SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

[  ] 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 x    NO o

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

YES o    NO x

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

As of July 21, 2005 there were approximately 4,114,458 shares outstanding of the Registrant’s common stock.

Page 1

TABLE OF CONTENTS

Part 1. Financial Information
	Item 1. Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Other Comprehensive Income
	Consolidated Statement of Changes in Stockholders’ Equity
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure about Market Risk
	Item 4. Controls and Procedures
Part 2. Other Information
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits
Signatures
Certifications
Exhibits

Page 2

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
(in thousands)
	30-Jun-05		31-Dec-04
ASSETS	Un-audited		(1)
Cash and due from banks	$	16,460	$	13,092
Federal funds sold		30,845		5,775
Money market funds		-		3,000
Total cash and cash equivalents		47,305		21,867
Interest bearing deposits other banks		398		498
Securities Available for sale		49,960		57,394
Federal Home Loan Bank Stock, at cost		1,844		1,809
Loans Held For Sale		7,444		2,253
Loans, net		362,103		334,964
Property, premises and equipment, net		10,797		10,383
Cash surrender value life insurance		7,559		7,130
Deferred Tax Assets		1,898		1,918
Goodwill		4,865		4,865
Core Deposit Intangible		1,734		2,021
Other assets		2,649		2,910
TOTAL ASSETS	$	498,556	$	448,012
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing	$	192,209	$	143,455
Savings, NOW, and money market deposits		164,331		166,015
Time deposits of $100 or more		16,570		18,034
Time deposits under $100		44,757		42,937
Total deposits		417,867		370,441
FHLB advances and other borrowed money		28,000		28,500
Securities Sold under Agreement to Repurchase		799		766
Notes Payable		-		-
Junior subordinated debentures		8,248		8,248
Other liabilities		2,599		2,807
Total liabilities		457,513		410,762
COMMITMENTS AND CONTINGENCIES		-
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding
4,114,458 and 4,102,987 for June 30, 2005
and December 31, 2004, respectively.		28,728		24,050
Retained earnings		12,139		13,053
Accumulated other comprehensive income		176		147
Total stockholders' equity		41,043		37,250
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	498,556	$	448,012

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

See notes to consolidated financial statements

Page 3

HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share date)
	For the three months				For the six months
	ended June 30,				ended June 30,
	2005		2004		2005		2004
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Interest Income:
Interest and fees on loans	$	6,493	$	5,031	$	12,616	$	9,866
Investment securities		544		562		1,097		1,152
Federal funds sold and commercial paper		99		83		169		154
Time certificates of deposit		3		2		5		5
Total interest income		7,139		5,678		13,887		11,177
Interest Expense:
Now accounts		22		6		42		11
MMDA accounts		329		127		542		249
Savings accounts		25		24		42		47
Time deposits of $100 or more		91		58		173		119
Other time deposits		275		216		506		458
Other borrowed funds		382		402		803		840
Total interest expense		1,124		833		2,108		1,724
Net Interest Income Before Prov. for Possible Loan Losses		6,015		4,845		11,779		9,453
Provision for loan losses		180		35		360		205
Net interest income after provision for loan losses		5,835		4,810		11,419		9,248
Non-interest Income:
Service charges on deposit accounts		632		589		1,171		1,098
Gain of Sale of Securities		-		28		-		28
Other income		635		570		1,228		1,096
Total Non-interest Income		1,267		1,187		2,399		2,222
Non-interest Expense:
Salaries and employee benefits		2,408		2,129		4,656		4,174
Occupancy and equipment		640		628		1,252		1,263
Other expenses		1,515		1,378		3,078		2,798
Total Noninterest Expenses		4,563		4,135		8,986		8,235
Income before provision for income taxes		2,539		1,862		4,832		3,235
Provision for applicable income taxes		933		700		1,808		1,197
Net Income	$	1,606	$	1,162	$	3,024	$	2,038
Earnings per share: (See note #4)
Basic	$	0.39	$	0.29	$	0.74	$	0.51
Fully Diluted	$	0.37	$	0.27	$	0.70	$	0.48

See notes to consolidated financial statements

Page 4

HERITAGE OAKS BANCORP
Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
	Three Month Period					Six Month Period
	Ended June 30,					Ended June 30,
	2005		2004			2005		2004
Net Income	$	1,606	$	1,162		$	3,024	$	2,038
Other Comprehensive Income Before Taxes:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during period		362		(705	)		29		(428	)
Reclassification adjustments for (gains) included in net income		-		(28	)		-		(28	)
Other comprehensive income (loss), before taxes		362		(733	)		29		(456	)
Income tax expense (benefit) related to realized gain in comprehensive income		-		11			-		11
Other Comprehensive Income (Loss), Net of Taxes		362		(722	)		29		(445	)
Comprehensive Income	$	1,968	$	440		$	3,053	$	1,593

See notes to consolidated financial statements

Page 5

June 30, 2005 and June 30, 2004
(Unaudited)
( in thousands except shares outstanding)
								Accumulated
								Other		Total
	Shares		Common		Retained			Comprehensive		Stockholders'
	Outstanding		Stock		Earnings			Income		Equity
			(in thousands)
Balance January 1, 2005		3,817,943	$	24,050	$	13,053		$	147	$	37,250
Exercise of Stock Options		101,502		748							748
Stock dividend- 5%		195,013		3,930		(3,930	)				0
Cash paid to Shareholders' in Lieu of
fractional shares on 5% Stock Dividend						(8	)				(8	)
Comprehensive Income
Net Income						3,024					3,024
Unrealized Security Holding Gains
'(net of $20 tax )									29		29
Total other comprehensive Income											3,053
Balance June 30, 2005		4,114,458	$	28,728	$	12,139		$	176	$	41,043

								Other			Total
	Shares		Common		Retained			Comprehensive			Stockholders'
	Outstanding		Stock		Earnings			Income			Equity
			(in thousands)
Balance January 1, 2004		3,604,497	$	20,649	$	11,541		$	98		$	32,288
Exercise of Stock Options		15,584		102								102
5% Stock Dividend to be distributed		180,301		3,065		(3,065	)					0
April 23, 2004
Cash Paid in lieu of fractional shares						(7	)					(7	)
Comprehensive Income
Net Income						2,038						2,038
Unrealized Security Holding Losses
(net of $285 tax )									(428	)		(428	)
Less reclasification adjustment for gain
(net of $11 tax)									(17	)		(17	)
Total other comprehensive Income												1,593
Balance June 30, 2004		3,800,382	$	23,816	$	10,507		$	(347	)	$	33,976

See notes to consolidated financial statements

Page 6

HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASHFLOWS
Periods ended June 30
(in thousands)
	2005			2004
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
Net income	$	3,024		$	2,038
Adjustments to reconcile net income to
net cash provided by operating activities
Net cash provided by operating activities
Depreciation and amortization		468			441
Provision for possible loan losses		360			205
Realized loss on sales of available-for-sale
securities, net		0			(28	)
Amortization of premiums/discounts on
investment securities, net		121			211
FHLB Stock dividends		(35	)		(35	)
Amortization of intangible assets		287			210
(Increase)/decrease in loans held for sale		(5,191	)		948
Net increase in cash surrender value of life insurance		(129	)		(139	)
Decrease in other assets		283			362
Decrease in other liabilities		(208	)		(592	)
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES		(1,020	)		3,621
Cash Flows From Investing Activities
Purchase of securities available-for-sale		0			(909	)
Purchase of mortgage backed securities available-for-sale		0			(17,295	)
Proceeds from sales of securities available-for-sale		0			1,534
Proceeds from principal reductions and maturities
of securities available-for-sale		0			500
Proceeds from principal reductions and maturities
of mortgage backed securities available-for-sale		7,362			7,101
Net Change in TCDs		100			0
Proceeds from Sale of FHLB stock		0			166
Purchase of life insurance policies		(300	)		0
Increase in loans, net		(27,521	)		(19,967	)
ALLL Recoveries		22			3
Purchase of property, premises and equipment, net		(904	)		(587	)
NET CASH USED IN INVESTING ACTIVITIES		(21,241	)		(29,454	)
Cash Flows From Financing Activities
Increase in deposits, net	$	47,426		$	21,061
Net increase/(decrease) in other borrowings		(467	)		403
Proceeds from exercise of stock options		748			102
Cash paid in lieu of fractional shares		(8	)		(7	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		47,699			21,559
Net Increase/(Decrease) in Cash and Cash Equivalents		25,438			(4,274	)
Cash and Cash Equivalents, Beginning of year		21,867			77,114
Cash and Cash Equivalents, End of year	$	47,305		$	72,840
Supplemental Disclosures of Cash Flow Information
Interest paid	$	2,102		$	1,799
Income taxes paid	$	1,430		$	1,015

