10QSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

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

(State or other jurisdiction of incorporation or organization)

77-0388249

(I.R.S. Employer Identification Code)

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  ý   NO  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes  o  No  ý

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 – 2,956,251 shares outstanding at July 9, 2003.

TABLE OF CONTENTS

Part 1. Financial Information
	Item 1. Financial Statements
	Consolidated Balance Sheets
	Consolidated Statements of Operations (Un-audited)
	Consolidated Statements of Cash Flows (Un-audited)
	Consolidated Statement of Changes in Stockholders’ Equity (Un-audited)
	Notes to Consolidated Financial Statements (Un-audited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.  Controls and Procedures
Part 2.  Other Information
	Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
Exhibits

2

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

HERITAGE OAKS BANCORP

CONSOLIDATED BALANCE SHEETS

	31-Dec-02		30-Jun-03
			(Unaudited)
ASSETS
Cash and due from banks	$	23,513,631	$	31,791,939
Federal funds sold	37,040,000		34,100,000
Total cash and cash equivalents	60,553,631		65,891,939
Interest bearing deposits other banks	497,000		497,000
Securities Available for sale	65,396,494		48,596,993
Federal Home Loan Bank Stock, at cost	1,950,900		1,661,900
Loans Held For Sale	8,166,011		9,265,851
Loans, net	187,311,368		209,553,394
Property, premises and equipment, net	4,542,591		4,599,687
Cash surrender value life insurance	5,415,500		6,369,284
Deferred Tax Assets	1,170,783		1,192,645
Core Deposit Intangible	358,557		338,262
Other assets	1,900,477		1,786,045
TOTAL ASSETS	$	337,263,312	$	349,753,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing	$	106,556,079	$	136,415,759
Savings, NOW, and money market deposits	112,567,856		106,630,414
Time deposits of $100,000 or more	8,154,256		8,801,836
Time deposits under $100,000	36,900,414		37,757,986
Total deposits	264,178,605		289,605,995
Other borrowed money	38,000,000		28,500,000
Securities Sold under Agreement to Repurchase	257,737		127,409
Company Obligated Preferred Securities of Subsidiary Trust Holding Floating Rate Junior Subordinated Deferred Interest Debentures	8,000,000		8,000,000
Other liabilities	7,013,500		1,679,141
Total liabilities	317,449,842		327,912,545
Stockholders’ equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding 2,924,810 and 2,956,251 for December 31, 2002 and June 30, 2003, respectively.	9,703,022		11,486,997
Accumulated other comprehensive income	562,359		709,565
Retained earnings	9,548,089		9,643,893
Total stockholders’ equity	19,813,470		21,840,455
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	337,263,312	$	349,753,000

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

See notes to condensed financial statements

3

HERITAGE OAKS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

For the three months ended June 30,

	2002		2003
	(Unaudited)		(Unaudited)
Interest Income:
Interest and fees on loans	$	3,162,626	$	3,856,499
Investment securities	589,529		544,519
Federal funds sold and commercial paper	63,877		40,088
Time certificates of deposit	1,530		3,181
Total interest income	3,817,562		4,444,287
Interest Expense:
Now accounts	61,374		31,846
MMDA accounts	42,463		130,410
Savings accounts	12,092		11,456
Time deposits of $100,000 or more	38,346		41,475
Other time deposits	279,455		217,278
Other borrowed funds	394,514		408,673
Total interest expense	828,244		841,138
Net Interest Income Before Prov. for Possible Loan Losses	2,989,318		3,603,149
Provision for loan losses	150,000		125,000
Net interest income after provision for loan losses	2,839,318		3,478,149
Non-interest Income:
Service charges on deposit accounts	326,365		411,638
Other income	471,520		515,540
Total Non-interest Income	797,885		927,178
Non-interest  Expense:
Salaries and employee benefits	1,284,100		1,518,718
Occupancy and equipment	410,089		429,187
Other expenses	983,345		1,031,863
Total Noninterest Expenses	2,677,534		2,979,768
Income before provision for income taxes	959,669		1,425,559
Provision for applicable income taxes	328,249		546,269
Net Income	$	631,420	$	879,290
Earnings per share: (See note #4)
Basic	$	0.22	$	0.30
Fully Diluted	$	0.20	$	0.28

See notes to condensed financial statements

4

HERITAGE OAKS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

For the six months ended June 30,

	2002		2003
	(Unaudited)		(Unaudited)
Interest Income:
Interest and fees on loans	$	6,270,975	$	7,531,362
Investment securities	860,153		1,081,033
Federal funds sold and commercial paper	102,237		107,022
Time certificates of deposit	2,320		6,281
Total interest income	7,235,685		8,725,698
Interest Expense:
Now accounts	121,040		68,564
MMDA accounts	71,855		275,231
Savings accounts	23,329		22,755
Time deposits of $100,000 or more	78,602		83,424
Other time deposits	593,688		455,096
Other borrowed funds	447,931		873,000
Total interest expense	1,336,445		1,778,070
Net Interest Income Before Prov. for Possible Loan Losses	5,899,240		6,947,628
Provision for loan losses	285,000		250,000
Net interest income after provision for loan losses	5,614,240		6,697,628
Non-interest Income:
Service charges on deposit accounts	642,578		802,111
Investment securities gains, net	0		56,988
Other income	937,423		969,359
Total Non-interest Income	1,580,001		1,828,458
Non-interest  Expense:
Salaries and employee benefits	2,541,161		3,022,018
Occupancy and equipment	849,739		818,690
Other expenses	1,965,030		2,007,783
Total Noninterest Expenses	5,355,930		5,848,491
Income before provision for income taxes	1,838,311		2,677,595
Provision for applicable income taxes	638,670		973,736
Net Income	$	1,199,641	$	1,703,859
Earnings per share: (See note #4)
Basic	$	0.42	$	0.58
Fully Diluted	$	0.38	$	0.54

See notes to condensed financial statements

5

HERITAGE OAKS BANCORP

CONSOLIDATED STATEMENTS OF CASHFLOWS

Periods ended June 30,

	2002			2003
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
Net income	$	1,199,641		$	1,703,859
Adjustments to reconcile net income to net cash provided by operating activities
Net cash provided by operating activities
Depreciation and amortization	309,979			309,706
Provision for possible loan losses	285,000			250,000
Provision for possible unfunded loan losses	0			25,000
Realized gain on sales of available-for-sale securities, net	0			(56,988		)
Gain on sales of property, premise and equipment	17,332			0
Amortization of premiums/discounts on investment securities, net	11,010			263,812
Amortization of intangible assets	23,302			20,295
(Increase)/decrease in loans held for sale	401,125			(1,099,840		)
(Increase)/decrease in deferred tax asset	102,832			(120,000		)
Net increase in cash surrender value of life insurance	(131,923		)	(123,784		)
(Increase)/decrease in other assets	(369,738		)	114,432
Increase/(decrease) in other liabilities	392,428			(5,359,359		)
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES	2,240,988			(4,072,867		)
Cash Flows From Investing Activities
Purchase of securities available-for-sale	(41,537,414		)	(11,133,751		)
Proceeds from sales of securities available-for-sale	0			12,364,963
Proceeds from principal reductions and maturities of securities available-for-sale	2,596,330			15,606,808
Proceeds from sale of FHLB stock	0			289,000
Purchase of life insurance policies	0			(830,000		)
Increase in loans, net	(10,960,125		)	(22,492,026		)
Purchase of property, premises and equipment, net	(211,169		)	(366,802		)
NET CASH USED IN INVESTING ACTIVITIES	(50,112,378		)	(6,561,808		)
Cash Flows From Financing Activities
Increase in deposits, net	$	21,672,479		$	25,427,390
Net increase/(decrease) in other borrowings	36,398,426			(9,630,328		)
Proceeds from sale of Trust Preferred Securities	8,000,000			0
Proceeds from exercise of stock options	111,004			179,173
Cash paid in lieu of fractional shares	(6,405		)	(3,252		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	66,175,504			15,972,983
Net Increase in Cash and Cash Equivalents	18,304,114			5,338,308
Cash and Cash Equivalents, Beginning of year	20,398,048			60,553,631
Cash and Cash Equivalents, End of year	$	38,702,162		$	65,891,939
Supplemental Disclosures of Cash Flow Information
Interest paid	$	1,207,461		$	1,867,673
Income taxes paid	$	785,000		$	930,000
Supplemental Disclosures of Non-Cash Flow Information
Change in other comprehensive income	$	344,332		$	147,206

See notes to condensed financial statements

6

HERITAGE OAKS BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

June 30, 2003 and June 30, 2002

(Unaudited)

	Shares Outstanding	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance January 1, 2003	2,785,533	$	9,703,022	$	9,548,089		$	562,359		$	19,813,470
Exercise of Stock Options	31,670	179,173		0						179,173
Stock dividend- 5%	139,048	1,604,802		(1,604,802		)				0
Cash paid to Shareholders’ in Lieu of fractional shares on 5% Stock Dividend				(3,253		)				(3,253		)
Comprehensive Income
Net Income				1,703,859						1,703,859
Unrealized Security Holding Gains/(Losses) ‘(net of $120,933 tax)							181,400			181,400
Less reclasification  adjustment for gain (net of $22,795 tax)							(34,194		)	(34,194		)
Total other comprehensive Income										1,885,259
Balance June 30, 2003	2,956,251	$	11,486,997	$	9,643,893		$	709,565		$	21,840,455

	Shares Outstanding	Common Stock		Retained Earnings			Other Comprehensive Income			Total Stockholders’ Equity
Balance January 1, 2002	1,362,774	$	7,535,495	$	8,496,122		$	(154,836	)	$	15,876,781
Exercise of Stock Options	22,958	111,004		0						111,004
Stock dividend- 5%	67,880	1,680,849		(1,680,849		)				0
Cash paid to Shareholders’ in Lieu of fractional shares on 5% Stock Dividend				(6,405		)				(6,405		)
Stock Split- 2 for 1	1,453,613
Comprehensive Income
Net Income				1,199,641						1,199,641
Unrealized Security Holding Gains/(Losses) ‘(net of $126,330 tax)							344,332			344,332
Total other comprehensive Income										1,543,973
Balance June 30, 2002	2,907,225	$	9,327,348	$	8,008,509		$	189,496		$	17,525,353

7

Note 1.CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of Management, the un-audited consolidated condensed financial statements contain all (consisting of only normal recurring adjustments) adjustments necessary to present fairly Heritage Oaks Bancorp’s (the “Company”) consolidated financial position at June 30, 2003 and results of cash flows for the six months ended June 30, 2002 and 2003 and the results of operation for the three and six months ended June 30, 2002 and 2003.

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 2002 Annual Report to shareholders. The results for the three and six months ended June 30, 2002 and 2003 may not necessarily be indicative of the operating results for the full year.

Note 2.INVESTMENT SECURITIES

In accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”, which addresses the accounting for investments in equity securities that have a readily determinable 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 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.

The amortized cost and fair values of investment securities available for sale at June 30, 2003 and

December 31, 2002 were:

June 30, 2003	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of U.S. government agencies and corporations	$	592,844	$	—	$	(16,316	)	$	576,528
Mortgage-backed securities	36,858,038		665,212		(1,160		)	37,522,090
Obligations of State and Political Subdivisions	9,954,865		534,872		0			10,489,737
Other Securities	8,638		0		0			8,638
TOTAL	$	47,414,385	$	1,200,084	$	(17,476	)	$	48,596,993

December 31, 2002	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of U.S. government agencies and corporations	$	816,521	$	562	$	(18,469	)	$	798,614
Mortgage-backed securities	54,480,395		777,972		(4,342		)	55,254,025
Obligations of State and Political Subdivisions	9,153,674		247,715		(66,172		)	9,335,217
Other Securities	8,638		0		0			8,638
TOTAL	$	64,459,228	$	1,026,249	$	(88,983	)	$	65,396,494

8

Note 3.LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans were:

	December 31, 2002			June 30, 2003
Commercial, financial, and agricultural	$	40,373,350		$	39,574,493
Real estate-construction	30,773,530			31,414,420
Real estate-mortgage	116,758,894			139,699,456
Installment loans to individuals	2,290,874			1,981,024
All other loans (including overdrafts)	272,607			162,081
	190,469,255			212,831,474
Less - deferred loan fees, net	(821,668		)	(763,119		)
Less - reserve for possible loan losses	(2,336,219		)	(2,514,961		)
Total loans	$	187,311,368		$	209,553,394
Loans Held For Sale	$	8,166,011		$	9,265,851

Concentration of Credit Risk

At June 30, 2003, approximately $171.1 million 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 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 June 30, 2003, the Bank was contingently liable for letters of credit accommodations made to its customer totaling approximately $1.3 million and un-disbursed loan commitments in the approximate amount of $80.7 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 agreement 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 involve 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.

