----

----

** **

**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-QSB**
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF****THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------------|

**For the quarterly period endedJune 30, 2001**
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**For the Transition Period from____________ to ____________**

**Commission File No. 0-25020**

| **HERITAGE OAKS BANCORP**                                      |
|----------------------------------------------------------------|
| ****                                                           |
| (Exact name of registrant as specified in charter)             |
|                                                           |
| **STATE OF CALIFORNIA**                                        | **77-0388249** |
| ****                                                           | **** |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Code) |
|                                                           |   |
| **545 12th STREET, PASO ROBLES, CA  93446**               |
| ****                                                           |
| (Address of principal office)                                  |
|                                                           |
| **(805) 239-5200**                                             |
| ****                                                           |
| (Registrant's telephone number, including area code)           |

             Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding twelve (12) months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past ninety (90) days.

| YES  ý | NO  o |
|------------------|------------|

Aggregatemarket value of Common Stock of Heritage Oaks Bancorp at July 11, 2001:$28,553,360.

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

No par value Common Stock - 1,297,880 sharesoutstanding at July 11,2001.

----

----

## **TABLE OF CONTENTS**

|                                                                                                     |   |
|----------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance  Sheets for periods ended December 31, 2000 and June 30, 2001                       |   |
|                                                                                                     |   |
| Consolidated  Statements of Income for the three months ended June 30, 2000 and June 30,  2001           |   |
|                                                                                                     |   |
| Consolidated  Statements of Income for the six months ended June 30, 2000 and June 30, 2001              |   |
|                                                                                                     |   |
| Consolidated  Statements of Cash Flows for periods ended June 30, 2000 and June 30, 2001                 |   |
|                                                                                                     |   |
| Consolidated  Statements of Stockholders’ Equity for periods ended June 30, 2000 and June  30, 2001 |   |
|                                                                                                     |   |
| Notes to  Consolidated Condensed Financial Statements                                                    |   |
|                                                                                                     |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations     |   |
|                                                                                                     |   |
| Part 2.  Other Information                                                                          |   |
| Item 1.  Legal Proceedings                                                                          |   |
| Item  2. Changes in Securities and Use of Proceeds                                                       |   |
| Item  3. Defaults Upon Senior Securities                                                                 |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                             |   |
| Item 5. Other  Information                                                                               |   |
|                                                                                                     |   |
| Signatures                                                                                               |   |
|                                                                                                     |   |
| Exhibits                                                                                                 |   |
|                                                                                                     |   |

**HERITAGE OAKS BANCORPCONSOLIDATED BALANCE SHEETS**

 

|                                                                                                                                                              | **31-Dec-2000** |        | **30-Jun-2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|-------------|-----------------|--------|
|                                                                                                                                                              | ****            |        | ****            |   |
| ASSETS                                                                                                                                                            | **(1****)**     |        | **(Unaudited)** |   |
| Cash and due from banks                                                                                                                                           | $               | 19,435,534  |            | $      | 14,621,921 |   |
| Federal funds sold                                                                                                                                                | 4,600,000       |        | 14,500,000      |   |
|                                                                                                                                                              |                 |        |                 |   |
| Total cash and cash equivalents                                                                                                                                   | 24,035,534      |        | 29,121,921      |   |
|                                                                                                                                                              |            |        |            |   |
| Interest bearing deposits other banks                                                                                                                             | 198,000         |        | 198,000         |   |
|                                                                                                                                                              |            |        |            |   |
| Securities Available for sale                                                                                                                                     | 16,212,505      |        | 13,595,810      |   |
| Securities held to maturity (see note 2)                                                                                                                          | 0               |        | 0               |   |
| Federal Home Loan Bank Stock, cost                                                                                                                                | 381,600         |        | 221,300         |   |
| Loans Held For Sale                                                                                                                                               | 2,474,542       |        | 2,853,265       |   |
| Loans, net (see note 3)                                                                                                                                           | 133,680,029     |        | 136,284,490     |   |
|                                                                                                                                                              |            |        |            |   |
| Property, premises and equipment, net                                                                                                                             | 3,062,815       |        | 2,742,510       |   |
| Other real estate owned                                                                                                                                           | 0               |        | 0               |   |
| Cash surrender value life insurance                                                                                                                               | 1,369,549       |        | 2,576,028       |   |
| Other assets                                                                                                                                                      | 2,673,451       |        | 2,297,940       |   |
|                                                                                                                                                              |                 |        |                 |   |
| TOTAL ASSETS                                                                                                                                                      | $               | 184,088,025 |            | $      | 189,891,264 |   |
|                                                                                                                                                              |                 |        |                 |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                              |            |        |            |   |
| LIABILITIES                                                                                                                                                       |            |        |            |   |
| Deposits:                                                                                                                                                         |            |        |            |   |
| Demand, non-interest bearing                                                                                                                                      | $               | 51,821,233  |            | $      | 62,760,859 |   |
| Savings, NOW, and money market deposits                                                                                                                           | 63,715,930      |        | 63,162,931      |   |
| Time deposits of $100,000 or more                                                                                                                                 | 7,659,791       |        | 4,107,832       |   |
| Time deposits under $100,000                                                                                                                                      | 44,499,935      |        | 43,311,151      |   |
|                                                                                                                                                              |                 |        |                 |   |
| Total deposits                                                                                                                                                    | 167,696,889     |        | 173,342,773     |   |
|                                                                                                                                                              |            |        |            |   |
| Other borrowed money                                                                                                                                              | 1,050,000       |        | 400,000         |   |
| Securities Sold under Agreement to Repurchase                                                                                                                     | 0               |        | 0               |   |
| Other liabilities                                                                                                                                                 | 1,886,127       |        | 1,421,639       |   |
|                                                                                                                                                              |                 |        |                 |   |
| Total liabilities                                                                                                                                                 | 170,633,016     |        | 175,164,412     |   |
|                                                                                                                                                              |            |        |            |   |
| Stockholders' equity                                                                                                                                              |            |        |            |   |
| Common stock,  no par value; 20,000,000 shares authorized; issued and outstanding 1,224,999  and 1,297,880 for December 31, 2000 and June 30, 2001, respectively. | 6,305,233       |        | 7,510,438       |   |
| Accumulated other comprehensive income                                                                                                                            | (141,364        | )           | (48,539         | )      |
| Retained earnings                                                                                                                                                 | 7,291,140       |        | 7,264,953       |   |
|                                                                                                                                                              |                 |        |                 |   |
| Total stockholders' equity                                                                                                                                        | 13,455,009      |        | 14,726,852      |   |
|                                                                                                                                                              |                 |        |                 |   |
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                                                                                                      | $               | 184,088,025 |            | $      | 189,891,264 |   |
|                                                                                                                                                              |                 |        |                 |   |

