 30,**
            
            **December 31,***(dollars in thousands)*
            
            **2007**
            
            **2006**Commercial,
                financial, and agricultural
            
            $
            101,748
            
            $
            84,976Real
                estate-construction/land
            
            
            105,054
            
            
            105,712Real
                estate - other
            
            
            253,860
            
            
            237,401Home
                equity lines of credit
            
            
            8,897
            
            
            10,792Installment
                loans to individuals
            
            
            5,580
            
            
            5,598All
                other loans (including overdrafts)
            
            
            488
            
            
            504Total
                loans, gross
            
            
            475,627
            
            
            444,983Less
                - deferred loan fees, net
            
            
            1,941
            
            
            1,625Less
                - reserve for possible loan losses
            
            
            4,720
            
            
            4,081Total
                loans, net
            
            $
            468,966
            
            $
            439,277Loans
                held for sale
            
            $
            902
            
            $
            1,764


-
          10 -




*Concentration
      of Credit Risk*





At
      September 30, 2007, approximately $367.8 million or 77.3% of the Bank’s loan
      portfolio was collateralized by various forms of real estate, this represents
      an
      increase of approximately $13.9 million when compared to the $353.9 million
      or
      79.5% reported at December 31, 2006. Such loans are generally made to borrowers
      located in San Luis Obispo and Santa Barbara Counties. The Bank attempts to
      reduce its concentration of credit risk by making loans which are diversified
      by
      project type. While management believes that the collateral presently securing
      this portfolio is adequate, there can be no assurances that significant
      deterioration in the California real estate market would not expose the Bank
      to
      significantly greater credit risk. At September 30, 2007, the Bank was
      contingently liable for letters of credit accommodations made to its customers
      totaling approximately $16.5 million and un-disbursed loan commitments in the
      approximate amount of $163.9 million. The Bank makes commitments to extend
      credit in the normal course of business to meet the financing needs of its
      customers. Commitments to extend credit are agreements to lend to a customer
      as
      long as there is no violation of any condition established in the contract.
      Commitments generally have fixed expiration dates or other termination clauses
      and may require payment of a fee. Since many of the commitments are expected
      to
      expire without being drawn upon, the total outstanding commitment amount does
      not necessarily represent future cash requirements. Standby letters of credit
      written are conditional commitments issued by the Bank to guarantee the
      performance of a customer to a third party. The credit risk involved in issuing
      letters of credit is essentially the same as those involved in extending loan
      facilities to customers. The Bank anticipates no losses as a result of such
      transactions.




*Allowance
      for Loan Losses*




An
      allowance for loan losses has been established by management to provide for
      those loans that may not be repaid in their entirety for a variety of reasons.
      The allowance is maintained at a level considered by management to be adequate
      to provide for probable incurred losses. The allowance is increased by
      provisions charged to earnings and is reduced by charge-offs, net of recoveries.
      The provision for loan losses is based upon past loan loss experience and
      management’s evaluation of the loan portfolio under current economic conditions.
      Loans are charged to the allowance for loan losses when, and to the extent,
      they
      are deemed by management to be un-collectible. The allowance for loan losses
      is
      composed of allocations for specific loans and a historical portion for all
      other loans.




An
      analysis of the changes in the allowance for possible loan losses for the
      periods indicated below is as follows:




**For the three months ended**
            
            **For the nine months ended**
            
            **For the year ended***(dollars in thousands)*
            
            **September 30, 2007**
            
            **September 30, 2006**
            
            **September 30, 2007**
            
            **September 30, 2006**
            
            **December 31, 2006**Balance
                at beginning of period
            
            $
            4,520
            
            $
            3,695
            
            $
            4,081
            
            $
            3,881
            
            $
            3,881Additions
                charged to operating expense
            
            
            210
            
            
            180
            
            
            520
            
            
            480
            
            
            600Loans
                charged off
            
            
            (16
            )
            
            (17
            )
            
            (36
            )
            
            (519
            )
            
            (561
            )Recoveries
                of loans previously charged off
            
            
            6
            
            
            5
            
            
            155
            
            
            21
            
            
            161Balance
                at end of period
            
            $
            4,720
            
            $
            3,863
            
            $
            4,720
            
            $
            3,863
            
            $
            4,081




For
      the
      three months ended September 30, 2007 and 2006, the Company had net charge-offs
      of approximately $10 thousand and $12 thousand respectively. During the first
      nine months of 2007 the Company had a net recovery of loans previously charged
      off of approximately $119 thousand. For the same period ended in 2006, the
      Company reported a net charge-off of approximately $498 thousand.





The
      Bank
      recognizes that credit losses will be experienced and 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 loan.
      The
      allowance for loan losses represents the Bank’s estimate of the allowance
      necessary to provide for probable incurred losses in the portfolio. In making
      this determination, the Bank analyzes the ultimate ability to collect the loans
      in its portfolio by incorporating feedback provided by internal loan staff,
      an
      independent loan review function, and information provided by examinations
      performed by regulatory agencies. The Bank makes monthly evaluations as to
      the
      adequacy of the allowance for loan losses.





The
      analysis of the allowance for loan losses is comprised of three components:
      specific credit allocation; general portfolio allocation; and subjectively
      by
      determined allocation. Effective January 1, 1995, the Bank adopted SFAS No.114,
      “ *Accounting
      by Creditors for Impairment of a Loan”* (SFAS
      114), as amended by SFAS No. 118, *“Accounting
      by Creditors for Impairment of a Loan - Income Recognition and
      Disclosures.”* These
      pronouncements provide that when it is probable that a creditor will be unable
      to collect all amounts due in accordance with the terms of the loan that such
      loan is deemed impaired. Impaired loans are accounted for differently in that
      the amount of the impairment is measured and reflected in the records of the
      creditor. The allowance for loan losses related to loans that are identified
      for
      evaluation in accordance with Statement 114 is based on discounted cash flows
      using the loan’s initial effective interest rate or the fair value of the
      collateral for certain collateral dependent loans. The general portfolio
      allocation consists of an assigned reserve percentage based on the credit rating
      of the loan. The subjective portion is determined based on loan history and
      the
      Bank’s evaluation of various factors including current economic conditions and
      trends in the portfolio including delinquencies and impairment, as well as
      changes in the composition of the portfolio.




-
          11
          -




The
      allowance for loan losses is based on estimates, and ultimate losses will vary
      from current estimates. These estimates are reviewed monthly, and as
      adjustments, either positive or negative, become necessary, a corresponding
      increase or decrease is made in the provision for loan losses. The methodology
      used to determine the adequacy of the allowance for possible loan losses for
      the
      three months ended September 30, 2007 is consistent with prior periods. The
      allowance for loan losses as a percentage of total gross loans was 0.99% as
      of
      September 30, 2007 and 0.92% as of December 31, 2006. Management believes that
      the allowance for loan losses at September 30, 2007 is prudent and warranted,
      based on information currently available.





**Note
      4.**  **EARNINGS
      PER SHARE**





Basic
      earnings per share are based on the weighted average number of shares
      outstanding before any dilution from common stock equivalents. Diluted earnings
      per share reflects the potential dilution that could occur if securities or
      other contracts to issue common stock were exercised or converted into common
      stock or resulted in the issuance of common stock that then shares in the
      earnings of the entity.





The
      following table shows the number of shares used to calculate and the earnings
      per share for the three and nine months ending September 30, 2007:





**For the three months ending**
              **September 30,**
            
            **For the nine months ending**
              **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                Income
            
            $
            1,627,644
            
            $
            1,733,149
            
            $
            4,938,509
            
            $
            5,012,872Basic
            
            $
            0.25
            
            $
            0.27
            
            $
            0.77
            
            $
            0.79Diluted
            
            $
            0.24
            
            $
            0.26
            
            $
            0.74
            
            $
            0.76Shares:Basic
            
            
            6,472,653
            
            
            6,350,727
            
            
            6,429,830
            
            
            6,326,743Diluted
            
            
            6,679,114
            
            
            6,594,626
            
            
            6,679,987
            
            
            6,594,800





**Note
      5.**  **RECENT
      ACCOUNTING PRONOUNCEMENTS**





ACCOUNTING
      FOR UNCERTAINTY IN INCOME TAXES: In July 2006, the Financial Accounting
      Standards Board (FASB) issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
      109* (FIN 48)
      which clarifies the accounting and disclosure for uncertainty in tax positions,
      as defined. FIN 48 seeks to reduce the diversity in practice associated with
      certain aspects of the recognition and measurement related to accounting for
      income taxes. This interpretation is effective for fiscal years beginning after
      December 15, 2006. As part of the analysis of the impact of FIN 48 the Company’s
      CFO and tax accounting firm engaged in discussions surrounding a potential
      disclosure issue related to FASB Interpretation No. 48, Accounting for *Uncertainty
      in Income Taxes—an interpretation of FASB Statement No. 109* (FIN
      48). It was concluded that a previous position taken on the Company’s 2004 and
      2005 tax returns in regard to Deferred Loan Fees can not be supported and that
      amended returns will be filed for those periods. For income tax purposes, both
      Federal and Franchise, this is a “timing” issue and does not flow through the
      Income Statement. The Balance Sheet is impacted to the extent that current
      taxes
      payable is increased and offset by a deferred tax asset in the same amount.
      The
      2004 and 2005 amended tax returns were filed in June 2007.




FAIR
      VALUE MEASUREMENTS: In September 2006, the FASB issued Statement of Financial
      Accounting Standards No. 157, *Fair
      Value Measurements* (SFAS
      157). SFAS 157 enhances existing guidance for measuring assets and liabilities
      using fair value. Prior to the issuance of SFAS 157, guidance for applying
      fair
      value was incorporated in several accounting pronouncements. SFAS 157 provides
      a
      single definition of fair value, together with a framework for measuring it,
      and
      requires additional disclosure about the use of fair value to measure assets
      and
      liabilities. SFAS 157 also emphasizes that fair value is a market-based
      measurement, not an entity-specific measurement, and sets out a fair value
      hierarchy with the highest priority being quoted prices in active markets.
      Under
      SFAS 157, fair value measurements are disclosed by level within that hierarchy.
      While SFAS 157 does not add any new fair value measurements, it does change
      current practice. Changes to practice include: (1) a requirement for an
      entity to include its own credit standing in the measurement of its liabilities;
      (2) a modification of the transaction price presumption; (3) a
      prohibition on the use of block discounts when valuing large blocks of
      securities for broker-dealers and investment companies; and (4) a
      requirement to adjust the value of restricted stock for the effect of the
      restriction even if the restriction lapses within one year. SFAS 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      Company has not determined the impact of adopting SFAS 157 on its financial
      statements.




-
          12
          -




EMPLOYERS’
      ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS: In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans (an
      amendment of FASB Statements No. 87, 88, 106, and 132R)* (SFAS
      158), requires an employer to: (a) Recognize in its statement of financial
      position an asset for a plan’s over funded status or a liability for a plan’s
      under funded status; (b) measure a plan’s assets and its obligations that
      determine its funded status as of the end of the employer’s fiscal year (with
      limited exceptions); and (c) recognize changes in the funded status of a
      defined benefit postretirement plan in the year in which the changes occur.
      Those changes will be reported in comprehensive income of a business entity
      and
      in changes in net assets of a not-for-profit organization. The requirement
      by
      SFAS 158 to recognize the funded status of a benefit plan and the disclosure
      requirements of SFAS 158 are effective as of the end of the fiscal year ending
      after December 15, 2006 for entities with publicly traded equity
      securities. The adoption of SFAS 158 has not had a material impact on the
      financial position of the company at September 30, 2007.





ESTABLISHING
      THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND LIABILITIES: In February of
      2007,
      the FASB Issued SFAS No. 159, *Establishing
      the Fair Value Option for Financial Assets and Liabilities.* The
      Financial Accounting Standards Board has issued SFAS 159 to permit all entities
      to choose to elect, at specified election dates, to measure eligible financial
      instruments at fair value. An entity shall report unrealized gains and losses
      on
      items for which the fair value option has been elected in earnings at each
      subsequent reporting date, and recognize upfront costs and fees related to
      those
      items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal
      years beginning after November 15, 2007, with early adoption permitted for
      an
      entity that has also elected to apply the provisions of SFAS No. 157, Fair
      Value
      Measurements. An entity is prohibited from retrospectively applying SFAS No.
      159, unless it chooses early adoption. SFAS No. 159 also applies to eligible
      items existing at November 15, 2007 (or early adoption date). The Company did
      not adopt SFAS No. 159 prior to the required period and does not anticipate
      that
      the adoption of SFAS 159 will have a material effect on the Company's financial
      condition.




**Note
      6. SHARE-BASED COMPENSATION**





As
      of
      September 30, 2007, the Company had three share-based employee compensation
      plans, which are more fully described in Note 14 of the Consolidated Financial
      Statements in the Company's Annual Report filed on Form 10-K for the year ended
      December 31, 2006. These plans include two stock option plans and the 2005
      Equity Based Compensation Plan.





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123(R), using the modified prospective transition method and,
      therefore, have not restated results for prior periods.





Prior
      to
      January 1, 2006, the Company accounted for stock-based compensation under the
      recognition, measurement and pro forma disclosure provisions of APB No. 25,
      the
      original provisions of SFAS No. 123, and SFAS No. 148, "Accounting for
      Stock-Based Compensation-Transition and Disclosure". No share-based compensation
      expense was reflected in net income as all options are required by the plan
      to
      be granted with an exercise price equal to the estimated fair value of the
      underlying common stock on the date of grant. Additionally, prior to the
      adoption of SFAS No. 123(R), the Company presented the tax benefit of stock
      option exercises as operating cash flows, upon the adoption of SFAS No. 123(R),
      tax benefits resulting from tax deductions in excess of the compensation cost
      recognized for those options are classified as financing cash
      flows.





Share-based
      compensation expense for all share-based compensation awards granted after
      January 1, 2006, is based on the grant-date fair value. For all awards except
      stock option awards, the grant date fair value is either the fair market value
      per share or book value per share (corresponding to the type of stock awarded)
      as of the grant date. For stock option awards, the grant date fair value is
      estimated using the Black-Scholes option pricing model. For all awards the
      Company recognizes these compensation costs only for those shares expected
      to
      vest on a straight-line basis over the requisite service period of the award,
      for which we use the related vesting term. The Company estimates forfeiture
      rates based on historical employee option exercise and employee termination
      experience.




-
          13
          -




The
      share-based compensation expense recognized in the condensed consolidated
      statement of operations for the three and nine months ended September 30, 2007
      and 2006 is based on awards ultimately expected to vest, and accordingly has
      been adjusted by the amount of estimated forfeitures. SFAS No. 123(R) requires
      forfeitures to be estimated at the time of grant and revised, if necessary,
      in
      subsequent periods if actual forfeitures differ from those estimates.
      Forfeitures were estimated based partially on historical
      experience.