9

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

	December 31, 2002			June 30, 2003
Balance at beginning of year	$	1,744,070		$	2,336,219
Additions charged to operating expense	545,000			250,000
Loans charged off	(81,405		)	(145,000		)
Recoveries of loans previously charged off	128,554			73,742
Balance at end of year	$	2,336,219		$	2,514,961

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 loss 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 collectibility of 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 Statement of Financial Accounting Standards 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 credit 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 effect interest rate or the fair value of the collateral for certain collateral dependent loans. As a result of the Statement 114 Evaluation, $145,000 was charged against the allowance for loan losses during the second quarter of 2003.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.

The allowance for loan losses is based on estimate, 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 second quarter of 2003 is consistent with prior periods.

The Bank’s provision for loan losses was $250,000 for the six months ending June 30, 2003, compared to $300,000 for the same period in 2002. However, the Bank also has reserved $25,000 in 2003 as a provision for possible loan loss in conjunction with off balance sheet loan commitments.

The allowance for loan losses as a percentage of total net loans was 1.20% as of June 30, 2003 and 1.23% as of December 31, 2002. Management believes that the allowance for credit losses at June 30, 2003 is prudent and warranted, based on information currently available.

Non-Accrual and Non-Performing Loans

Loan on non-accrual status totaled $1,345,755 and $800,033 at December 31, 2002 and June 30, 2003, respectively. Typically, these loans have adequate collateral protection and/or personal guaranties to provide a source of repayment to the Bank. Most of the loans on non-accrual are related to several commercial loans that

10

are being addressed by specific workout plans at this time. 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 $134,508 and $44,164 for the period ended December 31, 2002 and June 30, 2003, respectively.

Non-performing loans include non-accrual loans and accruing loans that are 90 days or more delinquent. The Bank had no loans that were 90 days or more delinquent and still accruing interest at December 31, 2002 and June 30, 2003.

Non-performing loans were .40% and .23% of total assets as of December 31, 2002 and June 30, 2003, respectively. The allowance for loan loss to non-performing loans was 1.74x and 3.14x at December 31, 2002 and June 30, 2003, respectively.

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.

On July 19, 2002, the Company announced that the Board of Directors of the Company approved a two-for-one stock split. The record date for the stock split was August 2, 2002 and the pay date was August 15, 2002. Holders of shares of common stock of Heritage Oaks Bancorp were issued one additional share of common stock for each share of common stock owned on the record date of August 2, 2002.

On March 4, 2003, the Company announced that the Board of Directors of the Company approved a 5% stock dividend. The record date for the stock dividend was March 14, 2003 and the pay date was March 28, 2003.

Share information has been retroactively adjusted for the two-for-one stock split in August 2002 and the 5% stock dividend in March 2003.

Earnings per share and total number of shares used for calculating basic earnings per share for the three months ended June 30, 2002 and 2003, were $.22 and $.30 and 2,838,145 and 2,939,471, respectively. Earnings per share and total number of shares used for calculating diluted earnings per share for the three months ended June 30, 2002 and 2003, were $.20 and $.28 and 3,145,005 and 3,137,036, respectively.

Earnings per share and total number of shares used for calculating basic earnings per share for the six months ended June 30, 2002 and 2003, were $.42 and $.58 and 2,878,991and 2,932,661, respectively. Earnings per share and total number of shares used for calculating diluted earnings per share for the six months ended June 30, 2002 and 2003, were $.38 and $.54 and 3,149,822 and 3,138,878, respectively.

11

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS 123, Accounting for Stock Based Compensation, to stock based employee compensation:

	Three Months Ended						Six Months Ended
	June 30, 2002			June 30, 2003			June 30, 2002			June 30, 2003
Net income:
As reported	$	631,420		$	879,290		$	1,199,641		$	1,703,859
Stock-based compensation using the intrinsic value method	—			—			—			—
Stock-based compensation that would have been reported	—			—			—			—
using the fair value method of SFAS 123	(14,792		)	(22,546		)	(50,273		)	(57,387		)
Pro forma net income	$	616,628		$	856,744		$	1,149,368		$	1,646,472
Weighted Average Shares Outstanding - Basic	2,838,145			2,939,471			2,878,991			2,932,661
Weighted Average Shares Outstanding - Diluted	3,145,005			3,137,036			3,149,822			3,138,878
Basic Earnings per share
As reported	$	0.22		$	0.30		$	0.42		$	0.58
Pro forma	$	0.22		$	0.29		$	0.40		$	0.56
Earnings per share - assuming dilution
As reported	$	0.20		$	0.28		$	0.38		$	0.54
Pro forma	$	0.20		$	0.27		$	0.36		$	0.52

Note 5.PREMISE

On July 26, 2002, the Bank purchased a parcel of land (approximately 2 acres) on the corner of Niblick and South River Roads in Paso Robles, Ca. The purchase price was $900,000. On February 12, 2003, the Bank and HBE Corporation entered into a Construction Agreement for the branch office building that will be located on this parcel of land. It is the intent of the Bank to build a full service branch on this parcel and to relocate the existing “Woodland” office, that is currently located at 171 Niblick Road, Paso Robles, Ca.  The Bank anticipates that the building will be approximately 5,000 square feet in size and will open sometime in the first quarter of 2004. The cost of construction is estimated to be approximately $1.8 million.

On July 3, 2003, the Bank closed escrow to purchase real property located at 500 13^th Street, Paso Robles, Ca. This property is located directly adjacent to the Bank’s Headquarters. The purchase price was $1.1 million. It is the Bank’s intention to either remodel and expand the existing building or to build a new structure on the site to allow for the consolidation of all Administrative functions of the Bank within the new facility. The Bank anticipates that this project will be complete in the fourth quarter of 2004 or first quarter of 2005.

Note 6.ISSUANCE OF TRUST PREFERRED SECURITIES

On April 10, 2002, the Company completed its offering of trust preferred securities in the amount of $8.0 million. The securities were issued by a special purpose business trust formed by the Company and were sold to a pooled investment vehicle sponsored by Sandler O’Neill & Partners, L.P. and Salomon Smith Barney Inc. in a private transaction. The securities were sold pursuant to an applicable exemption from registration under the Securities Act of 1933, as amended (the “Act”), and have not been registered under the Act.  Sandler O’Neill assisted the Company in the placement of the trust preferred securities. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

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The $8.0 million in trust preferred securities have a floating rate of interest, which is reset semi-annually, equal to 6-month LIBOR plus 3.70%.  The floating rate, however, may not exceed 11.0% for the first five years. The $8.0 million accounts for approximately 4% of the increase in total assets.

As the result of the issuance of $8.0 million in trust preferred securities, on April 11, 2002, the Company down-streamed $5.2 million to the Bank in the form of Tier I Capital. This enabled the Bank to implement an investment strategy whereby the Bank borrowed $38 million from the Federal Home Loan Bank (FHLB) and purchased approximately $40 million in investment securities. The purchased investment securities serve as collateral for the borrowing. On February 22, 2003, the Bank repaid $9.5 million of the borrowing.

Note 7.RECENT LEGISLATIVE ACTIVITY
SARBANES-OXLEY ACT OF 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”).

On August 28, 2002, in accordance with Section 302 of the Act, the Securities and Exchange Commission (the “SEC”) adopted final rules that require an issuer’s principal executive and principal financial officer to certify the contents, including the financial and other information, of the issuer’s quarterly and annual reports. The rules became effective on August 29, 2002. In addition, the SEC adopted previously proposed rules requiring issuers to maintain, and regularly evaluate the effectiveness of control and procedures designed to ensure that the information required in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported on a timely basis.

A separate provision of the Act (section 906) creates an independent CEO and CFO certification obligation that took effect immediately upon signing the Act into law and impacted periodic reporting beginning with the June 30, 2002 10-QSB. The certification in section 906 provides for a statement that any periodic report containing financial statements fully complies with Section 13(a) or 15 (d) of the Exchange Act and that the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operation of the public company.

The SEC has also adopted new Exchange Act Rules 13a-14 and 15d-14 that require an issuer to establish and maintain an overall system of disclosure controls and procedures that are adequate to meet its Exchange Act reporting obligations.

Note 8.Recent Accounting Pronouncements

At its August 7, 2002 Board meeting, the FASB approved, in principle, Statement 147 which will replace certain paragraphs in Statement 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions”. The new guidance was effective on September 30, 2002. The requirement in Statement 72 to recognize (and amortize) an “unidentifiable intangible asset” when more liabilities are acquired than assets, such as in a branch purchase that is a business combination, will no longer apply. Previously recorded core deposit intangibles must continue to be amortized.

The Bank acquired four branch offices from Westamerica Bank in November 2001. The premium, net  of fair value for certain assets acquired, was fully accounted for as core deposit intangibles. This core deposit intangible has and will continue to be amortized over a period of ten years.

Core Deposit Intangible and Goodwill in the approximate amount of $4.5 million will be created as the result of the recently announced merger transaction with Hacienda Bank (refer to Management’s Discussion and Analysis, Recent Events). Once finalized, the ultimate amount of intangible created may vary depending on the fair value assessment of assets and liabilities acquired on the purchase date.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133.  SFAS No. 149

13

is generally effective for contracts entered into or modified after June 30, 2003.  The adoption of SFAS No. 149 will not have a material impact on the financial condition or operating results of the Company.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances.)  Many of those instruments were previously classified as equity.  SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 did not have a material impact on the financial condition or operating results of the Company.

Note 9.Reclassifications

Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation.

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Certain statements contained in this Quarterly Report on Form 10-QSB (“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: 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, economic, political and global changes arising from the terrorist attacks of September 11, 2001 and their aftermath and other factors referenced in the Company’s filings with the SEC. (Refer to the Company’s December 31, 2002 10-KSB, ITEM 1. Description of Business.) 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.

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 financial subsidiary owned by the Company. In April 2002, the Company formed Heritage Oaks Capital Trust I (the “Trust”). The Trust is a statutory business trust formed under the laws of the State Of Delaware and is wholly-owned by the Company. In July 2003, the Company formed Heritage Oaks Merger Corp. to facilitate the acquisition of Hacienda Bank as a wholly owned subsidiary of the Company.

RECENT EVENTS

Acquisition Announced

On June 11, 2003, Heritage Oaks Bancorp (the “Company”), a California corporation, and Hacienda Bank (the “Seller”), a California Banking corporation, entered into an Agreement to Merge and Plan of Reorganization (“Agreement”). Subject to the terms and conditions of the Agreement and the Agreement of Merger, at the Effective time, Seller will become a wholly owned subsidiary of the Company in accordance with the procedures specified in the California Financial Code (CFC) and the California General Corporation Law (CGCL) by merging with a wholly owned subsidiary of the Company, Heritage Oaks Merger Corp. Seller will be the Surviving Bank in the Merger.