----

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

** **

 

**HERITAGE OAKS BANCORPCONSOLIDATED STATEMENTS OF INCOMEFor the three months ended June 30,**

|                                                       | **2000**        |      | **2001**        |       |
|------------------------------------------------------------|-----------------|-----------|-----------------|------------|
|                                                       | **(Unaudited)** |      | **(Unaudited)** | ** ** |
| Interest Income:                                           |            |      |            |       |
|                                                       |            |      |            |       |
| Interest and fees on loans                                 | $               | 3,062,065 |            | $          | 3,312,484 |   |
| Investment securities                                      | 265,749         |      | 192,941         |       |
| Federal funds sold and commercial paper                    | 64,131          |      | 147,131         |       |
| Time certificates of deposit                               | 4,694           |      | 4,430           |       |
|                                                       |                 |      |                 |       |
| Total interest income                                      | 3,396,639       |      | 3,656,986       |       |
|                                                       |            |      |            |       |
| Interest Expense:                                          |            |      |            |       |
|                                                       |            |      |            |       |
| Now accounts                                               | 190,940         |      | 143,409         |       |
| MMDA accounts                                              | 42,540          |      | 55,420          |       |
| Savings accounts                                           | 76,221          |      | 59,385          |       |
| Time deposits of $100,000 or more                          | 109,247         |      | 100,079         |       |
| Other time deposits                                        | 501,008         |      | 587,180         |       |
| Other borrowed funds                                       | 118,428         |      | 12,592          |       |
|                                                       |                 |      |                 |       |
| Total interest expense                                     | 1,038,384       |      | 958,065         |       |
|                                                       |            |      |            |       |
| Net Interest Income Before Prov. for Possible Loan  Losses | 2,358,255       |      | 2,698,921       |       |
| Provision for loan losses                                  | 57,000          |      | 150,000         |       |
|                                                       |                 |      |                 |       |
| Net interest income after provision for loan losses        | 2,301,255       |      | 2,548,921       |       |
|                                                       |            |      |            |       |
| Non-interest Income:                                       |            |      |            |       |
| Service charges on deposit accounts                        | 267,767         |      | 288,134         |       |
| Investment securities gains (losses), net                  | 0               |      | 0               |       |
| Other income                                               | 1,161,267       |      | 834,853         |       |
|                                                       |                 |      |                 |       |
| Total Non-interest Income                                  | 1,429,034       |      | 1,122,987       |       |
|                                                       |            |      |            |       |
| Non-interest   Expense:                               |            |      |            |       |
| Salaries and employee benefits                             | 1,040,958       |      | 1,129,929       |       |
| Occupancy and equipment                                    | 377,832         |      | 372,138         |       |
| Other expenses                                             | 1,576,286       |      | 1,376,637       |       |
|                                                       |                 |      |                 |       |
| Total Noninterest Expenses                                 | 2,995,076       |      | 2,878,704       |       |
| Income before provision for income taxes                   | 735,213         |      | 793,204         |       |
| Provision for applicable income taxes                      | 201,745         |      | 274,508         |       |
|                                                       |                 |      |                 |       |
| Net Income                                                 | $               | 533,468   |            | $          | 518,696 |   |
|                                                       |                 |      |                 |       |
| Earnings per share: (See note #4)                          |            |      |            |       |
| Basic                                                      | $               | 0.42      |            | $          | 0.40 |   |
| Fully Diluted                                              | $               | 0.38      |            | $          | 0.37 |   |

See notes tocondensed financial statements

**HERITAGE OAKS BANCORPCONSOLIDATED STATEMENTS OF INCOMEFor the six months ended June 30,**

 

|                                                       | **2000**        |      | **2001**        |   |
|------------------------------------------------------------|-----------------|-----------|-----------------|--------|
|                                                       | **(Unaudited)** |      | **(Unaudited)** |   |
| Interest Income:                                           |            |      |            |   |
|                                                       |            |      |            |   |
| Interest and fees on loans                                 | $               | 5,830,346 |            | $      | 6,754,873 |   |
| Investment securities                                      | 538,655         |      | 413,233         |   |
| Federal funds sold and commercial paper                    | 72,627          |      | 210,630         |   |
| Time certificates of deposit                               | 5,222           |      | 6,960           |   |
|                                                       |                 |      |                 |   |
| Total interest income                                      | 6,446,850       |      | 7,385,696       |   |
|                                                       |            |      |            |   |
| Interest Expense:                                          |            |      |            |   |
|                                                       |            |      |            |   |
| Now accounts                                               | 350,705         |      | 348,372         |   |
| MMDA accounts                                              | 88,696          |      | 138,580         |   |
| Savings accounts                                           | 152,615         |      | 136,456         |   |
| Time deposits of $100,000 or more                          | 232,030         |      | 138,088         |   |
| Other time deposits                                        | 880,824         |      | 1,283,029       |   |
| Other borrowed funds                                       | 190,651         |      | 52,364          |   |
|                                                       |                 |      |                 |   |
| Total interest expense                                     | 1,895,521       |      | 2,096,889       |   |
|                                                       |            |      |            |   |
| Net Interest Income Before Prov. for Possible Loan  Losses | 4,551,329       |      | 5,288,807       |   |
| Provision for loan losses                                  | 114,000         |      | 300,000         |   |
|                                                       |                 |      |                 |   |
| Net interest income after provision for loan losses        | 4,437,329       |      | 4,988,807       |   |
|                                                       |            |      |            |   |
| Non-interest Income:                                       |            |      |            |   |
| Service charges on deposit accounts                        | 500,385         |      | 566,221         |   |
| Investment securities gains (losses), net                  | -2,188          |      | -1,606          |   |
| Other income                                               | 2,265,624       |      | 2,396,588       |   |
|                                                       |                 |      |                 |   |
| Total Non-interest Income                                  | 2,763,821       |      | 2,961,203       |   |
|                                                       |            |      |            |   |
| Non-interest   Expense:                               |            |      |            |   |
| Salaries and employee benefits                             | 2,042,872       |      | 2,195,744       |   |
| Occupancy and equipment                                    | 793,868         |      | 881,451         |   |
| Other expenses                                             | 2,826,505       |      | 3,158,783       |   |
|                                                       |                 |      |                 |   |
| Total Noninterest Expenses                                 | 5,663,245       |      | 6,235,978       |   |
| Income before provision for income taxes                   | 1,537,905       |      | 1,714,032       |   |
| Provision for applicable income taxes                      | 498,332         |      | 598,918         |   |
|                                                       |                 |      |                 |   |
| Net Income                                                 | $               | 1,039,573 |            | $      | 1,115,114 |   |
|                                                       |                 |      |                 |   |
| Earnings per share: (See note #4)                          |            |      |            |   |
| Basic                                                      | $               | 0.82      |            | $      | 0.86 |   |
| Fully Diluted                                              | $               | 0.73      |            | $      | 0.79 |   |