The
      following table provides a summary of the expense the Company has recognized
      related to share-based compensation awards as a result of the Company’s January
      1, 2006 adoption of SFAS No. 123(R). The table below also shows the impact
      those
      expenses have had on diluted earnings per share, and the remaining expense
      associated with those awards.





**For the three months ended**
              **September
                30,**
            
            **For the nine months ended**
              **September
                30,***(dollars in thousands except share and per share data)*
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**Share-based
                compensation expense:Stock
                option expense
            
            $
            24
            
            $
            9
            
            $
            80
            
            $
            83Restricted
                stock expense
            
            
            56
            
            
            51
            
            
            184
            
            
            157Total
                share-based compensation expense
            
            
            80
            
            $
            60
            
            
            264
            
            $
            240Total
                share-based compensation expense, net of tax
            
            $
            56
            
            $
            35
            
            $
            182
            
            $
            151Diluted
                shares outstanding
            
            
            6,679,114
            
            
            6,594,626
            
            
            6,679,987
            
            
            6,594,800Impact
                on diluted earnings per share
            
            $
            0.008
            
            $
            0.005
            
            $
            0.027
            
            $
            0.023Unrecognized
                compensation expense:Stock
                option expense
            
            $
            147
            
            $
            256Restricted
                stock expense
            
            
            850
            
            
            1,073Total
                unrecognized share-based compensation expense
            
            $
            997
            
            $
            1,329Total
                unrecognized share-based compensation expense, net of tax
            
            $
            635
            
            $
            865




As
      of
      September 30, 2007, there was a total of $147 thousand of unrecognized
      compensation expense related to non-vested stock option awards. That expense
      is
      expected to be recognized over a weighted-average period of 0.91
      years.





The
      Company grants restricted share awards periodically for the benefit of
      employees. These restricted shares generally “cliff vest” after five years of
      issuance. 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 as of September 30, 2007 is $850 thousand.
      The remaining amount of compensation expense related to restricted share awards
      at September 30, 2007 is expected to be recognized over the next 3.38
      years.





The
      aggregate intrinsic value in the table below represents the total pretax
      intrinsic value (the difference between the Company’s closing stock price on the
      last trading day of the third quarter of 2007 and the exercise price, multiplied
      by the number of in-the-money options that would have been received by the
      option holders had all option holders exercised their options on September
      30,
      2007. The aggregate pretax intrinsic value is subject to change based on the
      fair market value of the Company's stock. Total intrinsic value of options
      exercised for the nine month period ended September 30, 2007 was $1,070
      thousand. No options were exercised during the third quarter of 2007. The total
      intrinsic value of options exercised for the three and nine month periods ended
      September 30, 2006, was $330 thousand and $1,033 thousand, respectively. No
      options were granted during the three and nine month periods ended September
      30,
      2007 or in the entirety of 2006.




-
          14
          -




The
      following table provides a summary of the aggregate intrinsic value of options
      outstanding and exercisable as well as options granted, exercised, and forfeited
      during the year-to-date period ended September 30, 2007:





**Number of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Average**
              **Remaining**
              **Contractual**
              **Term**
              **(in
                years)**
            
            **Total**
              **Intrinsic**
              **Value**
              **(in
                000's)**Options
                outstanding, January 1, 2007
            
            
            436,567
            
            $
            5.43Granted
            
            
            **-**
            
            
            **-**Exercised
            
            
            (129,764
            )
            
            2.97Forfeited
            
            
            (997
            )
            
            10.77Options
                outstanding, September 30, 2007
            
            
            305,806
            
            $
            6.46
            
            
            3.99
            
            $
            2,948Exercisable
                at September 30, 2007
            
            
            264,029
            
            $
            5.71
            
            
            3.57
            
            $
            2,742Options
                outstanding, January 1, 2006
            
            
            525,915
            
            $
            5.19Granted
            
            
            -
            
            
            -Exercised
            
            
            (72,989
            )
            
            3.66Forfeited
            
            
            (3
            )
            
            4.35Options
                outstanding, September 30, 2006
            
            
            452,923
            
            $
            5.43
            
            
            3.90
            
            $
            4,924Exercisable
                at September 30, 2006
            
            
            383,837
            
            $
            4.49
            
            
            3.70
            
            $
            4,534





**Note
      7. SUBSEQUENT EVENTS**





On
      October 12, 2007, the Company completed the merger of Business First National
      Bank (“Business First”) with and into the Company’s subsidiary, Heritage Oaks
      Bank, which it had previously announced on May 29, 2007. The Company paid
      approximately $19.5 million for Business First. Business First shareholders
      received approximately $3.44 in cash and 0.5758 shares of Heritage Oaks Bancorp
      common stock for each share of Business First they owned. No balances or results
      of operations of Business First are included in the consolidated financial
      statements of the Company as of or for the period ended September 30, 2007.
      The
      Company issued 850,213 shares of common stock and paid approximately $5.1
      million in cash to Business First shareholders in connection with the merger.
      As
      of September 30, 2007, the Company incurred approximately $198 thousand in
      expenses directly related to the merger, all of which have been
      capitalized.








**Note
      8.**  **RECLASSIFICATIONS**





Certain
      amounts in the 2006 financial statements have been reclassified to conform
      to
      the 2007 presentation.





-
          15
          -


**Forward
      Looking Statements**





**Certain
      statements contained in this Quarterly Report on Form 10-Q (“Quarterly Report”),
      including, without limitation, statements containing the words “believes”,
“anticipates”, “intends”, “expects”, and words of similar impact, constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
      Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors that may cause the actual results, performance or achievements
      of
      the Company to be materially different from any future results, performance
      or
      achievements expressed or implied by such forward-looking statements. Such
      factors include, among others, the following: the recent fluctuations in U.S.
      markets resulting, in part, from problems related to sub-prime lending, general
      economic and business conditions in those areas in which the Company operates,
      demographic changes, competition, fluctuations in interest rates, changes in
      business strategy or development plans, changes in governmental regulation,
      credit quality, the availability of capital to fund the expansion of the
      Company’s business, as well as economic, political and global changes arising
      from the war on terrorism. (Refer to the Company’s December 31, 2006 10-K, ITEM
      1A. Risk Factors.) The Company disclaims any obligation to update any such
      factors or to publicly announce the results of any revisions to any of the
      forward-looking statements contained herein to reflect future events or
      developments.**





-
          16
          -


**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





The
      following is an analysis of the results of operations and financial condition
      of
      the Company for the periods ending September 30, 2007 and 2006. The analysis
      should be read in connection with the consolidated financial statements and
      notes thereto appearing elsewhere in this report.




*The
      Company*





Heritage
      Oaks Bancorp (the "Company") is a California corporation organized in 1994
      to
      act as a holding company of Heritage Oaks Bank ("Bank"), a 12 branch bank
      serving San Luis Obispo and northern Santa Barbara Counties. In 1994, the
      Company acquired all of the outstanding common stock of the Bank in a holding
      company formation transaction.





In
      October 2006, the Company formed Heritage Oaks Capital Trust II (the “Trust”).
      The Trust is a statutory business trust formed under the laws of the State
      of
      Delaware. The Trust is a wholly-owned, non-financial, non-consolidated
      subsidiary of the Company.





In
      September 2007, the Company formed Heritage Oaks Capital Trust III (the
“Trust”). The Trust is a statutory business trust formed under the laws of the
      State of Delaware. The Trust is a wholly-owned, non-financial, non-consolidated
      subsidiary of the Company.





Other
      than holding the shares of the Bank, the Company conducts no significant
      activities, although it is authorized, with the prior approval of the Board
      of
      Governors of the Federal Reserve System (the "Federal Reserve Board"), the
      Company's principal regulator, to engage in a variety of activities which are
      deemed closely related to the business of banking. The Company has also caused
      to be incorporated a subsidiary, CCMS Systems, Inc. which is currently inactive
      and has not been capitalized. The Company has no present plans to activate
      the
      proposed subsidiary.




*Where
      You Can Find More Information*





Under
      the
      Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current
      reports must be filed with the SEC. The Company electronically files the
      following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly
      Report), Form 8-K (Current Report), and Form DEF 14A (Proxy Statement). The
      Company may file additional forms. The SEC maintains an internet site,
      www.sec.gov, in which all forms filed electronically may be accessed.
      Additionally, all forms filed with the SEC and additional shareholder
      information is available free of charge on the Company’s website:
      www.heritageoaksbancorp.com





The
      Company posts these reports to its website as soon as reasonably practicable
      after filing them with the SEC. None of the information on or hyperlinked from
      the Company’s website is incorporated into this Quarterly Report on Form
      10-Q.





-
          17
          -




**EXECUTIVE
      SUMMARY AND RECENT DEVELOPMENTS**





*Earnings
      and Financial Condition Overview*





For
      the
      three months ended September 30, 2007, the Company earned $1.6 million or $0.24
      per diluted share. This, when compared to the $1.7 million or $0.26 per diluted
      share the Company earned in the year ago period, represents an approximate
      decrease of  6.1%
      in
      net income. For the first nine months of 2007, the Company earned $4.9 million
      or $0.74 per diluted share. This represents an approximate decrease of 1.5%
      in
      net income when compared to the $5.0 million or $0.76 per diluted share the
      Company earned in the same period a year earlier.  The
      decrease in net income for the quarter and year to date period of 2007 compared
      to the same periods in 2006 can be attributed to higher interest expense
      associated with the Company’s strong deposit growth and a moderation in the net
      growth of the loan portfolio during the second half of 2007. Although the
      funding of new loans remains strong, the loan portfolio has also experienced
      a
      proportionate increase in the dollar amount of loans paid down, thus placing
      some pressure on the growth rate in interest income. Additionally, higher
      non-interest expenses have also contributed to the year over year decline in
      net
      income, which can be attributed in part to the addition of one new full service
      branch in the town of Templeton, California that was opened in August 2006.
      In
      addition, the Bank has received approval to open a full service branch office
      in
      the town of San Miguel, California and is in the process of finalizing facility
      improvement. It is anticipated that this office will open late in the fourth
      quarter of 2007, however, staff has been on board since August
      2007.





Net
      interest income for the three and nine months ended September 30, 2007, was
      $7.3
      million and $21.6 million respectively. This represents an increase of
      approximately $0.3 million or 4.4% for the third quarter of 2007 over the same
      period in 2006 and an increase of approximately $1.5 million or 7.5% for the
      first nine months of 2007 over the same period last year. The year over year
      increases in net interest income can be attributed to a $49.7 million or 11.8%
      increase in net loan balances from the quarter ended September 30, 2006.
      However, the year over year growth in interest income was moderated by the
      increase in interest expense, associated with the strong growth in interest
      bearing deposits the Bank has seen year to date and year over year. In an effort
      to curtail the rise in interest expense, the Company has re-priced certain
      interest bearing deposit products during the quarter in conjunction with the
      50
      basis point decline in the Fed Funds rate.





Non-interest
      expense for the three and nine months ended September 30, 2007 totaled
      approximately $5.8 million and $17.0 million, respectively. This represents
      increases of approximately 7.3% and 10.5% over the same quarter and year to
      date
      periods ended in 2006. The rise in non-interest expenses can be attributed
      to
      higher professional fees and outside services and increased salaries and
      employee benefits related to the addition of two new branch
      locations.





For
      the
      three and nine months ended September 30, 2007, the Company’s efficiency ratio
      was 66.89% and 66.87%, respectively. For the same periods ended in 2006 the
      efficiency ratio was 65.31% and 64.90% respectively. The rise in the efficiency
      ratio over the same periods a year earlier is a result of higher salaries and
      employee benefits related to the addition of two new branches.





Return
      on
      average equity for the three and nine months ended September 30, 2007 was 12.09%
      and 12.68% respectively. For the same periods a year earlier, return on average
      equity was 14.43% and 14.31%.





As
      of
      September 30, 2007, total assets were $572.7 million. This represents an
      increase of approximately $30.9 million or 5.7% when compared to $541.8 million
      in total assets the Company reported at December 31, 2006.  The
      growth in total assets can be attributed to an increase of approximately $29.7
      million or 6.8% in net loan balances from the $439.3 million reported at
      December 31, 2006 as well as a $10.4 million or 268.5% increase in the balance
      of federal funds sold. The rise in federal funds sold can be attributed in
      part
      to the significant rise in deposit balances during 2007.  At
      September 30, 2007, total deposits were $496.3 million. When compared to the
      $420.5 million the Company reported at December 31, 2006, deposit balances
      grew
      by approximately $75.8 million or 18.0%.  The
      strong growth in deposit balances can be attributed to a $69.5 million or 47.5%
      increase in savings, NOW, and money market account balances during the year
      as
      well as a $29.1 million or 24.0% increase in time deposit balances, despite
      a
      $22.8 million or 14.9% decline in demand deposits. The growth in deposit
      balances has allowed the Company to pay down the remaining $30 million in higher
      cost Federal Home Loan Bank (“FHLB”) borrowings during the quarter. The Company
      had no FHLB borrowings at September 30, 2007 and $50 million at December 31,
      2006.


-
          18
          -




*Recent
      Developments*





On
      May
      29, 2007 the Company announced that it had entered into an Agreement to Merge
      and Plan of Reorganization with Business First National Bank (“Business First”).
      The merger was completed on October 12, 2007. Under the terms of the agreement
      and based on Heritage’s closing stock price as of the close of the transaction,
      Heritage paid approximately $19.5 million for Business First. Business First
      shareholders received $3.44 per share in cash and 0.5758 shares of Heritage
      common stock for each share of Business First they owned. Under the terms of
      the
      agreement, Business First was merged with and into Heritage Oaks Bank, a wholly
      owned subsidiary of Heritage Oaks Bancorp. Business First is located in Santa
      Barbara, California with two branches and will operate as a division of Heritage
      Oaks Bank. As of September 30, 2007, Business First had assets totaling
      approximately $145.8 million.





On
      September 20, 2007, the Company issued $5.2 million in Junior Subordinated Debt
      Securities (the “Debt Securities”) to Heritage Oaks Capital Trust III, a
      statutory trust created under the laws of the State of Delaware. The Debt
      Securities are subordinated to effectively all borrowings of the Company and
      are
      due and payable in September 2037. Interest is payable quarterly on these
      securities based on the five year SWAP rate plus 2.00% for an effective rate
      of
      6.888%. Interest on the Debt Securities is fixed for five years and at the
      end
      of such time will convert to a floating rate of the five year SWAP rate plus
      2.00%. The Company has the right under the Indenture to defer payment of
      interest on the Debt Securities at any time for a period not to exceed twenty
      consecutive quarterly periods (each an “Extension Period”) provided that no
      Extension Period may extend beyond the maturity of the Debt Securities. In
      the
      event the Company exercises the right to defer payment of interest on the Debt
      Securities, it may not declare or pay any dividends on its common stock. The
      Company presently has no intention to defer interest payments on the Debt
      Securities, and it considers the likelihood of such a deferral to be remote.
      The
      securities can be called at any time commencing on December 15, 2012, at par.
      The Company also purchased a 3.1% minority interest totaling $155 thousand
      in
      Heritage Oaks Capital Trust III. The balance of the equity of Heritage Oaks
      Capital Trust III is comprised of mandatorily redeemable preferred securities
      and is included in other assets. The company used the proceeds from the sale
      of
      the securities to assist in the acquisition in Business First, for general
      corporate purposes, and for capital contributions to the Bank for future
      growth.