The Agreement provides that shareholders of Hacienda Bank will have the election of receiving Heritage Oaks Bancorp common stock, cash or a combination in return for their shares of Hacienda Bank stock, provided that cash must constitute not less than 25% nor more than 35% of the total consideration issued in the merger. Hacienda Bank shareholders who elect stock will receive 0.5208 in Heritage Oaks Bancorp stock. Hacienda Bank shareholders who elect cash will receive $6.50 cash per share which is subject to possible upward adjustment up to $6.75 per share based on changes in the price of Heritage Oaks Bancorp stock preceding the effective date of the transaction. The transaction is valued at approximately $9.7 million.  It represents approximately 1.71 times Hacienda Bank book value at December 31, 2002 and 22.8 times 2002 earnings.  The merger is structured to be tax-free and is intended to be accounted for as a purchase.  Heritage Oaks Bancorp expects the transaction to close late in the fourth quarter 2003 and is expected to be accretive to earnings in 2004.

The Merger requires the affirmative approval of the holder of the outstanding shares of the Company and the Seller.

Subject to the terms and conditions of this Agreement and the Agreement of Merger, at the Effective Time,

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Heritage Oaks Merger Corp. (HOMC), will be merged into Seller in accordance with the procedures specified in the California General Corporation Law (GCL).  Seller will be the Surviving Bank in the Merger.

The name of the Surviving Bank shall be “Hacienda Bank.”  Upon the consummation of the Merger, the separate corporate existence of HOMC shall cease:  All assets, rights, franchises, titles and interests of Seller and HOMC in and to every type of property (real, personal and mixed, including all the right, title and interest to HOMC’s names, trade names, service marks and the like) and choses in action shall be transferred to and vested in Seller by virtue of the Merger without any deed or other transfer, and Seller, without order or action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests in the same manner and to the same extent that such rights, franchises and interests were held by Seller and HOMC at the effective time of the Merger.  At the Effective Time, Seller shall be liable for all liabilities of Seller and HOMC, and all debts, liabilities, obligations and contracts of Seller and HOMC, whether matured or un-matured, accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of accounts or records of Seller and Bank, shall be those of Seller; and all rights of creditors or other obligees and all liens on property of Seller and HOMC shall be preserved unimpaired.

Hacienda Bank, Heritage Oaks Bank and Heritage Oaks Bancorp are all well-capitalized as of June 30, 2003 and will remain well-capitalized on the effective date of the transaction.

On July 15, 2003, the Company received a commitment letter from Pacific Coast Bankers Bank for a revolving line of credit in the amount of $3.5 million. The Company will pledge 339,332 shares or 51% of its stock in Heritage Oaks Bank as collateral. The funds will be used in the acquisition of Hacienda Bank for payment to shareholders who elect cash and/or Tier I capital in the form of Surplus to its financial subsidiaries.

Property Purchased

On July 3, 2003, the Bank closed escrow to purchase real property located at 500 13^th Street, Paso Robles, Ca. This property is located directly adjacent to the Bank’s Headquarters. The purchase price is $1.1 million. It is the Bank’s intention to either remodel and expand the existing building or to build a new structure on the site to allow for the consolidation of all Administrative functions of the Bank within the new facility. The Bank anticipates that this project will be complete in the fourth quarter of 2004 or first quarter of 2005.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are set forth in note 1 of the consolidated financial statements as of December 31, 2002 which was filed on Form 10-KSB. Of these significant accounting policies, 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. Refer to “Note 3. Allowances for Loan Losses” found elsewhere in this document for a detailed explanation of the Company’s assessment.

FINANCIAL CONDITION

As of June 30, 2003, total consolidated assets of Heritage Oaks Bancorp were $349.8 million compared to $337.3 million at December 31, 2002. This represents an increase of 3.7%. The components of this increase are discussed below.

Cash and Due From Banks

Total cash and due from banks at June 30, 2003 was $31.8 million, an increase of 35.2% from $23.5

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million at December 31, 2002. This line item will vary depending on cash letters from the previous night and actual cash on hand in the branches. The balance in the Fed account had a closing balance of $16.1 million to meet the target for Reserve Requirements.

Loans

Total net loans at June 30, 2003 were $209.6 million compared to $187.3 million at December 31, 2002. This represents an increase of 11.9%. For the six months ending June 30, 2003, commercial, financial and agriculture loans decreased by $.8 million or 2.0%, real estate-construction loans increased by $.6 million or 2.1%, real estate-mortgage loans increased by $22.9 million or 19.7% and installment loans to individuals decreased by $.3 million or 13.5%.

The modest decrease in agricultural loans is attributed to the refinance of several development loans through the Farmer Mac program. This program is a long-term mortgage product that offers low interest rates on producing agricultural real estate. We continue to use this product to payoff our development loans and also to finance homes on acreage. With the current oversupply of wine grapes, vineyard development has decreased significantly hence new development loan requests have also diminished.  Commercial loan growth has been impacted by the economic slowdown with most companies hesitant to request funds for plant expansion, new equipment, etc.

The small increase in real estate-construction loans can be attributed to several large construction projects financed in 2002 that are continuing to fund and to new projects financed in 2003. They include a condominium project in the amount of $5.3 million that will payoff as units are sold; an office building in the amount of nearly $4 million, another office building for $3.8 million, a hotel for $4 million, a hotel for $2.4 million, two medical offices totaling $3.3 million, a strip center in the amount of $4.4 million and a RV park in the amount of $1.6 million. Many of the properties are pre-leased prior to construction startup. Upon completion of construction, the properties for which the Bank is willing to offer permanent financing are granted loans with monthly principal and interest payments based on a term of not more than fifteen years with not more than a twenty-five year amortization. These loans have a variable rate of interest that may be fixed for the initial two to three years.

The large increase in real estate-mortgage loans is attributed primarily to several construction loans converting to amortizing loans as indicated above and to approximately $10 million in new commercial real estate loans.  They include an office/retail building for $3.3 million, light industrial buildings for $1.9 million, vacation rentals for $1.4 million, a motel for $.6 million and numerous $200-500,000 property loans.

There are two categories of loan concentration at June 30, 2003. These categories are reported monthly to the Bank’s Director Loan Committee. The two categories are 1) construction and land loans and 2) motel/hotel loans. Construction and land loans total approximately $35.0 million. This represents 134.09% of the Bank’s Tier 1 capital. The projects are spread throughout our market area and range from single family residences to large commercial projects. The largest project represents approximately 12% of the total construction and land loans outstanding. Construction projects are inspected regularly to ensure progress is in line with funds drawn on specific loans. Motel /hotel loans total approximately $39.4 million and represent 143.05% of the Bank’s Tier 1 capital. These loans are also spread throughout our market area with no concentration in any one community. All motel/hotel loans are performing as agreed with zero delinquencies. The majority of operators have indicated that occupancy rates are between 60%-70% representing a decrease of about 3%-7%. However, daily room rates are up. The overall effect on profits and cash flow has been minimal and has had no impact on the customer’s ability to repay

Loans held for sale were $9.3 million at June 30, 2003 compared to $8.2 million at December 31, 2002. Typically, loans held for sale are sold within 45 days of funding.

Securities

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 its board of directors. The asset/liability committee of the Bank is responsible for reporting and monitoring

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compliance with the investment policy. Reports are provided to the Bank’s board 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 as accumulated other comprehensive income. As of June 30, 2003, accumulated other comprehensive income was $709,565 compared to $562,359 at December 31, 2002.

Securities available-for-sale decreased to $48.6 million at June 30, 2003 from $65.4 million at December 31, 2002. This represents a decrease of $16.8 million or 25.7%. With the interest rate environment remaining at historic lows, prepayments on Mortgage Backed Securities (MBS) have accelerated to nearly $16 million during the first six months of 2003. During the first quarter of 2003, the Bank sold two MBS securities with principal outstanding balances of approximately $7.4 million and one Collateralized Mortgage Obligation (CMO) in the amount of approximately $5 million. These securities were replaced with two CMO securities in the total amount of approximately $11 million. These transactions were executed as the result of an analysis on interest rate sensitivity and to better position the investment portfolio for future interest rate movements of either up or down.

As the result of the issuance of $8.0 million in trust preferred securities, in April 2002, the Company down-streamed $5.2 million to the Bank in the form of Tier I Capital. This enabled the Bank to implement an investment strategy whereby the Bank borrowed $38 million from the Federal Home Loan Bank (FHLB) and purchased approximately $40 million in investment securities. The purchased investment securities serve as collateral for the borrowing. The Bank made this decision knowing that it would improve the return on average equity by increasing the net interest income in absolute terms even though it would reduce the return on average assets and the net interest margin as a percentage. Prior to investing, the Bank performed extensive due diligence in assessing the interest rate and market value risk of this strategy including the performance in various interest rate scenarios of up and down 100, 200 and 300 basis points. Management believes that variances up to 300 basis points would not have a material effect on the overall interest rate and market value risk to the Company.

At June 30, 2003, available-for-sale securities in the portfolio included obligations of state and political subdivisions, obligations of US government agencies and corporations and mortgaged 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.

Federal Funds Sold

Federal funds sold were $34.1 million at June 30, 2003 compared to $37 million at December 31, 2002. The decrease of $2.9 million is the direct result of the Bank repaying $9.5 million in borrowings to the Federal Home Loan Bank (FHLB) on February 22, 2003. The primary reason for retaining these large over night investments is due to the volatile nature of certain deposit relationships that are related to the current robust mortgage business. These relationships are discussed in more detail under “Deposits and Borrowed Funds”.

Deposits and Borrowed Funds

Total deposits were $289.6 million at June 30, 2003 compared to $264.2 million at December 31, 2002. This represents an increase of $25.4 million or 9.6%.

Demand deposits of $136.4 million at June 30, 2003 increased $29.9 million or 28.0% compared to $106.6 million at December 31, 2002. This growth is attributed to the Bank’s presence within its primary market area, continued marketing efforts and three volatile account relationships. Demand deposit balances held by three, long time customers of the Bank that transact in mortgage related business

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accounts for approximately 27% of total deposits and 57% of Demand Deposits. The balances in these accounts were $77.1 million at June 30, 2003 compared to $59.6 million at December 31, 2002. This represents an increase of $17.5 million or 22.7%. These volatile account relationships are included in the volatile liability dependency report that the Bank produces on a monthly basis. Management and the Board of Directors of the Bank are keenly aware that if and when the mortgage market conditions change, these balances will be negatively impacted. This is the primary reason for the large balances maintained in over night investing in Federal Funds Sold.

Savings, NOW and money market deposits were $106.6 million at June 30, 2003 compared to $112.6 million at December 31, 2002. This represents a decrease of $5.9 million or 5.3%. Savings accounts increased by $.5 million, while NOW and money market accounts decreased by $2.6 million and $3.9 million, respectively. In August 2002, the Bank began to offer a personal insured money market account with the intent to raise deposits that otherwise generally reside in non-financial investment companies. The Bank offered a competitive introductory rate and has been successful in increasing these balances from approximately $33.3 million at December 31, 2002 to $34.1 million at June 30, 2003. The already existing business insured money market account product decreased by $4.7 million for the period ending June 30, 2003 compared to December 31, 2002.

Time deposits of >$100,000 increased by $.6 million or 7.9%. Time deposits of <$100,000 increased by $.9 million or 2.3%.

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 $280.8 million represented 97.0% of total deposits at June 30, 2003. The Company does not purchase funds through deposit brokers.

The Bank has established borrowing lines with the Federal Home Loan Bank (FHLB) of approximately $13.0 million and $30.9 million secured by loans and securities, respectively. At June 30, 2003, the Bank had borrowings of $28.5 million against those lines. The $28.5 million borrowing consists of $9.5 million maturing in April 2004 and $19 million maturing in April 2005. On February 22, 2003, the Bank repaid $9.5 million to the FHLB that matured on April 24, 2003. The cost of the pre-payment penalty plus lost opportunity income in the form of Fed Funds Sold resulted in less than $500 of cost to the Bank.

The Bank utilizes securities sold under repurchase agreements as a source of funds.  The Bank had $127,409 in securities sold under repurchase agreements at June 30, 2003 compared to $257,737 at December 31, 2002.

Capital Resources

On March 4, 2003, the Company announced that the Board of Directors of the Company approved a 5% stock dividend. The record date for the stock dividend was March 14, 2003 and the pay date was March 28, 2003. A press release was issued on March 4, 2003.