 

See notes to condensed financialstatements

**HERITAGEOAKS BANCORPCONSOLIDATED STATEMENTS OF CASHFLOWSPeriods ended June 30,**

 

|                                                     | 2000                                                                                                |        | 2001        |       |
|----------------------------------------------------------|-----------------------------------------------------------------------------------------------------|-------------|-------------|------------|
|                                                     |                                                                                                     |        |             |       |
|                                                     | (Unaudited)                                                                                         |        | (Unaudited) |       |
| **Cash Flows from Operating Activities**                 |                                                                                                |        |        |       |
|                                                     | Net income                                                                                          | $           | 1,039,573   |       | $ | 1,115,114 |   |
|                                                     | Adjustments to reconcile net income  to net cash provided by operating activities                   |        |        |       |   |
|                                                     | Net cash  provided by operating activities                                                          |        |        |       |   |
|                                                     | Depreciation  and amortization                                                                      | 352,732     |        | 449,937    |   |
|                                                     | Provision for  possible loan losses                                                                 | 114,000     |        | 300,000    |   |
|                                                     | Provision for  possible OREO losses                                                                 | 0           |        | 0          |   |
|                                                     | Realized (gain) loss on sales of  available-for-sale securities, net                                | (2,188      | )           | (1,606     | ) |
|                                                     | Gain on sales  of property, premise and equipment                                                   | 0           |        | 0          |   |
|                                                     | Amortization of premiums/discounts  on investment securities, net                                   | (79,171     | )           | (66,141    | ) |
|                                                     | (Increase)/decrease  in loans held for sale                                                         | (421,118    | )           | (378,723   | ) |
|                                                     | (Increase)/decrease  in deferred tax asset                                                          | (31,124     | )           | (14,242    | ) |
|                                                     | (Increase)/decrease  in other assets                                                                | (364,717    | )           | (816,726   | ) |
|                                                     | Increase/(decrease)  in other liabilities                                                           | 552,889     |        | (371,663   | ) |
|                                                     |                                                                                                     |        |             |       |
|                                                     | **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                                       | 1,160,876   |        | 215,950    |   |
|                                                     |                                                                                                     |        |             |       |
| **Cash Flows From Investing Activities**                 |                                                                                                |        |        |       |
|                                                     | Purchase of  securities held-to-maturity                                                            |        |        |       |   |
|                                                     | Purchase of  mortgage-backed securities held-to-maturity                                            |        |        |       |   |
|                                                     | Purchase of  securities available-for-sale                                                          | 0           |        | 0          |   |
|                                                     | Purchase of  mortgage-backed securities available-for-sale                                          | 0           |        | 0          |   |
|                                                     | Proceeds from principal reductions  and maturities of securities held-to-maturity                   | 0           |        | 0          |   |
|                                                     | Proceeds from principal reductions  and maturities of mortgage-backed securities held-to-maturity   | 0           |        | 0          |   |
|                                                     | Proceeds from  sales of securities available-for-sale                                               | 0           |        | 551,532    |   |
|                                                     | Proceeds from principal reductions  and maturities of securities available-for-sale                 | 2,009,558   |        | 2,234,641  |   |
|                                                     | Proceeds from sales of  mortgage-backed securities available-for-sale                               | 0           |        | 0          |   |
|                                                     | Proceeds from principal reductions  and maturities of mortgage-backed securities available-for-sale | 0           |        | 0          |   |
|                                                     | Net change in interest bearing  deposits in other financial institutions                            | 0           |        | 0          |   |
|                                                     | Purchase of  life insurance policies                                                                | 0           |        | 0          |   |
|                                                     | Proceeds from  sale of other real estate owned                                                      |        |        |       |   |
|                                                     | Recoveries on  loans previously written off                                                         | 0           |        | 0          |   |
|                                                     | Increase in  loans, net                                                                             | (19,961,967 | )           | (2,845,892 | ) |
|                                                     | Purchase of  property, premises and equipment, net                                                  | (221,656    | )           | (129,632   | ) |
|                                                     |                                                                                                     |        |             |       |
|                                                     | **NET CASH USED IN INVESTING ACTIVITIES**                                                           | (18,174,065 | )           | (189,351   | ) |
|                                                     |                                                                                                     |        |             |       |
| **Cash Flows From Financing Activities**                 |                                                                                                |        |        |       |
|                                                     | Increase in  deposits, net                                                                          | $           | 23,619,857  |       | $ | 5,645,884 |   |
|                                                     | Net  increase/(decrease) in other borrowings                                                        | 589,000     |        | (650,000   | ) |
|                                                     | Net  (decrease)/increase in notes payable                                                           | 0           |        | 0          |   |
|                                                     | Proceeds from  exercise of stock options                                                            | 72,755      |        | 68,584     |   |
|                                                     | Cash paid in  lieu of fractional shares                                                             | (3,923      | )           | (4,680     | ) |
|                                                     | Cash dividends  paid or declared                                                                    |        |        |       |   |
|                                                     |                                                                                                     |        |             |       |
|                                                     | **NET CASH PROVIDED BY FINANCING ACTIVITIES**                                                       | 24,277,689  |        | 5,059,788  |   |
|                                                     |                                                                                                     |        |             |       |
| **Net (Decrease)/Increase in Cash and Cash Equivalents** | 7,264,500                                                                                           |        | 5,086,387   |       |
| **Cash and Cash Equivalents**, Beginning of  year        | 18,359,073                                                                                          |        | 24,035,534  |       |
|                                                     |                                                                                                     |        |             |       |
| **Cash and Cash Equivalents**, End of year               | $                                                                                                   | 25,623,573  |        | $          | 29,121,921 |   |
|                                                     |                                                                                                     |        |             |       |
|                                                          |                                                                                                     |             |             |            |  |  |  |  |  |  |

