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Heritage Oaks Bancorp Reports Third Quarter 2013 Results

The decline in non-interest expense for the third quarter of 2013 was largely the result of a $0.1 million reduction in provision for mortgage repurchases as no such provisions were recorded in the current quarter, and lower regulatory expenses attributable to the Company's improved regulatory standing. The increase for the first nine months of 2013 was primarily the result of increased salary and employee benefit costs due to the lack of an incentive compensation plan in 2012, 2013 merit increases, higher mortgage commissions due to increased mortgage production in the first half of 2013 and lower salary continuation plan costs in 2012 due to the reversal of unvested benefits for terminated employees. Other non-interest expense increased $0.6 million for the first nine months of 2013 as compared with the same period in 2012 primarily as a result of higher loan administration costs associated with higher loan originations and minor settlement costs incurred to resolve a legal matter. These increases were partially offset by a $0.4 million decline in the provision for mortgage repurchases as we resolved all known claims during 2012.

The Company's operating efficiency ratio increased to 67.1% for the third quarter of 2013 from 65.5% for the same period a year ago. For the first nine months of 2013, the operating efficiency ratio increased to 69.9% from 67.0% for the same period a year earlier. Our operating efficiency ratio for the three and nine months ended September 30, 2013 reflects the impacts of the changes in non-interest expense discussed above. However, the most notable impact on the operating efficiency ratio has been the negative impacts caused by the net interest margin compression resulting from the continuing effects of the current low interest rate environment.

Income Taxes

Income tax expense was $1.6 million for the third quarter of 2013 compared with a $2.9 million tax benefit for the same period a year earlier. For the first nine months of 2013, income tax expense was $5.7 million compared with a $3.5 million tax benefit for the same period a year ago. The income tax benefits for both the three and nine months ended September 30, 2012 included the impact of the partial reversal of $4.1 million and $5.6 million, respectively, of the valuation allowance held against the Company's deferred tax assets, which was fully reversed by the end of the third quarter of 2012.

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