On July 19, 2002, the Board of Directors of the Company declared a two for one (2 for 1) stock split.  The record date for the stock split was August 2, 2002 and the pay date was August 15, 2002.  Holders of shares of common stock of Heritage Oaks Bancorp were issued one additional share of common stock for each share of common owned on the record date of August 2, 2002. A Press Release was issued on July 19, 2002.

In April 2002, the Company completed its offering of trust preferred securities in the amount of $8.0 million. The securities were issued by a special purpose business trust formed by the Company and were sold to a pooled investment vehicle sponsored by Sandler O’Neill & Partners, L.P. and Salomon Smith Barney Inc. in a private transaction. The securities were sold pursuant to an applicable exemption from registration under the Securities Act of 1933, as amended (the “Act”), and have not been registered under the Act.  Sandler O’Neill assisted the Company in the placement of the trust preferred securities. The securities may not be offered or sold in the United States absent registration or an applicable exemption

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from registration requirements.

The $8.0 million in trust preferred securities have a floating rate of interest, which is reset semi-annually, equal to 6-month LIBOR plus 3.70%.  The floating rate, however, may not exceed 11.0% for the first five years.

The Company is reflecting the trust preferred securities as financing debt on its consolidated balance sheet.

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.

The Company used the proceeds from the sale of the securities for general corporate purposes, including the repayment of outstanding indebtedness of $1.8 million on April 11, 2002 and capital contributions to the Bank for future growth.

The Company issued a press release announcing the sale on April 10, 2002.

The Company’s total stockholders equity was $21,840,455 at June 30, 2003 compared to $19,813,470 at December 31, 2002. The increase in capital was from net income of $1,703,859, $179,173 from stock options exercised, $116,142 net change in other comprehensive income related to unrealized security holding gain, $31,064 net change in other comprehensive income related to realized security gains, net of tax and $3,253 in cash paid in lieu of fractional shares as the result of the 5% stock dividend distributed on March 28, 2003.

On July 15, 2003, the Company received a commitment letter from Pacific Coast Bankers Bank for a revolving line of credit in the amount of $3.5 million. The Company will pledge approximately 339,332 shares or 51% of its stock in Heritage Oaks Bank as collateral. The funds will be used in the acquisition of Hacienda Bank for payment to shareholders who elect cash and/or Tier I capital in the form of Surplus to its financial subsidiaries.

Capital ratios for commercial banks in the United States are generally calculated using several 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.

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Summarized below are the Bank’s and Company’s capital ratios at June 30, 2003:

	Regulatory Standard
	Adequately Capitalized		Well Capitalized		Heritage Oaks Bank		Heritage Oaks Bancorp
Leverage Ratio	4.00	%	5.00	%	8.33	%	8.05	%
Tier One Risk Based Captial Ratio	4.00	%	6.00	%	10.67	%	10.70	%
Total Risk Based Captial Ratio	8.00	%	10.00	%	11.71	%	12.41	%

For the Company, approximately $6.3 million and $1.7 million of the trust preferred securities are accounted for as Tier I and Tier II Capital, respectively, for purposes of calculating Regulatory Capital.

RESULTS OF OPERATIONS FOR THE THREE and SIX MONTHS ENDED JUNE 30, 2002 AND 2003

Net income for the three months ending June 30, 2003 was $879,290, compared to $631,420 for the same period in 2002. This represents an increase of $247,870 or 39.3%. Per share earnings on a diluted basis for the three months ending June 30, 2003 and 2002 were $.28 and $.20, respectively. Basic per share earnings for the three months ending June 30, 2003 and 2002 were $.30 and $.22, respectively.

Net income for the six months ending June 30, 2003 was $1,703,859, compared to $1,199,641 for the same period in 2002. This represents an increase of $504,218 or 42.0%. Per share earnings on a diluted basis for the six months ending June 30, 2003 and 2002 were $.54 and $.38, respectively. Basic per share earnings for the six months ending June 30, 2003 and 2002 were $.58 and $.42, respectively.

The following discussion highlights the components of the significant increase in earnings.

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 netinterest 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.

For the six months ended June 30, 2003 the Company reported a net interest margin of 4.84% compared to 5.53% for the same period in 2002. The average yield on earning assets decreased by 71 basis points while the average cost of interest bearing liabilities increased by 4 basis points. This decrease in net interest margin is the direct result of the 50 basis point decrease in prime rate in November 2002. On June 25, 2003, the Federal Reserve Bank took additional action and prime rate decreased by 25 basis points. While the impact of the 50 basis point decrease in the fourth quarter of 2002 is evidenced by the lower net interest margin for the first six months of 2003, there could be further, albeit at a lesser amount,  decrease in the net interest margin due to the recent 25 basis point cut in prime. With the volume of earning assets continuing to increase, the Company anticipates that while the net interest margin may narrow, the amount of net interest income will rise.

Net interest income for the three months ending June 30, 2003 was $3,603,149 compared to $2,989,318 for the same period in 2002. This represents an increase of $613,831 or 20.5%. Interest income was $4,444,287 and $3,817,562 for the three months ending June 30, 2003 and 2002, respectively. Increased interest income was primarily the result of higher average loan and investment securities balances outstanding for the comparative periods of time.  Interest expense for this three month period was $841,138 at June 30, 2003 compared to $828,244 at June 30, 2002. This represents an increase of $12,894 or 1.6%. Approximately $4,500 of this increase is the result of a $4 million, 30 day advance from

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the FHLB on May 9, 2003.

Net interest income for the six months ending June 30, 2003 was $6,947,628 compared to $5,899,240 for the same period in 2002. This represents an increase of $1,048,388 or 17.8%. Interest income was $8,725,698 and $7,235,685 for the six months ending June 30, 2003 and 2002, respectively. Increased interest income was primarily the result of higher average loan and investment securities balances outstanding for the comparative periods of time.  Interest expense for this six month period was $1,778,070 at June 30, 2003 compared to $1,336,445 at June 30, 2002. Interest expense increased due to the borrowing with the FHLB and interest on the trust preferred securities that began in April 2002.

The table below sets forth the average balance sheet information, interest income and expense, average yields and rates and net interest income and margin for the six months ended June 30, 2003 and 2002.

AVERAGE BALANCE SHEET INFORMATION FOR JUNE 30,

(dollars in thousands)

	2002							2003
	Average Balance			Avg Yield Rate Paid		Amount Interest		Average Balance		Avg Yield Rate Paid		Amount Interest
Interest Earning Assets:
Time deposits with other banks	$	99		4.07	%	$	2	$	497	2.43	%	$	6
Investment securities taxable	30,186			4.84	%	724		48,323		3.58	%	858
Investment securities non-taxable	5,795			4.84	%	139		9,859		4.56	%	223
Federal funds sold	12,451			1.62	%	100		17,042		1.27	%	107
Loans (1) (2)	164,748			7.68	%	6,271		211,403		7.18	%	7,532
Total interest earning assets	213,279			6.84	%	7,236		287,124		6.13	%	8,726
Allowance for possible loan losses	-1,946							-2,481
Non-earning assets:
Cash and due from banks	17,042							20,279
Property, premises and equipment	3,585							4,582
Other assets	8,918							9,562
TOTAL ASSETS	$	240,878						$	319,066
Interest -bearing liabilities:
Savings/NOW/money market	77,738			0.56	%	216		109,828		0.67	%	367
Time deposits	46,980			2.88	%	672		45,950		2.36	%	538
Other borrowings	19,427			4.65	%	448		32,191		5.47	%	873
Total interest-bearing liabilities	144,145			1.87	%	1,336		187,969		1.91	%	1,778
Non-interest bearing liabilities:
Demand deposits	74,806							98,570
Other liabilities	1,480							3,649
Total liabilities	220,431							290,188
Trust Preferred Securities	4,000							8,000
Stockholders’ equity
Common stock	8,708							10,835
Retained earnings	7,840							9,476
Valuation Allowance Investments	(101		)					567
Total stockholders’ equity	16,447							20,878
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	240,878						$	319,066
Net Interest Income						$	5,900					$	6,948
Net Interest Margin (3)				5.53	%					4.84	%

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

(2)Loan fees of $327,048 and $406,908 for 2002 and 2003, respectively, have been included in the interest income computation.

(3)Net interest margin has been calculated by dividing the annulaized net interest income by total earning assets.

The hypothetical impacts of sudden interest rate movements applied to the Bank’s asset and liability

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balances are modeled monthly. The results of this movement indicate how much of the Bank’s net interest income is “at risk” from various sudden rate changes. Although interest rates normally would not change in this sudden manner, this exercise is valuable in identifying risk exposures. The results for the Bank’s June 30, 2003 balances indicate that the Bank’s net interest income at risk over a one year time horizon from a 1% and 2% rate movement are within the Bank’s policy guidelines for such sudden changes.

	Rates Down 2%		Rates Down 1%		Rates Up 1%		Rates Up 2%
Change in Net Interest Income	(8.27	)%	(4.56	)%	6.13	%	13.16	%

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 effecting 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 Bank’s net interest income. Therefore, the results of this analysis should not be relied upon as indicative of actual future results.

Non-interest Income

Non-interest income for the three months ending June 30, 2003 was $927,178 compared to $797,885 for the same period in 2002. That represents an increase of $129,293 or 16.2%. Non-interest income for the six months ending June 30, 2003 was $1,828,458 compared to $1,580,001 for the same period in 2002. That represents an increase of $248,457 or 15.7%.

Income from service charges on deposit accounts income was $411,638 for the three months ending June 30, 2003 compared to $326,365 for the same period in 2002. Income from service charges on deposit accounts income was $802,111 for the six months ending June 30, 2003 compared to $642,578 for the same period in 2002. The increase for both periods reported is the result of 1) a revised service charge schedule that became effective in August 2002 and 2) overall deposit growth.

Bankcard merchant fees were $23,803 for the three months ending June 30, 2003 compared to $35,822 for the same period in 2002. Bankcard merchant fees were $42,435 for the six months ending June 30, 2003 compared to $62,985 for the same period in 2002. When the Bank sold the merchant portfolio in September 1999, the compensation provisions called for payment of certain basis points on the gross sales. In September 2002, pursuant to the agreement, the basis points paid to the Bank were reduced. This will continue until August 2004 at which time the compensation will be renegotiated. Management does not believe that this change in revenue stream will have a material impact on the Company

Mortgage origination fees were $239,272 for the three months ending June 30, 2003 compared to $131,353 for the same period in 2002. Mortgage origination fees were $429,234 for the six months ending June 30, 2003 compared to $273,381 for the same period in 2002. The impact of the very robust re-finance market has had a favorable impact to this revenue stream.

Non-Interest  Expense

Non-interest expense was $2,979,768 and $2,677,534 for the three months ending June 30, 2003 and 2002, respectively. This represents an increase of $302,234 or 11.3%. Non-interest expense was $5,848,491 and $5,355,930 for the six months ending June 30, 2003 and 2002, respectively. This represents an increase of $492,561 or 9.2%.

Salaries and employee benefits expense were $1,518,718 and $1,284,100 for the three months ending June 30, 2003 and 2002, respectively. This represents an increase of $234,618 or 18.3%. Salaries and

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employee benefits expense were $3,022,018 and $2,541,161 for the six months ending June 30, 2003 and 2002, respectively. This represents an increase of $480,857 or 18.9%.

As the result of the Company’s growth, salaries have increased with the addition of, but not limited to, a Compliance Officer, Training Officer, two Credit Analysts and additional support staff for loan and deposit related activity. Approximately $264,000 of the six month ending reported figure is in salary costs. The remainder of the variance is attributed to, but not limited to, increases in employee benefits categories such as Group Health Insurance, Bonus and training.