On
      May
      11, 2007 the Company entered into a material definitive agreement to sell four
      of the Bank’s properties to First States Group, L.P. (“First States”) in a
      sale/leaseback transaction for $12,810,000. In connection with the sale, the
      Bank entered into a separate lease agreement with First States Investors, LLC
      to
      lease back three branches and one administrative facility under which the Bank
      will continue to utilize for the normal course of business. The three branches
      are located in Paso Robles, Arroyo Grande and Santa Maria, California. The
      administrative facility is located in Paso Robles, California. The initial
      annual base rents for the Paso Robles, Arroyo Grande, and Santa Maria branches
      are $198,594, $92,456, and $150,920 respectively. The initial annual base rent
      for the administrative facility is $454,730. Each of the four leases contain
      an
      annual rent escalation clause equal to the lower of CPI-U (Consumer Price Index
      for all Urban Consumers) or 2.5 percent, commencing in the second year of the
      lease term. Each of the four leases provide for an initial term of 15 years
      with
      the option to renew for two 10 year terms.





In
      connection with the sale of the properties mentioned, the Bank will recognize
      a
      gain of approximately $3.4 million. This gain will be amortized over a fifteen
      year period in accordance with sale-leaseback accounting rules. For the three
      and nine months ended September 30, 2007, the Bank recognized a gain of
      approximately $56 thousand and $33 thousand, net of tax, related to the
      sale-leaseback transaction. This gain was recorded as an offset to rental
      expense for the periods mentioned. In addition to deferring the gain on sale,
      the Bank has recorded an income tax liability and a deferred tax asset in the
      approximate amounts of $1.4 million, directly related to the deferred gain
      on
      sale.





The
      following table provides a brief summary of the gain the Bank will recognize
      in
      connection with the sale of the properties previously mentioned:





Aggregate
                purchase price
            
            $ 12,809,999Net
                book value of properties sold
            
            
            9,401,087Gain
                on sale
            
            
            3,408,912Yearly
                amortization of gain
            
            $
            227,261




-
          19
          -




On
      April
      23, 2007 the Company redeemed all of the Floating Rate Junior Subordinated
      Debt
      Securities it held associated with Heritage Oaks Capital Trust I, a wholly-owned
      subsidiary of Heritage Oaks Bancorp. The redemption price was 100% of the
      principal amount redeemed plus accrued and unpaid interest as of the Redemption
      Date. The Company paid $379,011 for the standard interest payment due April
      22,
      2007, plus a payment of $8,248,000 for the principal amount to be redeemed
      on
      that date. These amounts were funded from the Company’s general corporate
      reserves. As a result of the redemption of the securities the Company held
      associated with Heritage Oaks Capital Trust I, the Trust was dissolved on June
      1, 2007.





On
      July
      18, 2007, the Board of Directors authorized a one year extension of the stock
      repurchase program that was adopted in July 2006. Under the one year extension
      the Company may repurchase up to 100,000 shares of its common stock. As of
      September 30, 2007, the Company has repurchased 46,000 shares of its common
      stock under the current plan, of which 6,000 shares were repurchased during
      the
      third quarter of 2007.





On
      October 17, 2007, the Board of Directors declared a quarterly cash dividend
      of
      $0.08 per share to be paid on November 16, 2007 to shareholders of record on
      November 2, 2007.





On
      July
      18, 2007, the Board of Directors declared a quarterly cash dividend of $0.08
      per
      share to be paid on August 17, 2007 to shareholders of record on August 3,
      2007.





On
      April
      20, 2007, the Board of Directors declared a quarterly cash dividend of $0.08
      per
      share to be paid on May 18, 2007 to shareholders of record on May 4, 2007.




On
      January 19, 2007, the Board of Directors declared a quarterly cash dividend
      of
      $0.08 per share to be paid on February 16, 2007 to shareholders of record on
      February 2, 2007.




*Selected
      Financial Data*





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




*(dollars
      in thousands except share data)*





**For
                the quarters ended****09/30/07**
            
            **06/30/07**
            
            **03/31/07**
            
            **12/31/06**
            
            **09/30/06**
            
            **06/30/06**
            
            **03/31/06**
            
            **12/31/05**Return
                on average assets
            
            1.12
            %
            1.25
            %
            1.10
            %
            1.24
            %
            1.33
            %
            1.38
            %
            1.33
            %
            1.47
            %Return
                on average equity
            
            
            12.09
            %
            
            13.84
            %
            
            12.10
            %
            
            13.64
            %
            
            14.43
            %
            
            14.37
            %
            
            13.92
            %
            
            16.38
            %Average
                equity to average assets
            
            
            9.27
            %
            
            9.02
            %
            
            9.07
            %
            
            9.11
            %
            
            9.25
            %
            
            9.59
            %
            
            9.58
            %
            
            8.97
            %Net
                interest margin
            
            
            5.44
            %
            
            5.56
            %
            
            5.66
            %
            
            5.77
            %
            
            6.02
            %
            
            6.06
            %
            
            5.98
            %
            
            6.06
            %Efficiency
                ratio*
            
            
            66.89
            %
            
            64.32
            %
            
            68.89
            %
            
            67.12
            %
            
            65.31
            %
            
            64.34
            %
            
            65.02
            %
            
            60.65
            %Average
                loans to average deposits
            
            
            95.79
            %
            
            103.52
            %
            
            108.23
            %
            
            105.03
            %
            
            97.15
            %
            
            94.37
            %
            
            90.15
            %
            
            89.84
            %Net
                Income
            
            $
            1,628
            
            $
            1,800
            
            $
            1,510
            
            $
            1,649
            
            $
            1,733
            
            $
            1,673
            
            $
            1,606
            
            $
            1,808Earnings
                Per Share:Basic
            
            $
            0.25
            
            $
            0.28
            
            $
            0.24
            
            $
            0.26
            
            $
            0.27
            
            $
            0.26
            
            $
            0.26
            
            $
            0.29Diluted
            
            $
            0.24
            
            $
            0.27
            
            $
            0.23
            
            $
            0.25
            
            $
            0.26
            
            $
            0.25
            
            $
            0.24
            
            $
            0.27Outstanding
                Shares:Basic
            
            
            6,472,653
            
            
            6,432,687
            
            
            6,384,150
            
            
            6,355,466
            
            
            6,350,727
            
            
            6,337,712
            
            
            6,283,890
            
            
            6,223,500Diluted
            
            
            6,679,114
            
            
            6,692,467
            
            
            6,605,942
            
            
            6,598,355
            
            
            6,594,626
            
            
            6,670,942
            
            
            6,643,432
            
            
            6,592,000





*
      The
      efficiency ratio is defined as total non-interest expense as a percent of the
      combined net interest income plus non-interest income.





The
      Company’s earnings are highly influenced by changes in short term interest
      rates. The nature of the Company’s balance sheet can be summarily described as
      of short duration and asset sensitive. The balance sheet is of short duration
      because a large percentage of its interest sensitive assets and liabilities
      re-price immediately with changes in the Federal Funds and Prime interest rates.
      The Company is asset sensitive, primarily due to its large volume of
      non-interest bearing demand deposit accounts which effectively never re-price.
      Therefore, an upward movement in short term interest rates will generally result
      in higher net interest margin and, conversely, a reduction in short term
      interest rates will result in reduced net interest margin.




-
          20 -




Historically,
      the largest and most variable source of income for the Company is net interest
      income. The results of operations for the three and nine months ended September
      30, 2007 and September 30, 2006 reflect the impact of a rising rate environment
      that covered the majority of 2004 through the third quarter of 2007 as well
      as
      growth in the volume of both interest earning assets and interest bearing
      liabilities during these periods. More recently rates have begun to decline
      and
      the impact of the decline will be more fully reflected in the fourth quarter
      of
      2007.





*Local
      Economy*





The
      economy in the Company’s service area is based primarily on agriculture,
      tourism, light industry, oil and retail trade. Services supporting these
      industries have also developed in the areas of medical, financial and
      educational services. The population of San Luis Obispo County and the City
      of
      Santa Maria (in Northern Santa Barbara County) in 2005 **** totaled
      approximately 260,000 and 90,000, respectively, according to economic data
      provided by local county and title company sources. The population of the City
      of Santa Barbara, in which the two branches of Business First are located,
      is
      approximately 90,000 as of the most recent census. The moderate climate allows
      a
      year round growing season for numerous vegetables and fruits. Vineyards and
      cattle ranches also contribute largely to the local economy. The Central Coast’s
      leading agricultural industry is the production of high quality wine grapes
      and
      production of premium quality wines. Vineyards in production have grown
      significantly over the past several years throughout the Company’s service area.
      Access to numerous recreational activities, including lakes, mountains and
      beaches, provide a relatively stable tourist industry from many areas including
      the Los Angeles/Orange County basin, the San Francisco Bay area and the San
      Joaquin Valley. Principally due to the diversity of the various industries
      in
      the Company’s service area, the area, while not immune from economic
      fluctuations, does tend to enjoy a more stable level of economic activity than
      many other areas of California.





*Critical
      Accounting Policies*





The
      Company’s significant accounting policies are set forth in the 2006 Annual
      Report, Note 1 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, which was
      filed on Form 10-K.





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





*Allowance
      for Loan and Lease Losses*





The
      Company considers its policy regarding the allowance for loan losses to be
      its
      most critical accounting policy, because it requires management's most
      subjective and complex judgments. In addition, changes in economic conditions
      can have a significant impact on the allowance for loan losses and therefore
      the
      provision for loan losses and results of operations. The Company has developed
      appropriate policies and procedures for assessing the adequacy of the allowance
      for loan losses, recognizing that this process requires a number of assumptions
      and estimates with respect to its loan portfolio. The Company's assessments
      may
      be impacted in future periods by changes in economic conditions, the impact
      of
      regulatory examinations, and the discovery of information with respect to
      borrowers, which is not known to management at the time of the issuance of
      the
      consolidated financial statements.





The
      allowance for loan and lease losses represents management’s best estimate of
      losses inherent in the existing loan portfolio. The allowance for loan and
      lease
      losses is increased by the provision for loan and lease losses charged to
      expense and reduced by loans charged-off, net of recoveries. The allowance
      for
      loan and lease losses is determined based on management’s assessment of several
      factors: reviews and evaluation of individual loans, changes in the nature
      and
      volume of the loan portfolio, current economic conditions and the related impact
      on specific borrowers and industry groups, historical loan loss experiences
      and
      the level of classified and nonperforming loans.





Loans
      are
      considered impaired if, based on current information and events, it is probable
      that we will be unable to collect the scheduled payments of principal or
      interest when due according to the contractual terms of the loan agreement.
      The
      measurement of impaired loans is generally based on the present value of
      expected future cash flows discounted at the historical effective interest
      rate
      stipulated in the loan agreement, except that all collateral-dependent loans
      are
      measured for impairment based on the fair value of the collateral. In measuring
      the fair value of the collateral, management uses assumptions and methodologies
      consistent with those that would be utilized by unrelated third parties. Changes
      in the financial condition of individual borrowers, economic conditions,
      historical loss experience and the condition of the various markets which
      collateral may be sold may all affect the required level of the allowance for
      loan and lease losses and the associated provision for loan and lease losses.


-
          21 -





See
      Note
      3 to the Consolidated Financial Statements for further discussion on Allowance
      for Loan Losses.





*Securities
      Available for Sale*





The
      fair
      values of most securities that are designated available for sale are based
      on
      quoted market prices. If quoted market prices are not available, fair values
      are
      extrapolated from the quoted prices of similar instruments.





*Goodwill
      and Other Intangible Assets*





As
      discussed in the 2006 Annual Report, Note 1 of the NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS, which was filed on Form 10-K, we assess goodwill and
      other
      intangible assets each year for impairment. This assessment involves a “carrying
      amount comparison” that compares the fair value of the reporting unit to its
      carrying value (stated shareholders’ equity, including goodwill). If the
      carrying value of a reporting unit materially exceeds its fair value, the
      Company would be required to take a charge against earnings to write down the
      assets to the lower value. The Company determined that there was no impairment
      at December 31, 2006.


-
          22 -


**RESULTS
      OF OPERATIONS**





*Net
      Interest Income and Interest Margin*





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





The
      volume and rate variances table below sets forth the dollar difference in
      interest earned and paid for each major category of interest-earning assets
      and
      interest-bearing liabilities for the three and nine month periods ended
      September 30, 2007, and the amount of such change attributable to changes in
      average balances (volume) or changes in average interest rates.




*(dollars
                in thousands)*
            
            **For
                the three months ended**
              **September
                30, 2007 over 2006**
            
            **For
                the nine months ended**
              **September
                30, 2007 over 2006****Volume**
            
            **Rate**
            
            **Total**
            
            **Volume**
            
            **Rate**
            
            **Total****Interest
                income:**Loans
                (1)
            
            $
            1,223
            
            $
            (133
            )
            $
            1,090
            
            $
            5,160
            
            $
            452
            
            $
            5,612Investment
                securities taxable
            
            
            (58
            )
            
            24
            
            
            (34
            )
            
            (179
            )
            
            68
            
            
            (111
            )Investment
                securities non-taxable (2):
            
            
            (8
            )
            
            5
            
            
            (3
            )
            
            11
            
            
            (3
            )
            
            8Taxable
                equivalent adjustment (2):
            
            
            3
            
            
            (2
            )
            
            1
            
            
            (4
            )
            
            1
            
            
            (3
            )Interest-bearing
                deposits
            
            
            12
            
            
            (18
            )
            
            (6
            )
            
            5
            
            
            (20
            )
            
            (15
            )Federal
                funds sold
            
            
            255
            
            
            (1
            )
            
            254
            
            
            33
            
            
            31
            
            
            64Net
                increase (decrease)
            
            
            1,427
            
            
            (125
            )
            
            1,302
            
            
            5,026
            
            
            529
            
            
            5,555**Interest
                expense:**Savings,
                now, money market
            
            
            249
            
            
            429
            
            
            678
            
            
            231
            
            
            963
            
            
            1,194Time
                deposits
            
            
            339
            
            
            196
            
            
            535
            
            
            1,168
            
            
            569
            
            
            1,737Other
                borrowings
            
            
            (209
            )
            
            21
            
            
            (188
            )
            
            892
            
            
            75
            
            
            967Long
                term borrowings
            
            
            16
            
            
            (45
            )
            
            (29
            )
            
            197
            
            
            (54
            )
            
            143Net
                increase (decrease)
            
            
            395
            
            
            601
            
            
            996
            
            
            2,488
            
            
            1,553
            
            
            4,041Total
                net increase (decrease)
            
            $
            1,032
            
            $
            (726
            )
            $
            306
            
            $
            2,538
            
            $
            (1,024
            )
            $
            1,514





(1)
            Loan
                fees of $232 and $303 for the three months ending September 30, 2007
                and
                2006 respectively and $873 and $960 for the nine months ending September
                30, 2007 and 2006 respectively have been included in interest income
                computation.