See notes to condensed financialstatements

**HERITAGE OAKS BANCORPCONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITYJune 30, 2000 and June 30, 2001(Unaudited)**

 

|                                                                          | **Shares Outstanding**                                            |       | **Common Stock** |          | **Retained Earnings** |      | **Accumulated Other Comprehensive  Income** |       | **Total Stockholders' Equity** |         |
|-------------------------------------------------------------------------------|-------------------------------------------------------------------|------------|------------------|---------------|-----------------------|-----------|---------------------------------------------|------------|--------------------------------|--------------|
|                                                                          |                                                                   |       |                  |          |                       |      |                                             |       |                                |         |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |
| Balance January 1, 2000                                                       | 1,144,282                                                         |       | $                | 5,288,179     |                  | $         | 5,912,823                                   |       | $                              | (658,840     | ) | $ | 10,542,162 |   |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |
| Exercise of Stock Options                                                     | 18,961                                                            |       | 72,755           |          | 0                     |      |                                        |       | 72,755                         |         |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |
| Cash dividends paid                                                           | 0                                                                 |       | 0                |          | 0                     |      |                                        |       | 0                              |         |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |
| Stock dividend- 5%                                                            | 57,452                                                            |       | 861,780          |          | (861,780              | )         |                                        |       | 0                              |         |
| Cash paid to  Shareholders' in Lieu of fractional shares on 5% Stock Dividend |                                                              |       |             |          | (3,923                | )         |                                        |       | (3,923                         | )            |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |
| Comprehensive Income                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |
|                                                                          | Net Income                                                        |       |             |          |                  | 1,039,573 |                                        |       |                           | 1,039,573    |   |
|                                                                          | Unrealized  Security Holding Gains/(Losses) '(net of $44,167 tax) |       |             |          |                  |      |                                        | 66,250     |                           | 66,250       |   |
|                                                                          | Less  Reclassification Adjustment for Losses (net of $875 tax)    |       |             |          |                  |      |                                        | (1,313     | )                              | (1,313       | ) |
|                                                                          |                                                              |       |             |          |                  |      |                                             |       |                                |         |
| Total other comprehensive Income                                              |                                                              |       |             |          |                  |      |                                        |       | 1,104,510                      |         |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |
| **Balance June 30, 2000**                                                     | **1,220,695**                                                     | ** ** | **$**            | **6,222,714** | ** **            | **$**     | **6,086,693**                               | ** ** | **$**                          | **(593,903** | **)** | **$** | **11,715,504** | ** ** |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |         |

 

|                                                                          | **Shares Outstanding**                                            |       | **Common Stock** |          | **Retained Earnings** |      | **Accumulated Other Comprehensive  Income** |       | **Total Stockholders' Equity** |        |
|-------------------------------------------------------------------------------|-------------------------------------------------------------------|------------|------------------|---------------|-----------------------|-----------|---------------------------------------------|------------|--------------------------------|-------------|
|                                                                          | ****                                                              |       | ****             |          | ****                  |      | ****                                        |       | ****                           |        |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |
| Balance January 1, 2001                                                       | 1,224,999                                                         |       | $                | 6,305,233     |                  | $         | 7,291,140                                   |       | $                              | (141,364    | ) | $ | 13,455,009 |   |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |
| Exercise of Stock Options                                                     | 11,442                                                            |       | 68,584           |          | 0                     |      |                                        |       | 68,584                         |        |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |
| Cash dividends paid                                                           | 0                                                                 |       | 0                |          | 0                     |      |                                        |       | 0                              |        |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |
| Stock dividend- 5%                                                            | 61,439                                                            |       | 1,136,621        |          | (1,136,621            | )         |                                        |       | 0                              |        |
| Cash paid to  Shareholders' in Lieu of fractional shares on 5% Stock Dividend |                                                              |       |             |          | (4,680                | )         |                                        |       | (4,680                         | )           |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |
| Comprehensive Income                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |
|                                                                          | Net Income                                                        |       |             |          |                  | 1,115,114 |                                        |       |                           | 1,115,114   |   |
|                                                                          | Unrealized  Security Holding Gains/(Losses) '(net of $61,884 tax) |       |             |          |                  |      |                                        | 92,825     |                           | 92,825      |   |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                                |        |
| Total other comprehensive Income                                              |                                                              |       |             |          |                  |      |                                        |       | 1,207,939                      |        |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |
| **Balance June 30, 2001**                                                     | **1,297,880**                                                     | ** ** | **$**            | **7,510,438** | ** **            | **$**     | **7,264,953**                               | ** ** | **$**                          | **(48,539** | **)** | **$** | **14,726,852** | ** ** |
|                                                                          |                                                              |       |             |          |                  |      |                                        |       |                           |        |

Note 1: CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of Management, the unaudited consolidatedcondensed financial statements contain all (consisting of only normal recurringadjustments) adjustments necessary to present fairly the Company's consolidatedfinancial position at December 31, 2000, and June 30, 2001 and the results ofcash flows for the six months ended June 30, 2000 and 2001 and the results ofoperations for the three and six months ended June 30, 2000 and 2001.

Certain information and footnote disclosures normallypresented in financial statements prepared in accordance with generallyaccepted accounting principles have been omitted.  These interim consolidated condensed financial statements shouldbe read in conjunction with the consolidated financial statements and notesthereto included in the Company's 2000 Annual Report to shareholders.  The results for the three and six monthsended June 30, 2000 and 2001 may not necessarily be indicative of the operatingresults for the full year.

Note 2: INVESTMENT SECURITIES 

The Company adopted SFAS No. 115 "Accounting forCertain Investments in Debt and Equity Securities" on January 1, 1994,which addresses the accounting for investments in equity securities that havereadily determinable fair values and for investments in all debt securities.  Securities are classified in three categoriesand accounted for as follows: debit and equity securities that the company hasthe positive intent and ability to hold to maturity are classified as  held-to-maturity and are measured atamortized cost; debt and equity securities bought and held principally for thepurpose of selling in the near term are classified as trading securities andare measured at fair value, with unrealized gains and losses included inearnings;, debt and equity securities not classified as either held-to-maturityor trading securities are deemed as available-for-sale and are measured at fairvalue, with unrealized gains and losses, net of applicable taxes, reported in aseparate component of stockholders' equity. Any gains and losses on sales of investments are computed on a specificidentification

The amortized cost and fair values of investmentsecurities available for sale at June 30, 2001 and December 31, 2000 were: 