Occupancy and equipment costs were $429,187 and $410,089 for the three months ending June 30, 2003 and 2002, respectively. This represents an increase of $19,098 or 4.7%. Occupancy and equipment costs were $818,690 and $849,739 for the six months ending June 30, 2003 and 2002, respectively. This represents a decrease of $31,049 or 3.7%. There was a small decrease in nearly every line item (i.e. Rental Costs, Small FF&E Purchases, Miscellaneous Computer Purchases, FFE Depreciation, etc) within this category that accounts for the overall decrease. No one line item had a significant variance.

Expense associated with all other non-interest expense categories was $1,031,863 and $983,345 for the three months ending June 30, 2203 and 2002, respectively. This represents an increase of $48,518 or 4.9%. Expense associated with all other non-interest expense categories was $2,007,783 and $1,965,030 for the six months ending June 30, 2203 and 2002, respectively. This represents an increase of $42,753 or 2.2%.

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 2001 to be approximately 655,600. San Luis Obispo County represents about 38% of this total with Santa Barbara County accounting for the remaining approximately 62%. 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.

The Central Coast’s leading industry is the production of wine grapes and production of premium quality wines. Over the past two years, production of new vineyard land has led to an over capacity of wine grapes.  Excess production of wine grapes has led to a decrease in prices of grapes sold and in some cases, the inability of farmers to sell grapes at any price.  Wineries on the other hand are purchasing grapes at existing contract prices and in some cases, below contract prices. Wineries are becoming select in the quality of grapes purchases, asking farmers to thin crops to produce a higher quality fruit.

The Bank recognized in 2000 that there would be over capacity in the production of wine grapes in our market area. As a result, efforts were made to move a significant portion of the vineyard development loan portfolio out of the Bank and into the government sponsored Farmer Mac program. Because of these actions on the part of the Bank, it is the opinion of Management that there would not be any negative impact from the current state of the wine grape industry.

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

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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 million. During the first six months of 2003 the average amount of borrowing on these lines was $22,099.

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. The average funds borrowed through these facilities during the first six months of 2003 was $32.0 million.

The Bank manages its liquidity by maintaining a majority of its investment portfolio in federal funds sold and other liquid investments.  At June 30, 2003, the ratio of liquid assets to deposits and other liabilities was 20.8%. The ratio of net loans to deposits, another key liquidity ratio, was 72.4% at June 30, 2003.

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.  During the two-year period ended December 31, 2002 and through the first six months of 2003 the fluctuation in interest rates creating narrowing net interest margins has been significant to the Bank’s financial position and results of operations. However, inflation has not been a factor in the customer’s ability to repay debt or in upward pressure on operation expenses.

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Item 3. Controls and Procedures

Background of Bank’s and Company’s Internal Controls/Audits

The Bank is the sole financial subsidiary of the Company. The Bank has in place extensive policies and operating procedures for loans, operations, accounting and compliance. Loans are audited twice a year for asset quality by an external firm not affiliated with the Bank’s CPA. An external compliance audit of loan regulations is scheduled to be performed annually by an external audit company that is not affiliated with the Bank’s CPA. All other compliance regulations are audited at least annually by the internal auditor. Operating policies and procedures are audited at least annually by the internal auditor. All audits, whether internal or external are reported directly to the Audit Committee of the Bank and subsequently to the Audit Committee and Board of Directors of the Company.

The Audit Committees of the Bank and Company maintain an audit calendar prepared by the internal auditor for planning purposes. This audit calendar is submitted to the Board of the Bank and the Company for approval. Annually the Company engages an external Certified Public Accounting firm to perform an independent audit conducted in accordance with generally accepted auditing standards.

Monthly certifications are performed by various departments and are reviewed and approved by a member of Senior Management. These certifications document that the assets and liabilities of the Bank, as well as other non-balance sheet areas (i.e. cashiers check supplies, safekeeping, etc) are in balance. Department certifications are due by the 10^th business day of the following month. Many balance sheet accounts are balanced daily in the normal routine of processing transactions that are applied to the un-posted general ledger accounts.

The Bank has in place a rigorous training program that is fully documented and active throughout the year. Regular training includes compliance with regulations, product knowledge and operating policies and procedures. Training is also provided for all new products or changes in methods of operation.

The Officers Loan Committee meets on a weekly basis as does Senior Management. The meetings provide an environment for current and meaningful communication between the various departments of the Bank and is a forum to discuss material actions and/or events.

Daily, the CEO and CFO review the Bank’s consolidated balance sheet and income statement for unusual postings. The relative non-complex and stable nature of the Bank’s business allows for these officers to detect anomalies and question them that same day. Because of this daily scrutiny, inadvertent material entries are corrected immediately and rarely occur on the last day of the month or quarter. Such anomalies are generally the case of a miss-encoded item that the department is already aware and not that of intentional misrepresentation. Historically, quarterly changes to the Bank’s balance sheet have been re-slotting of un-posted account loan and deposit amounts and suspense items to the appropriate categories within the general ledger. These entries, whether or not material, are researched and submitted to the Controller for adjustment within general ledger accounts for Call Report purposes.

Formation of Disclosure Controls and Procedures Officer Committee

The Disclosure Controls and Procedures Officer Committee (the “Committee”) has the responsibility for considering the materiality of information (a material fact) and determining disclosure obligations on a timely basis. The Committee has implemented disclosure controls and procedures that meet the standards established by the new rules. These controls and procedures will be reviewed and adopted by the audit committee of the Company and the Bank. The Committee will consist of members of the Officer Planning Meeting that meets weekly.

Control and Procedures

The Committee meets on the last Thursday of the quarter. Members are to provide information that is documented within the Quarterly Control and Procedures Report. This report contains attestations and, where applicable, documentation in regard to the following:

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1.Internal Controls have been reviewed within the past 90 days

2.Concern about weaknesses in internal control

3.Events that may require disclosure

4.Internal Fraud/Defalcation

5.Potential Material Losses

6.New Off-Balance Sheet Arrangements

7.Material Amounts not reflected on the general ledger

8.Material trends in operation of any Bank unit

The report is completed, signed and presented to the CEO and CFO prior to completing the first draft of the quarterly 10-QSB.  Because material issues may occur between regularly scheduled quarterly meetings, this report is to be generated by the appropriate Officers at anytime when warranted. The CEO and CFO will consult with the Company’s Disclosure Policy Committee to determine any action that is necessary.

Evaluation of disclosure controls and procedures

(a)  Within 90 days prior to the date of 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 Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

 (b)  Subsequent to the date of this evaluation, there have been no changes in the Company’s internal controls or in other factors that could significantly affect these controls, and no discoveries of any significant deficiencies or material weaknesses in such controls that would require the Company to take corrective actions.

PART 2.  OTHER INFORMATION

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a)Exhibits:
Exhibit 10.33	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Mark Stasinis, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
Exhibit 10.34	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Kelley Stolz, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
Exhibit 10.35	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Paul Deline, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
Exhibit 10.36	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Mitch Massey, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
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

(b)Reports on Form 8-K:

The Company filed the announcement of an Agreement to Merge and Plan of Reorganization

27

Form 8-K, Item 5 with the SEC on June 12, 2003.

The Company filed the announcement of second quarter 2003 earnings on registration Form 8-K, Item 9 with the SEC on July 9, 2003.

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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: July 25, 2003
	/s/ Lawrence P. Ward
	Lawrence P. Ward
	President
	Chief Executive Officer
	/s/ Margaret A. Torres
	Margaret A. Torres
	Chief Financial Officer
	Executive Vice President

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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 (Report of Unscheduled Material Events), 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.heritageoaksbank.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 Annual Report on Form 10-QSB.

Exhibit Index

Exhibit 10.33	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Mark Stasinis, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
Exhibit 10.34	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Kelley Stolz, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
Exhibit 10.35	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Paul Deline, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
Exhibit 10.36	Executive Salary Continuation Agreement dated July 1, 2003 between Heritage Oaks Bank and Mitch Massey, filed with the SEC in the Company’s 10-QSB reported for June 30, 2003.
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 the the Sarbanes-Oxley Act of 2002

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EX-10.33

Exhibit 10.33

HERITAGE OAKS BANK

SALARY CONTINUATION AGREEMENT

THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this                day of                          , 200    , by and between HERITAGE OAKS BANK, a state-chartered commercial bank located in Paso Robles, California (the “Company”), and MARK STASINIS (the “Executive”).

The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company.  This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.  The Company will pay the benefits from its general assets.

AGREEMENT

The Company and the Executive agree as follows:

Article 1

Definitions

Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1“Accrual Balance” means the amount accrued by the Company as a liability for benefits under this Agreement, as shown on Schedule A.

1.2“Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.3“Beneficiary Designation Form” means the form established from time to time by the Company that the Executive completes, signs and returns to the Company to designate one or more Beneficiaries.

1.4“Change of Control” means:

(a)A change in the ownership of the capital stock of the Corporation, whereby another corporation, person, or group acting in concert (hereinafter this Agreement shall collectively refer to any combination of these three [another corporation, person, or group acting in concert] as a “Person”) as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Corporation which constitutes fifty percent (50%) or more of the combined voting power of the Corporation’s then outstanding capital stock then entitled to vote generally in the election of directors; or

(b)The persons who were members of the Board of Directors of the Corporation immediately prior to a tender offer, exchange offer, contested election or any combination of the foregoing, cease to constitute a majority of the Board of Directors; or

(c)The adoption by the Board of Directors of the Corporation of a merger, consolidation or reorganization plan involving the Corporation in which the Corporation is not the surviving entity, or a sale of all or substantially all of the assets of the Corporation.  For purposes of this Agreement, a sale of all or substantially all of the assets of the Corporation shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Corporation that have an aggregate fair market value equal

1

to fifty percent (50%) or more of the fair market value of all of the respective gross assets of the Corporation immediately prior to such acquisition or acquisitions; or

(d)A tender offer or exchange offer is made by any Person which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Corporation’s outstanding shares of Common Stock or shares of capital stock having fifty percent (50%) or more the combined voting power of the Corporation’s then outstanding capital stock (other than an offer made by the Corporation), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; or

(e)Any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 1.4.

Notwithstanding the above, certain transfers are permitted within Section 318 of the Code and such transfers shall not be deemed a Change of Control under this Section 1.4.

1.5“Code” means the Internal Revenue Code of 1986, as amended.

1.6“Corporation” means Heritage Oaks Bancorp.

1.7“Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled.  The Executive must submit proof to the Plan Administrator of the carrier’s or Social Security Administration’s determination upon the request of the Plan Administrator.

1.8“Discount Rate” means the rate used by the Company for determining the Accrual Balance under Generally Accepted Accounting Principles (“GAAP”).  The initial rate is 7.5%, however, it may be adjusted by the Company upon written guidance from the Company’s outside auditor that an adjustment in necessary to maintain the rate within reasonable standards according to GAAP.

1.9“Early Termination” means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.

1.10“Early Termination Date” means the month, day and year in which Early Termination occurs.

1.11“Effective Date” means                                                          .

1.12“Normal Retirement Age” means the Executive’s sixty-fifth (65^th) birthday.

1.13“Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.

1.14“Plan Administrator” means the plan administrator described in Article 8.

1.15“Plan Year” means each twelve-month period commencing on the Effective Date.

1.16“Schedule A” means the schedule, as it exists from time to time, attached to this Agreement and made a part hereof, that shows benefits that may be payable under this Agreement.

1.17“Termination for Cause” has that meaning set forth in Article 5.

1.18“Termination of Employment” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.

2

Article 2

Benefits During Lifetime

2.1Normal Retirement Benefit.  Upon Termination of Employment on or after the Normal Retirement Agefor reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

2.1.1Amount of Benefit.  The annual benefit under this Section 2.1 is EIGHTEEN THOUSAND DOLLARS ($18,000).

2.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Normal Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.

2.2Early Termination Benefit.  Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

2.2.1Amount of Benefit.  The benefit under this Section 2.2 is the Early Termination Lump Sum benefit set forth on Schedule A for the Plan Year ending immediately prior to the Early Termination Date.  The Early Termination benefit is determined by vesting the Executive in ten percent (10%) of the Accrual Balance for the first Plan Year and an additional ten percent (10%) of said amount for each succeeding year thereafter until the Executive becomes one hundred percent (100%) vested in the Accrual Balance.

