UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-QSB
             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

[ ] 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 SMALL BUSINESS ISSUER AS SPECIFIED IN ITS 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
                                 --------------
                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

           CHECK  WHETHER  THE ISSUER (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 ____

INDICATE THE NUMBER OF SHARES  OUTSTANDING  OF EACH OF THE  ISSUER'S  CLASSES OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE:

NO PAR VALUE COMMON STOCK - 3,800,382 SHARES OUTSTANDING AT JULY 9, 2004.


1


<PAGE>



                               TABLE OF CONTENTS

Part 1. Financial Information

        Item 1. Financial Statements

        Consolidated Balance Sheets
        Consolidated Statements of Operations (Un-audited)
        Consolidated Statements of Cash Flows (Un-audited)
        Consolidated Statement of Changes in Stockholders' Equity (Un-audited)
        Notes to Consolidated Financial Statements (Un-audited)

        Item 2. Management's Discussion and Analysis of
                Financial Condition and Results of Operations

        Item 3. Controls and Procedures

Part 2. Other Information

        Item 4. Submission of Matters to a Vote of Security Holders
        Item 6. Exhibits and Reports on Form 8-K

Signatures

Certifications

Exhibits



2


<PAGE>

                          PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              HERITAGE OAKS BANCORP
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                       31-DEC-03    30-JUN-04
                                                       ---------    ---------
ASSETS                                                    (1)      (UNAUDITED)
Cash and due from banks                                $  40,374    $  32,500
Federal funds sold                                        36,740       40,340
                                                       ---------    ---------

Total cash and cash equivalents                           77,114       72,840

Interest bearing deposits other banks                        498          498

Securities Available for sale                             54,956       63,096
Federal Home Loan Bank Stock, at cost                      1,959        1,828
Loans Held For Sale                                        4,402        3,454
Loans, net                                               274,051      293,810

Property, premises and equipment, net                      9,874       10,020
Cash surrender value life insurance                        6,859        6,998
Deferred Tax Assets                                        1,971        2,268
Goodwill                                                   4,905        4,905
Core Deposit Intangible                                    2,442        2,232
Other assets                                               2,917        2,559

TOTAL ASSETS                                           $ 441,948    $ 464,508
                                                       =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES

Deposits:
Demand, non-interest bearing                           $ 137,859    $ 162,252
Savings, NOW, and money market deposits                  153,413      155,340
Time deposits of $100 or more                             23,694       21,865
Time deposits under $100                                  51,473       48,043
                                                       ---------    ---------
Total deposits                                           366,439      387,500

FHLB advances and other borrowed money                    28,500       28,500
Securities Sold under Agreement to Repurchase                460          863
Notes Payable                                              3,500        3,500
Junior subordinated debentures                             8,248        8,248
Other liabilities                                          2,513        1,921
                                                       ---------    ---------
Total liabilities                                        409,660      430,532

COMMITMENTS AND CONTINGENCIES                                 --           --

Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding
3,784,722 and 3,800,382 for December 31, 2003
and June 30, 2004, respectively                           20,649       23,816
Retained earnings                                         11,541       10,507
Accumulated other comprehensive income                        98         (347)
                                                       ---------    ---------
Total stockholders' equity                                32,288       33,976
                                                       ---------    ---------

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY               $ 441,948    $ 464,508
                                                       =========    =========



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

See notes to condensed financial statements


3


<PAGE>


                              HERITAGE OAKS BANCORP
                        CONSOLIDATED STATEMENTS OF INCOME
                       FOR THE THREE MONTHS ENDED JUNE 30,
                      (in thousands except per share date)


                                                            2003         2004
                                                      ----------   ----------
                                                      (UNAUDITED)  (UNAUDITED)

Interest Income:

Interest and fees on loans                            $    3,856   $    5,031
Investment securities                                        545          562
Federal funds sold and commercial paper                       40           83
Time certificates of deposit                                   3            2
                                                      ----------   ----------
Total interest income                                      4,444        5,678

Interest Expense:

Now accounts                                                  32            6
MMDA accounts                                                130          127
Savings accounts                                              11           24
Time deposits of $100 or more                                 42           58
Other time deposits                                          217          216
Other borrowed funds                                         409          402
                                                      ----------   ----------
Total interest expense                                       841          833

Net Interest Income Before Prov. for Possible
  Loan Losses                                              3,603        4,845
Provision for loan losses                                    125           35
                                                      ----------   ----------
Net interest income after provision for loan losses        3,478        4,810

Non-interest Income:
Service charges on deposit accounts                          412          589
Gain of Sale of Securities                                     0           28
Other income                                                 515          570
                                                      ----------   ----------
Total Non-interest Income                                    927        1,187

Non-interest Expense:
Salaries and employee benefits                             1,519        2,129
Occupancy and equipment                                      429          628
Other expenses                                             1,032        1,378
                                                      ----------   ----------
Total Noninterest Expenses                                 2,980        4,135
Income before provision for income taxes                   1,425        1,862
Provision for applicable income taxes                        546          700
                                                      ----------   ----------
Net Income                                            $      879   $    1,162
                                                      ==========   ==========

Earnings per share (See:note #4)
Basic                                                 $     0.28   $     0.31
Fully Diluted                                         $     0.27   $     0.29

See notes to condensed financial statements


4


<PAGE>


                              HERITAGE OAKS BANCORP
                        CONSOLIDATED STATEMENTS OF INCOME
                        FOR THE SIX MONTHS ENDED JUNE 30,
                      (in thousands except per share date)

                                                            2003         2004
                                                      ----------   ----------
                                                      (UNAUDITED)  (UNAUDITED)
Interest Income:

Interest and fees on loans                            $    7,532   $    9,866
Investment securities                                      1,081        1,152
Federal funds sold and commercial paper                      107          154
Time certificates of deposit                                   6            5
                                                      ----------   ----------
Total interest income                                      8,726       11,177

Interest Expense:

Now accounts                                                  69           11
MMDA accounts                                                275          249
Savings accounts                                              23           47
Time deposits of $100 or more                                 83          119
Other time deposits                                          455          458
Other borrowed funds                                         873          840
                                                      ----------   ----------
Total interest expense                                     1,778        1,724

Net Interest Income Before Prov. for
   Possible Loan Losses                                    6,948        9,453
Provision for loan losses                                    250          205
                                                      ----------   ----------
Net interest income after provision for loan losses        6,698        9,248

Non-interest Income:
Service charges on deposit accounts                          802        1,098
Gain of Sale of Securities                                    57           28
Other income                                                 969        1,096
                                                      ----------   ----------
Total Non-interest Income                                  1,828        2,222

Non-interest Expense:
Salaries and employee benefits                             3,022        4,174
Occupancy and equipment                                      818        1,263
Other expenses                                             2,008        2,798
                                                      ----------   ----------
Total Noninterest Expenses                                 5,848        8,235
Income before provision for income taxes                   2,678        3,235
Provision for applicable income taxes                        974        1,197
                                                      ----------   ----------
Net Income                                            $    1,704   $    2,038
                                                      ==========   ==========

Earnings per share (See:note #4)
Basic                                                 $     0.55   $     0.54
Fully Diluted                                         $     0.52   $     0.50