See notes to consolidated financial statements

Page 7

Note 1. CONSOLIDATED FINANCIAL STATEMENTS

The accompanying un-audited condensed consolidated financial statement of Heritage Oaks Bancorp and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In the opinion of Management, all adjustments (which consist solely of normal recurring accruals) considered necessary for a fair presentation of results for the interim periods presented have been included. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2004 Annual Report on Form 10-KSB.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned financial subsidiary, Heritage Oaks Bank (the “Bank”). All significant inter-company balances and transactions have been eliminated. Heritage Oaks Capital Trust I is an unconsolidated subsidiary formed solely for the purpose of issuing trust preferred securities. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. Certain amounts in the consolidated financial statements for the year ended December 31, 2004 and the three and six month period ended June 30, 2004 may have been reclassified to conform to the presentation of the consolidated financial statement in 2005.

The preparation of consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Note 2.INVESTMENT SECURITIES

In accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”, which addresses the accounting for investments in equity securities that have readily determinable fair values and for investments in all debt securities, securities are classified in three categories and accounted for as follows: 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.

Page 8

The amortized cost and fair values of investment securities available for sale at June 30, 2005 and December 31, 2004:

30-Jun-05			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Obligations of U.S. government agencies and corporations	$	1,838	$	-	$	(26	)	$	1,812
Mortgage-backed securities		35,095		88		(267	)		34,916
Obligations of State and Political Subdivisions		12,724		576		(77	)		13,223
Other Securities		9		-		-			9
TOTAL	$	49,666	$	664	$	(370	)	$	49,960

31-Dec-04				Gross		Gross
(in thousands)		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value
Obligations of U.S. government agencies and corporations	$	1,868	$	5	$	(30	)	$	1,843
Mortgage-backed securities		42,622		181		(239	)		42,564
Obligations of State and Political Subdivisions		12,651		413		(86	)		12,978
Other Securities		9		-		-			9
TOTAL	$	57,150	$	599	$	(355	)	$	57,394

Note 3.LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans were:
	June 30,			December 31,
(in thousands)	2005			2004
Commercial, financial, and agricultural	$	62,883		$	49,584
Real estate-construction		74,603			66,833
Commercial real estate		224,060			217,473
Installment loans to individuals		5,164			5,538
All other loans (including overdrafts)		534			265
		367,244			339,693
Less - deferred loan fees, net		(1,556	)		(1,482	)
Less - reserve for possible loan losses		(3,585	)		(3,247	)
Total loans	$	362,103		$	334,964
Loans Held For Sale	$	7,444		$	2,253

Concentration of Credit Risk

At June 30, 2005, approximately $299 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.

Page 9

At June 30, 2005, the Bank was contingently liable for letters of credit accommodations made to its customers totaling approximately $16.5 million and un-disbursed loan commitments in the approximate amount of $133 million. The Bank makes commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total outstanding commitment amount does not necessarily represent future cash requirements. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as those involved in extending loan facilities to customers. The Bank anticipates no losses as a result of such transactions.

Allowance for Loan Losses

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

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

 

(in thousands)	June 30,			December 31,
	2005			2004
Balance at beginning of year	$	3,247		$	3,070
Additions charged to operating expense		360			410
Loans charged off		(33	)		(236	)
Recoveries of loans previously charged off		11			3
Balance at end of year	$	3,585		$	3,247

The Bank recognized 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 collectability 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. 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.

Page 10

The allowance for loan losses is based on estimates, and ultimate losses will vary from current estimates. These estimates are reviewed monthly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the provision for loan losses. The methodology used to determine the adequacy of the allowance for possible loan losses for the three and six months ended June 30, 2005 is consistent with prior periods.

The allowance for loan losses as a percentage of total net loans was .99% as of June 30, 2005 and .97% as of December 31, 2004. Management believes that the allowance for credit losses at June 30, 2005 is prudent and warranted, based on information currently available.

Note 4.EARNINGS PER SHARE

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

On March 25, 2005, the Company’s Board of Directors declared a 5% stock dividend. The record date for the stock dividend was April 8, 2005 and the pay date was April 22, 2005.

Share information has been retroactively adjusted for such 5% stock dividend.

The following table shows the number of shares used to calculate and the earnings per share for the three and six months ending June 30, 2005 and 2004:

	EPS				EPS
	For the Three Months Ending:				For the Six Months Ending:
	30-Jun-05		30-Jun-04		30-Jun-05		30-Jun-04
Net Income	$	1,606,322	$	1,162,079	$	3,023,708	$	2,037,596
Basic	$	0.39	$	0.29	$	0.74	$	0.51
Diluted	$	0.37	$	0.27	$	0.70	$	0.48
Shares:
Basic		4,111,714		3,987,768		4,085,013		3,984,287
Diluted		4,349,899		4,272,027		4,346,839		4,280,444

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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, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Net income:
As reported	$	1,606,322		$	1,162,079		$	3,023,708		$	2,037,594
Stock-based compensation using the intrinsic value method		-			-			-			-
Stock-based compensation that would have been reported
using the fair value method of SFAS 123		(22,446	)		(22,456	)		(70,933	)		(45,176	)
Pro forma net income	$	1,583,876		$	1,139,623		$	2,952,775		$	1,992,418
Weighted Average Shares Outstanding - Basic		4,111,714			3,987,768			4,085,013			3,984,287
Weighted Average Shares Outstanding - Diluted		4,349,899			4,272,027			4,346,839			4,280,444
Basic Earnings per share
As reported	$	0.39		$	0.29		$	0.74		$	0.51
Pro forma	$	0.39		$	0.29		$	0.72		$	0.50
Earnings per share - assuming dilution
As reported	$	0.37		$	0.27		$	0.70		$	0.48
Pro forma	$	0.36		$	0.27		$	0.68		$	0.47

Note 5.RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial Accounting Standards Board (FASB) issued an exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." This proposed statement would eliminate the ability to account for stock-based compensation using APB 25 and require such transactions be recognized as compensation expense in the income statement based on their fair values at the date of grant. Companies transitioning to fair value based accounting for stock-based compensation will be required to use the "modified prospective" method whereby companies must recognize equity compensation cost from the beginning of the year in which the recognition provisions are first applied as if the fair value method had been used to account for all equity compensation awards granted, modified, or settled in fiscal years beginning after December 31, 1994. As proposed, this statement would have been effective for the Corporation on January 1, 2005. In December 2004, the FASB issued SFAS No. 123 (revised 2004). “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. On April 14, 2005, the SEC announced that public companies will not be required to adopt SFAS 123(R) , which provides for stock option expensing, until their first fiscal year beginning after June 15, 2005. The Company has not determined if the adoption of this standard will have a material impact on its financial statements.

In January 2003, the FASB issued the Emerging Information Task Force Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investors (“EITF 03-1”), and in March 2004, FASB issued an update. EITF 03-1 addresses the meaning of other-than-temporary impairment and its application to certain debt and equity securities. EITF 03-1 aids in the determination of impairment of an investment and gives guidance as to the measurement of impairment loss and the recognition and disclosures of other-than-temporary investments. EITF 03-1 also provides a model to determine other-than-temporary impairment using evidence-based judgment about the recovery of the fair value up to the cost of the investment by considering the severity and duration of the impairment in relation to the forecasted recovery of the fair value. In July 2005, FASB adopted the recommendation of its staff to nullify key parts of Emerging Issues Task Force (“EITF”) Issue 03-1. The staff’s recommendations were to nullify the guidance on the determination of whether an investment is impaired as set forth in paragraphs 10-18 of Issue 03-1 and not to provide additional guidance on the meaning of other-than-temporary impairment. Instead, the staff recommends entities recognize other-than-temporary impairments by applying existing accounting literature such as paragraph 16 of SFAS 115.