2.2.2Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following the Early Termination Date.

2.3Disability Benefit.  If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

2.3.1Amount of Benefit.  The benefit under this Section 2.3 is the Disability Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Disability benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance, and continuing to apply the Discount Rate to the Accrual Balance for the duration of payments.

2.3.2Payment of Benefit.  The Company shall pay the benefit to the Executive in one hundred eighty (180) equal consecutive installments commencing with the first of the month following Normal Retirement Age.

2.4Change of Control Benefit.  Upon a Change of Control, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

2.4.1Amount of Benefit.  The benefit under this Section 2.4 is the Change of Control Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Change of Control benefit is determined by vesting the Executive in one hundred percent (100%) of the Normal Retirement Benefit amount described in Section 2.1.1.

2.4.2Payment of Benefit. The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing with the first of the month following Normal

3

Retirement Age.  The annual benefit shall be paid to the Executive for a period of fifteen (15) years.

Article 3

Death Benefits

3.1Death During Active Service.  If the Executive dies while in the active service of the Company, the Company shall pay to the Beneficiary the benefit described in this Section 3.1.  This benefit shall be paid in lieu of the benefits under Article 2.

3.1.1Amount of Benefit.  The annual benefit under this Section 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.

3.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Beneficiary in twelve (12) equal monthly installments commencing with the month following the Executive’s death.  The annual benefit shall be paid to the Beneficiary for a period of fifteen (15) years.

3.2Death During Payment of a Benefit.  If the Executive dies after any benefit payments have commenced under Article 2 of this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

3.3Death After Termination of Employment But Before Payment of a Benefit Commences.If the Executive is entitled to any benefit payments under Article 2 of this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the same benefit payments to the Beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.

Article 4

Beneficiaries

4.1Beneficiary Designation.  The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under this Agreement to a Beneficiary upon the death of the Executive.  The Beneficiary designated under this Agreement may be the same as or different from the Beneficiary designation under any other plan of the Company in which the Executive participates.

4.2Beneficiary Designation: Change.  The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent.  The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.  The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.

4.3Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

4.4No Beneficiary Designation.  If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary.  If the Executive has no surviving spouse, the benefits shall be made to the

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personal representative of the Executive’s estate.

4.5Facility of Payment.  If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.

Article 5

General Limitations

5.1 Termination for Cause.  Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company’s Board of Directors terminates the Executive’s employment for:

(a) Gross negligence or gross neglect of duties to the Company;

(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or

(c) Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive’s employment and resulting in a material adverse effect on the Company.

5.2Suicide or Misstatement.  The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the Effective Date.  In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application for life insurance owned by the Company on the Executive’s life.

5.4Excess Parachute Payment.  Notwithstanding any provision of this Agreement to the contrary, to the extent any benefit would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall reduce the benefit paid under this Agreement to the extent it would not result in any such excise tax.

Article 6

Claims And Review Procedures

6.1Claims Procedure.  An Executive or Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

6.1.1Initiation – Written Claim.  The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits.

6.1.2Timing of Plan Administrator Response.  The Plan Administrator shall respond to such claimant within 90 days after receiving the claim.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.1.3Notice of Decision.  If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial.  The Plan Administrator shall

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write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed;

(d)An explanation of the Agreement’s review procedures and the time limits applicable to such procedures; and

(e)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

6.2Review Procedure.  If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows:

6.2.1Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a written request for review.

6.2.2Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

6.2.3Considerations on Review.  In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

6.2.4Timing of Plan Administrator Response.  The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.2.5Notice of Decision.  The Plan Administrator shall notify the claimant in writing of its decision on review.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits; and

(d)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

Article 7

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.  Provided, however, if the Company’s Board of Directors determines that the Executive is no longer a member of a select group of management or highly compensated employees for reasons other

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than death, Disability or retirement, the Company may amend or terminate this Agreement.  Upon such amendment or termination the Company shall pay benefits to the Executive as if Early Termination occurred on the date of such amendment or termination, regardless of whether Early Termination actually occurs.

Article 8

Administration of Agreement

8.1Plan Administrator Duties.  This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint.  The Executive may be a member of the Plan Administrator.  The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administra­tion of this Agreement and (ii) decide or resolve any and all ques­tions including interpretations of this Agreement, as may arise in connection with the Agreement.

8.2Agents.  In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.

8.3Binding Effect of Decisions.  The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.

8.4Indemnity of Plan Administrator.  The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5Company Information.  To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the Compensation of its Participants, the date and circum­stances of the retirement, Disability, death or Termina­tion of Employment of its Participants, and such other pertinent information as the Plan Administrator may reasonably require.

Article 9

Miscellaneous

9.1Binding Effect.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.

9.2No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

9.3Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

9.4Tax Withholding.  The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.5Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.

9.6Unfunded Arrangement.  The Executive and Beneficiary are general unsecured creditors of the

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Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive’s life is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.

9.7Reorganization.The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.  Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.

9.8Entire Agreement.This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

9.9Interpretation.  Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.

9.10Alternative Action.  In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company.

9.11Headings.  Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

9.12Validity.  In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

9.13Notice.  Any notice or filing required or permitted to be given to the Company under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.

IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:		COMPANY:
		HERITAGE OAKS BANK
		By
Mark Stasinis	Title

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EX-10.34

Exhibit 10.34

HERITAGE OAKS BANK

SALARY CONTINUATION AGREEMENT

THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this                day of                    , 200   , by and between HERITAGE OAKS BANK, a state-chartered commercial bank located in Paso Robles, California (the “Company”), and KELLEY STOLZ (the “Executive”).

The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company.  This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.  The Company will pay the benefits from its general assets.

AGREEMENT

The Company and the Executive agree as follows:

Article 1

Definitions

Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1“Accrual Balance” means the amount accrued by the Company as a liability for benefits under this Agreement, as shown on Schedule A.

1.2“Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.3“Beneficiary Designation Form” means the form established from time to time by the Company that the Executive completes, signs and returns to the Company to designate one or more Beneficiaries.

1.4“Change of Control” means:

(a)A change in the ownership of the capital stock of the Corporation, whereby another corporation, person, or group acting in concert (hereinafter this Agreement shall collectively refer to any combination of these three [another corporation, person, or group acting in concert] as a “Person”) as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Corporation which constitutes fifty percent (50%) or more of the combined voting power of the Corporation’s then outstanding capital stock then entitled to vote generally in the election of directors; or

(b)The persons who were members of the Board of Directors of the Corporation immediately prior to a tender offer, exchange offer, contested election or any combination of the foregoing, cease to constitute a majority of the Board of Directors; or

(c)The adoption by the Board of Directors of the Corporation of a merger, consolidation or reorganization plan involving the Corporation in which the Corporation is not the surviving entity, or a sale of all or substantially all of the assets of the Corporation.  For purposes of this Agreement, a sale of all or substantially all of the assets of the Corporation shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Corporation that have an aggregate fair market value equal

1

to fifty percent (50%) or more of the fair market value of all of the respective gross assets of the Corporation immediately prior to such acquisition or acquisitions; or

(d)A tender offer or exchange offer is made by any Person which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Corporation’s outstanding shares of Common Stock or shares of capital stock having fifty percent (50%) or more the combined voting power of the Corporation’s then outstanding capital stock (other than an offer made by the Corporation), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; or

(e)Any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 1.4.

Notwithstanding the above, certain transfers are permitted within Section 318 of the Code and such transfers shall not be deemed a Change of Control under this Section 1.4.

1.5“Code” means the Internal Revenue Code of 1986, as amended.

1.6“Corporation” means Heritage Oaks Bancorp.

1.7“Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled.  The Executive must submit proof to the Plan Administrator of the carrier’s or Social Security Administration’s determination upon the request of the Plan Administrator.

1.8“Discount Rate” means the rate used by the Company for determining the Accrual Balance under Generally Accepted Accounting Principles (“GAAP”).  The initial rate is 7.5%, however, it may be adjusted by the Company upon written guidance from the Company’s outside auditor that an adjustment in necessary to maintain the rate within reasonable standards according to GAAP.

1.9“Early Termination” means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.

1.10“Early Termination Date” means the month, day and year in which Early Termination occurs.

1.11“Effective Date” means                                                    .

1.12“Normal Retirement Age” means the Executive’s sixty-fifth (65^th) birthday.

1.13“Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.

1.14“Plan Administrator” means the plan administrator described in Article 8.

1.15“Plan Year” means each twelve-month period commencing on the Effective Date.

1.16“Schedule A” means the schedule, as it exists from time to time, attached to this Agreement and made a part hereof, that shows benefits that may be payable under this Agreement.

1.17“Termination for Cause” has that meaning set forth in Article 5.

1.18“Termination of Employment” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.

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Article 2

Benefits During Lifetime

2.1Normal Retirement Benefit.  Upon Termination of Employment on or after the Normal Retirement Agefor reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

2.1.1Amount of Benefit.  The annual benefit under this Section 2.1 is EIGHTEEN THOUSAND DOLLARS ($18,000).

2.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Normal Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.

2.2Early Termination Benefit.  Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

2.2.1Amount of Benefit.  The benefit under this Section 2.2 is the Early Termination Lump Sum benefit set forth on Schedule A for the Plan Year ending immediately prior to the Early Termination Date.  The Early Termination benefit is determined by vesting the Executive in ten percent (10%) of the Accrual Balance for the first Plan Year and an additional ten percent (10%) of said amount for each succeeding year thereafter until the Executive becomes one hundred percent (100%) vested in the Accrual Balance.

2.2.2Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following the Early Termination Date.

2.3Disability Benefit.  If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

2.3.1Amount of Benefit.  The benefit under this Section 2.3 is the Disability Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Disability benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance, and continuing to apply the Discount Rate to the Accrual Balance for the duration of payments.

2.3.2Payment of Benefit.  The Company shall pay the benefit to the Executive in one hundred eighty (180) equal consecutive installments commencing with the first of the month following Normal Retirement Age.

2.4Change of Control Benefit.  Upon a Change of Control, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

2.4.1Amount of Benefit.  The benefit under this Section 2.4 is the Change of Control Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Change of Control benefit is determined by vesting the Executive in one hundred percent (100%) of the Normal Retirement Benefit amount described in Section 2.1.1.

2.4.2Payment of Benefit. The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing with the first of the  month following Normal

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Retirement Age.  The annual benefit shall be paid to the Executive for a period of fifteen (15) years.

Article 3

Death Benefits

3.1Death During Active Service.  If the Executive dies while in the active service of the Company, the Company shall pay to the Beneficiary the benefit described in this Section 3.1.  This benefit shall be paid in lieu of the benefits under Article 2.

3.1.1Amount of Benefit.  The annual benefit under this Section 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.

3.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Beneficiary in twelve (12) equal monthly installments commencing with the month following the Executive’s death.  The annual benefit shall be paid to the Beneficiary for a period of fifteen (15) years.

3.2Death During Payment of a Benefit.  If the Executive dies after any benefit payments have commenced under Article 2 of this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

3.3Death After Termination of Employment But Before Payment of a Benefit Commences.If the Executive is entitled to any benefit payments under Article 2 of this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the same benefit payments to the Beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.

Article 4

Beneficiaries

4.1Beneficiary Designation.  The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under this Agreement to a Beneficiary upon the death of the Executive.  The Beneficiary designated under this Agreement may be the same as or different from the Beneficiary designation under any other plan of the Company in which the Executive participates.

4.2Beneficiary Designation: Change.  The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent.  The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.  The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.

4.3Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

4.4No Beneficiary Designation.  If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary.  If the Executive has no surviving spouse, the benefits shall be made to the

4

personal representative of the Executive’s estate.

4.5Facility of Payment.  If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.

Article 5

General Limitations

5.1 Termination for Cause.  Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company’s Board of Directors terminates the Executive’s employment for:

(a)Gross negligence or gross neglect of duties to the Company;

(b)Commission of a felony or of a gross misdemeanor involving moral turpitude; or

(c)Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive’s employment and resulting in a material adverse effect on the Company.

