10QSB

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
£	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 Code)
545 12th STREET, PASO ROBLES, CA	93446
(Address of principal office)	(zip code)
(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   T     NO   £

Aggregate market value of Common Stock of Heritage Oaks Bancorp at April 1, 2001: $27,198,045.

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

No par value Common Stock - 1,295,145 shares outstanding at April 1, 2001.

TABLE OF CONTENTS

Item 1.  Legal Proceedings

HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
	31-Dec-00 (1)	31-Mar-01 (Unaudited)
ASSETS
Cash and due from banks	$19,435,534	$16,391,899
Federal funds sold	4,600,000	14,175,000
Total cash and cash equivalents	24,035,534	30,566,899
Interest bearing deposits other banks	198,000	198,000
Securities Available for sale	16,212,505	14,839,031
Federal Home Loan Bank Stock, cost	381,600	387,900
Loans Held For Sale	2,474,542	3,666,250
Loans, net (see note 3)	133,680,029	133,433,248
Property, premises and equipment, net	3,062,815	2,877,047
Other real estate owned	0	0
Cash surrender value life insurance	1,369,549	2,542,490
Deferred Tax Asset	998,754	877,833
Other assets	1,674,697	1,393,842
TOTAL ASSETS	$184,088,025	$190,782,540
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Deposits:
Demand, non-interest bearing	$51,821,233	56,052,780
Savings, NOW, and money market deposits	63,715,930	62,656,597
Time deposits of $100,000 or more	7,659,791	4,490,106
Time deposits under $100,000	44,499,935	50,309,851
Total deposits	167,696,889	173,509,334
Other borrowed money	1,050,000	1,050,000
Securities sold under agreement to repurchase	0	0
Other liabilities	1,886,127	1,947,449
Total liabilities	170,633,016	176,506,783
Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding 1,224,999 and 1,295,145 for December 31, 2000 and March 31, 2001, respectively	6,305,233	7,489,361
Accumulated other comprehensive income	(141,364)	40,017
Retained earnings	7,291,140	6,746,379
Total stockholders' equity	13,455,009	14,275,757
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$184,088,025	$190,782,540

(1)  These numbers have been derived from the audited financial statements.
See notes to condensed financial statements

HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31,
	2000	2001
	(Unaudited)	(Unaudited)
Interest Income:
Interest and fees on loans	$2,768,281	$3,442,390
Investment securities	270,645	220,289
Federal funds sold and commercial paper	8,496	63,498
Time certificates of deposit	2,788	2,530
Total interest income	3,050,210	3,728,707
Interest Expense:
Now accounts	159,765	204,963
MMDA accounts	46,156	83,160
Savings accounts	76,395	77,071
Time deposits of $100,000 or more	122,784	38,009
Other time deposits	379,815	695,849
Other borrowed funds	72,224	39,773
Total interest expense	857,139	1,138,825
Net Interest Income Before Prov. for Possible Ln Losses	2,193,071	2,589,882
Provision for loan losses	57,000	150,000
Net interest income after provision for loan losses	2,136,071	2,439,882
Non-interest Income:
Service charges on deposit accounts	232,618	278,087
Investment securities gains (losses), net	(2,188)	(1,606)
Other income	1,104,357	1,561,735
Total Non-interest Income	1,334,787	1,838,216
Non-interest  Expense:
Salaries and employee benefits	1,001,914	1,065,814
Occupancy and equipment	416,036	511,313
Other expenses	1,250,217	1,780,142
Total Noninterest Expenses	2,668,167	3,357,269
Income before provision for income taxes	802,691	920,829
Provision for applicable income taxes	296,587	324,410
Net Income	$506,104	$596,419
Earnings per share:       (See note #4)
Basic	$0.40	$0.46
Fully Diluted	$0.36	$0.43
See notes to condensed financial statements

HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASHFLOWS
Periods ended March 31,
	2000	2001
	(Unaudited)	(Unaudited)
Cash Flows from Operating Activities
Net income	$506,104	$596,419
Adjustments to reconcile net income tonet cash provided by operating activities
Net cash provided by operating activities
Depreciation and amortization	180,424	286,990
Provision for possible loan losses	57,000	150,000
Provision for possible OREO losses	0	0
Realized (gain) loss on sales of available-for-sale  securities, net	(2,188)	(1,606)
Gain on sales of property, premise and equipment	1,979	0
Amortization of premiums/discounts oninvestment securities, net	(37,905)	(112,603)
(Increase)/decrease in loans held for sale	(581,588)	(1,191,708)
(Increase)/decrease in deferred tax asset	22,211	120,921
(Increase)/decrease in other assets	(465,451)	257,914
Increase/(decrease) in other liabilities	339,895	61,322
NET CASH PROVIDED BY OPERATING ACTIVITIES	20,481	167,649
Cash Flows From Investing Activities
Purchase of securities held-to-maturity
Purchase of mortgage-backed securities held-to-maturity
Purchase of securities available-for-sale	(13,016)	(14,938)
Purchase of mortgage-backed securities available-for-sale	0	0
Proceeds from principal reductions and maturitiesof securities held-to-maturity	0	0
Proceeds from principal reductions and maturitiesof mortgage-backed securities held-to-maturity	0	0
Proceeds from sales of securities available-for-sale	0	0
Proceeds from principal reductions and maturitiesof securities available-for-sale	1,330,864	1,527,695
Proceeds from sales of mortgage-backed securities available-for-sale	0	0
Proceeds from principal reductions and maturitiesof mortgage-backed securities available-for-sale	0	0
Net change in interest bearing deposits in other financial institutions	0	0
Purchase of life insurance policies	0	(1,150,000)
Proceeds from sale of other real estate owned
Recoveries on loans previously written off	0	0
Increase in loans, net	(13,027,305)	246,781
Purchase of property, premises and equipment, net	(118,564)	(101,215)
NET CASH USED IN INVESTING ACTIVITIES	(11,828,021)	508,323
Cash Flows From Financing Activities
Increase in deposits, net	$8,599,241	$5,812,445
Net increase/(decrease) in other borrowings	4,999,000	0
Net (decrease)/increase in notes payable	0	0
Proceeds from exercise of stock options	41,316	47,507
Cash paid in lieu of fractional shares	0	(4,559)
Cash dividends paid or declared
NET CASH PROVIDED BY FINANCING ACTIVITIES	13,639,557	5,855,393
Net (Decrease)/Increase in Cash and Cash Equivalents	1,832,017	6,531,365
Cash and Cash Equivalents, Beginning of year	18,359,073	24,035,534
Cash and Cash Equivalents, End of year	$20,191,090	$30,566,899
See notes to condensed financial statements

HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
March 31, 2000 and March 31, 2001
(Unaudited)

				Accumulated
				Other	Total
	Shares	Common	Retained	Comprehensive	Stockholders'
	Outstanding	Stock	Earnings	Income	Equity
Balance December 31, 1999	1,144,282	$5,288,179	$5,912,823	($658,840)	$10,542,162
Exercise of Stock Options	9,997	41,316	0		41,316
5% Stock Dividend to be distributed April 17, 2000	57,713	865,695	(865,695)		0
Comprehensive Income
Net Income			506,104		506,104
Unrealized Security Holding Gains (Net of $8,374 tax)				(12,561)
Total Other Comprehensive Income					(12,561)
Total comprehensive Income					493,543
Balance March 31, 2000	1,211,992	$6,195,190	$5,553,232	($671,401)	$11,077,021

				Accumulated
				Other	Total
	Shares	Common	Retained	Comprehensive	Stockholders'
	Outstanding	Stock	Earnings	Income	Equity
Balance December 31, 2000	1,224,999	$6,305,233	$7,291,140	($141,364)	$13,455,009
Exercise of Stock Options	8,707	47,507	0		47,507
5% Stock Divident to be distributed March 30, 2001	61,439	1,136,621	(1,136,621)		0
Cash Paid in lieu of Fractional Shares			(4,559)		(4,559)
Comprehensive Income
Net Income			596,419		596,419
Unrealized Security Holding Gains (Net of $120,919 tax)				181,381
Total Other Comprehensive Income					181,381
Total comprehensive Income					777,800
Balance March 31, 2001	1,295,145	$7,489,361	$6,746,379	$40,017	$14,275,757

NOTES TO CONSOLIDATED CONDENSED FINANACIAL STATEMENTS

Note 1: CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of Management, the unaudited consolidated condensed financial statements contain all (consisting of only normal recurring adjustments) adjustments necessary to present fairly the Company's consolidated financial position at December 31, 2000 and March 31, 2001, and the results of operations and cash flows for the three months ended March 31, 2000 and March 31, 2001. Certain information and footnote disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted.  These interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2000 Annual Report to shareholders.  The results for the three months ended March 31, 2000 and March 31, 2001 may not necessarily be indicative of the operating results for the full year.

Note 2: INVESTMENT SECURITIES

The Company accounts for Investment Securities in accordance SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" , that addresses the accounting for investments in equity securities that have readily deteminable fair values and for investments in all debt securities.  Securities are classified in three categories and accounted for as follows: debit 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 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 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.

 

The amortized cost and fair values of investment securities available for sale at March 31, 2001 and December 31, 2000 were:

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
March 31, 2001	Cost	Gains	Losses	Value
Obligations of U.S. government agencies and corporations	$1,108,943	$9,617	($4,956)	$1,113,604
Mortgage-backed securities	7,710,476	22,920	(139,755)	7,593,641
Obligations of State and Political Subdivisions	5,944,279	181,140	(2,271)	6,123,148
Other Securities	8,638	0	0	8,638
TOTAL	$14,772,336	$213,677	($146,982)	$14,839,031
December 31, 2000		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
Obligations of U.S. government agencies and corporations	$2,392,808	$0	($76,721)	$2,316,087
Mortgage-backed securities	7,958,658	6,468	(239,825)	7,725,301
Obligations of State and Political Subdivisions	6,088,006	90,786	(16,313)	6,162,479
Other Securities	8,638	0	0	8,638
TOTAL	$16,448,110	$97,254	($332,859)	$16,212,505

Note 3: Loans and Reserve for Possible Loan Losses

Major classifications of loans were:

	December 31,	March 31,
	2000	2001
Commercial, financial, and agricultural	$42,931,015	$42,165,556
Real estate-construction	18,599,452	18,584,818
Real estate-mortgage	70,550,560	70,859,172
Installment loans to individuals	3,246,214	3,589,848
All other loans (including overdrafts)	160,779	220,632
	135,488,020	135,420,026
Less - deferred loan fees	(487,473)	(517,445)
Less - reserve for possible loan losses	(1,320,518)	(1,469,333)
Total loans	$133,680,029	$133,433,248
Loans Held For Sale	$2,474,542	$3,666,250

Concentration of Credit Risk

At March 31, 2001, $89,443,990  of the Bank's loan portfolio was collateralized by various forms of real estate.  Such loans are generally made to borrowers located in San Luis Obispo County.  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.

Loans on nonaccrual status totaled $991,230 and $760,126 at December 31, 2000 and March 31, 2001, respectively.  Interest income that would have been recognized on non-accrual loans if they had performed in accordance with the terms of the loans was approximately $115,603 and $37,642, for the period ended December 31, 2000 and March 31, 2001, respectively.