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Under FASB Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” the Company is not allowed to consolidate Heritage Oaks Capital Trust I into the Company’s financial statements. Prior to the issuance of FIN No. 46, Bank holding companies typically consolidated these entities. On February 28, 2005, the Federal Reserve Board issued a new rule which provides that, notwithstanding the deconsolidation of such trusts, junior subordinated debentures, such as those issued by the Company, may continue to constitute up to 25% of a bank holding company's Tier 1 capital, subject to certain new limitations which will not become effective until March 31, 2009 and which, in any event, are not expected to affect the treatment of the Company's Junior Subordinated Debentures as Tier 1 capital for regulatory purposes. At June 30, 2005, the Company has included the net junior subordinated debt in its Tier1 Capital for regulatory capital purposes.

Note 6.Reclassifications

Certain amounts in the 2004 financial statements have been reclassified to conform to the 2005 presentation.

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Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q (“Quarterly Report”), including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects”, and words of similar impact, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Company operates, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of the Company’s business, as well as economic, political and global changes arising from the war on terrorism. (Refer to the Company’s December 31, 2004 10-KSB, ITEM 1. Description of Business-Factors that May Affect Future Results of Operations.) 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

The following is an analysis of the results of operations and financial condition of the Company for the periods ending June 30, 2005 and 2004. The analysis should be read in connection with the consolidated financial statements and notes thereto appearing elsewhere in this report.

THE COMPANY

Heritage Oaks Bancorp (the "Company") is a California corporation organized in 1994 to act as a holding company of Heritage Oaks Bank ("Bank"). In 1994, the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction.

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. The Trust is a wholly-owned, non-financial, non-consolidated subsidiary of the Company.

On October 31, 2003, the Company acquired Hacienda Bank and on June 28, 2004, Hacienda Bank was merged with and into the Bank.

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

Where You Can Find More Information

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. The Company electronically files the following reports with the SEC: Form 10-KSB (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.heritageoaksbancorp.com

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

Executive Summary and Recent Developments

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

SELECTED FINANCIAL DATA
For the Quarter Ended,
	Dec-03		Mar-04		Jun-04		Sep-04		Dec-04		Mar-05		Jun-05
Return on Average Assets		0.99%		0.82%		1.02%		1.06%		1.18%		1.24%		1.37%
Return on Average Equity		13.59%		10.60%		13.62%		13.62%		14.77%		14.74%		15.94%
Average Equity to Average Assets		6.76%		7.69%		7.58%		7.78%		6.76%		8.40%		8.60%
Net Interest Margin		4.85%		4.71%		4.87%		5.15%		5.40%		5.55%		5.68%
Efficiency Ratio*		68.94%		72.65%		68.55%		67.36%		67.64%		64.14%		62.66%
Average Loans to Average Deposits		81.74%		80.10%		80.63%		80.88%		85.65%		92.82%		91.91%
Net Income	$	975	$	876	$	1,162	$	1,193	$	1,353	$	1,417	$	1,606
Earnings Per Share:
Basic	$	0.26	$	0.22	$	0.29	$	0.30	$	0.33	$	0.35	$	0.39
Diluted	$	0.24	$	0.20	$	0.27	$	0.28	$	0.31	$	0.33	$	0.37
Outstanding Shares:
Basic		3,743,258		3,980,382		3,987,768		3,999,395		4,007,309		4,053,900		4,111,714
Diluted		4,033,538		4,282,901		4,272,027		4,279,079		4,306,783		4,305,622		4,349,899

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

Certainly, one of the Company’s most notable events was the acquisition of Hacienda Bank that took place on October 31, 2003. This acquisition was the culmination of many years effort to have a greater presence in the city of Santa Maria. In reviewing market share data (provided by the FDIC as of June every year) within the Company’s primary service area of San Luis Obispo and Northern Santa Barbara counties, it was very clear that the city of Santa Maria with 28% of the total deposit base provided opportunity for growth. In order to obtain more market share, the Company needed a greater presence than the existing one branch office that was opened in 1999. The Company views this acquisition as a positive step to enhancing market share and shareholder return. Initially, the Company anticipated that the acquisition would be accretive to earnings in the fourth quarter of 2004. However, the acquisition became accretive to diluted earnings per share for the three months ending June 30, 2004 and subsequent quarters.

In 1999, Heritage put into action a Corporate Culture Survey that allows employees to respond anonymously to nearly 100 questions regarding communication, training, management effectiveness and many other pertinent areas. This survey is conducted annually during the fourth quarter. The results of the survey provide Senior Management and the Board with information that assists in future endeavors to address areas where there is an opportunity to improve. During the past five years, the overall “rating” has shown measured improvement. Senior Management and the Board of Directors consider this to be one of the most important achievements for the Company.

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The Company continues to focus on increased market share in each city within its primary market area. In 2002, marketing plans were initiated to reach the long term goal of at least a pro rata share of deposits in each market. Measured calling programs for both lending and operational staff have been implemented utilizing among other resources a Customer Relationship Management (CRM) system. While competition remains robust in the Central Coast with numerous independent banks headquartered here and the typical plethora of major financial institutions, the Company believes that our unique corporate culture that concentrates on our staff will ultimately be our best tool to accomplish our market share goals. From June 1998 to June 2004, the Company’s market share in San Luis Obispo County grew from 5.9% to 7.5%. This growth represented a move from the eighth position among fifteen other commercial banks to fourth among fourteen commercial banks. The Compound Annual Growth Rate (CAGR) for the Company over a ten year period (1994 through 2004) was 20.6% compared to a CAGR of 6.4% for total deposits in San Luis Obispo County.

In July 2003, the Bank purchased a property immediately adjacent to its Headquarters facility. It is the intention to build approximately 20,000 square feet of office space to house all administrative functions of the Company. Completion of the project is anticipated to be late in the first quarter of 2006.

On September 27, 2004, the Company commenced trading under the symbol HEOP on the Nasdaq SmallCap Market.

In early October 2004, the Bank began the process of converting the previous Hacienda Bank computer systems and changing the name from Hacienda Bank, a Division of Heritage Oaks Bank to the Bank’s. The computer conversion took place on March 4, 2005. At that same time, the Bank relocated its original branch office in Santa Maria to one of the acquired branch locations. These two branch offices were located within one mile of one another. The Bank is in the process of sub-leasing the vacated facility. The underlying lease expires in October 2008.

In July 2005, the Company finalized a sale/leaseback of the Atascadero Branch Office real property. The property was sold to a non affiliated party for the appraised value. A five year lease with four five year options to renew was executed and became effective July 15, 2005. The triple net lease cost of $1.43 per square foot is consistent with market rates and the appraisal. The gain on sale of the property of approximately $283 thousand will be amortized over a period of five years and is not considered to be material to the net income of the Company.

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 Company’s primary market area consists of the following four distinct areas:

1. Our Growing Home Market

San Luis Obispo County

Paso Robles with two branches and Atascadero

- Small Town environment with transitioning culture and diverse industry

- A pocket of relatively affordable housing and one of California’s least populated Coastal Communities

- Halfway between SF and LA on US 101 and the main Hwy 46 corridor to the coast from rapidly growing Fresno and Bakersfield

2. The Progressive Village

San Luis Obispo

San Luis Obispo County

- California State Polytechnic University that is tops in the nation and in the Ca State University System

- Booming Real Estate Market with a highly attractive mix of Culture, Country and coast

- Dynamic environment of growth and cultural evolution

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3. The Gold Coast

San Luis Obispo County

Cambria, San Simeon, Morro Bay, Pismo and Arroyo Grande

- Some of the finest and most underdeveloped and accessible coastline left in California

- At the terminus of Hwy 46 from the Central Valley, these enclaves have attracted second home investment by many living in growing Fresno, Bakersfield and other Valley communities

- All the ingredients intact for economic transition and development

4. Sideways Country

Northern Santa Barbara County

Santa Maria, Orcutt

- Combination of family communities, resort destinations and agricultural zones

- Largest developable coastal area in the region

- Santa Maria is the largest city in the Central Coast Region

The population of San Luis Obispo County and the City of Santa Maria (in Northern Santa Barbara County) totaled 258,200 and 85,000, respectively, according to recent economic data provided by local county and title company sources. The moderate climate allows a year round growing season for numerous vegetables and fruits. Vineyards and cattle ranches also contribute largely to the local economy. 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.