See notes to condensed financial statements


5


<PAGE>


                              HERITAGE OAKS BANCORP
                      CONSOLIDATED STATEMENTS OF CASHFLOWS
                              PERIODS ENDED JUNE 30
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 2003         2004
                                                           ----------   ----------
                                                           (UNAUDITED)  (UNAUDITED)
<S>                                                        <C>          <C>
Cash Flows from Operating Activities
  Net income                                               $    1,704   $    2,038
  Adjustments to reconcile net income to
    net cash provided by operating activities
  Net cash provided by operating activities
  Depreciation and amortization                                   310          441
  Provision for possible loan losses                              250          205
  Provision for possible unfunded loan losses                      25            0
  Realized loss on sales of available-for-sale
   securities, net                                                (57)         (28)
  Amortization of premiums/discounts on
   investment securities, net                                     264          211
  FHLB Stock dividends                                           (49)         (35)
  Amortization of intangible assets                                20          210
  (Increase)/decrease in loans held for sale                   (1,100)         948
  Net increase in cash surrender value of life insurance         (124)        (139)
  (Increase)/decrease in other assets                              (6)         362
  Decrease in other liabilities                                (5,359)        (592)
                                                           ----------   ----------
     NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES       (4,122)       3,621
                                                           ----------   ----------
Cash Flows From Investing Activities
  Purchase of securities available-for-sale                         0         (909)
  Purchase of mortgage backed securities
   available-for-sale                                         (11,134)     (17,295)
  Proceeds from sales of securities available-for-sale         12,365        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            15,607        7,101
  Sale of FHLB stock                                              338          166
  Purchase of life insurance policies                            (830)           0
  Increase in loans, net                                      (22,492)     (19,967)
  ALLL Recoveries                                                   0            3
  Purchase of property, premises and equipment, net              (367)        (587)
                                                           ----------   ----------
     NET CASH USED IN INVESTING ACTIVITIES                     (6,513)     (29,454)
                                                           ----------   ----------
  Cash Flows From Financing Activities
  Increase in deposits, net                                $   25,427   $   21,061
  Net increase/(decrease) in other borrowings                  (9,630)         403
  Proceeds from exercise of stock options                         179          102
  Cash paid in lieu of fractional shares                           (3)          (7)
                                                           ----------   ----------
     NET CASH PROVIDED BY FINANCING ACTIVITIES                15,973      21,559
                                                           ----------   ----------
Net Increase/(Decrease) in Cash and Cash Equivalents            5,338       (4,274)
Cash and Cash Equivalents, Beginning of year                   60,554       77,114
                                                           ----------   ----------
Cash and Cash Equivalents, End of year                     $   65,892   $   72,840
                                                           ==========   ==========

Supplemental Disclosures of Cash Flow Information
  Interest paid                                            $    1,868   $    1,799
  Income taxes paid                                        $      930   $    1,015

Supplemental Disclosures of Non-Cash Flow Information
  Change in other comprehensive income                     $    1,885   $    1,610
</TABLE>

See notes to condensed financial statements


6


<PAGE>


<TABLE>
<CAPTION>

                             HERITAGE OAKS BANCORP
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        June 30, 2003 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)

<S>                                                  <C>           <C>           <C>           <C>           <C>
Balance January 1, 2003                               2,785,533    $    9,703    $    9,548    $      562    $   19,813

Exercise of Stock Options                                31,670           179             0                         179


Stock dividend- 5%                                      139,048         1,605        (1,605)                          0
Cash paid to Shareholders' in Lieu of
   fractional shares on 5% Stock Dividend                                                (3)                        (3)


Comprehensive Income
  Net Income                                                                          1,704                       1,704
  Unrealized Security Holding Gains
    '(net of $121 tax )                                                                               181           181
  Less reclasification  adjustment for gain
   (net of $23 tax)                                                                                   (34)          (34)
                                                                                                             ----------

Total other comprehensive Income                                                                                  1,885
                                                                                                             ----------

Balance June 30, 2003                                 2,956,251    $   11,487    $    9,644    $      709    $   21,840


                                                                   ------------------------------------------------------
                                                                                                  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                                                                                  1,610
                                                                                                             ----------

Balance June 30, 2004                                 3,800,382    $   23,816    $   10,507    $     (347)   $   33,976

</TABLE>


7

<PAGE>


NOTE 1.   CONSOLIDATED FINANCIAL STATEMENTS

Heritage Oaks Bancorp (the "Company") is a California Corporation and the parent
company  for  financial   subsidiary,   Heritage  Oaks  Bank  ("Bank")  and  one
non-financial, non-consolidated subsidiary, Heritage Oaks Capital Trust I.

In the opinion of Management,  the un-audited  consolidated  condensed financial
statements  contain  all  (consisting  of  only  normal  recurring  adjustments)
adjustments  necessary to present  fairly the Company's  consolidated  financial
position at June 30, 2004 and results of  operations  and cash flows for the six
months and three months ended June 30, 2003 and 2004.

Certain  information and footnote  disclosures  normally  presented in financial
statements prepared in accordance with generally accepted accounting  principles
in the United  States of America have been omitted.  These interim  consolidated
condensed   financial   statements  should  be  read  in  conjunction  with  the
consolidated  financial  statements and notes thereto  included in the Company's
2003  Annual  Report to  shareholders.  The results for the six months and three
months ended June 30, 2003 and 2004 may not  necessarily  be  indicative  of the
operating results for the full year.

NOTE 2.   INVESTMENT SECURITIES

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

The amortized cost and fair values of investment  securities  available for sale
at December 31, 2003 and June 30, 2004 :

December 31, 2003

<TABLE>
<CAPTION>
                                                                         GROSS       GROSS
                                                           AMORTIZED  UNREALIZED  UNREALIZED     FAIR
                                                              COST       GAINS      LOSSES      VALUE
                                                           ---------  ----------  ----------   -------
<S>                                                        <C>        <C>         <C>          <C>
Obligations of U.S. government agencies and corporations   $   2,484  $       22  $      (24)  $ 2,482
Mortgage-backed securities                                    41,980         197        (308)   41,869
Obligations of State and Political Subdivisions               10,320         365         (89)   10,596
Other Securities                                                   9           0           0         9
                                                           ---------  ----------  ----------   -------
TOTAL                                                      $  54,793  $      584  $     (421)  $54,956
                                                           =========  ==========  ==========   =======



JUNE 30, 2004
(in thousands)
                                                                         GROSS       GROSS
                                                           AMORTIZED  UNREALIZED  UNREALIZED     FAIR
                                                              COST       GAINS      LOSSES      VALUE
                                                           ---------  ----------  ----------   -------
Obligations of U.S. government agencies and corporations   $   1,940  $        9  $      (31)  $ 1,918
Mortgage-backed securities                                    50,429          85        (527)   49,987
Obligations of State and Political Subdivisions               11,294         157        (269)   11,182
Other Securities                                                   9          --          --         9
                                                           ---------  ----------  ----------   -------
TOTAL                                                      $  63,672  $      251  $     (827)  $63,096
                                                           =========  ==========  ==========   =======

</TABLE>


8


<PAGE>


NOTE 3.   LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans were:
                                                        DECEMBER 31,  JUNE 30,
                                                              2003      2004
                                                        ------------ ----------
(in thousands)
Commercial, financial, and agricultural                 $     49,024 $   49,507
Real estate-construction                                      47,720     51,086
Real estate-mortgage                                         175,880    191,966
Installment loans to individuals                               5,173      5,168
All other loans (including overdrafts)                           338        397
                                                        ------------ ----------
                                                             278,135    298,124

Less - deferred loan fees, net                                (1,014)    (1,169)
Less - reserve for possible loan losses                       (3,070)    (3,145)
                                                        ------------ ----------

Total loans                                             $    274,051 $  293,810
                                                        ------------ ----------

Loans Held For Sale                                     $      4,402 $    3,454


Concentration of Credit Risk

At June 30, 2004,  approximately  $243 million of the Bank's loan  portfolio was
collateralized by various forms of real estate. Such loans are generally made to
borrowers  located  in San Luis  Obispo  and Santa  Barbara  Counties.  The Bank
attempts to reduce its  concentration  of credit risk by making  loans which are
diversified  by project type.  While  Management  believes  that the  collateral
presently  securing this portfolio is adequate,  there can be no assurances that
significant  deterioration in the California real estate market would not expose
the Bank to significantly greater credit risk.

At June 30,  2004,  the Bank was  contingently  liable  for  letters  of  credit
accommodations  made to its  customer  totaling  approximately  $6.1 million and
un-disbursed loan commitments in the approximate  amount of $128.7 million.  The
Bank makes commitments to extend credit in the normal course of business to meet
the  financing  needs  of  its  customers.  Commitments  to  extend  credit  are
agreements  to  lend to a  customer  as long as  there  is no  violation  of any
condition  established  in  the  contract.   Commitments  generally  have  fixed
expiration dates or other termination  clauses and may require payment of a fee.
Since many of the  commitments  are expected to expire without being drawn upon,
the total outstanding  commitment  amount does not necessarily  represent future
cash requirements. Standby letters of credit written are conditional commitments
issued by the Bank to guarantee the  performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as
that involve in extending loan facilities to customers.  The Bank anticipates no
losses as a result of such transactions.