An analysis of the changes in the reserve for possible loan losses is as follows:

	December 31,	March 31,
	2000	2001
Balance at beginning of year	$1,241,016	$1,320,518
Additions charged to operating expense	519,000	150,000
Loans charged off	(458,920)	(1,500)
Recoveries of loans previously charged off	19,422	315
Balance at end of year	$1,320,518	$1,469,333
At March 31, 2001, the Bank was contingently liable for letters of credit accommodations made to its customers totaling $1,050,142 and undisbursed loan commitments in the amount of $37,079,000.  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 that involved in extending loan facilities to customers. The Bank anticipates no losses as a result of such transactions.
In accordance with SFAS No. 114, (as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a Loan", those loans identified as "impaired" are measured on the present value of expected future cash flows, discounted at the loan's effective interest rate or the fair value of the collateralif the loan is collateral dependent. A loan is impaired when it is probable the creditor will not be able to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.
Management believes that the allowance for credit losses at March 31, 2001 is prudent and warranted, based on information currently available.  However, no prediction of the ultimate level of loans charged-off in future years can be made with any certainty.
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 includes common stock equivalents from the effect of the exercise of stock options.  The total number of share used for calculating basic and diluted for March 31, 2000 was 1,201,701 and 1,320,354, respectively.  The total number of shares used for calculating basic and diluted for March 31, 2001 was 1,289,392 and 1,386,847, respectively.

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

Heritage Oaks Bancorp (the "Company") commenced operations on November 15, 1994 with the acquisition of Heritage Oaks Bank (the "Bank").  Each shareholder of the Bank received one share of stock in the Company in exchange for each share of Heritage Oaks Bank stock owned.  The Bank became a wholly owned subsidiary of the Company.  The Bank is the only active subsidiary owned by the Company.

SUMMARY OF FINANCIAL RESULTS

As of March 31, 2001, total consolidated assets of Heritage Oaks Bancorp were $190,782,540 compared to $184,088,025 at December 31, 2000.  This reflects an increase of 3.64%. The growth in the first quarter of 2001 is significantly less than the 9.83% growth in the first quarter of 2000. This comes as no surprise given the economic slowdown being experienced throughout the nation as well as the Bank’s primary market area. Management anticipates growth for the year 2001 to be about 15% growth.

Total cash at March 31, 2001 was $16,391,899 compared to $19,435,534 at December 31, 2000. The decrease of $3,043,635 or 15.66% is due to the Bank divesting itself of 36 ATM sites. As of March 31, 2001, the Bank was operating approximately 29 ATMs compared to approximately 65 ATMs at December 31, 2000. This will be discussed in more detail within this document.

Total net loans at March 31, 2001 were $133,433,428 compared to $133,680,029 at December 31, 2000. The Bank has been experiencing some pay-off activity along with less than robust loan demand. Efforts are ongoing to increase activity to meet expectations of 15% growth for the year.

Securities available for sale, which are carried at market value, were $14,830,393 at March 31, 2001 compared to $16,212,505 at December 31, 2000. Securities available for sale have decreased through security maturity and principal cash flow pay down.

Federal funds sold were $14,175,000 at March 31, 2001 and $4,600,000 at December 31, 2000. Total deposits were  $173,509,334 at March 31, 2001 compared to $167,696,889 at December 31, 2000, which represents an increase of 3.47%. The increase in total deposits is attributable to increased activity with Title Company accounts and growth in the branch offices.

Core deposits (time deposits less than $100,000, demand, and savings) gathered in the local communities served by the Bank continue to be the Bank's primary source of funds for loans and investments.  Core deposits of $172,318,629 represented 99.3% of total deposits at March 31, 2001. The Company does not purchase funds through deposit brokers.

The Company has a $2 million revolving line of credit available with Pacific Coast Bankers Bank. At March 31, 2001 and December 31, 2000, the balance of borrowed funds on this line was $1,050,000.

The Bank has established borrowing lines with the Federal Home Loan Bank (FHLB) of approximately $4.2 million and $2.5 million secured by securities and certain loans, respectively At March 31, 2001, the Bank has no borrowings against those lines.

RESULTS OF OPERATIONS

The Company reported net income for the period ended March 31, 2001 of $596,419 compared to $506,104 for the same period in 2000. Per share earnings on a diluted basis for March 31, 2001 and March 31, 2000 were $0.43 and $0.36, respectively. Basic per share earnings for March 31, 2001 and March 31, 2000 were $0.46 and $0.40, respectively.

Increased year-to-date earnings are the direct result of higher average loans within the existing infrastructure of the Bank and the Bank’s expansion into Arroyo Grande in January 2000.

The following discussion highlights changes in certain items in the consolidated statements of income.

Net interest income

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.

Net interest income for the period ended March 31, 2001 was $2,589,882 as compared to $2,193,071 for the same period in 2000. This represents an improvement of $396,811 or 18.09%. As a percentage of average earning assets, the net interest margin for the first three months of 2001 decreased to 6.48% from 6.77% from the same period one year earlier.  The decrease in net interest margin is primarily due to the three 50 basis point decreases in prime during the first quarter of 2001 and the fact that the Bank’s rate sensitive liabilities re-price at a slower pace than rate sensitive assets.

Average interestearning assets were $159,787,000 at March 31, 2001 compared to $129,503,000 at March 31, 2000.  Average interest-bearing liabilities increased to $115,537,000 at March 31, 2001 from $99,081,000 at March 31, 2000. For the first three months of 2001, the average yield on interest earning assets dropped 9 basis points from the same period in 2000. For the first three months of 2001 prime rate dropped from 9.0% to 7.5% and increased from 8.5% to 9.0% for the same period in 2000. At March 31, 2001 the average rate on interest-bearing liabilities was 3.94% compared to 3.46% at March 31, 2000. During the first two quarters of 2000, loan demand was strong while deposit growth was a challenge for our financial institution along with most other commercial banks in the United States. In order to fund the loan demand, the Bank offered very competitive rates on CDs that increased the cost of funds. However, the Bank still maintains a very favorable net interest margin. These CDs were opened primarily during the second quarter of 2000 and will be maturing throughout 2001. The Bank will have the opportunity to lower its cost of funds upon the maturity of these deposits.