Critical Accounting Policies

The Company’s significant accounting policies are set forth in the 2004 Annual Report, Note 1 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, which was filed on Form 10-KSB.

The following is a brief description of our current accounting policies involving significant management valuation judgments.

Allowance for Loan and Lease Losses

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

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

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Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties.

Changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan and lease losses and the associated provision for loan and lease losses.

Securities Available for Sale

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

Goodwill and Other Intangible Assets

As discussed in the 2004 Annual Report, Note 6 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, we assess goodwill and other intangible assets each year for impairment. The Company determined that there was no impairment at December 31, 2004.

RESULTS OF OPERATIONS

Earnings Overview

The Company reported net income for the three months ended June 30, 2005 of $1.6 million compared to $1.1 million during the same period in 2004. This represents an increase of 38%. Basic earnings per share for the three months ended June 30, 2005 and June 30, 2004, were $.39 and $.29, respectively. Diluted earnings per share for the three months ended June 30, 2005 and June 30, 2004, were $.37 and $.27, respectively.

The Company reported net income for the six months ended June 30, 2005 of $3.0 million compared to $2.0 million during the same period in 2004. This represents an increase of 48%. Basic earnings per share for the six months ended June 30, 2005 and June 30, 2004, were $.74 and $.51, respectively. Diluted earnings per share for the six months ended June 30, 2005 and June 30, 2004, were $.70 and $.48, respectively.

Net Interest Income and Interest Margin

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

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The table below sets forth changes for the three and six months ended June 30, 2005 compared to the same period in 2004 in regard to volume and rate associated with interest earning assets and interest bearing deposits.

Analysis of Changes in Net Interest Income (in thousands)
	Three months ended									Six months ended
	June 30. 2005 over 2004									June 30. 2005 over 2004
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans (1)	$	928		$	535		$	1,463		$	1,997		$	753		$	2,750
Investment securities taxable		(152	)		108			(44	)		(192	)		81			(111	)
Investment securities non-taxable (2):		30			6			36			66			(11	)		55
Taxable equivalent adjustment (2):		(10	)		(2	)		(12	)		(22	)		4			(18	)
Interest-bearing deposits		2			-			2			20			(1	)		19
Federal funds sold		14			2			16			20			(5	)		15
Net increase (decrease)		812			649			1,461			1,889			821			2,710
Interest expense:
Savings, now, money market		(27	)		245			218			1,549			(1,230	)		319
Time deposits		23			69			92			42			60			102
Other borrowings		(8	)		(48	)		(56	)		2			(98	)		(96	)
Long term borrowings		-			37			37			-			59			59
Net increase (decrease)		(12	)		303			291			1,593			(1,209	)		384
Total net increase (decrease)	$	824		$	346		$	1,170		$	296		$	2,030		$	2,326

(1) Loan fees of $333 and $272 for the three months ending June 30, 2005 and 2004 , respectively, and loan fees of $686 and $492 for the six months ending June 30, 2005 and 2004, respectively been included in the interest income computation.

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

Note A: Average balances of all categories in each period were included in the volume computations.

Note B: Average yield rates in each period were used in rate computations. Change attributable to both volume and rate have been allocated in proportion to the relationship between their absolute dollar amounts.

The tables below sets forth changes for the three and six months ending June 30, 2005 compared to the same periods in 2004 for average interest earning assets and their respective average yields.

	Average Balance										Average Yield
	for the three months ending										for the three months ending
(dollars in thousands)	June 30,				$			%			June 30,
Interest Earning Assets:	2005		2004		Variance			Variance			2005			2004			Variance
Time deposits with other banks	$	452	$	803	$	(351	)		-43.71	%		3.55	%		1.00	%		2.55	%
Investment securities taxable		40,529		49,535		(9,006	)		-18.18	%		3.96	%		3.60	%		0.36	%
Investment securities non-taxable		13,042		11,182		1,860			16.63	%		4.37	%		4.23	%		0.14	%
Federal funds sold		12,736		31,981		(19,245	)		-60.18	%		3.12	%		1.04	%		2.08	%
Loans (1) (2)		356,686		304,063		52,623			17.31	%		7.30	%		6.64	%		0.66	%
Total interest earning assets	$	423,445	$	397,564	$	25,881			6.51	%		6.76	%		5.73	%		1.03	%

	Average Balance										Average Yield
	for the six months ending										for the six months ending
(dollars in thousands)	June 30,				$			%			June 30,
Interest Earning Assets:	2005		2004		Variance			Variance			2005			2004			Variance
Time deposits with other banks	$	1,221	$	498	$	723			145.18	%		3.96	%		2.02	%		1.94	%
Investment securities taxable		42,494		48,177		(5,683	)		-11.80	%		3.77	%		3.79	%		-0.02	%
Investment securities non-taxable		13,053		11,151		1,902			17.06	%		4.37	%		4.45	%		-0.08	%
Federal funds sold		12,185		31,069		(18,884	)		-60.78	%		2.80	%		1.00	%		1.80	%
Loans (1) (2)		350,626		293,921		56,705			19.29	%		7.26	%		6.77	%		0.49	%
Total interest earning assets	$	419,579	$	384,816	$	34,763			9.03	%		6.67	%		5.86	%		0.81	%

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The Company has been able to grow the loan portfolio with continued market penetration by a team of seasoned loan officers who are compensated for production. The growth in the loan portfolio for both the three and six months ending June 30, 2005 was achieved under the Company’s established Loan Policy. For the three month and six months ending June 30, 2005 compared to the same period in 2004, the average yield on loans improved by 66 and 49 basis points, respectively. This has been primarily due to action by the Federal Reserve Bank of raising rates by 225 basis points from June 2004 through June 30 2005. See “Item 3. Quantitative and Qualitative Disclosure about Market Risk” for further discussion.

Other than loans and the tax-exempt portion of the investment portfolio all other categories of interest earning assets decreased and provided funds for the robust loan demand. Since there is significant room to grow in tax-exempts before bumping up against the Alternative Minimum Tax issue with the IRS the Company has increased this particular portfolio by approximately 17% in the past year. For the three months ending June 30, 2005, both the non-taxable and taxable investment portfolio gained in average yield due to extension caused by rising rates. Taxable investment securities decreased due to regular principal reductions on Mortgage Backed Securities (MBS). There were no securities purchased during the first six months of 2005.

The tables below sets forth changes for the three and six months ending June 30, 2005 compared to the same periods in 2004 for average interest bearing liabilities and their respective average rates paid.

	Average Balance										Average Rate
	for the three months ending										for the three months ending
(dollars in thousands)	June 30,				$			%			June 30,
Interest bearing liabilities:	2005		2004		Variance			Variance			2005			2004			Variance
Savings/NOW/money market	$	163,949	$	156,309	$	7,640			4.89	%		0.92	%		0.40	%		0.52	%
Time deposits		60,320		72,502		(12,182	)		-16.80	%		2.43	%		1.52	%		0.91	%
Other borrowings		28,944		32,716		(3,772	)		-11.53	%		3.30	%		3.63	%		-0.33	%
FF Purchased		107		0		107			100.00	%		3.75	%		0.00	%		3.75	%
Long Term Debt		8,248		8,248		-			0.00	%		6.95	%		5.15	%		1.80	%
Total interest-bearing liabilities	$	261,568	$	269,775	$	(8,207	)		-3.04	%		1.72	%		1.24	%		0.48	%

	Average Balance										Average Rate
	for the six months ending										for the six months ending
(dollars in thousands)	June 30,				$			%			June 30,
Interest bearing liabilities:	2005		2004		Variance			Variance			2005			2004			Variance
Savings/NOW/money market	$	164,807	$	154,345	$	10,462			6.78	%		0.77	%		0.40	%		0.37	%
Time deposits		60,519		73,218		(12,699	)		-17.34	%		2.26	%		1.59	%		0.67	%
Other borrowings		32,548		32,523		25			0.08	%		3.29	%		3.92	%		-0.63	%
FF Purchased		293		0		293			100.00	%		3.44	%		0.00	%		3.44	%
Long Term Debt		8,248		8,248		-			0.00	%		6.53	%		5.09	%		1.44	%
Total interest-bearing liabilities	$	266,415	$	268,334	$	(1,919	)		-0.72	%		1.60	%		1.30	%		0.30	%

The Company continues to enjoy a low cost of funds, specifically in regard to interest bearing deposits. The ability to attract low cost deposits is part of the Company’s marketing plans that have been in place for numerous years. While this remains Management’s main objective, in February 2005 the company implemented a Time Deposit/Money Market promotion to run for a period of approximately 60 days. This was done to provide appropriate liquidity for current and anticipated loan funding. This has resulted in an increase in deposit costs.