Allowance for Loan Losses

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


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

                                                        DECEMBER 31,  JUNE 30,
                                                            2003        2004
                                                        ------------ ----------

Balance at beginning of year                                 $ 2,933 $    3,070
Additions charged to operating expense                           370        205
Loans charged off                                               (466)      (133)
Recoveries of loans previously charged off                       233          3
                                                        ------------ ----------
Balance at end of year                                  $      3,070 $    3,145


9


<PAGE>


The Bank  recognizes that credit losses will be experienced and the risk of loss
will vary with,  among other things,  general economic  conditions;  the type of
loan being made; the  creditworthiness of the borrower over the term of the loan
and in the case of a collateralized loan, the quality of the collateral for such
loan.  The  allowance  for loan  loss  represents  the  Bank's  estimate  of the
allowance necessary to provide for probable incurred losses in the portfolio. In
making this determination,  the Bank analyzes the ultimate collectibility of the
loans in its  portfolio  by  incorporating  feedback  provided by internal  loan
staff,  an  independent  loan  review  function,  and  information  provided  by
examinations   performed  by  regulatory   agencies.   The  Bank  makes  monthly
evaluations as to the adequacy of the allowance for loan losses.

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

The  allowance  for loan losses is based on estimate,  and ultimate  losses will
vary from  current  estimates.  These  estimates  are reviewed  monthly,  and as
adjustments,  either  positive or negative,  become  necessary,  a corresponding
increase or decrease is made in the provision for loan losses.  The  methodology
used to determine the adequacy of the allowance for possible loan losses for the
second quarter of 2004 is consistent with prior periods.

The Bank's provision for loan losses was $205 thousand and $250 thousand for the
six months ending June 30, 2004 and 2003, respectively.

The  allowance  for loan losses as a percentage  of total net loans was 1.07% at
June 30, 2004 and 1.12% at  December  31,  2003.  Management  believes  that the
allowance for credit losses at June 30, 2004 is prudent and warranted,  based on
information currently available.

Non-Accrual and Non-Performing Loans

Loan on  non-accrual  status  totaled  $935  thousand  at June 30, 2004 and $1.5
million at December 31, 2003.  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  $67 thousand and $132
thousand for the period ended June 30, 2004 and December 31, 2003, respectively.

Non-performing loans include non-accrual loans,  accruing loans that are 90 days
or more delinquent and  restructured  loans.  Non-performing  loans totaled $1.0
million at June 30, 2004 and $1.6 million at December 31, 2003.

Non-performing  loans were .22% of total  assets as of June 30, 2004 and .36% at
December 31, 2003. The allowance for loan loss to non-performing  loans was 3.1x
and 1.92x at June 30, 2004 and December 31, 2003, respectively.

NOTE 4.   EARNINGS PER SHARE

Basic  earnings  per share are based on the  weighted  average  number of shares
outstanding before any dilution from common stock equivalents.  Diluted earnings
per share  reflects the  potential  dilution  that could occur if  securities or
other  contract 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 October 31, 2003, the Company  finalized the acquisition of Hacienda Bank and
issued 602,485 shares of Company stock to shareholders of Hacienda Bank.

On March 26,  2004,  the Company  announced  that the Board of  Directors of the
Company approved a 5% stock dividend. The record date for the stock dividend was
April 9, 2004 and the pay date was April 23, 2004.


10


<PAGE>


Share information has been  retroactively  adjusted for the 5% stock dividend in
March 2004.

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, 2003 and 2004:


                            Eps                              Eps
                For the Three Months Ending:      For the Six Months Ending:
                 30-Jun-03        30-Jun-04       30-Jun-03        30-Jun-04
                 ---------        ---------       ---------        ---------
        Basic    $    0.28        $    0.31       $    0.55        $    0.54
      Diluted    $    0.27        $    0.29       $    0.52        $    0.50
Shares:
        Basic    3,086,403        3,797,874       3,079,252        3,794,559
      Diluted    3,274,122        4,068,597       3,274,965        4,076,613


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:


<TABLE>
<CAPTION>


                                              Three Months Ended             Six Months Ended
                                        ----------------------------  ----------------------------
                                        June 30, 2003  June 30, 2004  June 30, 2003  June 30, 2004
                                        -------------  -------------  -------------  -------------
<S>                                     <C>            <C>            <C>            <C>
Net income:
  As reported                           $     879,290  $   1,162,079  $   1,703,859  $   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                  (26,027)       (22,131)       (60,994)       (44,484)
                                        -------------  -------------  -------------  -------------
Pro forma net income                    $     853,263  $   1,139,948  $   1,642,865  $   1,993,110
                                        =============  =============  =============  =============

Weighted Average Shares
   Outstanding - Basic                      3,086,403      3,797,874      3,079,252      3,794,559
Weighted Average Shares
  Outstanding - Dilute                      3,274,122      4,068,597      3,274,965      4,076,613

Basic Earnings per share
  As reported                           $        0.28  $        0.31  $        0.55  $        0.54
  Pro forma                             $        0.28  $        0.30  $        0.53  $        0.53

Earnings per share -
 assuming dilution
  As reported                           $        0.27  $        0.29  $        0.52  $        0.50
  Pro forma                             $        0.26  $        0.28  $        0.50  $        0.49

</TABLE>


NOTE 5.   NEW ACCOUNTING PRONOUNCEMENTS

In December 2003, the Accounting  Standards  Executive Committee of the American
Institute of Certified  Public  Accountants  issued Statement of Position 03-03,
Accounting  for Certain  Loans or Debt  Securities  Acquired in a Transfer  (SOP
03-03).  This SOP addresses  accounting for differences between contractual cash
flows  and cash  flows  expected  to be  collected  from an  investor's  initial
investment in loans or debt securities  (loans)  acquired in a transfer if those
differences are attributable,  at least in part, to credit quality.  It includes
such  loans  acquired  in  purchase  business  combinations  and  applies to all
nongovernmental entities, including not-for-profit organizations.  This SOP does
not apply to loans originated by the entity.  This SOP limits the yield that may
be  accreted  (accretable  yield) to the excess of the  investor's  estimate  of
undiscounted  expected  principal,  interest,  and other cash flows  (cash flows
expected at acquisition to be collected) over the investor's  initial investment
in the loan.  This SOP requires that the excess of  contractual  cash flows over
cash  flows  expected  to  be  collected  (non-accretable   difference)  not  be
recognized as an adjustment of yield, loss accrual, or valuation allowance. This
SOP prohibits  investors from  displaying  accretable  yield and  non-accretable
difference in the balance sheet.  Subsequent increases in cash flows expected to
be collected generally should be recognized  prospectively through adjustment of
the loan's yield over its remaining life. Decreases in cash flows expected to be
collected should be recognized as impairment,  thereby  retaining the accretable
yield on the loan as adjusted.

This SOP prohibits  "carrying  over" or creation of valuation  allowances in the
initial accounting of all loans acquired in a transfer that are within the scope
of this SOP. The prohibition of the valuation allowance carryover applies to the
purchase of an  individual  loan, a pool of loans,  a group of loans,  and loans
acquired in a purchase business combination.


11


<PAGE>


This SOP is  effective  for loans  acquired  in  fiscal  years  beginning  after
December 15, 2004.  Management  has not completed  its  evaluation of the impact
this pronouncement may have on the Company's  consolidated financial position or
results of operations.

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 be effective for the
Corporation on January 1, 2005.

NOTE 6.   RECLASSIFICATIONS

Certain  amounts in the 2003  financial  statements  have been  reclassified  to
conform to the 2004 presentation.

On October 31, 2003,  the Company  acquired  Hacienda  Bank.  At the time of the
transaction,  Hacienda Bank had approximately $90 million in assets. On June 28,
2004, Hacienda Bank merged with and into Heritage Oaks Bank.