(2)
            Adjusted
                to a fully taxable equivalent basis using a tax rate of
                34%.


-
          23 -





The
      tables below set forth average balance sheet information, interest income and
      expense, average yields and rates and net interest income and margin for the
      three and nine months ended September 30, 2007 and 2006. The average balance
      of
      non-accruing loans has been included in loan totals.





*(dollars
                in thousands)*
            
            **For
                the three months ending**
              **September
                30, 2007**
            
            **For
                the three months ending**
              **September
                30, 2006****Balance**
            
            **Rate
                (4)**
            
            **Income/**
              **Expense**
            
            **Balance**
            
            **Rate
                (4)**
            
            **Income/**
              **Expense**Interest
                Earning Assets:Investments
                with other banks
            
            **$**
            **481**
            
            
            **0.82**
            **%**
            **$**
            **1**
            
            $
            318
            
            
            8.73
            %
            $
            7Investment
                securities taxable
            
            
            **21,649**
            
            
            **4.60**
            **%**
            
            **251**
            
            
            26,366
            
            
            4.29
            %
            
            285Investment
                securities non-taxable
            
            
            **16,036**
            
            
            **4.33**
            **%**
            
            **175**
            
            
            16,467
            
            
            4.26
            %
            
            177Federal
                funds sold
            
            
            **29,447**
            
            
            **5.19**
            **%**
            
            **385**
            
            
            9,966
            
            
            5.22
            %
            
            131Loans
                (1) (2)
            
            
            **466,749**
            
            
            **8.55**
            **%**
            
            **10,058**
            
            
            409,897
            
            
            8.68
            %
            
            8,968Total
                interest earning assets
            
            
            **534,362**
            
            
            **8.07**
            **%**
            
            **10,870**
            
            
            463,014
            
            
            8.20
            %
            
            9,568Allowance
                for possible loan losses
            
            
            **(4,600**
            **)**
            
            
            
            
            
            
            
            (3,767
            )Other
                assets
            
            
            **46,858**
            
            
            
            
            
            
            
            
            56,073TOTAL
                ASSETS
            
            **$**
            **576,620**
            
            
            
            
            
            
            
            $
            515,320Interest
                Bearing Liabilities:Savings/NOW/money
                market
            
            
            **206,186**
            
            
            **2.49**
            **%**
            
            **1,292**
            
            
            154,539
            
            
            1.58
            %
            
            614Time
                deposits
            
            
            **147,659**
            
            
            **4.94**
            **%**
            
            **1,839**
            
            
            119,162
            
            
            4.34
            %
            
            1,304Other
                borrowings
            
            
            **17,940**
            
            
            **5.55**
            **%**
            
            **251**
            
            
            32,195
            
            
            5.29
            %
            
            429Federal
                funds purchased
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            652
            
            
            6.08
            %
            
            10Long-term
                debt
            
            
            **8,864**
            
            
            **7.16**
            **%**
            
            **160**
            
            
            8,248
            
            
            9.09
            %
            
            189Total
                interest-bearing liabilities
            
            
            **380,649**
            
            
            **3.69**
            **%**
            
            **3,542**
            
            
            314,796
            
            
            3.21
            %
            
            2,546Demand
                deposits
            
            
            **133,432**
            
            
            
            
            
            
            
            
            148,215Other
                liabilities
            
            
            **9,098**
            
            
            
            
            
            
            
            
            4,646Stockholders'
                Equity:Common
                stock
            
            
            **30,042**
            
            
            
            
            
            
            
            
            29,589Additional
                paid in capital
            
            
            **555**
            
            
            
            
            
            
            
            
            -Retained
                earnings
            
            
            **22,958**
            
            
            
            
            
            
            
            
            18,336Valuation
                allowance investments
            
            
            **(114**
            **)**
            
            
            
            
            
            
            
            (262
            )Total
                stockholders' equity
            
            
            **53,441**
            
            
            
            
            
            
            
            
            47,663TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            **$**
            **576,620**
            
            
            
            
            
            
            
            $
            515,320Net
                Interest Income
            
            
            
            
            
            
            
            **$**
            **7,328**
            
            
            
            
            
            
            
            $
            7,022Net
                Interest Margin (3)
            
            
            
            
            
            **5.44**
            **%**
            
            
            
            
            
            
            
            6.02
            %





(1)
            Nonaccrual
                loans have been included in total
                loans.


(2)
            Loan
                fees of $232 and $303 for the three months ending September 30, 2007
                and
                2006, respectively 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)
            Rate
                is annualized using actual number of days in
                period.


-
          24 -





*(dollars
                in thousands)*
            
            **For
                the nine months ending**
              **September
                30, 2007**
            
            **For
                the nine months ending**
              **September
                30, 2006****Balance**
            
            **Rate
                (4)**
            
            **Income/**
              **Expense**
            
            **Balance**
            
            **Rate
                (4)**
            
            **Income/**
              **Expense**Interest
                Earning Assets:Investments
                with other banks
            
            **$**
            **373**
            
            
            **2.51**
            **%**
            **$**
            **7**
            
            $
            314
            
            
            9.37
            %
            $
            22Investment
                securities taxable
            
            
            **23,157**
            
            
            **4.58**
            **%**
            
            **794**
            
            
            28,161
            
            
            4.30
            %
            
            905Investment
                securities non-taxable
            
            
            **16,434**
            
            
            **4.31**
            **%**
            
            **530**
            
            
            16,209
            
            
            4.33
            %
            
            525Federal
                funds sold
            
            
            **15,117**
            
            
            **5.10**
            **%**
            
            **577**
            
            
            14,217
            
            
            4.82
            %
            
            513Loans
                (1) (2)
            
            
            **468,007**
            
            
            **8.60**
            **%**
            
            **30,087**
            
            
            387,627
            
            
            8.44
            %
            
            24,475Total
                interest earning assets
            
            
            **523,088**
            
            
            **8.18**
            **%**
            
            **31,995**
            
            
            446,528
            
            
            7.92
            %
            
            26,440Allowance
                for possible loan losses
            
            
            **(4,401**
            **)**
            
            
            
            
            
            
            
            (3,928
            )Other
                assets
            
            
            **52,443**
            
            
            
            
            
            
            
            
            52,319TOTAL
                ASSETS
            
            **$**
            **571,130**
            
            
            
            
            
            
            
            $
            494,919Interest
                Bearing Liabilities:Savings/NOW/money
                market
            
            
            **182,369**
            
            
            **2.22**
            **%**
            
            **3,025**
            
            
            163,506
            
            
            1.50
            %
            
            1,831Time
                deposits
            
            
            **135,749**
            
            
            **4.76**
            **%**
            
            **4,836**
            
            
            101,354
            
            
            4.09
            %
            
            3,099Other
                borrowings
            
            
            **43,453**
            
            
            **5.45**
            **%**
            
            **1,771**
            
            
            22,577
            
            
            5.04
            %
            
            851Federal
                funds purchased
            
            
            **1,408**
            
            
            **5.70**
            **%**
            
            **60**
            
            
            305
            
            
            5.70
            %
            
            13Long-term
                debt
            
            
            **11,839**
            
            
            **7.74**
            **%**
            
            **685**
            
            
            8,248
            
            
            8.79
            %
            
            542Total
                interest-bearing liabilities
            
            
            **374,818**
            
            
            **3.70**
            **%**
            
            **10,377**
            
            
            295,990
            
            
            2.86
            %
            
            6,336Demand
                deposits
            
            
            **137,706**
            
            
            
            
            
            
            
            
            147,908Other
                liabilities
            
            
            **6,525**
            
            
            
            
            
            
            
            
            4,178Stockholders'
                Equity:Common
                stock
            
            
            **29,740**
            
            
            
            
            
            
            
            
            29,506Additional
                paid in capital
            
            
            **465**
            
            
            
            
            
            
            
            
            -Retained
                earnings
            
            
            **21,869**
            
            
            
            
            
            
            
            
            17,562Valuation
                allowance investments
            
            
            **7**
            
            
            
            
            
            
            
            
            (225
            )Total
                stockholders' equity
            
            
            **52,081**
            
            
            
            
            
            
            
            
            46,843TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            **$**
            **571,130**
            
            
            
            
            
            
            
            $
            494,919Net
                Interest Income
            
            
            
            
            
            
            
            **$**
            **21,618**
            
            
            
            
            
            
            
            $
            20,104Net
                Interest Margin (3)
            
            
            
            
            
            **5.53**
            **%**
            
            
            
            
            
            
            
            6.02
            %





(1)
            Nonaccrual
                loans have been included in total
                loans.


(2)
            Loan
                fees of $873 and $960 for the nine months ending September 30, 2007
                and
                2006, respectively 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)
            Rate
                is annualized using actual number of days in
                period.


-
          25 -


The
      tables below set forth changes for the three and nine months ending September
      30, 2007 compared to the same periods in 2006 for average interest earning
      assets and their respective average yields.




*(dollars
                in thousands)*
            
            **Average Balance**
              **for the three months ending**
              **September 30,**
            
            **Variance**
            
            **Average Yield**
              **for the three months ending**
              **September 30,****2007**
            
            
            **2006**
            
            
            **dollar**
            
            
            **percentage**
            
            
            **2007**
            
            
            **2006**
            
            
            **Variance**Interest
                Earning Assets:Time
                deposits with other banks
            
            $
            481
            
            $
            318
            
            $
            163
            
            
            51.26
            %
            
            0.82
            %
            
            8.73
            %
            
            -7.91
            %Investment
                securities taxable
            
            
            21,649
            
            
            26,366
            
            
            (4,717
            )
            
            -17.89
            %
            
            4.60
            %
            
            4.29
            %
            
            0.31
            %Investment
                securities non-taxable
            
            
            16,036
            
            
            16,467
            
            
            (431
            )
            
            -2.62
            %
            
            4.33
            %
            
            4.26
            %
            
            0.07
            %Federal
                funds sold
            
            
            29,447
            
            
            9,966
            
            
            19,481
            
            
            195.47
            %
            
            5.19
            %
            
            5.22
            %
            
            -0.03
            %Loans
                (1) (2)
            
            
            466,749
            
            
            409,897
            
            
            56,852
            
            
            13.87
            %
            
            8.55
            %
            
            8.68
            %
            
            -0.13
            %Total
                interest earning assets
            
            $
            534,362
            
            $
            463,014
            
            $
            71,348
            
            
            15.41
            %
            
            8.07
            %
            
            8.20
            %
            
            -0.13
            %





(1)
            Nonaccrual
                loans have been included in total loans.


(2)
            Loan
                fees of $232 and $303 for the three months ending September 30, 2007
                and
                2006, respectively have been included in the interest income computation.





*(dollars
                in thousands)*
            
            **Average Balance**
              **for the nine months ending**
              **September 30,**
            
            **Variance**
            
            **Average Yield**
              **f****or the nine months ending
                September 30,**Interest
                Earning Assets:
            
            
            **2007**
            
            
            **2006**
            
            
            **dollar**
            
            
            **percentage**
            
            
            **2007**
            
            
            **2006**
            
            
            **Variance**Time
                deposits with other banks
            
            $
            373
            
            $
            314
            
            $
            59
            
            
            18.79
            %
            
            2.51
            %
            
            9.37
            %
            
            -6.86
            %Investment
                securities taxable
            
            
            23,157
            
            
            28,161
            
            
            (5,004
            )
            
            -17.77
            %
            
            4.58
            %
            
            4.30
            %
            
            0.29
            %Investment
                securities non-taxable
            
            
            16,434
            
            
            16,209
            
            
            225
            
            
            1.39
            %
            
            4.31
            %
            
            4.33
            %
            
            -0.02
            %Federal
                funds sold
            
            
            15,117
            
            
            14,217
            
            
            900
            
            
            6.33
            %
            
            5.10
            %
            
            4.82
            %
            
            0.28
            %Loans
                (1) (2)
            
            
            468,007
            
            
            387,627
            
            
            80,380
            
            
            20.74
            %
            
            8.60
            %
            
            8.44
            %
            
            0.15
            %Total
                interest earning assets
            
            $
            523,088
            
            $
            446,528
            
            $
            76,560
            
            
            17.15
            %
            
            8.18
            %
            
            7.92
            %
            
            0.26
            %





(1)
            Nonaccrual
                loans have been included in total loans.


(2)
            Loan
                fees of $873 and $960 for the nine months ending September 30, 2007
                and
                2006, respectively have been included in the interest income computation.





The
      Company has been able to increase the loan portfolio with continued market
      penetration by a team of seasoned loan officers who are compensated for
      production. Additions to the loan portfolio for the three and nine months ending
      September 30, 2007 were achieved under the Company’s established Loan Policy.





For
      the
      three month period ended September 30, 2007, the average yield on loans fell
      slightly to 8.55% from 8.68% earned during the same period a year earlier.
      For
      the first nine months of 2007, the average yield on loans improved to 8.60%
      from
      8.44% earned in the same year ago period. This has been primarily due to the
      rise in market interest rates from 2006 to 2007. From the end of the first
      quarter of 2006 to the end of the second quarter in 2007, the Prime rate rose
      by
      50 basis points. See “Item 3. Quantitative and Qualitative Disclosure about
      Market Risk” for further discussion.





The
      taxable investment portfolio gained in average yield due to extension of average
      life as the result of rising rates. Balances of taxable investment securities
      decreased due to regular principal reductions on Mortgage Backed Securities
      (MBS).


-
          26 -


The
      tables below set forth changes for the three and nine months ending September
      30, 2007 compared to the same periods in 2006 for average interest bearing
      liabilities and the respective average rates paid.