From June 2004 through June 2005, the Federal Reserve Bank increased rates by a total of 225 basis points. Due to the asset sensitive nature of the Company’s balance sheet, these increases, coupled with the Company’s substantial volume of non-interest bearing deposits and low average rates on interest bearing deposits, are the primary factors for the increase in net interest margin.

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For the three months ending June 30, 2005 compared to the same period in 2004, the Company was able to increase the Net Interest Margin as the result of an increase of 103 basis points in average yield on average interest earning assets while the average yield on average interest earning liabilities increased by only 48 basis points.

AVERAGE BALANCE SHEET INFORMATION

(dollars in thousands)	For the three months ending June 30,														For the six months ending June 30,
				2005							2004							2005							2004
	Avg.			Yield/		Amt.		Avg.			Yield/		Amt.		Avg.			Yield/		Amt.		Avg.			Yield/		Amt.
Interest Earning Assets:	Balance			Rate		Interest		Balance			Rate		Interest		Balance			Rate		Interest		Balance			Rate		Interest
Time deposits with other banks	$	452			3.55%	$	4	$	803			1.00%	$	2	$	1,221			3.96%	$	24	$	498			2.02%	$	5
Investment securities taxable		40,529			3.96%		400		49,535			3.60%		444		42,494			3.77%		795		48,177			3.79%		906
Investment securities non-taxable		13,042			4.37%		142		11,182			4.23%		118		13,053			4.37%		283		11,151			4.45%		246
Federal funds sold		12,736			3.12%		99		31,981			1.04%		83		12,185			2.80%		169		31,069			1.00%		154
Loans (1) (2)		356,686			7.30%		6,494		304,063			6.64%		5,031		350,626			7.26%		12,616		293,921			6.77%		9,866
Total interest earning assets		423,445			6.76%		7,139		397,564			5.73%		5,678		419,579			6.67%		13,887		384,816			5.86%		11,177
Allowance for possible loan losses		(3,479	)						(3,100	)						(3,403	)						(3,133	)
Other assets		48,386							61,867							47,351							59,345
TOTAL ASSETS	$	468,352						$	456,331						$	463,527						$	441,028
Interest -bearing liabilities:
Savings/NOW/money market		163,949			0.92%		375		156,309			0.40%		157		164,807			0.77%		626		154,345			0.40%		307
Time deposits		60,320			2.43%		366		72,502			1.52%		274		60,519			2.26%		679		73,218			1.59%		577
Other borrowings		28,944			3.31%		239		32,716			3.63%		296		32,548			3.29%		531		32,523			3.92%		632
FF Purchased		107			3.75%		1		0			0.00%		-		293			3.44%		5		-			0.00%		-
Long Term Debt		8,248			6.95%		143		8,248			5.15%		106		8,248			6.53%		267		8,248			5.09%		208
Total interest-bearing liabilities		261,568			1.72%		1,124		269,775			1.24%	$	833		266,415			1.60%		2,108		268,334			1.30%		1,724
Demand deposits		163,817							149,763							154,684							136,948
Other liabilities		2,665							2,672							3,042							2,322
Stockholders' equity
Common stock		28,639							23,797							27,121							22,249
Retained earnings		11,652							10,108							12,191							11,116
Valuation Allowance Investments		11							216							74							59
Total stockholders' equity		40,302							34,121							39,386							33,424
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY	$	468,352						$	456,331						$	463,527						$	441,028
Net Interest Income						$	6,015						$	4,845						$	11,779						$	9,453
Net Interest Margin (3)					5.68%							4.87%							5.61%							4.91%

Nonaccrual loans have been included in total loans.

Loan fees of $333 and $272 for the three months ending June 30, 2005 and 2004 , respectively, and loan fees of $686 and $492 for the six months ending June 30, 2005 and 2004, respectively been included in the interest income computation.

Net interest income has been calculated by dividing the net interest income by total average earning assets.

Page 21

Non-Interest Income

The tables below set forth changes for the three and six months ending June 30, 2005 compared to the same period in 2004 for non-interest income excluding loss on sale of investment.

Non-Interest Income Components
	For Three Months Ended
	June 30,
(dollars in thousands)	2005		2004		$ Variance			% Variance
Service Charges on Deposit Accounts	$	632	$	589	$	43			7.3	%
ATM/Debit Card Transaction/Interchange Fees		145		153		(8	)		-5.2	%
Bancard		39		33		6			18.2	%
Mortgage Origination Fees		226		198		28			14.1	%
Earnings on Cash Surrender Value Life Ins		79		80		(1	)		-1.3	%
Other		146		106		40			37.7	%
TOTAL	$	1,267	$	1,159	$	108			9.3	%

	For Six Months Ended
	June 30,
(dollars in thousands)		2005		2004	$	Variance		% Variance
Service Charges on Deposit Accounts	$	1,171	$	1,098	$	73		6.6	%
ATM/Debit Card Transaction/Interchange Fees		293		278		15		5.4	%
Bancard		71		58		13		22.4	%
Mortgage Origination Fees		423		377		46		12.2	%
Earnings on Cash Surrender Value Life Ins		151		160		(9	)	-5.6	%
Other		290		223		67		30.0	%
TOTAL	$	2,399	$	2,194	$	205		9.3	%

Mortgage origination fee income remains strong as we continue to experience favorable long term rates in the current flat yield curve environment. Service charges on deposit accounts have improved due to the growth of transactional deposit accounts.

Page 22

Non-Interest Expenses

The tables below set forth changes for the three and six months ending June 30, 2005 compared to the same period in 2004 for non-interest expense.

Non-Interest Expense Components
	For Three Months Ended
	June 30,
(dollars in thousands)	2005		2004		$ Variance			% Variance
Salaries and Employee Benefits	$	2,408	$	2,128	$	280			13.2	%
Occupany and Equipment		640		628		12			1.9	%
Data Processing		538		491		47			9.6	%
Advertising and promotional		137		123		14			11.4	%
Regulatory fees		25		33		(8	)		-24.2	%
Other professional fees and outside services		186		125		61			48.8	%
Legal fees and other litigation expense		21		32		(11	)		-34.4	%
Loan Department Costs		29		43		(14	)		-32.6	%
Stationery and supplies		80		95		(15	)		-15.8	%
Director fees		52		57		(5	)		-8.8	%
Core Deposit Intangible Amortization		143		106		37			34.9	%
Other		304		274		30			10.9	%
	$	4,563	$	4,135	$	428			10.4	%

	For Six Months Ended
	June 30,
(dollars in thousands)	2005		2004		$ Variance			% Variance
Salaries and Employee Benefits	$	4,656	$	4,174	$	482			11.5	%
Occupany and Equipment		1,252		1,263		(11	)		-0.9	%
Data Processing		1,117		967		150			15.5	%
Advertising and promotional		263		292		(29	)		-9.9	%
Regulatory fees		50		63		(13	)		-20.6	%
Other professional fees and outside services		229		269		(40	)		-14.9	%
Legal fees and other litigation expense		58		47		11			23.4	%
Loan Department Costs		71		78		(7	)		-9.0	%
Stationery and supplies		166		186		(20	)		-10.8	%
Director fees		106		115		(9	)		-7.8	%
Core Deposit Intangible Amortization		287		211		76			36.0	%
Other		731		570		161			28.2	%
	$	8,986	$	8,235	$	751			9.1	%

Salary/Related Expense

Salaries and employee related expense incurred the greatest dollar increase of any non-interest expense category for the three and six months ending June 30, 2005 and 2004. Approximately 45% of the increase is due to the increased bonus accrual as the result of the outstanding record earnings for the first two quarters of 2005. The remaining variance is due to an overall 6% increase in salary of which, approximately 4% would relate to annual merit increases for staff.