 

| **June 30, 2001**                                         | **Amortized Cost** |           | **Gross Unrealized  Gains** |   | **Gross Unrealized  Losses** |       | **Fair Value** |         |
|-----------------------------------------------------------|--------------------|----------------|-----------------------------|--------|------------------------------|------------|----------------|--------------|
|                                                      |                    |           |                             |   |                              |       |                |         |
|                                                      |               |           |                        |   |                         |       |           |         |
| Obligations of U.S. government agencies and  corporations | $                  | 1,040,436      |                        | $      | -                            |       | $              | (42,613      | ) | $ | 997,823 |   |
| Mortgage-backed securities                                | 6,885,744          |           | 33,905                      |   | (102,287                     | )          | 6,817,362      |         |
| Obligations of State and Political Subdivisions           | 5,741,891          |           | 81,205                      |   | (51,108                      | )          | 5,771,988      |         |
| Other Securities                                          | 8,637              |           | 0                           |   | 0                            |       | 8,637          |         |
|                                                      |                    |           |                             |   |                              |       |                |         |
| **TOTAL**                                                 | **$**              | **13,676,708** | ** **                  | **$**  | **115,110**                  | ** ** | **$**          | **(196,008** | **)** | **$** | **13,595,810** | ** ** |
|                                                      |                    |           |                             |   |                              |       |                |         |

 

| **December 31,  2000**                                    | **Amortized Cost** |           | **Gross Unrealized Gains** |   | **Gross Unrealized Losses** |       | **Fair Value** |         |
|-----------------------------------------------------------|--------------------|----------------|----------------------------|--------|-----------------------------|------------|----------------|--------------|
|                                                      |                    |           |                            |   |                             |       |                |         |
|                                                      |               |           |                       |   |                        |       |           |         |
| Obligations of U.S. government agencies and  corporations | $                  | 2,392,808      |                       | $      | -                           |       | $              | (76,721      | ) | $ | 2,316,087 |   |
| Mortgage-backed securities                                | 7,958,658          |           | 6,468                      |   | (239,825                    | )          | 7,725,301      |         |
| Obligations of State and Political Subdivisions           | 6,088,006          |           | 90,786                     |   | (16,313                     | )          | 6,162,479      |         |
| Other Securities                                          | 8,638              |           | 0                          |   | 0                           |       | 8,638          |         |
|                                                      |                    |           |                            |   |                             |       |                |         |
| **TOTAL**                                                 | **$**              | **16,448,110** | ** **                 | **$**  | **97,254**                  | ** ** | **$**          | **(332,859** | **)** | **$** | **16,212,505** | ** ** |
|                                                      |                    |           |                            |   |                             |       |                |         |

Note 3: Loans andReserve for Possible Loan Losses

Majorclassifications of loans were:

|                                    | **December 31, 2000** |        | **June 30, 2001** |   |
|-----------------------------------------|-----------------------|-------------|-------------------|--------|
|                                    |                  |        |              |   |
| Commercial, financial, and agricultural | $                     | 42,931,015  |              | $      | 40,959,283 |   |
| Real estate-construction                | 18,599,452            |        | 17,838,367        |   |
| Real estate-mortgage                    | 70,550,560            |        | 75,918,868        |   |
| Installment loans to individuals        | 3,246,214             |        | 3,440,836         |   |
| All other loans (including overdrafts)  | 160,779               |        | 150,301           |   |
|                                    |                       |        |                   |   |
|                                    | 135,488,020           |        | 138,307,655       |   |
|                                    |                  |        |              |   |
| Less - deferred loan fees               | (487,473              | )           | (513,730          | )      |
| Less - reserve for possible loan losses | (1,320,518            | )           | (1,509,435        | )      |
|                                    |                       |        |                   |   |
| Total loans                             | $                     | 133,680,029 |              | $      | 136,284,490 |   |
|                                    |                       |        |                   |   |
| Loans Held For Sale                     | $                     | 2,474,542   |              | $      | 2,853,265 |   |
|                                    |                  |        |              |   |

Concentration ofCredit Risk

At June 30, 2001, approximately $89,150,012 of theBank's loan portfolio was collateralized by various forms of real estate.  Such loans are generally made to borrowerslocated in San Luis Obispo County.  TheBank attempts to reduce its concentration of credit risk by making loans whichare diversified by project type.  Whilemanagement believes that the collateral presently securing this portfolio isadequate, there can be no assurances that significant deterioration in theCalifornia real estate market would not expose the Bank to significantlygreater credit risk.

Loans on nonaccrual status totaled $991,230 and $601,192at December 31, 2000 and June 30, 2001,respectively.  Interest income that would have been recognized on non-accrualloans if they had performed in accordance with the terms of the loans wasapproximately $115,603 and $54,487 for the period ended December 31, 2000 andJune 30, 2001, respectively.

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

 

|                                       | **December 31, 2000** |      | **June 30, 2001** |   |
|--------------------------------------------|-----------------------|-----------|-------------------|--------|
|                                       |                  |      |              |   |
| Balance at beginning of year               | $                     | 1,241,016 |              | $      | 1,320,518 |   |
| Additions charged to operating expense     | 519,000               |      | 300,000           |   |
| Loans charged off                          | (458,920              | )         | (112,789          | )      |
| Recoveries of loans previously charged off | 19,422                |      | 1,706             |   |
|                                       |                       |      |                   |   |
| Balance at end of year                     | $                     | 1,320,518 |              | $      | 1,509,435 |   |

At June 30, 2001, the Bank was contingently liable forletters of credit accommodations made to its customers totaling $989,933 andundisbursed loan commitments in the amount of $40,982,000.  The Bank makes commitments to extend creditin the normal course of business to meet the financing needs of itscustomers.  Commitments to extend creditare agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of afee.  Since many of the commitments areexpected to expire without being drawn upon, the total outstanding commitmentamount does not necessarily represent future cash requirements.  Standby letters of  credit written are conditional commitments issued by the Bank toguarantee the performance of a customer to a third party.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers. The Bank anticipates no losses as a result of such transactions.

In accordance with Financial Accounting Standards Board(FASB) Statement No. 114, Accounting by Creditors for Impairment of aLoan."  Allowance for credit lossesrelated to loans that are identified for evaluation in accordance withStatement 114 is based on discounted cash flows using the loan's initial effectinterest rate or the fair value of the collateral for certain collateraldependent loans.

Management believes that the allowance for credit lossesat June 30, 2001 is prudent and warranted, based on information currentlyavailable.  However, no prediction ofthe ultimate level of loans charged-off in future years can be made anycertainty.