*(dollars
                in thousands)*
            
            **Average Balance**
              **for the three months ending**
              **September 30,**
            
            **Variance**
            
            **Average Rate**
              **for the three months ending**
              **September 30,****2007**
            
            
            **2006**
            
            
            **dollar**
            
            
            **percentage**
            
            
            **2007**
            
            
            **2006**
            
            
            **Variance**Interest
                Bearing Liabilities:Savings/NOW/money
                market
            
            $
            206,186
            
            $
            154,539
            
            $
            51,647
            
            
            33.42
            %
            
            2.49
            %
            
            1.58
            %
            
            0.91
            %Time
                deposits
            
            
            147,659
            
            
            119,162
            
            
            28,497
            
            
            23.91
            %
            
            4.94
            %
            
            4.34
            %
            
            0.60
            %Other
                borrowings
            
            
            17,940
            
            
            32,195
            
            
            (14,255
            )
            
            -44.28
            %
            
            5.55
            %
            
            5.29
            %
            
            0.26
            %Federal
                funds purchased
            
            
            -
            
            
            652
            
            
            (652
            )
            
            -100.00
            %
            
            0.00
            %
            
            6.08
            %
            
            -6.08
            %Long
                term debt
            
            
            8,864
            
            
            8,248
            
            
            616
            
            
            7.47
            %
            
            7.16
            %
            
            9.09
            %
            
            -1.93
            %Total
                interest-bearing liabilities
            
            $
            380,649
            
            $
            314,796
            
            $
            65,853
            
            
            20.92
            %
            
            3.69
            %
            
            3.21
            %
            
            0.48
            %





*(dollars
                in thousands)*
            
            **Average Balance**
              **for the nine months ending**
              **September 30,**
            
            **Variance**
            
            **Average Rate**
              **for the nine months ending
                September 30,****2007**
            
            
            **2006**
            
            
            **dollar**
            
            
            **percentage**
            
            
            **2007**
            
            
            **2006**
            
            
            **Variance**Interest
                Bearing Liabilities:Savings/NOW/money
                market
            
            $
            182,369
            
            $
            163,506
            
            $
            18,863
            
            
            11.54
            %
            
            2.22
            %
            
            1.50
            %
            
            0.72
            %Time
                deposits
            
            
            135,749
            
            
            101,354
            
            
            34,395
            
            
            33.94
            %
            
            4.76
            %
            
            4.09
            %
            
            0.67
            %Other
                borrowings
            
            
            43,453
            
            
            22,577
            
            
            20,876
            
            
            92.47
            %
            
            5.45
            %
            
            5.04
            %
            
            0.41
            %Federal
                funds purchased
            
            
            1,408
            
            
            305
            
            
            1,103
            
            
            361.64
            %
            
            5.70
            %
            
            5.70
            %
            
            0.00
            %Long
                term debt
            
            
            11,839
            
            
            8,248
            
            
            3,591
            
            
            43.54
            %
            
            7.74
            %
            
            8.79
            %
            
            -1.05
            %Total
                interest-bearing liabilities
            
            $
            374,818
            
            $
            295,990
            
            $
            78,828
            
            
            26.63
            %
            
            3.70
            %
            
            2.86
            %
            
            0.84
            %





For
      the
      three and nine months ending September 30, 2007 compared to the same periods
      in
      2006, the Company’s average yield on average interest bearing liabilities
      increased by 48 and 84 basis points respectively.





While
      the
      Company’s balance sheet remains asset sensitive a competitive local market has
      caused deposit costs to outpace increases in interest rates earned on loans,
      applying pressure on the net interest margin. For the quarter, the net interest
      margin was 5.44%, down slightly from 5.56% for the second quarter of 2007 and
      6.02% for the three months ended September 30, 2006. The Company’s recent
      success in deposit gathering has proved to be beneficial in helping to reduce
      higher cost sources of funding, but has also contributed to the rise in interest
      expense, which in turn places pressure on the net interest margin.  Late in
      the third quarter, the company re-priced the rate associated with its successful
      money market program to curb the rapid increase in interest expense and to
      reflect the decline in current market rates triggered by the 50 basis point
      decrease in the Fed Funds Rate by the Federal Reserve in September.  The
      impact of this rate change will be more fully realized in the fourth quarter
      of
      2007. The Company continues to remain committed to aggressively pursuing core
      deposits in an effort to provide additional sources of inexpensive funding
      to
      fuel the continued growth in the loan portfolio.  Additionally,
      the re-branding initiative the Company has undertaken has and is expected to
      contribute to the acquisition of new low cost deposits.


-
          27 -


*Non-Interest
      Income*





The
      tables below set forth changes for the three and nine months ending September
      30, 2007 compared to the same period in 2006 for non-interest income.





**For
                the three months ended**
              **September
                30,**
            
            **Variance***(dollars
                in thousands)*
            
            **2007**
            
            **2006**
            
            **dollar**
            
            **percentage**Service
                charges on deposit accounts
            
            $
            642
            
            $
            644
            
            $
            (2
            )
            
            -0.3
            %ATM/Debit
                Card transaction/interchange fees
            
            
            194
            
            
            183
            
            
            11
            
            
            6.0
            %Bancard
            
            
            62
            
            
            35
            
            
            27
            
            
            77.1
            %Mortgage
                origination fees
            
            
            119
            
            
            110
            
            
            9
            
            
            8.2
            %Earnings
                on cash surrender value life insurance
            
            
            109
            
            
            113
            
            
            (4
            )
            
            -3.5
            %Other
            
            
            183
            
            
            137
            
            
            46
            
            
            33.6
            %Total
            
            $
            1,309
            
            $
            1,222
            
            $
            87
            
            
            7.1
            %





**For
                the nine months ended**
              **September
                30,**
            
            **Variance***(dollars
                in thousands)*
            
            **2007**
            
            **2006**
            
            **dollar**
            
            **percentage**Service
                charges on deposit accounts
            
            $
            1,937
            
            $
            1,826
            
            $
            111
            
            
            6.1
            %ATM/Debit
                Card transaction/interchange fees
            
            
            572
            
            
            542
            
            
            30
            
            
            5.5
            %Bancard
            
            
            178
            
            
            89
            
            
            89
            
            
            100.0
            %Mortgage
                origination fees
            
            
            378
            
            
            410
            
            
            (32
            )
            
            -7.8
            %Earnings
                on cash surrender value life insurance
            
            
            322
            
            
            289
            
            
            33
            
            
            11.4
            %Other
            
            
            545
            
            
            496
            
            
            49
            
            
            9.9
            %Total
            
            $
            3,932
            
            $
            3,652
            
            $
            280
            
            
            7.7
            %





For
      the
      three and nine months ending September 30, 2007 as compared to the same period
      in 2006, non-interest income has risen by approximately $87 thousand and $280
      thousand respectively. Service charges on deposit accounts and Bancard revenues
      contributed to the majority of the increase in other income for both the three
      and nine months ended September 30, 2007. These increases are partly
      attributable to deposit growth and an increase in the number of customer
      relationships the Bank has obtained during 2007.  Additionally,
      the increase in other non-interest income for the three months ended September
      30, 2007 compared to the same period a year ago can be attributed in part to
      a
      cumulative $23 thousand gain recognized in connection with the sale of various
      SBA loans the Bank participated in.





Mortgage
      origination fees declined in the nine months ended September 30, 2007, when
      compared to the same period in 2006. The rise in interest rates during the
      first
      nine months of 2007 has made the cost of borrowing less attractive than in
      previous quarters and as a result there has been a slowdown in resale
      transactions.





The
      table
      below illustrates the change in the number and total dollar volume of loans
      originated during the three and nine months ended September 30, 2007 compared
      to
      the same periods ended in 2006.





**For
                the three months ended September 30,***(dollars in thousands)*
            
            **2007**
            
            **2006**
            
            **Variance**Dollar
                volume
            
            $
            12,835
            
            $
            18,185
            
            
            -29.4
            %Number
                of loans
            
            
            37
            
            
            31
            
            
            19.4
            %




**For
                  the nine months ended September 30,****2007**
              
              **2006**
              
              **Variance**Dollar
                  volume
              
              $
              42,455
              
              $
              48,916
              
              
              -13.2
              %Number
                  of loans
              
              
              121
              
              
              147
              
              
              -17.7
              %


-
          28 -


*Non-Interest
      Expenses*





The
      tables below set forth changes for the three and nine months ending September
      30, 2007 compared to the same period in 2006 for non-interest expense.





**For
                the three months ended**
              **September
                30,**
            
            **Variance***(dollars
                in thousands)*
            
            **2007**
            
            **2006**
            
            **dollar**
            
            **percentage**Salaries
                and employee benefits
            
            $
            3,238
            
            $
            2,965
            
            $
            273
            
            
            9.2
            %Occupany
                and equipment
            
            
            830
            
            
            633
            
            
            197
            
            
            31.1
            %Data
                processing
            
            
            529
            
            
            517
            
            
            12
            
            
            2.3
            %Advertising
                and promotional
            
            
            165
            
            
            278
            
            
            (113
            )
            
            -40.6
            %Regulatory
                fees
            
            
            30
            
            
            28
            
            
            2
            
            
            7.1
            %Other
                professional fees and outside services
            
            
            304
            
            
            286
            
            
            18
            
            
            6.3
            %Legal
                fees and other litigation expense
            
            
            31
            
            
            30
            
            
            1
            
            
            3.3
            %Loan
                department costs
            
            
            31
            
            
            30
            
            
            1
            
            
            3.3
            %Stationery
                and supplies
            
            
            72
            
            
            84
            
            
            (12
            )
            
            -14.3
            %Director
                fees
            
            
            65
            
            
            69
            
            
            (4
            )
            
            -5.8
            %Core
                deposit intangible amortization
            
            
            88
            
            
            75
            
            
            13
            
            
            17.3
            %Other
            
            
            394
            
            
            389
            
            
            5
            
            
            1.3
            %Total
            
            $
            5,777
            
            $
            5,384
            
            $
            393
            
            
            7.3
            %





**For
                the nine months ended**
              **September
                30,**
            
            **Variance***(dollars
                in thousands)*
            
            **2007**
            
            **2006**
            
            **Dollar**
            
            **percentage**Salaries
                and employee benefits
            
            $
            9,682
            
            $
            8,534
            
            $
            1,148
            
            
            13.5
            %Occupany
                and equipment
            
            
            2,251
            
            
            1,901
            
            
            350
            
            
            18.4
            %Data
                processing
            
            
            1,634
            
            
            1,579
            
            
            55
            
            
            3.5
            %Advertising
                and promotional
            
            
            592
            
            
            632
            
            
            (40
            )
            
            -6.3
            %Regulatory
                fees
            
            
            85
            
            
            85
            
            
            -
            
            
            0.0
            %Other
                professional fees and outside services
            
            
            891
            
            
            694
            
            
            197
            
            
            28.4
            %Legal
                fees and other litigation expense
            
            
            77
            
            
            90
            
            
            (13
            )
            
            -14.4
            %Loan
                department costs
            
            
            102
            
            
            112
            
            
            (10
            )
            
            -8.9
            %Stationery
                and supplies
            
            
            244
            
            
            221
            
            
            23
            
            
            10.4
            %Director
                fees
            
            
            212
            
            
            217
            
            
            (5
            )
            
            -2.3
            %Core
                deposit intangible amortization
            
            
            265
            
            
            225
            
            
            40
            
            
            17.8
            %Other
            
            
            998
            
            
            1,127
            
            
            (129
            )
            
            -11.4
            %Total
            
            $
            17,033
            
            $
            15,417
            
            $
            1,616
            
            
            10.5
            %





***Salary
      and Employee Benefits***





Salaries
      and employee related expense incurred the greatest dollar increase of any
      non-interest expense category for the three and nine months ending September
      30,
      2007 over the same periods ended in 2006. The increase was primarily a result
      of
      increased expenses related to the expansion of our Executive Management team
      contributing to higher officer salaries as well as additional staff to enhance
      relationship management. The addition of two full service branches within the
      Bank’s existing footprint in the towns of Templeton and San Miguel has resulted
      in an increase in salary and employee benefits as well as occupancy expenses.





***Occupancy
      and Equipment***





Expenses
      related to occupancy and equipment has increased significantly when compared
      to
      the three and nine month periods a year ago. This is primarily the result of
      the
      sale lease-back transaction the Bank completed during the second quarter of
      this
      year. The additional rental expense incurred as a result of this transaction
      has
      been offset by the amortization of the gain on sale of the four properties
      as
      well additional interest income from the short-term investment of the proceeds
      from the sale.


-
          29 -


***Other
      Professional Fees and Outside Services***





Other
      professional fees and outside service expenses increased by $18 thousand and
      $197 thousand for the quarter and year to date periods ended September 30,
      2007
      when compared to the same periods a year earlier. The increase in this category
      is directly related to higher audit fees associated the Company’s compliance
      with section 404 of the Sarbanes-Oxley Act of 2002.





***Advertising
      and Promotional***





For
      the
      three and nine months ended September 30, 2007, advertising and promotional
      expenses have decreased by approximately $113 thousand and $40 thousand,
      respectively. During the first nine months of 2007, the Company has seen a
      significant rise in core deposits, which can be attributed in part to the
      increased promotional expenses the Company incurred during the first half of
      the
      year in connection with our efforts to acquire new customer relationships.
      The
      Company has begun to scale back expenses within this category during the second
      half of 2007, as our promotional efforts have proven to be successful in
      gathering lower cost core deposits.





***Provision
      for Income Taxes***





The
      provision for income taxes was 38.6% and 38.2% and 35.4% and 36.2%  of
      net
      pre-tax income for the three and nine month periods ending September 30, 2007
      and 2006, respectively. The provision for income tax was approximately 200
      basis
      points higher at 38.2% for the nine months ended September 30, 2007 compared
      to
      36.2% for the same period in 2006. The lower rate in 2006 was impacted by timing
      differences on certain tax issues that flowed through the Income Statement.





-
          30 -




**FINANCIAL
      CONDITION ANALYSIS**





Total
      assets of the Company were $572.7 million at September 30, 2007 compared to
      $541.8 million at December 31, 2006. This represents an increase of $30.9
      million or approximately 5.7%. Due to the significant deposit growth, Heritage
      Oaks reduced its FHLB borrowings by $30 million during the third quarter, and
      $50 million year-to-date. On September 20, 2007, the company issued $5.0 million
      in trust preferred securities. The securities were issued by a special purpose
      business trust formed by Heritage Oaks and were sold to a pooled investment
      vehicle sponsored by Keefe, Bruyette & Woods in a private transaction. The
      Company intends to use the funds for general corporate purposes including the
      acquisition of Business First.





Notwithstanding
      the payoff of FHLB borrowing, total assets increased 7.6% to $572.7 million
      at
      quarter-end, compared to $532.4 million a year earlier and increased 5.7%
      compared to $541.8 million in total assets at December 31, 2006.