Data Processing Expense

For the three months ending June 30, 2005 compared to the same period in 2004, there was an $80 thousand increase in Escrow Accounting costs related to three long-time deposit customers of the Bank and a $33 thousand decrease in all other categories of data processing expense.

Provision for Income Taxes

The provision for income taxes was 36.7% and 37.6% of net pre-tax income for the three months ending June 30 2005, and 2004, respectively. The provision for income taxes was 37.4% and 37.0% of net pre-tax income for the six months ending June 30 2005, and 2004, respectively.

Page 23

FINANCIAL CONDITION ANALYSIS

Total assets of the Company were $448.0 million at December 31, 2004 compared to $498.6 million at June 30, 2005. This represents an increase of $50.6 million or 11.3%.

Loans

The table below sets forth changes from December 31, 2004 to June 30, 2005 for the composition of the loan portfolio.

Major classifications of loans were:
	June 30,			December 30,
	2005			2004			$ Variance			% Variance
(in thousands)
Commercial, financial, and agricultural	$	62,883		$	49,584			13,299			26.82	%
Real estate-construction		74,603			66,833			7,770			11.63	%
Commercial Real Estate		224,060			217,473			6,587			3.03	%
Installment loans to individuals		5,164			5,538			(374	)		-6.75	%
All other loans (including overdrafts)		534			265			269			101.51	%
		367,244			339,693			27,551			8.11	%
Less - deferred loan fees, net		(1,556	)		(1,482	)		(74	)		4.99	%
Less - reserve for possible loan losses		(3,585	)		(3,247	)		(338	)		10.41	%
Total loans	$	362,103		$	334,964			27,139			8.10	%
Loans Held For Sale	$	7,444		$	2,253			5,191			230.40	%

Gross loans grew by over 8% in the first one-half of 2005 with most of the growth in the second quarter. During the first quarter of 2005, there were numerous construction projects that were completed resulting in either 1) the sale of the properties and pay-downs on the outstanding loans or 2) conversion to mini-perm commercial real estate loans. In addition, commercial real estate loans experienced some early pay-off activity during the first quarter. During the second quarter numerous new loans were made on commercial properties, for acquisition of residential development properties and for residential and commercial construction.

The increase in commercial, financial and agricultural loans is attributed primarily to draws on existing and new lines of credit.

The increase in real estate-construction loans can be attributed to several new large construction projects and funding of existing construction projects during the period. New loans include a hotel for $6.3 million, a strip center for $2.2 million, an office building for $3.3 million, a residential development for $3.3 million, retail/office building for $1.4 million, additions to a strip center for $2.2 million, a restaurant/wine shop for $1.7 million, a retail/office building for $4.2 million, a motel addition for $4.3 million, a gas station for $1 million and numerous other smaller projects. Construction loans are typically granted for a one year period and then, with income properties, are amortized over not more than 25 years with 10 to 15 year maturities.

The Bank presently has a concentration of loans in construction/land in the amount of $74.6 million which represents 171% of the Bank’s Total Risk Based capital. At June 30, 2005 there were 87 construction loans with outstanding balances and remaining commitments of approximately $52.2 million and $43 million, respectively. The single largest construction loan has a commitment amount of approximately $6.3 million with a balance of approximately $.6 million at June 30, 2005. This is a hotel near Paso Robles, Ca. At June 30, 2005, there were 51 land loans with balances of approximately $22.4 million. The single largest land loan accounts for approximately $3.3 million of the total and is for a single family home tract development. The construction/land loans are spread throughout our market area and have consistently performed in a satisfactory manner.

Page 24

The increase in commercial real estate loans is attributed to several of the construction loans moving into amortizing loans and new commercial property loans including an office/warehouse building for $2.1 million, a hotel for $4.3 million, commercial building for $2.2 million, several new property loans to one client for $3.7 million and a commercial warehouse for $2.7 million.

Hotel loans are not presently considered to be a concentration due to the increase in Risk based Capital. Hotel loans presently total $43.4 million, up $6.8 million from 2004 year end, which represents 99.25% of the Bank’s Total Risk Based capital. At June 30, 2005, there were 31 motel loans. The single largest loan with a balance of approximately $4.3 million was made to an upscale resort hotel located in Avila Beach, Ca. The hotel loans are also made to clients throughout our market. These loans have also typically paid as agreed. The Bank had one out of area hotel participation loan that was in default. This loan, in the original amount of $1 million, was paid down by $900 thousand in April 2004 and the remaining $95 thousand charged off. A small recovery of $1 thousand was received with no further payment expected.

In September 2004, the Bank issued an $11.7 million irrevocable standby letter of credit to guarantee the payment of Taxable Variable Rate Demand Bonds. The primary purpose of the bond issue was to refinance existing debt and provide funds for the expansion of an assisted living facility in San Luis Obispo. Approximately $6.6 million of the funds have been deposited with the Bank with $5.1 million remaining. These funds are being used for capital improvements to the assisted living facility. The letter of credit will expire in September 2007.

Construction loan demand for both single family and commercial real estate was strong during 2004 and has continued during 2005. Area home prices continue to increase however they remain considerably lower than the metropolitan areas to our North and South. Low mortgage rates and a multitude of financing options (interest only mortgages, 40 year loans, etc.) have kept many in the market. The continued availability of land for subdivision use also continues to drive the market.

Business properties are also in demand with low vacancies and favorable loan rates. Commercial property values and rental rates increased substantially during 2004. Investors, many seeking exchange properties, continue to seek properties in our market area. The Bank has and expects to experience continued growth in commercial real estate loans during 2005.

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

At June 30, 2005, the Bank had no foreign loans outstanding. The Bank did not have any concentrations of loans except as disclosed above.

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

The Bank’s provision for loan losses was $180,000 for the second quarter of 2005, compared to $35,000 for the same period 2004.The provision amount is based on the Bank’s monthly allowance for loan losses calculation including current plans for recovery collection.

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

Page 25

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

Loans on non-accrual status totaled $0.9 million and $0.5 million at December 31, 2004 and June 30, 2005, 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 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 $126 thousand and $49 thousandfor the period ended December 31, 2004 and June 30, 2005, respectively.

Non-performing loans include non-accrual loans, restructured loans and accruing loans that are 90 days or more delinquent. Non-performing loans totaled $0.9 million at December 31, 2004 and $0.5 million at June 30, 2005. There were no loans past due 90 days or more and still accruing interest at June 30, 2005.

Non-performing loans were .20% and .10% of total assets as of December 31, 2004 and June 30, 2005, respectively. The allowance for loan loss to non-performing loans was 3.6x and 7.3x at December 31, 2004 and June 30, 2005, respectively.

Total Cash and Due from Banks

Total cash and due from banks were $13.1 million and $16.4 million at December 31, 2004 and June 30, 2005, respectively. This line item will vary depending on cash letters from the previous night and actual cash on hand in the branches.

Investment Securities and Other Earning Assets

Other earning assets are comprised of Federal Home Loan Bank, Federal Funds sold (funds lent on a short-term basis to other banks), investments in securities and short-term interest bearing deposits at other financial institutions. These assets are maintained for liquidity needs of the Bank, collateralization of public deposits, and diversification of the earning asset mix.

Page 26

The table below sets forth changes from December 31, 2004 to June 30, 2005 for the composition of other earning assets. Interest bearing deposits with other financial institutions decreased by $3 million due to the return of funds which were previously placed in a short term (14 days) pool of money market accounts. Fed Funds Sold have increased due to 1) the return of the $3 million in money market accounts, 2) 13% deposit growth, including $40.5 million net increase in three volatile deposit relationships and, 3) a 13% decrease in the Investment Portfolio.