The table on the following page sets forth the average balance sheet information, interest income and expense, average yields and rates and net interest income and margin for the three months ended March 31, 2001 and 2000.

AVERAGE BALANCE SHEET INFORMATION FOR MARCH 31,

(dollars in thousands)

	2001			2000
	Average	Average Yield	Amount	Average	Average Yield	Amount
Interest Earning Assets:	Balance	Rate Paid	Interest	Balance	Rate Paid	Interest
Time deposits with other banks	$198	6.06%	$3	$377	3.18%	$3
Investment securities taxable	9,701	6.06%	147	11,941	6.43%	192
Investment securities non-taxable	6,146	4.75%	73	6,228	5.07%	79
Federal funds sold	4,872	5.25%	64	671	4.77%	8
Loans (1) (2)	138,870	9.91%	3,442	110,286	10.04%	2,768
Total interest earning assets	159,787	9.33%	3,729	129,503	9.42%	3,050
Allowance for possible loan losses	(1,386)			(1,271)
Non-earning assets:
Cash and due from banks	15,876			15,886
Property, premises and equipment	3,030			3,410
Other assets	4,496			3,910
TOTAL ASSETS	$181,803			$151,438
Interest -bearing liabilities:
Savings/NOW/money market	61,294	2.38%	365	54,491	2.07%	282
Time deposits	52,064	5.64%	734	39,965	5.03%	503
Other borrowings	2,179	7.34%	40	4,625	6.23%	72
Total interest-bearing liabilities	115,537	3.94%	1,139	99,081	3.46%	857
Non-interest bearing liabilities:
Demand deposits	50,089			40,026
Other liabilities	2,248			1,492
Total liabilities	167,874			140,599
Stockholders' equity
Common stock	6,777			5,302
Retained earnings	7,233			6,262
Valuation Allowance Investments	(81)			(725)
Total stockholders' equity	13,929			10,839
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$181,803			$151,438
Net Interest Income			$2,590			$2,193
Net Interest Margin (3)		6.48%			6.77%

(1)	Nonaccrual loans have been included in total loans.
(2)	Loan fees of $129,171 and $165,773 for 2001 and 2000, respectively, have been included in the interest income computation.
(3)	Net interest income has been calculated by dividing the net interest income by total earning assets.

Non-interest Income

Non-interest income consists of bankcard merchant fees, automatic teller machine ("ATM") transactions, Mortgage Department and other fees, service charges, and gains on other real estate owned. Non-interest income for the three months ended March 31, 2001 was $1,838,216 compared to $1,334,787 for the same period in 2000. That represents an increase of $503,429 or 37.7%. Income from bankcard merchant fees was $25,697 for the three months ended March 31, 2001 compared to $24,482 for the same period during 2000. Mortgage Department income was $123,307 for the first three months of 2001 compared to $ 55,867 for the same period in 2000. Decreasing interest rates have created a positive environment for mortgage refinancing. The Bank looks for this to continue while interest rates remain low. Service charge income increased from $232,618 during the first three months of 2000 to $278,087 for the threemonths ended March 31, 2001. This increase in service charges is a result of the Bank’s growth in deposit accounts due to branch office expansion in 1999 and 2000.

ATM transaction fees, interchange and other ATM related income were $1,243,621 for the first three months of 2001 compared to $899,178 for the same period in 2000. Approximately 66% of the increased revenue was the result of increased transactions in the Gaming Network, referred to as NANS. However, nearly all of that increase was offset by additional expense to the Gaming site. The total ATM income for 2001 includes the gross revenue obtained in the sale of the HOAK Network (retail sites) that was offset to a great extent by expenses associated with the divestiture. The Bank has been divesting itself of this line of business for the past twelve months by closing unprofitable sites and selling others. By the end of the second quarter of 2001, the remaining NANS Network will consist of 4 locations with 5 ATMs installed.

Other Expense

Non-interest expense was $3,357,269 and $2,668,167 for the three months ended March 31, 2001 and March 31, 2000, respectively. Salaries and employee benefits expense were $1,065,814 and $1,001,914 for the threemonths ended March 31, 2001 and 2000, respectively.  Full time equivalent employees were 94 at March 31, 2001 compared to 92 at March 31, 2000. Occupancy and equipment costs grew to $511,313 for the three months ended March 31, 2001 from $416,036 for the same period of 2000. This represents an increase of $95,277 or 22.9%. Approximately $107,000 of this variance is the result of fully depreciating equipment associated with the sold HOAK ATM Network. Operating expense associated with the ATM network was $874,428 and $605,569 for the three months ended March 31, 2001 and 2000, respectively. This represents an increase of $268,859 or 44.4%. Approximately 87% of this variance is due to the re-negotiating of a particular gaming agreement that the Bank will discontinue processing prior to the end of the second quarter in 2001. Expense associated with all other non-interest expense categories was $905,714 and $644,469 for the three months ended March 31, 2001 and 2000, respectively. This represents a variance of $261,245 pr 40.5%. Nearly 40% of that variance is associated with increases in data processing expense due to higher transaction volume. Another 27% of the variance is due to increased outside service costs that include attorney expense and Bank insurance.

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. The population in the two county areas comprising the Company’s service area, according to the U.S. Bureau of the Census, was estimated at July 1999 to be approximately 644,000. San Luis Obispo County represents about 37% of this total with Santa Barbara County accounting for the remaining approximately 63%. The moderate climate allows a year round growing season for numerous vegetable and fruits. Vineyards and cattle ranches also contribute largely to the local economy. 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 from many other areas of California.

CAPITAL

The Company's total stockholders equity was $14,275,757 at March 31, 2001 compared to $13,455,009 at December 31, 2000.  The increase in capital was from net income of $596,419, $47,507 from stock options exercised, $181,381 net change in other comprehensive income related to unrealized security holding gain, net of tax and $($4,559) in cash paid in lieu of fractional shares as the result of the 5% stock dividend distributed on March 30, 2001.