*Loans*





Total
      gross loans as of September 30, 2007, increased by $30.6 million over the year
      ended December 31, 2006. The growth in the loan portfolio was primarily
      attributable to a $16.8 million or 19.7% increase in commercial, financial,
      and
      agricultural loan balances and to a $16.5 million or 6.9% increase in commercial
      real estate loans during the first nine months of 2007.





The
      table
      below sets forth changes from December 31, 2006 to September 30, 2007 for the
      composition of the loan portfolio:





**September 30,**
            
            
            **December 31,**
            
            
            **Variance***(dollars
                in thousands)*
            
            
            **2007**
            
            
            **2006**
            
            
            **dollar**
            
            
            **percentage****Loan
                Classifications:**Commercial,
                financial, and agricultural
            
            $
            101,748
            
            $
            84,976
            
            $
            16,772
            
            
            19.74
            %Real
                estate-construction/land
            
            
            105,054
            
            
            105,712
            
            
            (658
            )
            
            -0.62
            %Real
                estate - other
            
            
            253,860
            
            
            237,401
            
            
            16,459
            
            
            6.93
            %Home
                equity lines of credit
            
            
            8,897
            
            
            10,792
            
            
            (1,895
            )
            
            -17.56
            %Installment
                loans to individuals
            
            
            5,580
            
            
            5,598
            
            
            (18
            )
            
            -0.32
            %All
                other loans (including overdrafts)
            
            
            488
            
            
            504
            
            
            (16
            )
            
            -3.17
            %Total
                loans, gross
            
            
            475,627
            
            
            444,983
            
            
            30,644
            
            
            6.89
            %Less
                - deferred loan fees, net
            
            
            1,941
            
            
            1,625
            
            
            316
            
            
            19.45
            %Less
                - reserve for possible loan losses
            
            
            4,720
            
            
            4,081
            
            
            639
            
            
            15.66
            %Total
                loans, net
            
            $
            468,966
            
            $
            439,277
            
            $
            29,689
            
            
            6.76
            %Loans
                held for sale
            
            $
            902
            
            $
            1,764
            
            $
            (862
            )
            
            -48.87
            %




***Commercial,
      Financial & Agricultural***





The
      increase in commercial, financial and agricultural loans is attributed primarily
      to a loan to acquire a chain of hair salons, four loans to an oil field
      maintenance company for equipment, a loan to a winery, an agricultural property
      acquisition loan, an agricultural property loan, a loan made to an accounting
      firm, and a loan to purchase a restaurant all totaling $12.1 million in new
      fundings. Additionally, numerous other new $0.5 to $1.0 million business lines
      of credit to medical groups, contractors and other businesses were made
      throughout the year. Approximately $5.0 million in participation loans were
      purchased during the period.





***Real
      Estate – Construction & Land***





The
      slight decrease in real estate-construction loans can be attributed to
      construction loans moving into longer term mortgages and to payoffs through
      outside sources. Several large construction loans were made during the third
      quarter and these have only been partially funded. New loans during the period
      include: a residential track development, a condo development, three separate
      hotel projects, two separate loans for office/warehouses, an addition to a
      strip
      center, a spec residence, loans made for commercial/industrial buildings, a
      hotel loan, and a land loan, all totaling $44.6 million in new fundings, as
      well
      as numerous other smaller projects. Construction loans are typically granted
      for
      a one year period and then, with income properties, are amortized over not
      more
      than 30 years with 10 to 15 year maturities.





-
          31
          -




The
      Bank
      presently has a concentration of loans in construction/land in the amount of
      $105.1 million which represents 188% of the Bank’s Tier I Capital. Of this, 9%
      are owner occupied thus the concentration is 179% net of owner occupied.
      Un-disbursed commitments total $40.5 million which combined with disbursed
      represent 261% of the Bank’s Tier I Capital with 56% owner occupied. At
      September 30, 2007 there were 65 construction loans with outstanding balances
      and remaining commitments of approximately $82.1 million and $38.7 million,
      respectively. The single largest construction loan has an original commitment
      amount of approximately $9.2 million with a balance of approximately $9.2
      million at September 30, 2007. At September 30, 2007, there were 48 land loans
      with an aggregate balance of approximately $22.9 million. The single largest
      land loan is for a residential tract development with a commitment of $4.8
      million and balance of $3.2 million at September 30, 2007. While these loans
      may
      be considered somewhat riskier than certain other real estate loans, the
      construction/land loans are spread throughout our market area and have
      consistently performed in a satisfactory manner. Single family residential
      construction loans represent 16.6% of the total construction and land loan
      commitments. Land loans account for 17.4%, multiple family income properties
      for
      19.0%, owner-occupied commercial properties for 25.5% and non-owner-occupied
      commercial properties for 21.2%. At September 30, 2007, there were no tract
      loans within this category.





***Real
      Estate – Commercial & Other***





The
      increase in commercial real estate loans is attributed to several loans in
      the
      construction/land category moving into amortizing loans and to new commercial
      property loans. During the first nine months of 2007, the Bank funded new loans
      in this category including a loan to an airport fuel/service facility, a loan
      for a mixed use property, loans to two separate medical offices, an auto
      dealership loan, a loan for a metal fabrication building, and two separate
      hotel
      loans, all totaling $17.5 million as well as several smaller real estate loans.
      Additionally, during the period, numerous loans were also refinanced and paid
      off through out of area lenders and mortgage brokers.





Hotel
      loans disbursed are not considered to be a concentration with balances of $44.8
      million which represents 80% of the Bank’s Tier I Capital. There are several
      hotel construction loans that increase total commitments to $69.7 million which
      represents a concentration at 125% of the Bank’s Tier I Capital. At September
      30, 2007, there were 35 motel loans. The single largest loan is a construction
      loan for $9.2 million with $9.2 million disbursed. The hotel loans are also
      made
      to clients throughout our market. These loans have historically paid as agreed.





In
      September 2004, the Bank issued an $11.7 million irrevocable standby letter
      of
      credit to guarantee the payment of taxable variable rate demand bonds. The
      letter of credit has been reduced to $11.4 million. The primary purpose of
      the
      bond issue was to refinance existing debt and provide funds for capital
      improvements and expansion of an assisted living facility in San Luis Obispo.
      The project is 100% complete and is now fully leased. The letter of credit
      will
      expire in September 2008.





***Summary
      of Market Condition***





Although
      the real estate market has come under some pressure during 2007, the Company’s
      market area continues to remain attractive with single family residence and
      commercial real estate prices considerably lower than the major metropolitan
      areas to the Company’s north and south. Although construction loan demand for
      both single family and commercial real estate moderated during the first half
      of
      2007, caused primarily by an increase in interest rates, construction costs,
      and
      a decrease in consumer demand; the Company saw a rise in commercial construction
      demand during the third quarter. Although the lending environment has become
      more challenging, the Company continues to believe the desirability of the
      area
      and the diversity of the loan portfolio will provide some insulation against
      a
      slowdown in growth. Additionally, the Company has and will continue to monitor
      lending trends in order to take the appropriate steps if necessary to mitigate
      any material adverse impact the slowing of the single family residential market
      may have on the loan portfolio overall.





Business
      properties have remained in high demand with relatively low vacancies and
      competitive loan rates. Commercial property values and rental rates increased
      during 2006 and have remained relatively strong in 2007. Lease absorption rates
      appear to have slowed during the first three quarters of this year. Investors,
      many seeking exchange properties, continue to pursue properties in our market
      area. Capitalization rates have steadily decreased with increased demand.
      Capitalization rate (the rate at which a stream of future cash flows is
      discounted to find their present value) ranges over the last three years are:
      6.5% to 7.5% in 2004, 5.5% to 6.5% in 2005, and 5.0% to 6.5% in 2006. Low
      capitalization rate properties typically require larger down payments in order
      to satisfy bank debt coverage requirements. The Bank has, thus far, experienced
      continued growth in commercial real estate loans this year. Interest rate
      margins have continued to decrease somewhat due to competitive pressures and
      increasing cost of funds.




-
          32
          -




The
      following charts give a breakdown of types of Construction/Land Loans and types
      of Commercial Real Estate loans as of September 30, 2007:










Loans
      held for sale consist of mortgage originations that have already been sold
      pursuant to correspondent mortgage loan agreements. There is no interest rate
      risk associated with these loans as the commitments are in place at the time
      that the Bank funds them. Settlement from the correspondents is typically within
      30 to 45 days.





At
      September 30, 2007, the Bank had no foreign loans outstanding. The Bank did
      not
      have any concentrations of loans except as disclosed above.





The
      Bank’s management is responsible for monitoring loan performance, which is done
      through various methods, including a review of loan delinquencies and personal
      knowledge of customers. Additionally, the Bank maintains both a “watch” list of
      loans that, for a variety of reasons, management believes requires regular
      review as well as an internal loan classification process. Annually, the loan
      portfolio is also reviewed by an experienced, outside loan reviewer not
      affiliated with the Bank. A list of delinquencies, the watch list, loan grades
      and the outside loan review are reviewed regularly by the Bank’s Board of
      Directors.





The
      Bank
      has a non-accrual policy that requires a loan greater than 90 days past due
      to
      be placed on non-accrual status unless such loan is well-collateralized and
      in
      the process of collection. When loans are placed on non-accrual status, all
      uncollected interest accrued is reversed from earnings. Once on non-accrual
      status, interest on a loan is only recognized on a cash basis. Loans may be
      returned to accrual status if management believes that all remaining principal
      and interest is fully collectible and there has been at least six months of
      sustained repayment performance since the loan was placed on non-accrual.





At
      September 30, 2007 non-accrual loans were $641 thousand or 0.11% of total
      assets. This, when compared to the $55 thousand balance of loans on non-accrual
      at December 31, 2006, represents an increase of approximately $586 thousand.
      Non-performing loans consist of seven loans to six borrowers, of which, one
      for
      approximately $186 thousand is in process of refinance, one for approximately
      $272 thousand that is real estate secured and has a loan to value ratio of
      less
      than 65% and is current, two loans that are less than $20 thousand each and
      are
      paying as agreed, one less than $50 thousand that is paying and one borrower’s
      loan is collateralized and is in process of workout.





As
      of
      September 30, 2007, unrecognized interest income related to loans placed on
      non-accrual totaled approximately $63 thousand compared to $67 thousand at
      December 31, 2006.




If
      a
      loan’s credit quality deteriorates to the point that collection of principal is
      believed by management to be doubtful and the value of collateral securing
      the
      obligation is sufficient the Bank generally takes steps to protect and liquidate
      the collateral. Any loss resulting from the difference between the loan balance
      and the fair market value of the property is recognized by a charge to the
      reserve for loan losses. When the property is held for sale after foreclosure,
      it is subject to a periodic appraisal. If the appraisal indicates that the
      property will sell for less than its recorded value, the Bank recognizes the
      loss by a charge to non-interest expense.




-
          33
          -





The
      following table provides a summary of non-performing assets at September 30,
      2007 compared to December 31, 2006 as well as key asset quality
      ratios:





**September 30,**
            
            **December 31,***(dollars
                in thousands)*
            
            **2007**
            
            **2006**Loans
                delinquent 90 days or more and still accruing
            
            $
            -
            
            $
            -Non-accruing
                loans
            
            
            641
            
            
            55Total
                non-performing loans
            
            $
            641
            
            $
            55Foreclosed
                collateral
            
            
            -
            
            
            -Total
                non-performing assets
            
            $
            641
            
            $
            55Ratio
                of allowance for credit losses to total gross loans
            
            
            0.99
            %
            
            0.92
            %Ratio
                of allowance for credit losses to total non-performing
                loans
            
            
            736
            %
            
            7420
            %Ratio
                of non-performing loans to total gross loans
            
            
            0.13
            %
            
            0.01
            %Ratio
                of non-performing loans to total assets
            
            
            0.11
            %
            
            0.01
            %




*Total
      Cash and Due from Banks*





Total
      cash and due from banks was $20.3 million and $19.2 million at September 30,
      2007 and December 31, 2006, respectively. This line item will vary depending
      on
      cash letters from the previous night and actual cash on hand in the branches.





*Investment
      Securities and Other Earning Assets*





Other
      earning assets are comprised of Federal Home Loan Bank stock, Federal Funds
      sold
      (funds the bank 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 liquidity needs of the Bank,
      collateralization of public deposits, and diversification of the earning asset
      mix.





The
      table
      below sets forth changes from December 31, 2006 to September 30, 2007 for the
      composition of other earning assets.





**September 30,**
            
            **December 31,**
            
            **Variance***(dollars
                in thousands)*
            
            **2007**
            
            **2006**
            
            **dollar**
            
            **percentage**Federal
                Home Loan Bank stock
            
            $
            2,171
            
            $
            2,350
            
            $
            (179
            )
            
            -7.62
            %Available-for-sale
                securities
            
            
            34,854
            
            
            38,445
            
            
            (3,591
            )
            
            -9.34
            %Federal
                funds sold
            
            
            14,260
            
            
            3,870
            
            
            10,390
            
            
            268.48
            %Interest
                bearing deposits other financial institutions
            
            
            1,718
            
            
            318
            
            
            1,400
            
            
            440.25
            %Total
                other earning assets
            
            $
            53,003
            
            $
            44,983
            
            $
            8,020
            
            
            17.83
            %





Investments
      available-for-sale decreased due to cash flow on Mortgage Backed Securities
      (MBS) and Collateralized Mortgage Obligations (CMO).





Federal
      funds sold increased $10.4 million when compared to December 31, 2006. The
      amount of fed funds sold can vary widely on a daily basis depending on the
      cash
      position of the bank which is affected by numerous variables such as cash
      letters, incoming and outgoing wire activity, and loan funding needs.
      Additionally, the increase in federal funds sold can be attributed in part
      to
      the funds received in connection with the sale of four of the Bank’s properties
      during the second quarter of 2007.




-
          34
          -




The
      Company manages its securities portfolio to provide a source of both liquidity
      and earnings. The Bank has an asset/liability committee that develops current
      investment policies based upon its operating needs and market circumstance.
      The
      Bank’s investment policy is formally reviewed and approved annually by the board
      of directors. The asset/liability committee of the Bank is responsible for
      reporting and monitoring compliance with the investment policy. Reports are
      provided to the Bank’s boards of directors on a regular basis.





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 December 31, 2006, net unrealized gains in the portfolio were $133
      thousand or $80 thousand, net of tax compared to a net unrealized gain of $117
      thousand or $69 thousand, net of tax at September 30, 2007. The portfolio
      decreased in size mainly due to principle reductions on MBS and CMOs of
      approximately $3,672 thousand during the first nine months of 2007.





At
      September 30, 2007, available-for-sale securities in the portfolio included
      obligations of state and political subdivisions, obligations of U.S. government
      agencies and corporations, and mortgage backed securities issued by various
      agencies.