COMPOSITION OF OTHER EARNING ASSETS
	June 30,		December 31,
	2005		2004		$ Variance			% Variance
(in thousands)
Federal Home Loan Bank, and other stock	$	1,844	$	1,809	$	35			1.93	%
Available-for-Sale Investments		49,960		57,394	$	(7,434	)		-12.95	%
Federal Funds Sold		30,845		5,775	$	25,070			434.11	%
Interest Bearing Deposits other fin inst.		398		3,498		(3,100	)		-88.62	%
Total Other Earning Assets	$	83,047	$	68,476	$	14,571			21.28	%

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

Securities available-for-sale are carried at fair value, with related unrealized net gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital. As of December 31, 2004, net unrealized gains in the portfolio were $147 thousand compared to a net unrealized gain of $176 thousand at June 30, 2005. This change in market value was driven by the flattening of the yield curve with lower long term rates even though the FRB continued increasing rates on short term investments. The portfolio decreased in size due to principle reductions on Mortgage Backed Securities.

At June 30, 2005, 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.

Page 27

Deposits and Borrowed Funds

The table below sets forth changes from December 31, 2004 to June 30, 2005 for the composition of deposit categories.

	June 30,		December 31,								% of Total
(in thousands)	2005		2004		$Variance			%Variance			Deposits
Deposits:
Demand, non-interest bearing	$	192,209	$	143,455		48,754			33.99	%		46	%
Interest bearing demand		54,527		60,256		(5,729	)		-9.51	%		13	%
Savings		35,008		36,232		(1,224	)		-3.38	%		8	%
Money market		74,796		69,527		5,269			7.58	%		18	%
Time deposits of $100 or more		16,570		18,034		(1,464	)		-8.12	%		4	%
Time deposits under $100		44,757		42,937		1,820			4.24	%		11	%
Total deposits	$	417,867	$	370,441	$	47,426			12.80	%		100	%

The Company has been able to increase deposits due to a well planned marketing strategy and incentive based compensation that has been in place for several years. Like all good strategies, this one is fluid and is subject to the changing dynamics within the Company’s balance sheet and staffing along with changes in its primary market area. Friendly competition between the branch offices to increase deposit totals has been in place for two years. The branch offices are all given goals for each deposit category type and results are measured monthly. Lending and Operational staff work together to meet or beat their goals. This program has generated a significant amount of pride for the entire staff and resulted in growth for the Company.

For the Company, at June 30, 2005, non-interest bearing demand deposits provide 46% of total deposits compared to 38.7% at December 31, 2004. At December 31, 2004 and June 30, 2005, the Bank had three and two deposit relationships, respectively, that it considers to be volatile. The smallest of the three deposit relationships that accounted for approximately 1% of total deposits at December 31, 2005 closed during the second quarter of 2005. The current volatile deposits are held by two, long time customers of the Bank that engage in mortgage related activities. The volatile nature of these relationships was evidenced by a net increase of $40.5 million in these account balances from December 31, 2004 to June 30, 2005. As a percentage of total deposits, these accounts represented 13.6% at December 31, 2004 compared to 21.7% at June 30, 2005. These volatile account relationships are included in the volatile liability dependency report that the Bank produces on a monthly basis. Typically, a material increase in balances held by these three customers is reflected in Federal Funds Sold and is recognized by Management to potentially be short term in nature. Therefore, any material increase in these balances is not considered to be a funding source for any form of long-term investment. Management and the Board of Directors of the Bank are keenly aware that as the mortgage market conditions change, these relationships will be impacted.

Core deposits (time deposits less than $100,000, demand, and savings) gathered in the local communities served by the Company continue to be the primary source of funds for loans and investments. Core deposits of $401.3 million represented 96% of total deposits at June 30, 2005. The Company does not purchase funds through deposit brokers.

In October 2003, the Company executed a Promissory Note with Pacific Coast Bankers Bank (PCBB) for a revolving line of credit in the amount of $3.5 million. As discussed in the paragraph below, at June 30, 2005, the Company had a zero balance outstanding on this loan. The note was obtained to assist with the cash and capital needs for the acquisition of Hacienda. The Company pledged 646,598 shares (51%) of the Bank’s stock as collateral for the loan. The note is revolving in nature for the first two years. The terms of the note call for quarterly interest only payments for the first two years with subsequent principal and interest payments for eight years on a fully amortized basis. At June 30, 2005, the interest rate on the note was 6.25% and is variable and moves with prime. Under the terms of the agreement, the Company will not incur any additional debt over $2 million exclusive of inter-company debt and existing debt without the prior written consent of PCBB. In addition, the Bank must be “well” capitalized on an on-going basis as defined by bank Regulators.

Page 28

One of the benefits of merging Hacienda Bank with and into the Bank on June 28, 2004 was the enhanced capital position of the resultant bank. On July 22, 2004, the Bank’s Board of Directors declared a dividend of $3.5 million to the Company to enable the Company to pay the PCBB line of credit down to zero. This was done on July 23, 2004. The line of credit in the amount of $3.5 million is still available to the Company until September 2005.

The Bank has established borrowing lines with the Federal Home Loan Bank (FHLB). At June30, 2005, the Bank had borrowings with the FHLB of $28 million collateralized by loans. The borrowing consists of the following:

a) $10 million in borrowing with an initial term of 3 months and a fixed rate of 3.14% matured on July 25, 2005 and was renewed for a period of one year at a variable rate of interest indexed to 3 month LIBOR. The initial rate is 3.61%.

b) $18 million in borrowing with a term of 6 months and a fixed rate of 3.35% matures on October 25, 2005.

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

At June 30, 2005, the Bank has a remaining borrowing capacity with existing collateral of approximately $56.9 million and $17.5 million secured by loans and securities, respectively.

The Bank utilizes securities sold under repurchase agreements as a source of funds. The Bank had $766 thousand in securities sold under repurchase agreements at December 31, 2004 compared to $799 thousand at June 30, 2005.

Capital

The Company's total stockholders equity was $37.2 million at December 31, 2004 compared to $41.0 million at June 30, 2005. The increase in capital was due to net income of $3,024 thousand, stock options exercised in the amount of $748 thousand, ($8) thousand cash paid in lieu of fractional shares for the April 22, 2005 distribution of the 5% stock dividend, and a decrease in accumulated other comprehensive income of $29 thousand.

On March 25, 2005 the Board of Directors of the Company announced a 5% stock dividend to shareholders of record on April 8, 2005 that was distributed on April 22, 2005. The Consolidated Statements of Stockholders’ Equity found under “Item 1. Financial Statements” in this document reflects the 5% stock dividend.

On April 10, 2002, the Company issued $8,248,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “debt securities”) to Heritage Oaks Capital Trust I, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of the Company and are due and payable on April 22, 2032. Interest is payable semi-annually on these debt securities at 6-Month LIBOR plus 3.7% for an effective rate of 7.11375% as of June 30, 2005. The debt securities can be called at any time commencing on April 22, 2007, at par. The debt securities can also be redeemed at par if certain events occur that impact the tax treatment, regulatory treatment or the capital treatment of the issuance. The Company also purchased a 3% minority interest totaling $248,000 in Heritage Oaks Capital Trust I. The balance of the equity of Heritage Oaks Capital Trust I is comprised of mandatorily redeemable preferred securities and is included in other assets.

Page 29

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 $1.9 million on April 11, 2002 and capital contributions to the Bank for future growth.

Under FASB Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” the Company is not allowed to consolidate Heritage Oaks Capital Trust I into the Company’s financial statements. Prior to the issuance of FIN No. 46, Bank holding companies typically consolidated these entities. On February 28, 2005, the Federal Reserve Board issued a new rule which provides that, notwithstanding the deconsolidation of such trusts, junior subordinated debentures, such as those issued by the Company, may continue to constitute up to 25% of a bank holding company's Tier 1 capital, subject to certain new limitations which will not become effective until March 31, 2009 and which, in any event, are not expected to affect the treatment of the Company's Junior Subordinated Debentures as Tier 1 capital for regulatory purposes. At June 30, 2005, the Company has included the net junior subordinated debt in its Tier1 Capital for regulatory capital purposes.