12


<PAGE>


CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-QSB ("QUARTERLY
REPORT"),  INCLUDING,  WITHOUT  LIMITATION,   STATEMENTS  CONTAINING  THE  WORDS
"BELIEVES",  "ANTICIPATES",  "INTENDS",  "EXPECTS", AND WORDS OF SIMILAR IMPACT,
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES  ACT OF 1933 AND SECTION 21E OF THE  SECURITIES  AND  EXCHANGE ACT OF
1934.  SUCH   FORWARD-LOOKING   STATEMENTS  INVOLVE  KNOWN  AND  UNKNOWN  RISKS,
UNCERTAINTIES  AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS,  PERFORMANCE
OR  ACHIEVEMENTS  OF THE  COMPANY  TO BE  MATERIALLY  DIFFERENT  FROM ANY FUTURE
RESULTS,   PERFORMANCE   OR   ACHIEVEMENTS   EXPRESSED   OR   IMPLIED   BY  SUCH
FORWARD-LOOKING  STATEMENTS.  SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
GENERAL  ECONOMIC  AND BUSINESS  CONDITIONS  IN THOSE AREAS IN WHICH THE COMPANY
OPERATES,  DEMOGRAPHIC  CHANGES,  COMPETITION,  FLUCTUATIONS  IN INTEREST RATES,
CHANGES IN  BUSINESS  STRATEGY OR  DEVELOPMENT  PLANS,  CHANGES IN  GOVERNMENTAL
REGULATION, CREDIT QUALITY, THE AVAILABILITY OF CAPITAL TO FUND THE EXPANSION OF
THE COMPANY'S BUSINESS,  ECONOMIC, POLITICAL AND GLOBAL CHANGES ARISING FROM THE
WAR ON  TERRORISM.  (REFER TO THE  COMPANY'S  DECEMBER 31, 2003 10-KSB,  ITEM 1.
DESCRIPTION  OF BUSINESS.)  THE COMPANY  DISCLAIMS ANY  OBLIGATION TO UPDATE ANY
SUCH FACTORS OR TO PUBLICLY  ANNOUNCE THE RESULTS OF ANY REVISIONS TO ANY OF THE
FORWARD-LOOKING   STATEMENTS  CONTAINED  HEREIN  TO  REFLECT  FUTURE  EVENTS  OR
DEVELOPMENTS.

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

The  following  is an  analysis  of the  results  of  operations  and  financial
condition  of the  Company for the  periods  ending June 30, 2004 and 2003.  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 June 11,  2003,  the Company  entered  into an Agreement to Merge and Plan of
Reorganization (the "Agreement") with Hacienda Bank ("Hacienda"),  as amended on
August 8, 2003,  pursuant to which, among other things, (i) Heritage Oaks Merger
Corp would  merge  with and into  Hacienda,  and (ii)  Hacienda  would  become a
wholly-owned  subsidiary  of the Company.  In  accordance  with the terms of the
Agreement,  as amended,  the merger was completed on October 31, 2003.  Hacienda
shareholders elected, after application of applicable pro ration provisions,  to
receive 75% of the  consideration  in stock and 25% in cash.  The Company issued
approximately   602,485  shares  to  the  former   Hacienda   shareholders   and
approximately $2.6 million in cash.

After the merger,  the Company became a two-bank  holding  company owning all of
the shares of both the Bank and Hacienda.  In connection  with the Agreement and
the merger,  Messrs. Mark Fugate and Alex Simas,  previous members of Hacienda's
board of directors, were added to the board of directors of the Company.

On March 26, 2004, the Company  announced  plans to merge Hacienda into the Bank
and operate Hacienda as a Division of the Bank. The merger was finalized on June
28,  2004.  The merger is expected  to simplify  and  streamline  the  Company's
regulatory reporting requirements. The goal is to accomplish the transition in a
manner that will be  transparent  to the  customers  and  employees and will not
affect the  day-to-day  operations of the Bank.  Immediate  cost savings will be
realized in relation to duplication of  organization  memberships  and Board and
Committee  Meeting fees. These initial hard dollar cost savings are not material
to the Company,  however, the savings in staff time for duplicate preparation of
Policies,   Procedures,  and  Board  and  Committee  monthly  packages  will  be
considerable and will allow the Company to grow organically without the addition
of administrative staff.

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


13


<PAGE>


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-QSB
(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

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-QSB.

Executive Summary and Recent Developments

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

<TABLE>
<CAPTION>


                                              SELECTED FINANCIAL DATA


                                            Jun-03         Sep-03         Dec-03         Mar-04         Jun-04
                                        -------------  -------------  -------------  -------------  -------------
<S>                                     <C>            <C>            <C>            <C>            <C>
Return on Average Assets                         1.06%         1.08%           0.99%          0.82%          0.92%

Return on Average Equity                        16.84%        17.18%          16.83%         10.60%         12.19%

Average Equity to Average Assets                 6.54%         6.55%           6.76%          7.69%          7.58%

Net Interest Margin                              4.84%         4.81%           4.82%          4.91%          4.91%

Efficiency Ratio*                               65.77%        66.05%          68.94%         72.66%         70.50%

Average Loans to Average Deposits               83.12%         81.64%         81.74%         80.10%         80.63%

Net Income                              $         879  $         916  $         975  $         876  $       1,162

Earnings Per Share:
     Basic                              $        0.28  $        0.29  $        0.27  $        0.23  $        0.31
     Diluted                            $        0.27  $        0.28  $        0.25  $        0.21  $        0.29
Outstanding Shares:
    Basic                                   3,086,403      3,117,100      3,565,008      3,791,244      3,797,874
    Diluted                                 3,274,122      3,301,375      3,841,465      4,096,227      4,068,597
</TABLE>

*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 recent events was the  acquisition
of Hacienda Bank that took place on October 31, 2003. Hacienda had approximately
$86 million in assets at June 30, 2004. 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.

In 1999,  Heritage  put into  action a  Corporate  Culture  Survey  that  allows
employee 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.  This  program  was  implemented  for
Hacienda in February 2004.


14


<PAGE>


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 2003, 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 2003) was 21.9%  compared to a CAGR
of 6.2% for total deposits in San Luis Obispo County.

On February 17, 2004,  the Bank  relocated  its Woodland  Branch Office from the
existing  storefront  location to the newly  constructed 5,000 square foot stand
alone facility.  This building has been under construction for approximately one
year and offers four drive through lanes,  one drive through ATM and one through
the wall ATM. The hours of operation  include  Sunday drive through from 10am to
2pm. The previous  Woodland facility now houses  administrative  offices for the
Bank and the lease expires in June 2005.

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.
Architectural  plans are currently  being  submitted to local city  departments.
Completion  of the project is  anticipated  to be sometime  during the second or
third quarter of 2005.

Local Economy

The economy in the  Company's  service area is based  primarily on  agriculture,
tourism,  light  industry,  oil and  retail  trade.  Services  supporting  these
industries  have  also  developed  in  the  areas  of  medical,   financial  and
educational.  The  population in the two county areas  comprising  the Company's
service area,  according to the U.S. Bureau of the Census, was estimated at July
2001 to be approximately 655,600. San Luis Obispo County represents about 38% of
this total with Santa Barbara County accounting for the remaining  approximately
62%.  The  moderate  climate  allows a year round  growing  season for  numerous
vegetable and fruits.  Vineyards and cattle ranches also  contribute  largely to
the local economy.  Vineyards in production  have grown  significantly  over the
past several years  throughout  the Company's  service area.  Access to numerous
recreational  activities,  including  lakes,  mountains  and beaches,  provide a
relatively   stable  tourist   industry  from  many  areas   including  the  Los
Angeles/Orange  County  basin,  the San  Francisco  Bay area and the San Joaquin
Valley.  Principally  due to the  diversity  of the  various  industries  in the
Company's  service area, the area, while not immune from economic  fluctuations,
does tend to enjoy a more  stable  level of  economic  activity  from many other
areas of California.