Note 4: Earnings Per Share:

Basic earnings per share are based on the weightedaverage number of shares outstanding before any dilution from common stockequivalents.  Diluted earnings per shareincludes common stock equivalents from the effect of the exercise of stockoptions.  The total number of share usedfor calculating basic and diluted earnings for the six months ended June 30,2000 was 1,267,772 and 1,424,073, respectively.  The total number of shares used for calculating basic and dilutedearnings for the three months ended June 30, 2000 was 1,270,162 and 1,403, 863,respectively.  The total number of shareused for calculating basic and diluted earnings for the six months ended June30, 2001 was 1,293,661 and 1,400,827, respectively.  The total number of shares used for calculating basic and dilutedearnings for the three months ended June 30, 2001 was 1,297,883 and 1,409,414,respectively.

**ITEM 2.**            **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

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

SUMMARY OF FINANCIAL RESULTS

As of June 30, 2001, total consolidatedassets of Heritage Oaks Bancorp were $189,891,264 compared to $184,088,025 atDecember 31, 2000.  This reflects an increaseof 3.15%. This moderate growth is reflective of the current economic slowdown.Further evidence of the changed economic environment is the minimal growth innet loans of only 1.95%.

Total cash at June 30, 2001 was$14,621,921, down from $19,435,534 at December 31, 2000. This decrease reflectsthe Bank’s sale of the ATM Retail Network along with the reduction throughattrition of the ATM Gaming Network. This will be discussed in more detailwithin this document. As of June 30, 2001, the Bank was operating approximately5 off-premise ATMs compared to 87 ATMs at June 30, 2000.

Total net loans at June 30, 2001 were$136,284,490 compared to $133,680,029 at December 31, 2000. The relativelysmall increase from year-end is attributable to the current economic slowdowncreating less demand. This slowing of demand is coupled with increased pay-offactivity as the result lower interest rates. The Bank has very recentlyexperienced a moderate increase in loan requests and, barring significantpay-off activity, expects to exhibit a respectable, albeit not as material asin the past two years, increase at year-end.

Securities available for sale, which arecarried at market value, were $13,595,810 at June 30, 2001 compared to$16,212,505 at December 31, 2000. Securities have decreased through securitymaturity and principal cash flow pay down.

Federal funds sold were $14,500,000 atJune 30, 2001 and $4,600,000 at December 31, 2000.

Total deposits were  $173,342,773 at June 30, 2001 compared to$167,696,889 at December 31, 2000, which represents an increase of 3.37%.Demand deposits have grown by $10.9 million or 21.1% from year-end.Approximately 50% of that growth is the result of increased title companyactivity while the remainder is growth throughout the eight-branch system. Timedeposits of  >$100,000 and<$100,000 have decreased by 46.4% and 2.7%, respectively. With increasedliquidity as the result of less loan demand, TCDs were priced such thatManagement was aware that these balances would decrease

Core deposits (timedeposits less than $100,000, demand, and savings) gathered in the localcommunities served by the Bank continue to be the Bank's primary source offunds for loans and investments.  Coredeposits of $169,234,941 represented 97.6% of total deposits at June 30, 2001.The Company does not purchase funds through deposit brokers.

The Company has a $2million revolving line of credit available with Pacific Coast Bankers Bank. AtJune 30, 2001 and December 31, 1999, the balance of borrowed funds on this linewas $400,000 and $1,050,000, respectively.

The Bank has established borrowing lines with theFederal Home Loan Bank (FHLB) of approximately $3.8 million and $2.5 millionsecured by securities and certain loans, respectively. At June 30, 2001, theBank had no borrowings against those lines.

RESULTS OF OPERATIONS

The Company reported netincome for the six months ended June 30, 2001 of $1,115,114 compared to$1,039,573 for the same period in 2000. Per share earnings on a diluted basisfor June 30, 2001 and June 30, 2000 were $0.80 and $0.73, respectively. Basicper share earnings for June 30, 2001 and June 30, 2000 were $0.86 and $0.82,respectively.

Net income for the threemonths ended June 30, 2001 was $518,696, compared to $533,468 for the sameperiod in 2000. The full impact of the 275 basis point decrease (From January4, 2001 to June 28, 2001) in prime rate is reflective in the decrease inquarterly earnings. The amount of net interest income increased within thisperiod, however, the average yield on earning assets decreased on the higherearning asset volume. During the second quarter of 2001, the net interestmargin dropped to a low of 5.99% for the month of April and subsequentlyreached 6.40% in June.

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

Netinterest income

Net interest income, theprimary component of the net earnings of a financial institution, refers to thedifference between the interest paid on deposits and borrowings, and the interestearned on loans and investments.  Thenet interest margin is the amount of net interest income expressed as apercentage of average earning assets. Factors considered in the analysis of net interest income are thecomposition and volume of earning assets and interest-bearing liabilities, theamount of non-interest bearing liabilities and non-accrual loans, and changesin market interest rates.

Net interest income forthe six months ended June 30,2001 was $5,288,807 as compared to$4,551,329 for the same period in 2000. This represents an improvement of$737,478 or 16.2%. As a percentage of average earning assets, the net interestmargin for the first six months of 2001 decreased to 6.47% from 6.70% from thesame period one year earlier. The Bank still maintains a very favorable netinterest margin even though there has been a 275 basis point decrease in primerate during the first six months of 2001. Approximately 60% of the loanportfolio is tied to prime that is impacted immediately whenever there is achange to prime while interest bearing liabilities, specifically TimeCertificate of Deposits re-price at the time of maturity. For the first sixmonths of 2001, the average yield on interest earning assets decreased 54 basispoints from the same period in 2000 while the average rate on interest bearingliabilities dropped only 5 basis points for the same period.

Net interest income forthe three months ended June 30, 2001 was $2,698,921 compared to$2,358,255 for the same period in 2000. This represents an increase of 14.5%.Interest expense for this three month period was $958,065 at June 30, 2001compared to $1,038,384 at June 30, 2000.

Average interest earningassets were $163,515,000 at June 30, 2001 compared to $135,840,000 at June 30,2000.  Average interest-bearingliabilities increased to $115,490,000 at June 30, 2001 from $103,778,000 atJune 30, 2000. Average interest rates on interest-bearing liabilities decreasedfrom 3.68% for the first six months of 2000 to 3.63% for the first six months of2001.