Capital ratios for commercial banks in the United States are generally calculated using nine 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 12 different countries around the world.  The standards essentially take into account the fact that different types of assets have different levels of risk associated with them.  Further, 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 average assets of the bank.  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" of the bank.  Risk weighted assets are determined by segregating all the assets and off balance sheet exposures into different risk categories and weighing 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 Bank's and Company's capital ratios at March 31, 2001:

	Regulatory Standard
	Adequately Capitalized	Well Capitalized	Heritage Oaks Bank	Heritage Oaks Bancorp
Leverage Ratio	4.00%	5.00%	7.78%	7.83%
Tier One Risk Based Captial Ratio	4.00%	6.00%	9.45%	9.68%
Total Risk Based Captial Ratio	8.00%	10.00%	10.43%	10.67%

It is the intent of Management to continue to maintain “well” capitalized ratios.

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 $5,000,000 and additionally can borrow money through repurchase agreements with a brokerage firm. During the first quarter of 2001, the average funds borrowed from correspondent banks was $62,222. There were no borrowings through repurchase agreements.

As of July 1999, the bank became a member of the Federal Home Loan Bank of San Francisco. Certain securities and loans are pledged as collateral with a combined borrowing capacity of approximately $6.7 million. During the first quarter of 2001, the Bank borrowed $3 million for 30 days using securities as collateral. The bank is able to borrow at a rate that does not significantly impact the net interest margin.

The Bank manages its liquidity by maintaining a majority of its investment portfolio in federal funds sold and other liquid investments.  At March 31, 2001, the ratio of liquid assets to deposits and other liabilities was 13.8%. The ratio of gross loans to deposits, another key liquidity ratio, was 80.3% at March 31, 2001.

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, which 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.  In addition, inflation affects the growth of total assets by increasing the level of loan demand, and may potentially adversely affect the Bank's capital adequacy because loan growth in inflationary periods may increase more rapidly than capital.  The effect on inflation during the period ended March 31, 2001 has not been significant to the Bank's financial position or result of operations.

PART 2.            OTHER INFORMATION

ITEM 1.            LEGAL PROCEEDINGS

The Company is not aware of any legal proceeding against it that will have a material effect on the Company’s financial statements.

ITEM 2.            CHANGES IN SECURITIES AND USE OF PROCEEDS

The Company has nothing to report.

ITEM 3.            DEFAULTS UPON SENIOR SECURITIES

The Company has nothing to report.

ITEM 4.            SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company has nothing to report.

ITEM 5.            OTHER INFORMATION

The Company has nothing to report.

ITEM 6.            EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits
10.2001	Executive Salary Continuation Agreement dated March 7, 2001 between Heritage Oaks Bank and Lawrence P. Ward, filed with the SEC in the Company’s 10-QSB reported for March 31, 2001.
(b)   Reports on Form 8-K.
	Michael J. Morris was elected Director to Heritage Oaks Bancorp and Heritage Oaks Bank, as filed with the SEC on February 20, 2001 on Form 8-K.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HERITAGE OAKS BANCORP

DATE: May 2, 2001

S/ Lawrence P. Ward

Lawrence P. Ward

President

Chief Executive Officer

S/ Margaret A. Torres

Margaret A. Torres

Chief Financial Officer

Executive Vice President

EX-10

EXHIBIT 10.2001

  EXECUTIVE SALARY CONTINUATION AGREEMENT

This Agreement is made and entered into this 7th day of March, 2001, by and between Heritage Oaks Bank, a bank chartered under the laws of the State of California (“the Employer”), and Mr. Lawrence P Ward, an individual residing in the State of California (hereinafter referred to as the “Executive”).

RECITALS

WHEREAS, the Executive is an employee of the Employer and is serving as its President and Chief Executive Officer;

WHEREAS, the Executive’s experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable;

WHEREAS, it is deemed to be in the best interest of the Employer to provide the Executive with certain salary continuation benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer’s employment;
and

WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive, or to the Executive’s spouse or the Executive’s designated beneficiaries, as the case may be;

NOW, THEREFORE, in consideration of the services to be performed in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows:

AGREEMENT

1.Terms and Definitions.

1.1Administrator.     The Employer shall be the “Administrator” and, solely for the purposes of ERISA, the “Fiduciary” of this Agreement where a fiduciary is required by ERISA.

1.2.Annual Benefit.    The term “Annual Benefit” shall mean the amount determined by first multiplying the sum of One Hundred Fifty Three Thousand One Hundred Sixty Six  ($153,166) by the Applicable Percentage (defined below), and by then subtracting from that amount those additional amounts as may be: (i) required under the other provisions of this Agreement, including, but not limited to, Paragraphs 5 and 6 hereof; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; and (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI).

1.3Applicable Percentage.  The term “Applicable Percentage” shall mean that percentage listed on Schedule “A” attached hereto which is adjacent to the number of complete years (with a “year” being the performance of personal services for or on behalf of he Employer for a period of 365 days) which have                          elapsed starting from the Effective date of this Agreement and ending on the date payments are to first begin under the terms of this Agreement.  Notwithstanding the foregoing or the percentages set forth on Schedule “A”, but subject to all other terms and conditions set forth herein, the “Applicable Percentage” shall be: (i) subject to clause (ii) of this Paragraph 1.3, one hundred percent (100%) in the event the Executive dies prior to Retirement as defined in subparagraph 1.11 below; and (ii) notwithstanding the subclause (i) of this Paragraph 1.3, zero percent (0%) in the event the Executive takes any action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive’s death and of which the Employer is the designated beneficiary.

1.4Beneficiary.  Excepting the reference made at the end of Paragraphs 1.3 and 1.10 hereof, the term “beneficiary” or “designated beneficiary” shall mean the person or persons whom the Executive shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Exhibit “B”, to receive the benefits provided hereunder.  A Beneficiary Designate shall be valid only if it is in the form attached hereto and made a part hereof and is received by the Administrator prior to the Executive’s death.