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

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

On December 22, 2003, a 6.5 magnitude  earthquake  rocked the Central Coast. The
earthquake was centered in San Simeon,  an area  approximately  20 miles west of
Paso Robles where the Company is headquartered. There was the tragic loss of two
lives in Paso  Robles.  The greatest  amount of property  damage was centered in
downtown Paso Robles.  The Company did not sustain any structural  damage to its
facilities and there were no injuries to any employees or their  families.  City
officials  reacted  quickly and obtained  disaster status from state and federal
agencies.  Business'  in the downtown  area  experienced  a moderate  decline in
activity,  however, the area has already begun to rebuild and things are getting
back to normal.  Within  days after the  earthquake,  the Company  performed  an


15


<PAGE>


assessment  as to any  financial  impact  it could  expect  regarding  effect to
customers  and their  ability  to repay any  outstanding  debt.  The  assessment
revealed that there was no material impact to the Company.


Critical Accounting Policies

The  Company's  significant  accounting  policies are set forth in note 1 of the
consolidated  financial  statements  as of December  31, 2003 which was filed on
Form 10-KSB. Of these significant accounting policies, the Company considers its
policy  regarding  the  allowance  for  loan  losses  to be  its  most  critical
accounting policy,  because it requires management's most subjective and complex
judgments.  In addition,  changes in economic  conditions can have a significant
impact on the  allowance  for loan losses and  therefore  the provision for loan
losses and results of operations. The Company has developed appropriate policies
and  procedures  for  assessing  the adequacy of the  allowance for loan losses,
recognizing  that this process  requires a number of  assumptions  and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future  periods by  changes in  economic  conditions,  the impact of  regulatory
examinations,  and the discovery of information with respect to borrowers, which
is not  known to  management  at the time of the  issuance  of the  consolidated
financial statements.

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

Allowance for Loan and Lease Losses

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

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

Changes in the financial condition of individual borrowers, economic conditions,
historical  loss  experience  and the condition of the various  markets 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 2003 Annual  Report,  Note 6 of the NOTES TO  CONSOLIDATED
FINANCIAL  STATEMENTS,  we assess goodwill and other intangible assets each year
for  impairment.  This  assessment  involves  estimating  cash  flows for future
periods.  If the  future  cash  flows  were  materially  less than the  recorded
goodwill and other intangible  assets  balances,  we would be required to take a
charge against earnings to write down the assets to the lower value.

RESULTS OF OPERATIONS

Earnings Overview

The Company reported net income for the three months ended June 30, 2004 of $1.2
million  compared  to $879  thousand  during  the  same  period  in  2003.  This
represents an increase of 32.2%.  Basic  earnings per share for the three months
ended June 30, 2004 and June 30, 2003, were $.31 and $.28, respectively. Diluted
earnings  per share for the three  months ended June 30, 2004 and June 30, 2003,
were $.29 and $.27, respectively.


16


<PAGE>

The Company  reported  net income for the six months ended June 30, 2004 of $2.0
million compared to $1.7 million during the same period in 2003. This represents
an increase of 19.6%. Basic earnings per share for the six months ended June 30,
2004 and June 30, 2003 were $.54 and $.55,  respectively.  Diluted  earnings per
share for the six  months  ended June 30,  2004 and June 30,  2003 were $.50 and
$.52, respectively.

When  viewing  data for the three and six months  ending  June 30,  2004,  it is
important  to keep in mind that  Hacienda was acquired by the Company on October
31,  2003.  Therefore,  income and  expense  for  Hacienda  is  included  in the
Company's consolidated results for the three and six months ending June 30, 2004
but is not included in the Company's  consolidated results for the three and six
months ending June 30, 2003.  There were 602,485  shares of Company common stock
issued in  connection  with the Hacienda  acquisition  and, as a result of these
increased shares, earnings per share on a fully diluted basis for the six months
ending June 30, 2004 decreased by $.02 from the six months ending June 30, 2003.
However,  for the three  months  ending June 30,  2004,  earnings per share on a
fully diluted basis were $.29 compared to $.27 for the same period in 2003.

Net Interest Income and Interest Margin

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

The tables  below sets forth  changes  from June 30,  2003 to June 30,  2004 for
average interest earning assets and their respective  average yields. Due to the
declining yields on loans, the Company had to increase average earning assets to
augment net  interest  income.  The Company was 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 was achieved under
the Company's established Loan Policy.

The tax-exempt portion of the investment  portfolio also increased,  however, it
experienced an 11 basis point  decrease in average yield.  At June 30, 2004, the
tax equivalent  yield was 6.985% compared to 7.231% for the same period in 2003.
The  Company  has  significant  room to grow in  tax-exempts  before  bumping up
against the Alternative  Minimum Tax issue with the IRS. The taxable  investment
portfolio gained in average yield due to extension caused by rising rates.

<TABLE>
<CAPTION>

                                                                 AVERAGE
                                                                 BALANCE
              (DOLLARS IN THOUSANDS)                             JUNE 30,
Interest Earning Assets:                                    2003          2004         $ VARIANCE     % VARIANCE
                                                       -------------  -------------  -------------    -----------
<S>                                                    <C>            <C>            <C>              <C>
              Time deposits with other banks           $         497  $         498  $           1           0.20%
              Investment securities taxable                   48,323         48,177           (146)         -0.30%
              Investment securities non-taxable                9,859         11,151          1,292          13.10%
              Federal funds sold                              17,042         31,069         14,027          82.31%
              Loans (1) (2)                                  211,403        293,921         82,518          39.03%
                                                       -------------  -------------  -------------
              Total interest earning assets            $     287,124  $     384,816  $      97,692          34.02%
                                                       =============  =============  =============


                                                                AVERAGE
                                                                  YIELD
                                                                JUNE 30,
Interest Earning Assets:                                    2003          2004         VARIANCE
                                                       -------------  -------------  -------------
              Time deposits with other banks                    2.43%          2.02%         -0.41%
              Investment securities taxable                     3.58%          3.79%          0.21%
              Investment securities non-taxable                 4.56%          4.45%         -0.11%
              Federal funds sold                                1.27%          1.00%         -0.27%
              Loans (1) (2)                                     7.18%          6.77%         -0.42%

              Total interest earning assets                     6.13%          5.86%         -0.27%

</TABLE>


17

<PAGE>


The tables  below sets forth  changes  from June 30,  2003 to June 30,  2004 for
average  interest bearing  liabilities and their respective  average rates paid.
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.


<TABLE>
<CAPTION>

                                                                AVERAGE
                                                                 BALANCE
              (DOLLARS IN THOUSANDS)                             JUNE 30,
Interest-bearing liabilities:                               2003          2004         $ VARIANCE     % VARIANCE
                                                       -------------  -------------  -------------    -----------
<S>                                                    <C>            <C>            <C>              <C>
              Savings/NOW/money market                 $     109,828  $     154,345  $      44,517          40.53%
              Time deposits                                   45,950         73,218         27,268          59.34%
              Other borrowings                                32,191         32,523            332           1.03%
              Long Term Debt                                   8,248          8,248             --           0.00%
                                                       -------------  -------------  -------------
              Total interest-bearing liabilities       $     196,217  $     268,334  $      72,117          36.75%
                                                       =============  =============  =============


                                                                 AVERAGE
                                                                  YIELD
                                                                 JUNE 30,
Interest-bearing liabilities:                               2003          2004         VARIANCE
                                                       -------------  -------------  -------------
              Savings/NOW/money market                          0.67%          0.40%         -0.27%
              Time deposits                                     2.36%          1.59%         -0.77%
              Other borrowings                                  4.12%          3.92%         -0.20%
              Long Term Debt                                    5.26%          5.09%         -0.17%

              Total interest-bearing liabilities                1.83%          1.30%         -0.53%

</TABLE>


The  Company  was able to  increase  the Net  Interest  Margin as the  result of
decreased costs for Interest Bearing Liabilities, primarily Time Deposits.