5.2Suicide or Misstatement.  The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the Effective Date.  In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application for life insurance owned by the Company on the Executive’s life.

5.4Excess Parachute Payment.  Notwithstanding any provision of this Agreement to the contrary, to the extent any benefit would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall reduce the benefit paid under this Agreement to the extent it would not result in any such excise tax.

Article 6

Claims And Review Procedures

6.1Claims Procedure.  An Executive or Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

6.1.1Initiation – Written Claim.  The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits.

6.1.2Timing of Plan Administrator Response.  The Plan Administrator shall respond to such claimant within 90 days after receiving the claim.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.1.3Notice of Decision.  If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial.  The Plan Administrator shall

5

write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed;

(d)An explanation of the Agreement’s review procedures and the time limits applicable to such procedures; and

(e)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

6.2Review Procedure.  If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows:

6.2.1Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a written request for review.

6.2.2Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

6.2.3Considerations on Review.  In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

6.2.4Timing of Plan Administrator Response.  The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.2.5Notice of Decision.  The Plan Administrator shall notify the claimant in writing of its decision on review.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits; and

(d)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

Article 7

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.  Provided, however, if the Company’s Board of Directors determines that the Executive is no longer a member of a select group of management or highly compensated employees for reasons other

6

than death, Disability or retirement, the Company may amend or terminate this Agreement.  Upon such amendment or termination the Company shall pay benefits to the Executive as if Early Termination occurred on the date of such amendment or termination, regardless of whether Early Termination actually occurs.

Article 8

Administration of Agreement

8.1Plan Administrator Duties.  This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint.  The Executive may be a member of the Plan Administrator.  The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administra­tion of this Agreement and (ii) decide or resolve any and all ques­tions including interpretations of this Agreement, as may arise in connection with the Agreement.

8.2Agents.  In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.

8.3Binding Effect of Decisions.  The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.

8.4Indemnity of Plan Administrator.  The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5Company Information.  To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the Compensation of its Participants, the date and circum­stances of the retirement, Disability, death or Termina­tion of Employment of its Participants, and such other pertinent information as the Plan Administrator may reasonably require.

Article 9

Miscellaneous

9.1Binding Effect.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.

9.2No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

9.3Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

9.4Tax Withholding.  The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.5Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.

9.6Unfunded Arrangement.  The Executive and Beneficiary are general unsecured creditors of the

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Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive’s life is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.

9.7Reorganization.The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.  Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.

9.8Entire Agreement.This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

9.9Interpretation.  Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.

9.10Alternative Action.  In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company.

9.11Headings.  Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

9.12Validity.  In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

9.13Notice.  Any notice or filing required or permitted to be given to the Company under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.

IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:	COMPANY:
	HERITAGE OAKS BANK
	By
Kelley Stolz

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EX-10.35

Exhibit 10.35

HERITAGE OAKS BANK

SALARY CONTINUATION AGREEMENT

THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this                   day of                             , 200   , by and between HERITAGE OAKS BANK, a state-chartered commercial bank located in Paso Robles, California (the “Company”), and PAUL DELINE (the “Executive”).

The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company.  This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.  The Company will pay the benefits from its general assets.

AGREEMENT

The Company and the Executive agree as follows:

Article 1

Definitions

Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1“Accrual Balance” means the amount accrued by the Company as a liability for benefits under this Agreement, as shown on Schedule A.

1.2“Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.3“Beneficiary Designation Form” means the form established from time to time by the Company that the Executive completes, signs and returns to the Company to designate one or more Beneficiaries.

1.4“Change of Control” means:

(a)A change in the ownership of the capital stock of the Corporation, whereby another corporation, person, or group acting in concert (hereinafter this Agreement shall collectively refer to any combination of these three [another corporation, person, or group acting in concert] as a “Person”) as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Corporation which constitutes fifty percent (50%) or more of the combined voting power of the Corporation’s then outstanding capital stock then entitled to vote generally in the election of directors; or

(b)The persons who were members of the Board of Directors of the Corporation immediately prior to a tender offer, exchange offer, contested election or any combination of the foregoing, cease to constitute a majority of the Board of Directors; or

(c)The adoption by the Board of Directors of the Corporation of a merger, consolidation or reorganization plan involving the Corporation in which the Corporation is not the surviving entity, or a sale of all or substantially all of the assets of the Corporation.  For purposes of this Agreement, a sale of all or substantially all of the assets of the Corporation shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Corporation that have an aggregate fair market value equal

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to fifty percent (50%) or more of the fair market value of all of the respective gross assets of the Corporation immediately prior to such acquisition or acquisitions; or

(d)A tender offer or exchange offer is made by any Person which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Corporation’s outstanding shares of Common Stock or shares of capital stock having fifty percent (50%) or more the combined voting power of the Corporation’s then outstanding capital stock (other than an offer made by the Corporation), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; or

(e)Any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 1.4.

Notwithstanding the above, certain transfers are permitted within Section 318 of the Code and such transfers shall not be deemed a Change of Control under this Section 1.4.

1.5“Code” means the Internal Revenue Code of 1986, as amended.

1.6“Corporation” means Heritage Oaks Bancorp.

1.7“Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled.  The Executive must submit proof to the Plan Administrator of the carrier’s or Social Security Administration’s determination upon the request of the Plan Administrator.

1.8“Discount Rate” means the rate used by the Company for determining the Accrual Balance under Generally Accepted Accounting Principles (“GAAP”).  The initial rate is 7.5%, however, it may be adjusted by the Company upon written guidance from the Company’s outside auditor that an adjustment in necessary to maintain the rate within reasonable standards according to GAAP.

1.9“Early Termination” means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.

1.10“Early Termination Date” means the month, day and year in which Early Termination occurs.

1.11“Effective Date” means                                                         .

1.12“Normal Retirement Age” means the Executive’s sixty-fifth (65^th) birthday.

1.13“Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.

1.14“Plan Administrator” means the plan administrator described in Article 8.

1.15“Plan Year” means each twelve-month period commencing on the Effective Date.

1.16“Schedule A” means the schedule, as it exists from time to time, attached to this Agreement and made a part hereof, that shows benefits that may be payable under this Agreement.

1.17“Termination for Cause” has that meaning set forth in Article 5.

1.18“Termination of Employment” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.

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Article 2

Benefits During Lifetime

2.1Normal Retirement Benefit.  Upon Termination of Employment on or after the Normal Retirement Agefor reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

2.1.1Amount of Benefit.  The annual benefit under this Section 2.1 is EIGHTEEN THOUSAND DOLLARS ($18,000).

2.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Normal Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.

2.2Early Termination Benefit.  Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

2.2.1Amount of Benefit.  The benefit under this Section 2.2 is the Early Termination Lump Sum benefit set forth on Schedule A for the Plan Year ending immediately prior to the Early Termination Date.  The Early Termination benefit is determined by vesting the Executive in ten percent (10%) of the Accrual Balance for the first Plan Year and an additional ten percent (10%) of said amount for each succeeding year thereafter until the Executive becomes one hundred percent (100%) vested in the Accrual Balance.

2.2.2Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following the Early Termination Date.

2.3Disability Benefit.  If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

2.3.1Amount of Benefit.  The benefit under this Section 2.3 is the Disability Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Disability benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance, and continuing to apply the Discount Rate to the Accrual Balance for the duration of payments.

2.3.2Payment of Benefit.  The Company shall pay the benefit to the Executive in one hundred eighty (180) equal consecutive installments commencing with the first of the month following Normal Retirement Age.

2.4Change of Control Benefit.  Upon a Change of Control, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

2.4.1Amount of Benefit.  The benefit under this Section 2.4 is the Change of Control Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Change of Control benefit is determined by vesting the Executive in one hundred percent (100%) of the Normal Retirement Benefit amount described in Section 2.1.1.

2.4.2Payment of Benefit. The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing with the first of the  month following Normal

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Retirement Age.  The annual benefit shall be paid to the Executive for a period of fifteen (15) years.

Article 3

Death Benefits

3.1Death During Active Service.  If the Executive dies while in the active service of the Company, the Company shall pay to the Beneficiary the benefit described in this Section 3.1.  This benefit shall be paid in lieu of the benefits under Article 2.

3.1.1Amount of Benefit.  The annual benefit under this Section 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.

3.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Beneficiary in twelve (12) equal monthly installments commencing with the month following the Executive’s death.  The annual benefit shall be paid to the Beneficiary for a period of fifteen (15) years.

3.2Death During Payment of a Benefit.  If the Executive dies after any benefit payments have commenced under Article 2 of this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

3.3Death After Termination of Employment But Before Payment of a Benefit Commences.If the Executive is entitled to any benefit payments under Article 2 of this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the same benefit payments to the Beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.

Article 4

Beneficiaries

4.1Beneficiary Designation.  The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under this Agreement to a Beneficiary upon the death of the Executive.  The Beneficiary designated under this Agreement may be the same as or different from the Beneficiary designation under any other plan of the Company in which the Executive participates.

4.2Beneficiary Designation: Change.  The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent.  The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.  The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.

4.3Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

4.4No Beneficiary Designation.  If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary.  If the Executive has no surviving spouse, the benefits shall be made to the

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personal representative of the Executive’s estate.

4.5Facility of Payment.  If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.

Article 5

General Limitations

5.1Termination for Cause.  Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company’s Board of Directors terminates the Executive’s employment for:

(a)Gross negligence or gross neglect of duties to the Company;

(b)Commission of a felony or of a gross misdemeanor involving moral turpitude; or

(c)Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive’s employment and resulting in a material adverse effect on the Company.

5.2Suicide or Misstatement.  The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the Effective Date.  In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application for life insurance owned by the Company on the Executive’s life.

5.4Excess Parachute Payment.  Notwithstanding any provision of this Agreement to the contrary, to the extent any benefit would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall reduce the benefit paid under this Agreement to the extent it would not result in any such excise tax.

Article 6

Claims And Review Procedures

6.1Claims Procedure.  An Executive or Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

6.1.1Initiation – Written Claim.  The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits.

6.1.2Timing of Plan Administrator Response.  The Plan Administrator shall respond to such claimant within 90 days after receiving the claim.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.1.3Notice of Decision.  If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial.  The Plan Administrator shall

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write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed;

(d)An explanation of the Agreement’s review procedures and the time limits applicable to such procedures; and

(e)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

6.2Review Procedure.  If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows:

6.2.1Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a written request for review.

6.2.2Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

6.2.3Considerations on Review.  In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

6.2.4Timing of Plan Administrator Response.  The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.2.5Notice of Decision.  The Plan Administrator shall notify the claimant in writing of its decision on review.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits; and

(d)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

Article 7

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.  Provided, however, if the Company’s Board of Directors determines that the Executive is no longer a member of a select group of management or highly compensated employees for reasons other

6

than death, Disability or retirement, the Company may amend or terminate this Agreement.  Upon such amendment or termination the Company shall pay benefits to the Executive as if Early Termination occurred on the date of such amendment or termination, regardless of whether Early Termination actually occurs.

Article 8

Administration of Agreement

8.1Plan Administrator Duties.  This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint.  The Executive may be a member of the Plan Administrator.  The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administra­tion of this Agreement and (ii) decide or resolve any and all ques­tions including interpretations of this Agreement, as may arise in connection with the Agreement.

8.2Agents.  In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.

8.3Binding Effect of Decisions.  The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.

8.4Indemnity of Plan Administrator.  The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5Company Information.  To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the Compensation of its Participants, the date and circum­stances of the retirement, Disability, death or Termina­tion of Employment of its Participants, and such other pertinent information as the Plan Administrator may reasonably require.

Article 9

Miscellaneous

9.1Binding Effect.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.

9.2No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

9.3Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

9.4Tax Withholding.  The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.5Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.

9.6Unfunded Arrangement.  The Executive and Beneficiary are general unsecured creditors of the

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Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive’s life is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.

9.7Reorganization.The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.  Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.

9.8Entire Agreement.This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

9.9Interpretation.  Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.

9.10Alternative Action.  In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company.