Management believes that organic growth in 2005 for the Company can be accomplished without further borrowing for capital or cash flow purposes. At June 30, 2005, the Company had sufficient cash to service the $8.2 million in junior subordinated debenture interest payments for approximately ten quarters without dividends from subsidiaries. The Bank’s capacity to provide cash to the Company, while remaining “well-capitalized”, was $1.2 million at June 30, 2005.

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

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

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Summarized below are the Company’s and the Bank’s capital ratios at June 30, 2005.

	Regulatory Standard
	Adequately	Well	Heritage Oaks	Heritage Oaks
	Capitalized	Capitalized	Bancorp	Bank
Leverage Ratio	4.00%	5.00%	9.03%	8.66%
Tier One Risk Based Captial Ratio	4.00%	6.00%	9.95%	9.40%
Total Risk Based Captial Ratio	8.00%	10.00%	10.83%	10.28%

For the Company, all $8 million of the trust preferred securities are accounted for as Tier I and Tier II Capital, respectively, for purposes of calculating Regulatory Capital.

Liquidity

The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. Asset liquidity is primarily derived from loan payments and the maturity of other earning assets. Liquidity from liabilities is obtained primarily from the receipt of new deposits. The Bank’s Asset Liability Committee (ALCO) is responsible for managing the on and off-balance sheet commitments to meet the needs of customers while achieving the Bank’s financial objectives. ALCO meets regularly to assess the projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual customer funding needs. Deposits generated from Bank customers serve as the primary source of liquidity. The Bank has credit arrangements with correspondent banks that serve as a secondary liquidity source in the amount of $7 million. At June 30, 2005, the Bank had no borrowings against credit arrangements with these correspondent banks. The Bank is a member of the FHLB and has a collateralized borrowing capacity remaining of approximately $74.4 million.

The Bank manages liquidity by maintaining a majority of the investment portfolio in federal funds sold and other liquid investments. At December 31, 2004, the ratio of liquid assets not pledged for collateral and other purposes to deposits and other liabilities was 12.7% compared to 17.5% at June 30, 2005. The ratio of net loans to deposits, another key liquidity ratio, was 90.4% at December 31, 2004 compared to 86.7% at June 30, 2005.

Inflation

The assets and liabilities of a financial institution are primarily monetary in nature. As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay debt and upward pressure on operating expenses. The effect of inflation during the three-year period ended June 30, 2005 has been significant to the Company’s financial position and results of operations in regard to fluctuation in interest rates creating in the decreasing rate environment a narrowing of the net interest margin and in the increasing rate environment for the past four quarters, a widening of the net interest margin. However, inflation has not been a factor in the customer’s ability to repay debt or in upward pressure on operation expenses.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.

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In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letter of credit, and standby letter of credit. Such financial instruments are recorded in the financial statement when they are funded or related fees are incurred or received. For a fuller discussion of these financial instruments, refer to Note 10 of the Company’s consolidated financial statements contained in Item 7 of Part II of the Company’s December 31, 2004 10-KSB.

In the ordinary course of business, the Bank is a party to various operating leases. For a fuller discussion of these financial instruments, refer to Note 5 of the Company’s consolidated financial statements contained in Item 7 of Part II of the Company’s December 31, 2004 10-KSB.

In connection with the $8.2 million in debt securities discussed in “Capital,” the Company issued the full and unconditional payment guarantee of certain accrued distributions.

Item 3.Quantitative and Qualitative Disclosure about Market Risk

As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the banking subsidiary level. Thus, virtually all of the Company’s interest rate risk exposure lies at the banking subsidiary level other than $8 million in subordinated debentures issued by the Company’s subsidiary grantor trust. As a result, all significant interest rate risk procedures are performed at the banking subsidiary level. The subsidiary bank’s real estate loan portfolio, concentrated primarily within Northern Santa Barbara County and San Luis Obispo County, California, are subject to risks associated with the local economy.

The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by Management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest-earning assets re-price differently than its interest-bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.

The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure.  Management believes historically it has effectively managed the effect of changes in interest rates on its operating results.  Management believes that it can continue to manage the short-term effect of interest rate changes under various interest rate scenarios.

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

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The hypothetical impacts of sudden interest rate movements applied to the Company’s asset and liability balances are modeled monthly. The results of this movement indicate how much of the Company’s net interest income is “at risk” from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. The results for the Company’s June 30, 2005 balances indicate that the net interest income at risk over a one year time horizon for a 1%, 2% and 3% rate increase and 1% rate decrease are within the Company’s policy guidelines for such changes.

(dollars in thousands)

	Shock Rate Scenarios
	-100bp		Base		+100bp		+200bp		+300bp
Net Interest
Income (NII)	$	24,089	$	25,647	$	27,418	$	29,282	$	31,155
$ Change from Base	$	1,558	$	-	$	1,771	$	3,634	$	5,508
% Change from Base		-6.08%		0.00%		6.90%		14.17%		21.48%

It is important to note that the above table is a summary of several forecasts and actual results may vary. The forecasts are based on estimates and assumptions of management that may turn out to be different and may change over time. Factors affecting these estimates and assumptions include, but are not limited to 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses. Changes that vary significantly from the assumptions and estimates may have significant effects on the Company’s net interest income, therefore, the results of this analysis should not be relied upon as indicative of actual future results.

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The following table shows Management’s estimate of how the loan portfolio is broken out between variable-daily, variable-daily but at floor, variable at various time lines and fixed rate loans.  It further identifies when and at what rate increase scenario the variable rate loans at floors will most likely come off their floor and re-price.

(dollars in thousands)

			% of
Loans	Balance		Total
Variable-Daily	$	154,117		42%
Variable-Daily with
Floor*		2,546		1%
Variable every 3 months		19,827		5%
Variable > 3 months		128,777		35%
Fixed		61,976		17%
Total Gross Loans	$	367,243		100%

*Daily Variable Loans with Floors
	Coming off
Rate Increase	Floor
0.25%	$	2,431
0.50%		19
0.75%		96
1.00%		-
	$	2,546

The table above identifies approximately 42% of the loan portfolio that will re-price immediately in a rising rate environment. The following table shows Management’s estimates of re-pricing opportunities for the entire loan portfolio.

(dollars in thousands)

Total Gross Loans			% of
Re-Pricing	Balance		Total
< 1 Year	$	244,875		67	%
1-3 Years		67,229		18	%
3-5 Years		37,493		10	%
> 5 Years		17,645		5	%
	$	367,243		100	%

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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There was no change in the Company’s internal controls over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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

PART 2. OTHER INFORMATION

Item 1.Legal Proceedings

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

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

N/A

Item 3.Defaults Upon Senior Securities

N/A

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

The following items were submitted to the security holders for approval at the annual meeting held on May 26, 2005:

1. Election of Directors. To elect ten (10) persons to the Board of Directors of the Company to serve until the 2006 Annual Meeting of Shareholders and until their successors are elected and have qualified. The following persons elected:

	For
Dr. B. R. Bryant	3,575,673
Donald H. Campbell	3,578,146
Kenneth L. Dewar	3,575,574
Mark C. Fugate	3,578,005
Dolores T. Lacey	3,572,840
Merle F. Miller	3,578,146
Michael J. Morris	3,578,146
Daniel J. O’Hare	3,578,146
Alexander F. Simas	3,575,574
Ole K. Viborg	3,380,112
Lawrence P. Ward	3,564,275

2. 2005 Equity Based compensation Plan. To approve the adoption of the 2005 Equity Based Compensation Plan.

For 2,552,385 Against 332,219 Abstained 66,115

3.   Ratification of Independent Accountants. To ratify the appointment of Vavrinek, Trine, Day & Co. LLP as the Company’s independent accountants for the 2005 fiscal year.

For 3,568,072 Against 3,867 Abstained 26,209

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Item 5.Other Information

N/A

Item 6.Exhibits

(a)Exhibits:

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

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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: August 5 , 2005

By:	/s/ Lawrence P. Ward
	Lawrence P. Ward
	Chief Executive Officer

By:	/s/ Margaret A. Torres
	Margaret A. Torres
	Chief Financial Officer Executive Vice President

EXHIBIT INDEX

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

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