All
      fixed
      and adjustable rate mortgage pools contain a certain amount of risk related
      to
      the uncertainty of prepayments of the underlying mortgages. Interest rate
      changes have a direct impact upon prepayment rates. The Bank 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. Stress tests are performed quarterly.





At
      September 30, 2007, issuers of MBS and CMO’s the Company held include: The
      Government National Mortgage Association (“Ginnie Mae”), The Federal National
      Mortgage Association (“Fannie Mae”), and The Federal Home Loan Mortgage
      Corporation (“Freddie Mac”). The MBS and CMO’s the Company holds carry the
      guarantee of the issuing agencies listed above. The Company held no Whole Loan
      securities as of September 30, 2007.





*Deposits
      and Borrowed Funds*





The
      table
      below sets forth changes from December 31, 2006 to September 30, 2007 for the
      composition of deposit categories.





**% of Total****September 30,**
            
            **December 31,**
            
            **Variance**
            
            **Deposits***(dollars
                in thousands)*
            
            **2007**
            
            **2006**
            
            **dollar**
            
            **percentage**
            
            **9/30/07**Deposits:Non-interest
                bearing demand
            
            $
            130,221
            
            $
            153,005
            
            $
            (22,784
            )
            
            -14.89
            %
            
            26.2
            %Interest
                bearing demand
            
            
            56,931
            
            
            45,164
            
            
            11,767
            
            
            26.05
            %
            
            11.5
            %Savings
            
            
            21,606
            
            
            23,406
            
            
            (1,800
            )
            
            -7.69
            %
            
            4.4
            %Money
                market
            
            
            137,039
            
            
            77,540
            
            
            59,499
            
            
            76.73
            %
            
            27.6
            %Time
                deposits of $100K or more
            
            
            50,666
            
            
            30,630
            
            
            20,036
            
            
            65.41
            %
            
            10.2
            %Time
                deposits under $100K
            
            
            99,847
            
            
            90,776
            
            
            9,071
            
            
            9.99
            %
            
            20.1
            %Total
                deposits
            
            $
            496,310
            
            $
            420,521
            
            $
            75,789
            
            
            18.02
            %
            
            100.0
            %




Acquisition
      of core deposits has become the single biggest challenge facing the Company.
      Still, the Company has been able to increase deposits due to a well planned
      marketing strategy and incentive based compensation that has been in place
      for
      several years.  Like
      all
      good strategies, this one is fluid and is subject to the changing dynamics
      within the Company’s balance sheet and staffing along with changes in its
      primary market area. For the first nine months of 2007, total deposits have
      increased by approximately $75.8 million or 18.0%. Increases in money market
      balances as well as time deposits have contributed significantly to the year
      to
      date rise in deposit balances. The rise in these categories of deposits can
      be
      attributed to current promotions designed to attract additional core deposits
      and lower cost sources of funding for the Bank. The Bank has remained relatively
      short with respect to time deposits, with premium yields being offered for
      shorter duration maturities. As a result, approximately $112.8 million in time
      deposit balances will re-price with in the next three months. Late in the third
      quarter of 2007, the Bank lowered the rates offered on money market and time
      deposits in an effort to curtail the rise in interest expense as well as in
      response to the decline in current market rates and the action the Federal
      Open
      Market Committee took to cut the Fed Funds rate by 50 basis points.


-
            35
            -
  As
        of
        September 30, 2007, non-interest bearing demand deposits provide 26.2% of
        total
        deposits compared to 36.4% at December 31, 2006. At September 30, 2007 and
        December 31, 2006, the Bank had three deposit relationships that it considers
        to
        be volatile. These deposits are held by three customers of the Bank that
        engage
        in mortgage related activities. As a percentage of total deposits, these
        accounts represented 4.1% or $20.2 million at September 30, 2007 compared
        to
        10.5% or $44.1 million at December 31, 2006. During the third quarter of
        2007,
        balances associated with these accounts declined by approximately $21.1 million.
        These volatile account relationships are included in the volatile liability
        dependency report that the Bank produces on a monthly basis. Typically, a
        material increase in balances held by these three customers is reflected
        in
        Federal Funds Sold and is recognized by Management to potentially be short
        term
        in nature. Therefore, any material increase in these balances is not considered
        to be a funding source for any form of long-term investment. Management and
        the
        Board of Directors of the Bank are keenly aware that as the mortgage market
        conditions change, these relationships will be impacted. Additionally, the
        substantial increase in core deposit balances during the year has allowed
        the
        Bank to rely less on these volatile deposits as a source of short-term
        investable funds.




Core
      deposits (time deposits less than $100 thousand, demand, and savings) gathered
      in the local communities served by the Company continue to be the primary source
      of funds for loans and investments. Core deposits of $445.6 million represented
      89.8% of total deposits at September 30, 2007. This represents an increase
      of
      approximately $55.8 million or 14.3% over core deposit balances of $389.9
      million reported at December 31, 2006. The Company has the ability to purchase
      funds through deposit brokers, but has no immediate plans to do so.





In
      October 2005, the Company renewed a Promissory Note with Pacific Coast Bankers
      Bank (PCBB) for a revolving line of credit in the amount of $3.5 million. At
      September 30, 2007, the Company had a zero balance outstanding on this note.
      The
      Company pledged 646,598 shares (51%) of the Bank’s stock as collateral for the
      loan. The note is revolving in nature for the first two years. The terms of
      the
      note call for quarterly interest only payments for the first two years with
      subsequent principal and interest payments for eight years on a fully amortized
      basis. At September 30, 2007, the interest rate on the note was 7.75% and is
      variable and moves with prime. Under the terms of the agreement, the Company
      will not incur any additional debt over $2 million exclusive of inter-company
      debt and existing debt without the prior written consent of PCBB. In addition,
      the Bank must be “well” capitalized on an on-going basis as defined by bank
      regulators. The Company is in the process of renewing this revolving line of
      credit.





The
      Bank
      has established borrowing lines with the Federal Home Loan Bank (FHLB). At
      September 30, 2007, the Bank had no borrowings with the FHLB, this represents
      a
      decrease of approximately $50 million when compared to the balance at December
      31, 2006. During the second quarter of 2007, the Bank paid down $30 million
      in
      FHLB advances, this is in addition to the $20 million the Bank paid down during
      the second quarter of 2007. Strength in lower cost core deposit balances during
      the quarter has allowed the Bank to rely less on these higher cost sources
      of
      funding.




Management
      makes regular assessments of balance sheet needs to determine how much if any
      and at what term it will borrow from the FHLB.





On
      September 17, 2004, the Bank issued a Letter of Credit in the amount of
      approximately $11.7 million to a customer in regard to a senior care facility.
      The Letter of Credit was issued pursuant to a Letter of Credit Reimbursement
      Agreement between the Bank and the FHLB. It is collateralized by a blanket
      lien
      with the FHLB that includes all qualifying loans on the Bank’s balance sheet.
      The letter of credit will expire in September 2008.





At
      September 30, 2007, the Bank had a remaining borrowing capacity with existing
      collateral of approximately $115.7 million and $4.6 million secured by loans
      and
      securities, respectively.





The
      Bank
      utilizes securities sold under repurchase agreements as a source of funds.
      The
      Bank had  $1.5
      million and $1.4 million in securities sold under repurchase agreements at
      September 30, 2007 and December 31, 2006, respectively.





*Capital*





The
      Company's total stockholders’ equity was $53.9 million at September 30, 2007
      compared to $49.5 million at December 31, 2006. The change in capital was due
      to
      net income of $4.9 million, stock options exercised in the amount of $825
      thousand, the capital impact of year-to-date share-based compensation expense
      of
      $264 thousand, $1,543 thousand paid year-to-date in quarterly cash dividends,
      repurchases of common stock in the approximate amount of $96 thousand, and
      a
      decrease in accumulated other comprehensive income of $11 thousand .





-
          36
          -




***Dividends***





On
      October 17, 2007, the Board of Directors declared a quarterly cash dividend
      of
      $0.08 per share to be paid on November 16, 2007 to shareholders of record on
      November 2, 2007.





On
      July
      18, 2007, the Board of Directors declared a quarterly cash dividend of $0.08
      per
      share to be paid on August 17, 2007 to shareholders of record on August 3,
      2007.





On
      April
      20, 2007, the Board of Directors declared a quarterly cash dividend of $0.08
      per
      share to be paid on May 18, 2007 to shareholders of record on May 4, 2007.





On
      January 19, 2007, the Board of Directors declared a quarterly cash dividend
      of
      $0.08 per share to be paid on February 16, 2007 to shareholders of record on
      February 2, 2007.





On
      October 20, 2006, the Board of Directors declared a quarterly cash dividend
      of
      $0.08 per share to be paid on November 17, 2006 to shareholders of record on
      November 3, 2006





On
      July
      21, 2006, the Board of Directors declared a quarterly cash dividend of $0.08
      per
      share to be paid on August 25, 2006 to shareholders of record on August 11,
      2006.





On
      April
      21, 2006 the Company declared a $0.25 per share special cash dividend to be
      paid
      on May 19, 2006 to shareholders of record on May 8, 2006. The special dividend
      was declared in lieu of recent annual stock dividends the Company has declared.





***Stock
      Repurchases***





On
      July
      21, 2006, the Board of Directors adopted a resolution authorizing the repurchase
      of up to 40,000 shares of the Company’s common stock. Purchases are to be made,
      as conditions warrant, from time to time in the open market or through privately
      negotiated transactions. The duration of the program is one year and the timing
      of purchases will depend on market conditions.





On
      October 20, 2006, the Board of Directors adopted a resolution to increase the
      number of shares available for repurchase to 100,000 for the repurchase plan
      that was adopted in July 2006.





On
      July
      18, 2007, the Board of Directors authorized a one year extension of the stock
      repurchase program that was adopted in July 2006. Under the one year extension
      the Company may repurchase up to 100,000 shares of its common stock, of which
      46,000 shares have already been repurchased under the current plan.  Under
      this program, the Company repurchased 6,000 shares during the third quarter
      of
      2007 at a total cost of approximately $96 thousand.





***Trust
      Preferred Securities***





On
      September 20, 2007, the Company issued $5,155,000 of Junior Subordinated
      Deferrable Interest Debentures (the “debt securities”) to Heritage Oaks Capital
      Trust III, a statutory trust created under the laws of the State of Delaware.
      These debt securities are subordinated to effectively all borrowings of the
      Company and are  due
      and
      payable in September 2037. Interest is payable quarterly on these debt
      securities at a fixed rate of interest of 6.888% for five years, equal to the
      five year SWAP plus 2.00%. The Company has the right under the Indenture to
      defer payment of interest on the Debt Securities at any time for a period not
      to
      exceed twenty consecutive quarterly periods (each an “Extension Period”)
      provided that no Extension Period may extend beyond the maturity of the Debt
      Securities. In the event the Company exercises the right to defer payment of
      interest on the Debt Securities, it may not declare or pay any dividends on
      its
      common stock. The Company presently has no intention to defer interest payments
      on the Debt Securities, and it considers the likelihood of such a deferral
      to be
      remote. The debt securities can be called at any time commencing on December
      15,
      2012 at par. The debt securities can also be redeemed at 107.5% or the present
      value of scheduled interest and principal payments from the special redemption
      date to the date the securities may be called by the Company if certain events
      occur that impact the tax treatment, regulatory treatment or the capital
      treatment of the issuance. The Company also purchased a 3.1% minority interest
      totaling $155 thousand in Heritage Oaks Capital Trust III. The balance of the
      equity of Heritage Oaks Capital Trust III is comprised of mandatory redeemable
      preferred securities and is included in other assets. The Company used the
      proceeds from the sale of the securities to assist in the acquisition of
      Business First, for general corporate purposes, and for capital contributions
      to
      the Bank for future growth.




-
          37
          -




On
      April
      10, 2002, the Company issued $8,248,000 of Floating Rate Junior Subordinated
      Deferrable Interest Debentures (the “debt securities”) to Heritage Oaks Capital
      Trust I, a statutory trust created under the laws of the State of Delaware.
      These debt securities are subordinated to effectively all borrowings of the
      Company and are due and payable on April 22, 2032. Interest is payable
      semi-annually on these debt securities at 6-Month LIBOR plus 3.7%. The debt
      securities can be called at any time commencing on April 22, 2007, at par.
      The
      debt securities can also be redeemed at par if certain events occur that impact
      the tax treatment, regulatory treatment or the capital treatment of the
      issuance. The Company also purchased a 3% minority interest totaling $248
      thousand in Heritage Oaks Capital Trust I. The balance of the equity of Heritage
      Oaks Capital Trust I is comprised of mandatory redeemable preferred securities
      and is included in other assets. The Company used the proceeds from the sale
      of
      the securities for general corporate purposes, including the repayment of
      outstanding indebtedness of $1.9 million on April 11, 2002 and capital
      contributions to the Bank for future growth.





On
      April
      23, 2007 the Company redeemed all of the Floating Rate Junior Subordinated
      Debt
      Securities it held associated with Heritage Oaks Capital Trust I, a wholly-owned
      subsidiary of Heritage Oaks Bancorp. The redemption price was 100% of the
      principal amount redeemed plus accrued and unpaid interest as of the Redemption
      Date. The Company paid $379,011 for the standard interest payment due April
      22,
      2007, plus a payment of $8,248,000 for the principal amount to be redeemed
      on
      that date. These amounts were funded from the Company’s general corporate
      reserves. As a result of the redemption of the securities associated with
      Heritage Oaks Capital Trust I, the Trust was dissolved on June 1,
      2007.





On
      October 27, 2006, the Company issued $8,248,000 of Floating Rate Junior
      Subordinated Deferrable Interest Debentures (the “debt securities”) to Heritage
      Oaks Capital Trust II, a statutory trust created under the laws of the State
      of
      Delaware. These debt securities are subordinated to effectively all borrowings
      of the Company and are due and payable on October 27, 2036. Interest is payable
      quarterly on these debt securities at 3-Month LIBOR plus 1.71% for an effective
      rate of 7.08% as of September 30, 2007. The debt securities can be called at
      any
      time commencing on October 27, 2011, at par. The debt securities can also be
      redeemed at par if certain events occur that impact the tax treatment or the
      capital treatment of the issuance. The Company also purchased a 3% minority
      interest totaling $248,000 in Heritage Oaks Capital Trust II. The balance of
      the
      equity of Heritage Oaks Capital Trust II is comprised of mandatory redeemable
      preferred securities and is included in other assets. The Company intends to
      use
      the proceeds of the sale of the Trust Preferred Securities issued to Heritage
      Oaks Capital Trust II for general corporate purposes which may include
      investment in the Bank, acquisitions, investments, payment of dividends and
      repurchases of our outstanding common stock.