 

**AVERAGE BALANCE SHEETINFORMATION FOR JUNE 30,**

**(dollarsin thousands)**

** **

|                                        | **2001**                            |    | **2000**                |   |
|---------------------------------------------|-------------------------------------|---------|-------------------------|--------|
|                                        | ****                                |    | ****                    |   |
| Interest Earning Assets:                    | **Average Balance**                 |    | **Avg Yield Rate Paid** |   | **Amount Interest** |   | **Average Balance** |   | **Avg Yield Rate Paid** |   | **Amount Interest** |   |
|                                        | ****                                |    | ****                    |   | **** |   | **** |   | **** |   | **** |   |
|                                        | Time deposits  with other banks     | $       | 198                     |   | 7.07 | % | $ | 7 |   | $ | 170 |   | 5.93 | % | $ | 5 |   |
|                                        | Investment  securities taxable      | 9,195   |                    | 5.87   | % | 270 |   | 11,744 |   | 6.54 | % | 381 |   |
|                                        | Investment  securities non-taxable  | 6,017   |                    | 4.75   | % | 143 |   | 6,256 |   | 5.09 | % | 158 |   |
|                                        | Federal funds  sold                 | 9,195   |                    | 4.59   | % | 211 |   | 2,395 |   | 6.15 | % | 73 |   |
|                                        | Loans (1) (2)                       | 138,910 |                    | 9.73   | % | 6,755 |   | 115,275 |   | 10.20 | % | 5,831 |   |
|                                        |                                |         |                    |   |   |  |   |  |   |   |   |  |   |
|                                        | Total interest  earning assets      | 163,515 |                    | 9.03   | % | 7,386 |   | 135,840 |   | 9.57 | % | 6,448 |   |
|                                        |                                     |    |                    |   |  |   |  |   |   |   |  |   |
| Allowance for  possible loan losses         | -1,469                              |    |                    |   |   |   | -1,278 |   |   |   |   |   |
| Non-earning  assets:                        |                                |    |                    |   |   |   |   |   |   |   |   |   |
|                                        | Cash and due  from banks            | 14,315  |                    |   |   |   |   | 16,384 |   |   |   |   |   |
|                                        | Property,  premises and equipment   | 2,938   |                    |   |   |   |   | 3,373 |   |   |   |   |   |
|                                        | Other assets                        | 4,862   |                    |   |   |   |   | 4,064 |   |   |   |   |   |
|                                        |                                     |    |                    |   |   |   |  |   |   |   |   |   |
| TOTAL ASSETS                                | $                                   | 184,161 |                    |   |   |   |   | $ | 158,383 |   |   |   |   |   |
|                                        |                                     |    |                    |   |   |   |  |   |   |   |   |   |
| Interest  -bearing liabilities:             |                                |    |                    |   |   |   |   |   |   |   |   |   |
|                                        | Savings/NOW/money  market           | 62,328  |                    | 2.00   | % | 623 |   | 55,104 |   | 2.17 | % | 592 |   |
|                                        | Time deposits                       | 51,876  |                    | 5.48   | % | 1,421 |   | 42,773 |   | 5.25 | % | 1,113 |   |
|                                        | Other  borrowings                   | 1,286   |                    | 8.09   | % | 52 |   | 5,901 |   | 6.53 | % | 191 |   |
|                                        |                                |         |                    |   |   |  |   |  |   |   |   |  |   |
|                                        | Total  interest-bearing liabilities | 115,490 |                    | 3.63   | % | 2,096 |   | 103,778 |   | 3.68 | % | 1,896 |   |
|                                        |                                     |    |                    |   |  |   |  |   |   |   |  |   |
| Non-interest  bearing liabilities:          |                                |    |                    |   |   |   |   |   |   |   |   |   |
|                                        | Demand deposits                     | 52,255  |                    |   |   |   |   | 41,890 |   |   |   |   |   |
|                                        | Other  liabilities                  | 2,086   |                    |   |   |   |   | 1,594 |   |   |   |   |   |
|                                        |                                |         |                    |   |   |   |   |  |   |   |   |   |   |
|                                        | Total  liabilities                  | 169,831 |                    |   |   |   |   | 147,262 |   |   |   |   |   |
|                                        |                                     |    |                    |   |   |   |  |   |   |   |   |   |
| Stockholders'  equity                       |                                |    |                    |   |   |   |   |   |   |   |   |   |
|                                        | Common stock                        | 7,112   |                    |   |   |   |   | 5,752 |   |   |   |   |   |
|                                        | Retained  earnings                  | 7,296   |                    |   |   |   |   | 6,073 |   |   |   |   |   |
|                                        | Valuation  Allowance Investments    | (78     | )                       |   |   |   |   | (704 | ) |   |   |   |   |
|                                        |                                |         |                    |   |   |   |   |  |   |   |   |   |   |
|                                        | Total  stockholders' equity         | 14,330  |                    |   |   |   |   | 11,121 |   |   |   |   |   |
|                                        |                                     |    |                    |   |   |   |  |   |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS'  EQUITY | $                                   | 184,161 |                    |   |   |   |   | $ | 158,383 |   |   |   |   |   |
|                                        |                                     |    |                    |   |   |   |  |   |   |   |   |   |
| Net Interest  Income                        |                                |    |                    |   | $ | 5,290 |   |   |   |   |   | $ | 4,552 |   |
|                                        |                                |    |                    |   |  |   |   |   |   |   |  |   |
| Net Interest  Margin (3)                    |                                |    | 6.47                    | %      |   |   |   |   | 6.70 | % |   |   |
|                                        |                                |    |                    |   |   |   |   |   |   |   |   |   |

----

| **(1)** | **Nonaccrual loans have been included in total loans.**                                                                         |
|---------|---------------------------------------------------------------------------------------------------------------------------------|
| **(2)** | **Loan fees of $310,365 and $296,624 for 2001 and 2000, respectively,  have been included in the interest income computation.** |
| **(3)** | **Net interest income has been calculated by dividing the net interest  income by total earning assets.**                       |

The preceding table setsforth average balance sheet information, interest income and expense, averageyields and rates and net interest income and margin for the three months endedJune 30, 2001 and 2000.