On June 29, 2004, the Federal  Reserve Bank increased  rates by 25 basis points.
This action so late in the quarter had no impact on the  Company's  net interest
margin as of June 30, 2004.  However,  due to the asset sensitive  nature of the
Company's balance sheet,  management  believes that this increase,  coupled with
the  Company's  substantial  volume of  non-interest  bearing  deposits  and low
average  rates on  interest  bearing  deposits,  will  favorably  impact the net
interest margin.


18

<PAGE>


The table  below sets forth the  average  balance  sheet  information,  interest
income and expense,  average yields and rates and net interest income and margin
for the six  months  ending  June 30,  2003 and 2004.  The  average  balance  of
non-accruing loans has been included in loan totals.


                            AVERAGE BALANCE SHEET INFORMATION FOR JUNE 30,
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      2003                                    2004
                                                      -------------------------------------   --------------------------------
                                                                     AVERAGE                               AVERAGE
                                                       AVERAGE        YIELD        AMOUNT      AVERAGE       YIELD     AMOUNT
Interest Earning Assets:                               BALANCE      RATE PAID     INTEREST     BALANCE    RATE PAID   INTEREST
                                                      ---------     ---------     ---------   ---------   ----------  --------
<S>                                                   <C>           <C>           <C>         <C>         <C>         <C>
              Time deposits with other banks          $     497          2.43%    $       6   $     498         2.02%$       5
              Investment securities taxable              48,323          3.58%          858      48,177         3.79%      906
              Investment securities non-taxable           9,859          4.56%          223      11,151         4.45%      246
              Federal funds sold                         17,042          1.27%          107      31,069         1.00%      154
              Loans (1) (2)                             211,403          7.18%        7,532     293,921         6.77%    9,866
                                                      ---------                   ---------   ---------               --------

              Total interest earning assets             287,124          6.13%        8,726     384,816         5.86%   11,177
                                                      ---------                   ---------   ---------               --------

Allowance for possible loan losses                       (2,481)                                 (3,133)
Non-earning assets:
              Cash and due from banks                    20,279                                  29,387
              Property, premises and equipment            4,582                                  10,143
              Other assets                                9,810                                  19,815
                                                      ---------                               ---------

TOTAL ASSETS                                          $ 319,314                               $ 441,028
                                                      ---------                               ---------

Interest-bearing liabilities:
              Savings/NOW/money market                  109,828          0.67%          367     154,345         0.40%      307
              Time deposits                              45,950          2.36%          538      73,218         1.59%      577
              Other borrowings                           32,191          4.12%          658      32,523         3.92%      632
              Long Term Debt                              8,248          5.26%          215       8,248         5.09%      208
                                                      ---------                   ---------   ---------               --------

              Total interest-bearing liabilities        196,217          1.83%        1,778     268,334         1.30%    1,724
                                                      ---------                   ---------   ---------               --------

Non-interest bearing liabilities:
              Demand deposits                            98,570                                 136,948
              Other liabilities                           3,649                                   2,322
                                                      ---------                               ---------
              Total liabilities                         298,436                                 407,604
                                                      ---------                               ---------


Stockholders' equity
              Common stock                               10,835                                  22,249
              Retained earnings                           9,476                                  11,116
              Valuation Allowance Investments               567                                      59
                                                      ---------                               ---------
              Total stockholders' equity                 20,878                                  33,424
                                                      ---------                               ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY                                              $ 319,314                               $ 441,028
                                                      ---------                               ---------

Net Interest Income                                                               $   6,948                           $  9,453
                                                                                  ---------                           --------
Net Interest Margin (3)                                                  4.84%                                  4.91%

</TABLE>


(1)  NONACCRUAL LOANS HAVE BEEN INCLUDED IN TOTAL LOANS.
(2)  LOAN  FEES OF $407 AND $492 FOR 2003  AND  2004,  RESPECTIVELY,  HAVE  BEEN
     INCLUDED IN THE INTEREST INCOME COMPUTATION.
(3)  NET INTEREST INCOME HAS BEEN CALCULATED BY DIVIDING THE NET INTEREST INCOME
     BY TOTAL AVERAGE EARNING ASSETS.

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, 2004 balances
indicate that the net interest  income at risk over a one year time horizon from
a 1% and 2% rate movement are within the Company's  policy  guidelines  for such
changes. Floors on loans are recognized in the models used.

----------------------- -------------- ------------- ------------ -------------
                        Rates Down 2%  Rates Down 1% Rates Up 1%  Rates Up 2%
----------------------- -------------- ------------- ------------ -------------
Change in Net                  (10.52%)       (6.18%)        6.96%       14.16%
Interest Income
----------------------- -------------- ------------- ------------ -------------

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


19

<PAGE>


assumptions of management  that may turn out to be different and may change over
time.  Factors  effecting these estimates and assumptions  include,  but are not
limited to 1)  competitor  behavior,  2) economic  conditions  both  locally and
nationally,  3) actions taken by the Federal Reserve Board, 4) customer behavior
and  5)  management's  responses.  Changes  that  vary  significantly  from  the
assumptions  and  estimates  may have  significant  effects on the Company's net
interest  income.  Therefore,  the results of this analysis should not be relied
upon as indicative of actual future results.

Non-Interest Income

The table below sets forth  changes for the three months ending June 30, 2003 to
June 30, 2004 for non-interest  income excluding $28 thousand Gain on Securities
Sold in 2004.


Non-Interest Income Components

<TABLE>
<CAPTION>
                                                 FOR THREE
                                               MONTHS ENDED
                                                  JUNE 30,
                                              ---------------
(DOLLARS IN THOUSANDS)                         2003     2004    $ VARIANCE  % VARIANCE
                                              ------   ------   ----------  ----------
<S>                                           <C>      <C>      <C>         <C>
Service Charges on Deposit Accounts           $  412   $  589   $      177       42.96%
ATM/Debit Card Transaction/Interchange Fees      100      153           53       53.00%
Bancard                                           24       33            9       37.50%
Mortgage Origination Fees                        239      198          (41)     -17.15%
Earnings on Cash Surrender Value Life Ins         70       80           10       14.29%
Other                                             82      106           24       29.27%
                                              ------   ------   ----------
TOTAL                                         $  927   $1,159   $      232       25.03%


The table below sets forth  changes  for the six months  ending June 30, 2003 to
June 30, 2004 for  non-interest  income  excluding $57 thousand and $28 thousand
Gain on Securities Sold in 2003 and 2004, respectively.


                                                  FOR SIX
                                               MONTHS ENDED
                                                  JUNE 30,
                                              ---------------
(DOLLARS IN THOUSANDS)                         2003     2004    $ VARIANCE  % VARIANCE
                                              ------   ------   ----------  ----------
Service Charges on Deposit Accounts           $  802   $1,098   $      296       36.91%
ATM/Debit Card Transaction/Interchange Fees      199      278           79       39.70%
Bancard                                           42       58           16       38.10%
Mortgage Origination Fees                        429      377          (52)     -12.12%
Earnings on Cash Surrender Value Life Ins        140      160           20       14.29%
Other                                            159      223           64       40.25%
                                              ------   ------   ----------
TOTAL                                         $1,771   $2,194   $      423       23.88%

</TABLE>

Increases  in Service  Charges on Deposit  Accounts and  ATM/Debit  Card related
transactions were favorably impacted by the 18.9% growth in Demand Deposits over
a one year period  that  includes  the  addition  of the three  Hacienda  branch
offices. Mortgage origination fees have been impacted negatively by the decrease
in "re-finance" activity due to rising rates.


20

<PAGE>

Non-Interest Expense

The tables below set forth  changes for the three and six months ending June 30,
2003 to June 30, 2004 for non-interest expense.