Under
      FASB Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities,
      an interpretation of ARB No. 51,” the Company is not allowed to consolidate
      Heritage Oaks Capital Trust II and III into the Company’s financial statements.
      Prior to the issuance of FIN No. 46, Bank holding companies typically
      consolidated these entities. On February 28, 2005, the Federal Reserve Board
      issued a new rule which provides that, notwithstanding the deconsolidation
      of
      such trusts, junior subordinated debentures, such as those issued by the
      Company, may continue to constitute up to 25% of a bank holding company's Tier
      1
      capital, subject to certain new limitations which will not become effective
      until March 31, 2009 and which, in any event, are not expected to affect the
      treatment of the Company's Junior Subordinated Debentures as Tier 1 capital
      for
      regulatory purposes. As of September 30, 2007, the Company has included $13.0
      million of net junior subordinated debt associated with Heritage Oaks Capital
      Trust II and Heritage Oaks Capital Trust III in its Tier I Capital for
      regulatory capital purposes.”





If
      the
      Company elects to defer interest payments pursuant to terms of the agreement,
      then the Company may not (i) declare or pay any dividends or distributions
      on,
      or redeem, purchase, acquire or make a liquidation payment with respect to
      any
      of the Company’s capital stock, or (ii) make any payment of principal of or
      premium, if any, or interest on or repay, repurchase or redeem any debt
      securities of the Company that rank pari passu with or junior in interest to
      the
      Debt Securities, other than, among other items, a dividend in the form of stock,
      warrants, options or other rights in the same stock as that on which the
      dividend is being paid or ranks pari passu with or junior to such stock. The
      prohibition on payment of dividends and payments on pari passu or junior debt
      also applies in the case of an event of default under the
      agreements.





At
      September 30, 2007, the Company had sufficient cash to service the existing
      $13.4 million in junior subordinated debenture interest payments for
      approximately five years without dividends from subsidiaries. The Bank’s
      capacity to provide cash to the Company, while remaining “well-capitalized”, was
      $8.5 million at September 30, 2007.




-
          38
          -




***Regulatory
      Capital Requirements***





Capital
      ratios for commercial banks in the United States are generally calculated using
      three different formulas. These calculations are referred to as the “Leverage
      Ratio” and two “risk-based” calculations known as: “Tier One Risk Based Capital
      Ratio” and the “Total Risk Based Capital Ratio.” These standards were developed
      through joint efforts of banking authorities from different countries around
      the
      world. The standards essentially take into account that different types of
      assets have different levels of risk associated with them. Furthermore, they
      take into account the off-balance sheet exposures of banks when assessing
      capital adequacy.





The
      Leverage Ratio calculation simply divides common stockholders’ equity (reduced
      by any goodwill a bank may have) by the total assets. In the Tier One Risk
      Based
      Capital Ratio, the numerator is the same as the leverage ratio, but the
      denominator is the total “risk-weighted assets”. Risk weighted assets are
      determined by segregating all the assets and off balance sheet exposures into
      different risk categories and weighting them by a percentage ranging from 0%
      (lowest risk) to 100% (highest risk). The Total Risk Based Capital Ratio again
      uses “risk-weighted assets” in the denominator, but expands the numerator to
      include other capital items besides equity such as a limited amount of the
      loan
      loss reserve, long-term capital debt, preferred stock and other instruments.





Summarized
      below are the Company’s and the Bank’s regulatory capital ratios at September
      30, 2007.





**Regulatory
                Standard****AdequatelyCapitalized**
            
            **WellCapitalized**
            
            **Heritage OaksBancorp**
            
            **Heritage OaksBank**Leverage
                Radio
            
            
            4.00
            %
            
            5.00
            %
            
            10.69
            %
            
            9.80
            %Tier
                I Risk Based Capital Radio
            
            
            4.00
            %
            
            6.00
            %
            
            11.65
            %
            
            10.69
            %Total
                Risk Based Capital Ratio
            
            
            8.00
            %
            
            10.00
            %
            
            12.58
            %
            
            11.62
            %





*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 Bank’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 Bank’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 Bank customers serve as the
      primary source of liquidity. The Bank has credit arrangements with correspondent
      banks that serve as a secondary liquidity source in the amount of $26.0 million.
      As of September 30, 2007, the Bank had no borrowings against credit arrangements
      with these correspondent banks. The Bank is also member of the FHLB and has
      a
      remaining collateralized borrowing capacity of approximately $120.3 million
      at
      September 30, 2007.





The
      Bank
      manages liquidity by maintaining a majority of the investment portfolio in
      federal funds sold and other liquid investments. At September 30, 2007, the
      ratio of liquid assets not pledged for collateral and other purposes to deposits
      and other liabilities was 9.83% compared to 9.31% at December 31, 2006. The
      ratio of net loans to deposits was 94.5% at September 30, 2007 compared to
      104.5% at December 31, 2006. The ratio of net loans to available funding
      sources, which takes into account all funding sources including those other
      than
      deposits such as FHLB lines, was 75.01% at September 30, 2007 compared to 82.93%
      at December 31, 2006.





*Inflation*





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 debt and
      upward pressure on operating expenses. The effect of inflation over the past
      two
      years has been significant to the Company’s financial position and results of
      operations in regard to fluctuation in interest rates. The increase in interest
      rates has created a narrowing of the net interest margin and the Company
      continues to experience contraction.  There
      has
      been a great deal of news in the national media related to the rising rate
      environment leading to the inability of some borrowers in the single family
      residential sub-prime and alt- a markets to repay their debt. However, the
      Company’s primary focus is commercial lending and the strong underwriting
      requirements of the Company has continued to lend itself to outstanding asset
      quality as evidenced by a 0.13% non-performing loan to total gross loan ratio
      as
      of September 30, 2007.




-
          39
          -





*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
      financial instruments consisting of commitments to extend credit, commercial
      letter of credit, and standby letter of credit. Such financial instruments
      are
      recorded in the financial statement when they are funded or related fees are
      incurred or received. For a fuller discussion of these financial instruments,
      refer to Note 10 of the Company’s consolidated financial statements contained in
      Item 8 of Part II of the Company’s December 31, 2006 10-K.





In
      the
      ordinary course of business, the Bank is a party to various operating leases.
      For a fuller discussion of these financial instruments, refer to Note 5 of
      the
      Company’s consolidated financial statements contained in Item 8 of Part II of
      the Company’s December 31, 2006 10-K.





In
      connection with the $13.4 million in debt securities discussed in “ *Capital* ,”
the
      Company issued the full and unconditional payment guarantee of certain accrued
      distributions.





**Item
      3.**  **Quantitative
      and Qualitative Disclosure about Market Risk**





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 banking
      subsidiary level. Thus, virtually all of the Company’s interest rate risk
      exposure lies at the banking subsidiary level other than $13.4 million in
      subordinated debentures issued by the Company’s subsidiary grantor trusts. As a
      result, all significant interest rate risk procedures are performed at the
      banking subsidiary level. The subsidiary bank’s real estate loan portfolio,
      concentrated primarily within Northern Santa Barbara County and San Luis Obispo
      County, California, are subject to risks associated with 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.  Management believes that it can continue to
      manage the short-term effect of interest rate changes under various interest
      rate scenarios.




Management
      employs the use of an Asset and Liability Management software that is used
      to
      measure the Bank’s exposure to future changes in interest rates. This model
      measures the expected cash flows and re-pricing of each financial
      asset/liability separately in measuring the Bank’s interest sensitivity. Based
      on the results of this model, management believes the Bank’s balance
      sheet is “asset sensitive”. This means the Company expects (all other
      things being equal) to expand its net interest income if rates rise and expects
      it conversely to contract if rates fall.  The level of potential or
      expected contraction indicated by the tables below is considered acceptable
      by
      management and is compliant with the Bank’s ALCO policies.  Management will
      continue to perform this analysis each quarter to further validate the expected
      results against actual data.




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          40
          -




The
      hypothetical impacts of sudden interest rate movements applied to the Company’s
      asset and liability balances are modeled monthly. The results of this movement
      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,
      2007 balances indicate that the net interest income at risk over a one year
      time
      horizon for a 1% and 2% rate increase and decrease is acceptable at this
      time.





The
      results in the table below indicate the change in net interest income the
      Company would expect to see as of September 30, 2007, if interest rates were
      to
      change in the amounts set forth:





**Rate
                Shock Scenarios***(dollars
                in thousands)*
            
            **-200bp**
            
            **-100bp**
            
            **Base**
            
            **+100bp**
            
            **+200bp**Net
                interest income (NII)
            
            $
            26,369
            
            $
            27,615
            
            $
            28,999
            
            $
            30,417
            
            $
            31,840$
                Change from base
            
            $
            (2,631
            )
            $
            (1,385
            )
            $
            -
            
            $
            1,417
            
            $
            2,841%
                Change from base
            
            
            -9.07
            %
            
            -4.77
            %
            
            0.00
            %
            
            4.89
            %
            
            9.80
            %





It
      is
      important to note that the above table is a summary of several forecasts and
      actual results may vary. The forecasts are based on estimates and assumptions
      of
      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. Changes that vary significantly from the assumptions and
      estimates may have significant 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.





The
      following tables show Management’s estimates of how the loan portfolio is broken
      out between variable-daily, variable at various time lines, fixed rate loans
      and
      estimates of re-pricing opportunities for the entire loan portfolio at September
      30, 2007.





*(dollars
                in thousands)***Total Gross Loans**
            
            ****
            
            **Percent of****Rate
                Type**
            
            **Balance**
            
            **Total**Variable
                - daily
            
            $
            191,371
            
            
            40.2
            %Variable
                other than daily
            
            
            211,991
            
            
            44.6
            %Fixed
                rate
            
            
            72,265
            
            
            15.2
            %Total
                gross loans
            
            $
            475,627
            
            
            100.0
            %





The
      table
      above identifies approximately 40.2% of the loan portfolio that will re-price
      immediately in a changing rate environment. At September 30, 2007, approximately
      84.8% of the Bank’s loan portfolio is variable.





*(dollars
                in thousands)***Total Gross Loans**
            
            ****
            
            **Percent of****Re-Pricing**
            
            **Balance**
            
            **Total**<
                1 Year
            
            $
            257,215
            
            
            54.1
            %1-3
                Years
            
            
            132,257
            
            
            27.8
            %3-5
                Years
            
            
            59,041
            
            
            12.4
            %>
                5 Years
            
            
            27,114
            
            
            5.7
            %Total
                gross loans
            
            $
            475,627
            
            
            100.0
            %




The
      table
      above indicates that as of September 30, 2007, approximately 54.1% of the Bank’s
      loan portfolio will re-price within one year and approximately 81.9% of the
      Bank’s loan portfolio will re-price within three years.




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          41
          -


**Item
      4.**  **Controls
      and Procedures**





*Evaluation
      of Disclosure Controls and Procedures*





As
      of the
      end of the period covered by this report, the Company carried out an evaluation,
      under the supervision and with the participation of its management, including
      the Company’s Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon
      that
      evaluation, the Chief Executive Officer and Chief Financial Officer concluded
      that the Company’s disclosure controls and procedures are effective to provide
      reasonable assurances that information required to be disclosed in the reports
      the Company files or submits under the Securities Exchange Act of 1934 is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms.





There
      was
      no change in the Company’s internal controls over financial reporting during the
      quarter ended September 30, 2007 that has materially affected, or is reasonably
      likely to materially affect, the Company’s internal controls over financial
      reporting.





In
      designing and evaluating disclosure controls and procedures, the Company’s
      management recognized that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable, not absolute, assurances
      of
      achieving the desired control objectives and management necessarily was required
      to apply its judgment in evaluating the cost-benefit relationship of possible
      controls and procedures.





-
          42
          -


**PART
      2. OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





The
      Company is not a party to any material legal proceeding.




**Item
      1A.Risk Factors**





During
      the period covered by this report there were no material changes from risk
      factors as previously disclosed in the Company’s December 31, 2006 10k in
      response to Item A to Part I of Form 10k.




**Item
      2.**  **Changes
      in Securities, Use of Proceeds and Issuer Purchases of Equity
      Securities**




*Unregistered
      Sale of Equity Securities*





None.




*Purchases
      of Equity Securities*





On
      July
      21, 2006, the Board of Directors adopted a one year stock repurchase plan in
      the
      initial amount of 40,000 shares. In October 2006, the Board of Directors adopted
      a resolution to increase the total number of shares available for repurchase
      under the plan to 100,000.





As
      of
      September 30, 2007, the Company had repurchased 46,000 shares of its common
      stock under the repurchase plan at an average market price of $17.71 per share.
      As of September 30, 2007, there were 54,000 shares of common stock available
      for
      purchase under the repurchase plan.





On
      July
      18, 2007, the Board of Directors authorized a one year extension of the stock
      repurchase program that was adopted in July 2006. Under the one year extension
      the Company may repurchase up to 100,000 shares of its common stock, of which
      46,000 shares have already been repurchased under the current plan.





The
      following table summarizes the repurchases the Company made of its common stock
      during the three months ended September 30, 2007.





**Total number**
            
            **Remaining number****of shares**
            
            **of
                shares that****Total number**
            
            **Average**
            
            **purchased as**
            
            **may be purchased****of shares**
            
            **price paid**
            
            **part of pubicly**
            
            **under the publicaly****Period**
            
            **purchased**
            
            **per share**
            
            **announced plan**
            
            **announced plan (1)**July
            
            
            -
            
            $
            -
            
            
            -
            
            
            60,000August
            
            
            4,500
            
            $
            15.98
            
            
            4,500
            
            
            55,500September
            
            
            1,500
            
            $
            16.25
            
            
            1,500
            
            
            54,000Total
            
            
            6,000
            
            $
            16.05
            
            
            6,000
            
            
            54,000




(1)
                Includes the additional 60,000 shares added to the plan in October
                2006





As
      indicated above, the Company repurchased 6,000 shares of its common stock at
      an
      average price of $16.05 per share during the third quarter of 2007. The Company
      made no repurchases of its common stock during the first and second quarters
      of
      2007.




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          43
          -


**Item
      3.**  **Defaults
      Upon Senior Securities**





N/A




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**





N/A




**Item
      5.**  **Other
      Information**





N/A





-
          44
          -




**Item
      6.**  **Exhibits**





(a)Exhibits :




Exhibit
      (10.1)  Form
      of change in control agreements entered into with named executive
      officers.




Exhibit
      (31.1)  Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
      of
      2002





Exhibit
      (31.2)  Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
      of
      2002





Exhibit
      (32.1)  Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
      of
      2002





Exhibit
      (32.2)  Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
      of
      2002







-
          45
          -


**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
      7, 2007





/s/
                Lawrence P. WardLawrence
                P. WardPresidentChief
                Executive Officer/s/
                Margaret A. TorresMargaret
                A. TorresExecutive
                Vice PresidentChief
                Financial Officer(Principal
                Financial and Accounting Officer)





-
          46
          -