1.5Change in Control. The term “Change in Control” shall mean, with respect to the Employer or any corporation formed to act as a parent or holding company of the Employer or its stock: (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the ‘Exchange Act’), or in response to any other form or report to the regulatory agencies or governmental authorities having jurisdiction over the Employer or any stock exchange on which the Employer’s shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the employer in which the Employer does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in fair market value of fifty percent (50%) of the total value of the assets of the Employer, reflected in the most recent balance sheet of the Employer; (iv) a transaction whereby any “person” (as such term is used in the Exchange Act or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, or securities of the Employer representing twenty-five (25%) or more of the combined voting power of the Employer’s then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Employer’s shareholders, of each new director is approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period.

1.6The Code.  The “Code” shall mean the Internal Revenue Code of 1986, as amended (the “Code”).

1.7Disability/Disabled.  The term “Disability” or “Disabled” shall have the same meaning given such term in the principal disability insurance policy covering the Executive, which is incorporated herein by reference to the limited extent thereof.  In the event the Executive is not covered by a disability policy containing a definition of “Disability” or “Disabled”, these terms shall mean an illness or incapacity which, having continued for a period of one hundred and eighty (180) consecutive days, thereafter prevents the Executive from adequately performing the Executive’s regular employment duties.  The determination of whether the Executive is Disabled shall be made by an independent physician selected by mutual agreement of the parties.

1.8Effective Date.  The term “Effective Date” shall mean the date upon which this Agreement was entered into by the parties, as first written above.

1.9.1ERISA.   The term “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

1.10.Lump Sum Payout Amount.  The term “Lump Sum Payout Amount” (also referred to herein as the “LSPA”) shall mean that dollar amount determined by: (a) multiplying (i) the “Designated Dollar Amount” listed on Schedule “C” corresponding to the year in which an event occurs requiring payment of the LSPA to the Executive occurs under this Agreement, by (ii) the “LSPA Percentage” listed on Schedule “D” corresponding to the year in which the event occurs requiring payment of the LSPA to the Executive under this Agreement; and (b) reducing this resulting amount as may be: (i) required under the other provisions of this Agreement, including, but not limited to Paragraph 4.2 (i.e., to take into account any previous Disability payment which may have been paid under the terms of this Agreement), Paragraph 5 and Paragraph 6 hereof; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; and (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI).

Notwithstanding the foregoing or the percentages set forth on Schedule "D," but subject to all other terms and conditions set forth herein, the "LSPA Percentage" shall be zero percent (0%) in the event the Executive takes any action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive's death and of which the Employer is the designated beneficiary.

1.11.Retirement.The term "Retirement" or "Retires" shall refer to the date on which, after the Executive attains sixty (60) years of age, the Executive acknowledges in writing to Employer to be the last day he will provide any significant .personal services, whether as an employee or independent consultant or contractor, to Employer or to, for, or on behalf of, any other business entity conducting, performing or making available to any person or entity banking or other financial services of any kind. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entitles in any thirty (30) day period.

1.12Surviving Spouse. The term "Surviving Spouse" shall mean the person, if any, who shall be legally married to the Executive on the date of the Executive's death.

1.3Termination for Cause. The term "Termination for Cause" shall mean termination of the employment of the Executive by reason of any of the following:

(a)  A termination "for cause" as this term may be defined in any written employment agreement entered into by and between the Employer and the Executive;

(b)  The willful breach of duty by the Executive in the course of his employment;

(c)  The habitual neglect by the Executive of his employment responsibilities and duties;

(d)  The Executive's deliberate violation of any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or of the rules or regulations of the: (i) The Office of the California Superintendent of Banking  (ii) Federal Deposit Insurance Corporation; (iii) Securities and Exchange Commission; or (iv) any other regulatory agency or governmental authority having jurisdiction over the Employer;

(e)  The determination by a state or federal banking agency or other governmental authority having jurisdiction over the Employer that the Executive is not suitable to act in the capacity for which she is employed by the Employer;

(f)  The Executive is convicted of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or

(g)  The Executive discloses without authority any secret or confidential information not otherwise publicly available concerning the Employer or takes any action which the Employer's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or induces any customer to breach any contract with the Employer.

             2. Scope, Purpose and Effect.

2.1.         Contract of Employment. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect upon, nor be affected by, the terms and provisions of said Employment Agreement.

2.2.         Fringe Benefit. The benefits provided by this Agreement are granted by the Employer as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement.

             3.          Payments Upon or After Retirement.

3.1. Payments Upon Retirement. If the Executive shall remain in the continuous employment of the Employer until attaining sixty (60) of age, the Executive shall be entitled to be paid the Annual Benefit, as defined above, for a period of fifteen (15) years, with each Annual Benefit amount to be paid in twelve (12) equal monthly installments (paid on the first day of each month), beginning with the month following the month in which the Executive Retires or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of said Retirement date. At the Employer's sole and absolute discretion. the Employer may increase the Annual Benefit as and when the Employer determines the same to be appropriate in order to reflect substantial change in the cost of living. Notwithstanding anything contained herein to the contrary, the Employer shall have no obligation hereunder to make any such cost–of–living adjustment.

3.2. Payments in the Event of Death After Retirement. The Employer agrees that if the Executive Retires, but shall die before receiving all of the monthly payments to which he is entitled hereunder, the Employer will continue to make such monthly payments to the Executive's designated beneficiary for the remaining period.  If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the term of this Agreement shall be paid to the Executive's Surviving spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate.