<TABLE>
<CAPTION>

Non-Interest Expense Components
                                                 FOR THREE
                                               MONTHS ENDED
                                                  JUNE 30,
                                              ---------------
(DOLLARS IN THOUSANDS)                         2003     2004    $ VARIANCE  % VARIANCE
                                              ------   ------   ----------  ----------
<S>                                           <C>      <C>      <C>         <C>
Salaries and Employee Benefits                $1,519   $2,128   $      609       40.09%
Occupany and Equipment                           429      628          199       46.39%
Data Processing                                  370      491          121       32.70%
Advertising and promotional                       78      123           45       57.69%
Regulatory fees                                   18       33           15       83.33%
Other professional fees and outside services      95      125           30       31.58%
Legal fees and other litigation expense           42       32          (10)     -23.81%
Loan Department Costs                             64       43          (21)     -32.81%
Stationery and supplies                           62       95           33       53.23%
Director fees                                     38       57           19       50.00%
Core Deposit Intangible Amortization              10      106           96      960.00%
Other                                            255      274           19        7.45%
                                              ------   ------   ----------
                                              $2,980   $4,135   $    1,155       38.76%



                                                  FOR SIX
                                               MONTHS ENDED
                                                  JUNE 30,
                                              ---------------
(DOLLARS IN THOUSANDS)                         2003     2004    $ VARIANCE  % VARIANCE
                                              ------   ------   ----------  ----------
Salaries and Employee Benefits                $3,022   $4,174   $    1,152       38.12%
Occupany and Equipment                           818    1,263          445       54.40%
Data Processing                                  751      967          216       28.76%
Advertising and promotional                      171      292          121       70.76%
Regulatory fees                                   37       63           26       70.27%
Other professional fees and outside services     190      269           79       41.58%
Legal fees and other litigation expense           62       47          (15)     -24.19%
Loan Department Costs                            129       78          (51)     -39.53%
Stationery and supplies                          115      186           71       61.74%
Director fees                                     77      115           38       49.35%
Core Deposit Intangible Amortization              20      211          191      955.00%
Other                                            456      570          114       25.00%
                                              ------   ------   ----------
                                              $5,848   $8,235   $    2,387       40.82%

</TABLE>

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,
2003 and 2004. Full time equivalent  (FTE) employees  increased from 127 at June
30, 2003 to 171 at June 30, 2004. The  acquisition of Hacienda  accounted for 25
FTE while the Bank  increased by 19 FTE. Of the 19 that were added for the Bank,
6 were in the Mortgage  Origination  Department (5 of whom are commission  based
employees),  7 for the newly expanded  Woodland  Branch Office  facility and the
remaining  6 were due to general  growth.  Approximately  $636  thousand  of the
increase  in the six  months of 2004 is the  result of  salary/related  cost for
Hacienda.

There has been much media attention related to the cost of doing business in the
State of  California.  Workers  Compensation  Insurance  costs  for the  Company
tripled on the renewal  date in July 2003 from  approximately  $75  thousand per
year to $220  thousand  per year.  Some of the  increase was due to an expanding
payroll,  however,  not to the extent  that the  premium  increased.  California
legislators have recently enacted changes that have resulted in a 7% decrease to
the Company's worker compensation insurance.

Group health benefit costs  increased by  approximately  $91 thousand in the six
months of 2004 compared to the same period in 2003.

Occupancy and Equipment

The increase in occupancy and equipment  expense is due in part to the inclusion
of  Hacienda's  expense of $354  thousand for the first six months of 2004.  The
remaining increase is due to the opening of the new branch office for the Bank


21

<PAGE>


Data Processing Expense

The increase in data  processing  expense is due to the  inclusion of Hacienda's
data  processing  expense of $297  thousand for the first six months of 2004. In
May 2003 and  August  2003,  the  Company  was able to  re-negotiate  their  ATM
processing and Data/Item Processing agreements, respectively, to lower costs.

Provision for Income Taxes

The provision for income taxes was 37.0% and 36.4% of net pre-tax income for the
six months ending June 30, 2004 and 2003, respectively.

FINANCIAL CONDITION ANALYSIS

Total assets of the Company were $441.9 million at December 31, 2003 compared to
$464.5 million at June 30, 2004. This represents an increase of $22.6 million or
5.1%.

Loans

A  significant  portion of total assets is the  Company's  gross loans that were
$278.1  million  and $298.1  million at  December  31,  2003 and June 30,  2004,
respectively.

The table below sets forth  changes from  December 31, 2003 to June 30, 2004 for
the composition of the loan portfolio.

Major classifications of loans were:

<TABLE>
<CAPTION>
                                           DECEMBER     JUNE 30,
                                           31, 2003       2004
                                          ---------    ---------
<S>                                       <C>          <C>          <C>           <C>
(IN THOUSANDS)
Commercial, financial, and agricultural   $  49,024    $  49,507          483         0.99%
Real estate-construction                     47,720       51,086        3,366         7.05%
Real estate-mortgage                        175,880      191,966       16,086         9.15%
Installment loans to individuals              5,173        5,168           (5)       -0.10%
All other loans (including overdrafts)          338          397           59        17.46%
                                          ---------    ---------    ---------
                                            278,135      298,124       19,989         7.19%

Less - deferred loan fees, net               (1,014)      (1,169)        (155)       15.29%
Less - reserve for possible loan losses      (3,070)      (3,145)         (75)        2.44%
                                          ---------    ---------    ---------

Total loans                               $ 274,051    $ 293,810       19,759         7.21%
                                          ---------    ---------

Loans Held For Sale                       $   4,402    $   3,454         (948)      -21.54%

</TABLE>


The small increase in commercial, financial and agricultural loans is attributed
to increased  activity on existing  credit lines and to several new credit lines
granted.

The increase in real  estate-construction  loans can be attributed to funding of
existing  construction  projects and to several new construction loans made. The
new construction loans include a residential tract development for $2.5 million,
an addition to a strip center for $4.4 million, a mini storage for $1.4 million,
a warehouse  for $1.4  million,  a retail  center for $1.4  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 large increase in real estate-mortgage loans is attributed to several of the
construction  loans  moving  into  amortizing  loans,  numerous  new  commercial
property loans including an office/light  industrial building for $8 million, an
office  complex for $2.5  million,  an  apartment  for $1.2  million,  an office
building  for $1 million,  an  apartment  for $1 million and a RV storage for $1
million.

The Bank presently has a concentration of loans in construction/land  and hotels
in  the   amount   of  $51   million   and  $30   million,   respectively.   The
construction/land   loans  are  spread  throughout  our  market  area  and  have
consistently  performed in a satisfactory  manner. 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 the area hotel participation loan that was


22

<PAGE>

in default.  This loan, in the original  amount of $1 million,  was paid down by
$900  thousand in April 2004 with the  remaining  $95 thousand  charged off. Two
other  hotel  loans were paid off during  the second  quarter by other  lenders,
reducing our exposure in the hotel industry by approximately $9 million.

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, 2004,  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 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.

If a loans 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.

Total Cash and Due from Banks

Total cash and due from banks were $40.4  million and $32.5  million at December
31, 2003 and June 30, 2004, 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.

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 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, 2003, net unrealized  gains in the portfolio
were $98 thousand compared to a net unrealized loss of $347 thousand at June 30,
2004. The portfolio  increased in size due to additional  security  purchases of
approximately  $17.3  million  off-set  by $7.1  million  and  $1.5  million  in
principle reductions and the sale of three small securities, respectively.

At June  30,  2004,  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.


23

<PAGE>

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.  Heritage 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.

Deposits and Borrowed Funds

The table below sets forth  changes from  December 31, 2003 to June 30, 2004 for
the composition of deposit categories.