9.11Headings.  Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

9.12Validity.  In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

9.13Notice.  Any notice or filing required or permitted to be given to the Company under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.

IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:		COMPANY:
		HERITAGE OAKS BANK
		By
Paul DeLine	Title

8

EX-10.36

Exhibit 10.36

HERITAGE OAKS BANK

SALARY CONTINUATION AGREEMENT

THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this                   day of                                , 200     , by and between HERITAGE OAKS BANK, a state-chartered commercial bank located in Paso Robles, California (the “Company”), and MITCH MASSEY (the “Executive”).

The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company.  This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.  The Company will pay the benefits from its general assets.

AGREEMENT

The Company and the Executive agree as follows:

Article 1

Definitions

Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1“Accrual Balance” means the amount accrued by the Company as a liability for benefits under this Agreement, as shown on Schedule A.

1.2“Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.3“Beneficiary Designation Form” means the form established from time to time by the Company that the Executive completes, signs and returns to the Company to designate one or more Beneficiaries.

1.4“Change of Control” means:

(a)A change in the ownership of the capital stock of the Corporation, whereby another corporation, person, or group acting in concert (hereinafter this Agreement shall collectively refer to any combination of these three [another corporation, person, or group acting in concert] as a “Person”) as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Corporation which constitutes fifty percent (50%) or more of the combined voting power of the Corporation’s then outstanding capital stock then entitled to vote generally in the election of directors; or

(b)The persons who were members of the Board of Directors of the Corporation immediately prior to a tender offer, exchange offer, contested election or any combination of the foregoing, cease to constitute a majority of the Board of Directors; or

(c)The adoption by the Board of Directors of the Corporation of a merger, consolidation or reorganization plan involving the Corporation in which the Corporation is not the surviving entity, or a sale of all or substantially all of the assets of the Corporation.  For purposes of this Agreement, a sale of all or substantially all of the assets of the Corporation shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Corporation that have an aggregate fair market value equal

1

to fifty percent (50%) or more of the fair market value of all of the respective gross assets of the Corporation immediately prior to such acquisition or acquisitions; or

(d)A tender offer or exchange offer is made by any Person which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Corporation’s outstanding shares of Common Stock or shares of capital stock having fifty percent (50%) or more the combined voting power of the Corporation’s then outstanding capital stock (other than an offer made by the Corporation), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; or

(e)Any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 1.4.

Notwithstanding the above, certain transfers are permitted within Section 318 of the Code and such transfers shall not be deemed a Change of Control under this Section 1.4.

1.5“Code” means the Internal Revenue Code of 1986, as amended.

1.6“Corporation” means Heritage Oaks Bancorp.

1.7“Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled.  The Executive must submit proof to the Plan Administrator of the carrier’s or Social Security Administration’s determination upon the request of the Plan Administrator.

1.8“Discount Rate” means the rate used by the Company for determining the Accrual Balance under Generally Accepted Accounting Principles (“GAAP”).  The initial rate is 7.5%, however, it may be adjusted by the Company upon written guidance from the Company’s outside auditor that an adjustment in necessary to maintain the rate within reasonable standards according to GAAP.

1.9“Early Termination” means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.

1.10“Early Termination Date” means the month, day and year in which Early Termination occurs.

1.11“Effective Date” means                                                   .

1.12“Normal Retirement Age” means the Executive’s sixty-fifth (65^th) birthday.

1.13“Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.

1.14“Plan Administrator” means the plan administrator described in Article 8.

1.15“Plan Year” means each twelve-month period commencing on the Effective Date.

1.16“Schedule A” means the schedule, as it exists from time to time, attached to this Agreement and made a part hereof, that shows benefits that may be payable under this Agreement.

1.17“Termination for Cause” has that meaning set forth in Article 5.

1.18“Termination of Employment” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.

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Article 2

Benefits During Lifetime

2.1Normal Retirement Benefit.  Upon Termination of Employment on or after the Normal Retirement Agefor reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

2.1.1Amount of Benefit.  The annual benefit under this Section 2.1 is EIGHTEEN THOUSAND DOLLARS ($18,000).

2.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Normal Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.

2.2Early Termination Benefit.  Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

2.2.1Amount of Benefit.  The benefit under this Section 2.2 is the Early Termination Lump Sum benefit set forth on Schedule A for the Plan Year ending immediately prior to the Early Termination Date.  The Early Termination benefit is determined by vesting the Executive in ten percent (10%) of the Accrual Balance for the first Plan Year and an additional ten percent (10%) of said amount for each succeeding year thereafter until the Executive becomes one hundred percent (100%) vested in the Accrual Balance.

2.2.2Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following the Early Termination Date.

2.3Disability Benefit.  If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

2.3.1Amount of Benefit.  The benefit under this Section 2.3 is the Disability Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Disability benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance, and continuing to apply the Discount Rate to the Accrual Balance for the duration of payments.

2.3.2Payment of Benefit.  The Company shall pay the benefit to the Executive in one hundred eighty (180) equal consecutive installments commencing with the first of the month following Normal Retirement Age.

2.4Change of Control Benefit.  Upon a Change of Control, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

2.4.1Amount of Benefit.  The benefit under this Section 2.4 is the Change of Control Installment benefit set forth on Schedule A for the Plan Year ending immediately prior to the Executive’s Termination of Employment (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1).  The Change of Control benefit is determined by vesting the Executive in one hundred percent (100%) of the Normal Retirement Benefit amount described in Section 2.1.1.

2.4.2Payment of Benefit. The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing with the first of the  month following Normal

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Retirement Age.  The annual benefit shall be paid to the Executive for a period of fifteen (15) years.

Article 3

Death Benefits

3.1Death During Active Service.  If the Executive dies while in the active service of the Company, the Company shall pay to the Beneficiary the benefit described in this Section 3.1.  This benefit shall be paid in lieu of the benefits under Article 2.

3.1.1Amount of Benefit.  The annual benefit under this Section 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.

3.1.2Payment of Benefit.  The Company shall pay the annual benefit to the Beneficiary in twelve (12) equal monthly installments commencing with the month following the Executive’s death.  The annual benefit shall be paid to the Beneficiary for a period of fifteen (15) years.

3.2Death During Payment of a Benefit.  If the Executive dies after any benefit payments have commenced under Article 2 of this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

3.3Death After Termination of Employment But Before Payment of a Benefit Commences.If the Executive is entitled to any benefit payments under Article 2 of this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the same benefit payments to the Beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.

Article 4

Beneficiaries

4.1Beneficiary Designation.  The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under this Agreement to a Beneficiary upon the death of the Executive.  The Beneficiary designated under this Agreement may be the same as or different from the Beneficiary designation under any other plan of the Company in which the Executive participates.

4.2Beneficiary Designation: Change.  The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent.  The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.  The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.

4.3Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

4.4No Beneficiary Designation.  If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary.  If the Executive has no surviving spouse, the benefits shall be made to the

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personal representative of the Executive’s estate.

4.5Facility of Payment.  If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.

Article 5

General Limitations

5.1Termination for Cause.  Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company’s Board of Directors terminates the Executive’s employment for:

(a)Gross negligence or gross neglect of duties to the Company;

(b)Commission of a felony or of a gross misdemeanor involving moral turpitude; or

(c)Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive’s employment and resulting in a material adverse effect on the Company.

5.2Suicide or Misstatement.  The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the Effective Date.  In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application for life insurance owned by the Company on the Executive’s life.

5.4Excess Parachute Payment.  Notwithstanding any provision of this Agreement to the contrary, to the extent any benefit would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall reduce the benefit paid under this Agreement to the extent it would not result in any such excise tax.

Article 6

Claims And Review Procedures

6.1Claims Procedure.  An Executive or Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

6.1.1Initiation – Written Claim.  The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits.

6.1.2Timing of Plan Administrator Response.  The Plan Administrator shall respond to such claimant within 90 days after receiving the claim.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.1.3Notice of Decision.  If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial.  The Plan Administrator shall

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write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed;

(d)An explanation of the Agreement’s review procedures and the time limits applicable to such procedures; and

(e)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

6.2Review Procedure.  If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows:

6.2.1Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a written request for review.

6.2.2Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

6.2.3Considerations on Review.  In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

6.2.4Timing of Plan Administrator Response.  The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

6.2.5Notice of Decision.  The Plan Administrator shall notify the claimant in writing of its decision on review.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)The specific reasons for the denial;

(b)A reference to the specific provisions of the Agreement on which the denial is based;

(c)A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits; and

(d)A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

Article 7

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.  Provided, however, if the Company’s Board of Directors determines that the Executive is no longer a member of a select group of management or highly compensated employees for reasons other

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than death, Disability or retirement, the Company may amend or terminate this Agreement.  Upon such amendment or termination the Company shall pay benefits to the Executive as if Early Termination occurred on the date of such amendment or termination, regardless of whether Early Termination actually occurs.

Article 8

Administration of Agreement

8.1Plan Administrator Duties.  This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint.  The Executive may be a member of the Plan Administrator.  The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administra­tion of this Agreement and (ii) decide or resolve any and all ques­tions including interpretations of this Agreement, as may arise in connection with the Agreement.

8.2Agents.  In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.

8.3Binding Effect of Decisions.  The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.

8.4Indemnity of Plan Administrator.  The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5Company Information.  To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the Compensation of its Participants, the date and circum­stances of the retirement, Disability, death or Termina­tion of Employment of its Participants, and such other pertinent information as the Plan Administrator may reasonably require.

Article 9

Miscellaneous

9.1Binding Effect.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.

9.2No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

9.3Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

9.4Tax Withholding.  The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.5Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.

9.6Unfunded Arrangement.  The Executive and Beneficiary are general unsecured creditors of the

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Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive’s life is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.

9.7Reorganization.The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.  Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.

9.8Entire Agreement.This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

9.9Interpretation.  Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.

9.10Alternative Action.  In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company.

9.11Headings.  Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

9.12Validity.  In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

9.13Notice.  Any notice or filing required or permitted to be given to the Company under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.

IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:		COMPANY:
		HERITAGE OAKS BANK
		By
Mitch Massey	Title

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Lawrence P. Ward, Chief Executive Officer, certify that:

1.I have reviewed this quarterly report on Form 10-QSB of Heritage Oaks Bancorp;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to filing date of this quarterly report (the “Evaluation Date”); and

c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and audit committee of registrant’s board of directors (or persons performing the equivalent function);

a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:       July 25, 2003
	/s/ Lawrence P. Ward
	Lawrence P. Ward
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Margaret A. Torres, Chief Financial Officer, certify that:

7.I have reviewed this quarterly report on Form 10-QSB of Heritage Oaks Bancorp;

8.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

9.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

10.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to filing date of this quarterly report (the “Evaluation Date”); and

c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

11.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and audit committee of registrant’s board of directors (or persons performing the equivalent function);

a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

12.The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:       July 25, 2003
	/s/ Margaret A. Torres
	Margaret A. Torres
	Chief Financial Officer

EX-32.1

Exhibit 32.1

HERITAGE OAKS BANCORP

Quarterly Report on Form 10QSB
for the Quarter ended June 30, 2003

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, who is the Chief Executive Officer of Heritage Oaks Bancorp (the “Company”), hereby certify that (i) the Quarterly Report on Form 10QSB for the quarter ended June 30, 2003, as filed by the Company with the Securities and Exchange Commission (the “Quarterly Report”), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  July 25, 2003	/s/ Lawrence P. Ward
	Lawrence P. Ward,
	President and Chief Executive Officer

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EX-32.2

Exhibit 32.2

HERITAGE OAKS BANCORP

Quarterly Report on Form 10QSB

for the Quarter ended June 30, 2003

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, who is the Chief Financial Officer of Heritage Oaks Bancorp (the “Company”), hereby certify that (i) the Quarterly Report on Form 10QSB for the quarter ended June 30, 2003, as filed by the Company with the Securities and Exchange Commission (the “Quarterly Report”), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  July 25, 2003	/s/ Margaret A. Torres
	Margaret A. Torres
	Executive Vice President and Chief Financial Officer

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