             4.          Payments in the Event Death or Disability Occurs Prior to Retirement.

4.1.         Payments in the Event of Death Prior to Retirement. In the event the Executive should die while actively employed by the Employer at any time after the Effective Date of this Agreement, but prior to attaining sixty (60) years of age or if the Executive chooses to work after attaining sixty (60) years of age, but dies before Retirement, the Employer agrees to pay the Annual Benefit to the Executive's designated beneficiary for a period of fifteen (15) years, with each Annual Benefit amount to be paid in twelve (12) equal monthly installments (paid on the first day of each month), beginning with the month following the month in which the Executive's death occurs. If a valid Beneficiary designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse in the same manner. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate.

4.2.         Payments in the Event of Permanent Disability Prior to Retirement. In the event the Executive becomes Disabled while actively employed by The Employer at any time after the date of this Agreement but prior to Retirement, the Executive shall be entitled to be paid the Annual Benefit, as defined above, for a period of fifteen (15)years, with each Annual Benefit amount to be paid in twelve (12) equal monthly installments paid on the first day of each month), beginning with the month following the earlier of (1) the month in which the Executive formally retires after reaching sixty (60) years of age, or (2) the date upon which the Executive is no longer entitled to receive Disability benefits under the Executive's principal Disability Insurance policy (or the date of the Disability if no Disability policy exists), provided that the Executive remains unable to return to and thereafter fulfill the responsibilities associated with the employment position held with The Employer prior to becoming Disabled by reason of such Disability continuing. However, in the event the Executive's Disability should cease and Executive is able to return to and thereafter fulfill the responsibilities associated with the employment position held with the Employer prior to becoming Disabled, the Employer's obligation to make additional payments under this Paragraph shall be suspended until such time as Executive next becomes eligible to receive payments under the terms of this Agreement. In the event the Employer's obligation to make additional payments under this Paragraph is suspended as aforesaid, and the Executive then becomes entitled to receive payments under the terms of this Agreement, the aggregate amount paid prior to suspension shall be treated, notwithstanding anything contained in this Agreement to the contrary, as having satisfied the Employer's payment obligations with respect to that number of initial monthly payments as is equal to the aggregate amount previously paid out under the terms of this Paragraph; provided, however, that the Employer promptly begin making the remaining monthly payments required under this Agreement to the Executive for as long as such payments would otherwise be required after proper adjustment has been made for the amounts previously paid to the Executive under this Paragraph. For example, if the Executive receives $10,000 during a period of Disability, and the Executive returns to work (such that future payments are suspended) and  then becomes eligible for the Retirement payout option described above (and is entitled to receive $10,000 over the first twelve payments under such option), the Employer shall be entitled to credit the prior payments as having satisfied its obligation to make the first twelve payments due to the Executive provided the Employer pays to the Executive, on the first day of each successive month following the month in which the Retirement occurs (as provided for above), the next monthly payment amount required with respect to the payout option selected, i.e., in this example, the amount to be paid as the first monthly payment under the Retirement option would equal the amount payable under the Retirement option for the thirteenth month (with the second payment equaling the amount payable with respect to the fourteenth month and so on), until such time as the Executive, etc., has received the 168 remaining payments due after making the adjustment for payments made prior to suspension. In the event a Lump Sum Payment Amount is to be paid under Paragraph 5, the SPA shall be reduced as provided for in Paragraph 1.10 above by the aggregate amounts previously distributed to the Executive under the terms of this Paragraph.

5.       Payments in the Event Employment Is Terminated Prior to Retirement. As indicated in Paragraph 2 above, the Employer reserves the right to terminate the Executive's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the employment of the Executive shall be terminated, other than by reason of Disability, Death or Retirement, prior to the Executive's attaining sixty (60) years of age, then this Agreement shall terminate upon the date of such termination of employment; provided, however, that the Executive shall be entitled to the following benefits, which shall  be paid in lieu of any other payout options contained herein, depending upon the circumstances surrounding the Executive's termination:

5.1.         Termination Without Cause. If the Executive's employment is terminated by the Employer without cause, the Executive shall be entitled to be paid the Lump Sum Payment Amount, as defined above, within ninety (90) days after the effective date of the Executive's termination, or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of the effective date of the Executive's termination .

5.2.         Voluntary Termination by the Executive. If the Executive's employment is voluntarily terminated by the Executive, the Executive shall be entitled to be paid the Lump Sum Payment Amount, as defined above, within ninety (90) days after the effective date of the Executive's termination, or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of the effective date of the Executive's termination.

5.3.         Termination for Cause. The Executive agrees that his employment with the Employer is terminated "for cause," as defined in subparagraph 1.13 of this Agreement, he forfeit any and all rights and benefits he may have under the toughens of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Employer pursuant to the terms of this Agreement.

5.4.         Termination by the Employer on Account of or After a Change in Control. In the event: (i) the executive's employment with the Employer is terminated by the Employer in conjunction with, or by reason of, a "change in control" (as defined in subparagraph 1.5 above); or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Executive's position, responsibilities, duties, salary, benefits, or location of employment after a "change in control" (as defined in subparagraph 1.5) occurs or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination by forcing a resignation or otherwise) of the Executive's employment after a "change in control" (as defined in subparagraph 1.5) occurs, then the Executive shall be entitled to be paid the Annual Benefit, as defined above, for a period of fifteen (15) years, with each Annual Benefit amount to be paid in twelve (12) equal monthly installments paid on the first day of each month), beginning with the month following the month in which the Executive is terminated or the action referred to above occurs.