<TABLE>
<CAPTION>

                                          DECEMBER      JUNE 30,
(IN THOUSANDS)                             31, 2003       2004      $VARIANCE   % VARIANCE
                                          ---------    ---------    ---------   ----------
<S>                                       <C>          <C>          <C>         <C>
Deposits:
Demand, non-interest bearing              $ 137,859    $ 162,252       24,393        17.69%
Savings, NOW, and money market deposits     153,413      155,340        1,927         1.26%
Time deposits of $100 thousand or more       23,694       21,865       (1,829)       -7.72%
Time deposits under $100 thousand            51,473       48,043       (3,430)       -6.66%
                                          ---------    ---------    ---------
Total deposits                              366,439      387,500       21,061         5.75%

</TABLE>

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, 2004,  non-interest bearing demand deposits provide
41.9% of total  deposits  compared to 37.6% at December 31,  2003.  The Bank has
three deposit relationships that it considers to be volatile. These deposits are
held by three,  long time customers of the Bank that engage in mortgage  related
activities.  The  volatile  nature of these  relationships  was  evidenced by an
increase of $17.7 million in account balances from December 31, 2003 to June 30,
2004.  These  volatile  account  relationships  are  included  in  the  volatile
liability  dependency  report  that  the  Bank  produces  on  a  monthly  basis.
Management  and the Board of  Directors of the Bank are keenly aware that 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 $365.6 million represented
94.4% of total  deposits at June 30, 2004.  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. The note was obtained to assist with the cash and capital needs for the
acquisition of Hacienda.  The Company pledged 633,920 shares (50%) 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. The interest rate on the note is 4.25% and is
variable and moves with prime.  At June 30,  2004,  the Company had $3.5 million
outstanding on this loan. 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.

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 $0. 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 June 30, 2004, the Bank had borrowings  with the FHLB of $9.5 million and $19
million collateralized by loans and securities,  respectively.


24
<PAGE>

The $28.5 million in borrowing matures in April 2005. At June 30, 2004, the Bank
has a remaining borrowing capacity with existing collateral of approximately $.8
million and $9.1 million secured by loans and securities, respectively.

The Bank utilizes  securities  sold under  repurchase  agreements as a source of
funds. The Bank had $460 thousand in securities sold under repurchase agreements
at December 31, 2003 compared to $863 thousand at June 30, 2004.

Capital

The Company's total  stockholders  equity was $32.3 million at December 31, 2003
compared to $34 million at June 30, 2004. The increase in capital was due to net
income  of  $2,038  thousand,  stock  options  exercised  in the  amount of $102
thousand,  and a decrease  in  accumulated  other  comprehensive  income of $445
thousand and $7 thousand cash paid in lieu of fractional shares.

On March 26, 2004 the Board of  Directors  of the  Company  announced a 5% stock
dividend  to  shareholders  of record on April 9, 2004 that was  distributed  on
April 23, 2004. The Consolidated  Statements of Stockholders' Equity found under
Item 1. 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  quarterly on these debt  securities  at 6-Month  LIBOR plus 3.7% for an
effective rate of 5.07% as of June 30, 2004.  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.

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. The Federal Reserve Board had ruled that
certain  mandatorily  redeemable  preferred  securities of a consolidated entity
qualified as Tier 1 Capital.  At June 30, 2004, the Company has included the net
junior subordinated debt in its Tier1 Capital for regulatory capital purposes.

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

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  Heritage  for future
growth.

On May 6,  2004,  the  Federal  Reserve  Board  released  a notice  of  proposed
rulemaking  ("NPR")  pertaining  to the continued  inclusion of trust  preferred
securities in the Tier 1 capital of bank holding companies ("BHCs"). This NPR is
subject to public comment prior to July 11, 2004 and therefore may be revised.

This NPR proposes three  substantive  changes in the capital  treatment of trust
preferred  securities:  (i)  subtraction of goodwill from core capital  elements
before calculating permitted trust preferred,(ii) amortization of tier 1 capital
credit of trust preferred securities in the 5 years prior to maturity, and (iii)
limitation  of  trust  preferred  securities  to 15% of tier 1  capital,  net of
goodwill for  internationally  active BHCs. If this NPR is finally adopted,  the
Company will still be considered  "well  capitalized"  under current  regulatory
guidelines.


25

<PAGE>

Management  believes  that  organic  growth  in  2004  for  the  Company  can be
accomplished  without  further  borrowing for capital or cash flow purposes.  At
June 30, 2004,  the Company had  sufficient  cash to service the $8.2 million in
junior  subordinated  debenture interest payments for approximately six quarters
without dividends from subsidiaries.  The Bank's capacity to provide cash to the
Company, while remaining "well-capitalized", was $5.4 million at June 30, 2004.

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.

Summarized  below are the  Company's and the Bank's  capital  ratios at June 30,
2004.

                                      REGULATORY STANDARD
                                   ------------------------  HERITAGE  Heritage
                                    ADEQUATELY     WELL        OAKS      Oaks
                                   CAPITALIZED  CAPITALIZED   BANCORP    Bank
                                   -----------  ----------- ---------- --------
Leverage Ratio                            4.00%        5.00%     7.71%    8.21%

Tier One Risk Based Captial Ratio         4.00%        6.00%    10.15%   10.45%

Total Risk Based Captial Ratio            8.00%       10.00%    11.09%   11.38%

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
of June 30, 2004, 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 $9.9 million.

The Bank manages liquidity by maintaining a majority of the investment portfolio
in federal funds sold and other liquid  investments.  At December 31, 2003,  the
ratio of liquid assets not pledged for collateral and other purposes to deposits
and other liabilities was 28.1% compared to 26.8% at June 30, 2004. The ratio of
net loans to deposits,  another key liquidity  ratio,  was 76.0% at December 31,
2003 compared to 75.8% at June 30, 2004.

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 on  inflation  during the
three-year  period  ended June 30, 2004 has been  significant  to the  Company's
financial position or results of operations in regard to fluctuation in interest
rates creating narrowing net interest margins. However, inflation has not been a
factor  in the  customer's  ability  to  repay  debt or in  upward  pressure  on
operation expenses.


26

<PAGE>

Off-Balance Sheet Arrangements

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

In the  ordinary  course of business,  the Company has entered into  off-balance
sheet  financial  instruments   consisting  of  commitments  to  extend  credit,
commercial  letter of  credit,  and  standby  letter of credit.  Such  financial
instruments  are  recorded in the  financial  statement  when they are funded or
related  fees  are  incurred  or  received.  For a  fuller  discussion  of these
financial instruments,  refer to Note 10 of the Company's consolidated financial
statements  contained  in Item 7 of Part II of the  Company's  December 31, 2003
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, 2003 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.


27

<PAGE>

ITEM 3.   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.

There was no change in the Company's internal controls over financial  reporting
during the  quarter  ended June 30,  2004 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 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 27, 2004:

                    1. ELECTION OF  DIRECTORS.  To elect ten (10) persons to the
                    Board of  Directors  of the  Company to serve until the 2005
                    Annual Meeting of  Shareholders  and until their  successors
                    are  elected  and  have  qualified.  The  following  persons
                    elected:

                                                     For
                           Dr. B. R. Bryant          2,924,151
                           Donald H. Campbell        2,924,872
                           Kenneth L. Dewar          2,924,872
                           Mark C. Fugate            2,923,511
                           Dolores T. Lacey          2,923,462
                           Merle F. Miller           2,924,872
                           Michael J. Morris         2,924,872
                           Alexander F. Simas        2,924,627,
                           Ole K. Viborg             2,752,830
                           Lawrence P. Ward          2,904,999

                    2.  RATIFICATION OF INDEPENDENT  ACCOUNTANTS.  To ratify the
                    appointment  of  Vavrinek,  Trine,  Day &  Co.  LLP  as  the
                    Company's independent accountants for the 2004 fiscal year.

                    FOR    2,882,967    AGAINST  100     ABSTAINED    43,950


28

<PAGE>

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits:
          --------------

          Exhibit (10.41)  Fifth   Amendment   to  Service   Bureau   Processing
                           Agreement  dated  June  19,  2004  between   Fidelity
                           Information Services, Inc. and Heritage Oaks Bank.

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

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

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

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

          (b)  Reports on Form 8-K:

               The first  quarter  press  release of earnings for March 31, 2004
               for the Company was filed on Form 8-K, Items 7. and 12., with the
               SEC on April 9, 2004.


29

<PAGE>

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 9, 2004


                           /s/ Lawrence P. Ward
                           ------------------------
                           Lawrence P. Ward
                           President
                           Chief Executive Officer



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



30

<PAGE>


                                  EXHIBIT INDEX

Exhibit (10.41)     Fifth amendment to Service Bureau Processing Agreement dated
                    June 19, 2004 between Fidelity  Information  Services,  Inc.
                    and Heritage Oaks Bank.

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


31