                 6.         Additional Limitations on the Amount of the Annual Benefit. The Executive acknowledges and agrees that the parties have entered into this Agreement based  Upon the certain financial and tax accounting assumptions. Accordingly, with full knowledge of the potential consequences the Executive agrees that, notwithstanding anything contained herein to the contrary: (i) the amount of the Annual Benefit or the SPA, as the case may be, shall be Limited to that amount of the Annual Benefit or the SPA (determined without regard to this Paragraph 6) which will be deductible by the Employer under the Code in the year in which payment is to be made to the Executive; (ii) the Annual Benefit or the SPA amount shall be deemed to be the last payment made to the Executive and the first for which an income tax deduction, if any, has been disallowed; and (iii) any compensatory amounts for which a deduction is denied to the Employer shall, at the Employer's election, serve to first reduce the Employer's obligation to pay the monthly Annual Benefit payments or the SPA to the Executive under the terms of this Agreement. The Executive recognizes that, in this regard, limitations on deductibility may be imposed under, but not limited to, Code Section 280G. Consistent with the foregoing, and in the event that any payment or benefit received or to be received by the Executive, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Employer (together with the Annual Benefit or the SPA, the "Total Payments"), will not be deductible (in whole or in part) as a result of Code Section 280G, the Annual Benefit or the SPA, as the case may be, shall be reduced until no portion of the Total Payments is nondeductible as a result of Section 280G of the Code (or the Annual Benefit or SPA is reduced to zero (O)). For purposes of this limitation:

(a)  No portion of the Total Payments, the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the date of payment of a SPA or any future Annual Benefit payments, shall be taken into account;

(b)  No portion of the Total Payments which, in the opinion of the tax counsel selected by the Employer and acceptable to the Executive, does not constitute a "parachute payment" within the meaning of Section 280G of the Code shall be taken into account;

(c)  Future Annual Benefit payments, or the SPA as the case may be, shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (a) or (b) above in their entirety) constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of tax counsel refined to in clause (b) above; and

(d)  The value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Employer's independent auditors in accordance with the principles of Section 280G of the Code.

7.          Right To Determine Funding Methods. The Employer reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, the Executive's spouse or the Executive's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any lime, in whole or, in part. Consistent with Paragraph 9 below, neither the Executive, the Executive’s spouse nor the Executive's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Executive to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Executive, the Executive's spouse and the Executive's beneficiaries of any and all rights to payment hereunder. Notwithstanding anything contained herein to the contrary, no interest shall accrue or be payable with respect to any of the amounts payable under the terms of this Agreement.

8.          Claims Procedure. The Employer shall, but only to the extent necessary to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make ail determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Executive, the Executive's spouse, or the Executive's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Executive, the Executive's spouse or the Executive's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim.

9.          Status as an Unsecured General Creditor. Notwithstanding anything contained herein to the contrary: (i) neither the Executive, the Executive's spouse or the Executive's beneficiary shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Executive, the Executive's spouse or the Executive's beneficiaries or held in any way as security for the fulfillment of the obligations  of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employers to pay money in the future; and (v) the Executive, the Executive's spouse and the Executive's beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement.

10.        Miscellaneous.

10.1     Opportunity To Consult With Independent Counsel. The Executive acknowledges that he has been afforded the opportunity to consult with independent counsel of his choosing regarding both the benefits granted to him under the terms of this Agreement and the terms and conditions which may affect the Executive's right to these benefits. The Executive further acknowledges that he has read, understands and  consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.

10.2.    Arbitration of Disputes. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), presently located at 111 Pine Suite, Suite 710, in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), presently located at 417 Montgomery Street, in San Francisco, California, shall conduct the binding Arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Francisco, California, unless otherwise agreed to by the parties.

10.3. Attorneys' Fees. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the losing party reasonable expenses, Attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered.

10.4. Notice. Any notice required or permitted of either the Executive or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representation; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party.

If to the Employer:	Heritage Oaks Bank
	545 Twelfth Street
	Paso Robles, CA 93446
	Attn: Corporate Secretary
If to the Executive:	Mr. Lawrence P Ward
	2495 Dry Well Place
	Paso Robles, CA 93446

10.5. Assignment. Neither the Executive, the Executive's spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive, the Executive's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and shall terminate this Agreement, and the Employer shall thereupon have no further liability hereunder.

10.6. Binding Effect/Merger or Reorganization. This Agreement shall be binding upon and inure to the benefit of the Executive and the Employers and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to  refer to such surviving or successor firm, person, entity of corporation.

10.7. Nonwaiver. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement.

10.8. Partial Invalidity. If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to  be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall  remain in full force and effect notwithstanding such partial invalidity.

10.9. Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party.

10.10. Modifications. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative.

10.11 Paragraph Headings.The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement.

10.12. No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person.

10.13.Governing Law.  The laws of the State of California, other than those laws denominated choice of law rules, and, where applicable, the rules and regulations of the: (i) Office of the California Superintendent of Banks; (ii) Federal Deposit Insurance Corporation; and (iii) Securities and Exchange Commission shall govern the validity, interpretation, construction and effect of this Agreement.

IN WITNESS WHEREOF, the Employer and the Executive have executed this Agreement on the date first above-written in the City of Paso Robles, San Luis Obispo County, California.

THE EMPLOYER:	THE EXECUTIVE:
HERITAGE OAKS BANK
By:    __________________________________	__________________________________
Dr. B.R. Bryant, Chairman	Mr. Lawrence P. Ward

SCHEDULE “A” NUMBER OF COMPLETE YEARS WHICH HAVE ELAPSED	APPLICABLE PERCENTAGE
1.	10.0%
2	20.0%
3	30.0%
4	40.0%
5	50.0%
6	60.0%
7	70.0%
8	80.0%
9	90.0%
10	100.0%
11	100.0%

SCHEDULE "C"
NUMBER OF COMPLETED YEARS WHICH  HAVE ELAPSED	DISGNATED DOLLAR AMOUNT
1	$41,397.00
2	$86,230.00
3	$134,784.00
4	$187,368.00
5	$244,316.00
6	$305,991.00
7	$372,785.00
8	$445,123.00
9	$523,465.00
10	$608,309.00
11	$700,194.00

SCHEDULE “D”

NUMBER OF COMPLETE YEARS WHICH HAVE ELAPSED	LSPA PERCENTAGE
1	10.0%
2	20.0%
3	30.0%
4	40.0%
5	50.0%
6	60.0%
7	70.0%
8	80.0%
9	90.0%
10	100.0%
11	100.0%