Non-interestIncome

Non-interest income forthe six months ended June 30, 2001 was $2,961,203 compared to $2,763,821for the same period in 2000. That represents an increase of $197,382 or 7.1%.Non-interest income consists of bankcard merchant fees, automatic tellermachine ("ATM") transactions, mortgage origination fees and otherfees, service charges on deposit accounts, and gains on other real estateowned. Service charge income on deposit accounts increased from $500,385 duringthe first six months of 2000 to $566,221 for the six months ended June 30,2001. This increase in service charges is a result of the Bank’s growth in thenumber of branches and deposit accounts. Bankcard merchant fees remainedrelatively stagnate at $57,431 for the first six months of 2001 and $54,841 forthe same period in 2000. Because of the favorable interest rate environment formortgage refinancing, mortgage origination fees were $285,455 for the first sixmonths of 2001 compared to $107,112 for the same period in 2000.

For the past six months,the Bank has been divesting itself of the off-premise ATM Networks commonlyreferred to as HOAK (retail sites) and NANS (gaming sites). The total ATMincome for 2001 includes the gross revenue obtained in the sale of the retail(HOAK) Network that was consummated on March 31, 2001. Most of the revenueobtained in that transaction was offset by related expense. (See Non-InterestExpense in this document) This transaction was reported in the March 31,2001 10QSB along with the Sale Agreement. ATM transaction fees and interchangeincome were $1,692,776 during the six months ended June 30, 2001 compared to$1,808,659 during the same period for 2000. As of this writing, there are noHOAK ATM sites in operation for the Bank and four NANS sites.

Non-interest income forthe three months ended June 30, 2001 was $1,122,987 compared to$1,429,034 for the same period in 2000. That represents a decrease of $306,047or 21.4%. Service charges on deposit accounts income was $288,134 for the threemonths ended June 30, 2001 compared to $267,767 for the same period in 2000.Bankcard merchant fees were similar at $31,734 and $30,359 for the three monthsended June 30, 2001 and 2000, respectively. Mortgage origination fees were$162,149 for the three months ended June 30, 2001 compared to $51,245 for thesame period in 2000.

ATM transaction fees andinterchange income were $456,916 for the three months ended June 30, 2001compared to $915,729 for the same period in 2000.

Other Expense

Non-interest expense was$6,235,978 and $5,663,245 for the six months ended June 30, 2001 and thesame period in 2000, respectively. Salaries and employee benefits expense were$2,195,744 and $2,042,872 for the six months ended June 30, 2001 and2000, respectively.  Full timeequivalent employees were 91 at June 30, 2001 compared to 93 at June 30, 2000.Occupancy and equipment costs increased to $881,451 for the six monthsended June 30, 2001 from $793,868 for the same period of 2000. Expenseassociated with the ATM network was $1,321,819 and $1,276,758 for the sixmonths ended June 30, 2001 and 2000, respectively. Expense associated withall other non-interest expense categories was $1,836,964 and $1,549,747 for thesix months ended June 30, 2001 and 2000, respectively. The increase inother expense is primarily associated with data processing costs that increasedby 26.3% due to new bank products (i.e. Internet Banking) and deposit accountgrowth.

Non-interest expense was$2,878,704 and $2,995,076 for the three months ended June 30, 2001 andthe same period in 2000, respectively. Salaries and employee benefits expensewere $1,129,929 and $1,040,958 for the three months ended June 30, 2001 and2000, respectively. Occupancy and equipment costs decreased to $372,138 for thethree months ended June 30, 2001 from $377,832 for the same period in 2000.Expense associated with the ATM network was $447,391 and $671,189 for the threemonths ended June 30, 2001 and 2000, respectively. This category will continueto show decreasing since the Bank has divested itself almost entirely of thisline of business. Expense associated with all other non-interest expensecategories was $929,246 and $905,097 for the three months ended June 30, 2001and 2000, respectively.

LOCALECONOMY

The economy in theCompany’s service area is based primarily on agriculture, tourism, lightindustry, oil and retail trade. Services supporting these industries have alsodeveloped in the areas of medical, financial and educational. The population inthe two county areas comprising the Company’s service area, according to theU.S. Bureau of the Census, was estimated at July 1999 to be approximately644,000. San Luis Obispo County represents about 37% of this total with SantaBarbara County accounting for the remaining approximately 63%. The moderateclimate 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 yearsthroughout the Company’s service area. Access to numerous recreationalactivities, including lakes, mountains and beaches, provide a relatively stabletourist industry from many areas including the Los Angeles/Orange County basin,the San Francisco Bay area and the San Joaquin Valley. Principally due to thediversity of the various industries in the Company’s service area, the area,while not immune from economic fluctuations, does tend to enjoy a more stablelevel of economic activity from many other areas of California.   

Capital

The Company's total stockholders equity was $14,726,852 at June30, 2001 compared to $13,455,009 at December 31, 2000.  The increase in capital was from net incomeof $1,115,114, $68,584 from stock options exercised, $92,825 net change inother comprehensive income related to unrealized security holding gain, net oftax and $($4,680) in cash paid in lieu of fractional shares as the result ofthe 5% stock dividend distributed on March 30, 2001.

Capital ratios for commercial banks in the United States aregenerally calculated using nine different formulas.  These calculations are referred to as the "LeverageRatio" and two "risk based" calculations known as: "TierOne Risk Based Capital Ratio” and the "Total Risk Based CapitalRatio."   These standards weredeveloped through joint efforts of banking authorities from 12 differentcountries around the world.  Thestandards essentially take into account the fact that different types of assetshave different levels of risk associated with them.  Further, they take into account the off-balance sheet exposuresof banks when assessing capital adequacy.

The Leverage Ratio calculation simply divides commonstockholders equity (reduced by any Goodwill a bank may have) by the totalaverage assets of the bank.  In the TierOne Risk Based Capital Ratio, the numerator is the same as the leverage ratio,but the denominator is the total "risk-weighted assets" of thebank.  Risk weighted assets aredetermined by segregating all the assets and off balance sheet exposures intodifferent risk categories and weighing them by a percentage ranging from 0%(lowest risk) to 100% (highest risk). The Total Risk Based Capital Ratio again uses "risk-weightedassets" in the denominator, but expands the numerator to include othercapital items besides equity such as a limited amount of the loan loss reserve,long-term capital debt, preferred stock and other instruments.

Summarized beloware the bank's and the company’s capital ratios at June 30, 2001:

|                               | Well Capitalized     |   | Heritage   |   | Heritage      |   |
|------------------------------------|----------------------|--------|------------|--------|---------------|--------|
|                               | Regulatory  Standard |   | Oaks  Bank |   | Oaks  Bancorp |   |
|                               |                      |   |            |   |               |   |
| Leverage Ratio                     | 5.00                 | %      | 7.53       | %      | 7.92          | %      |
| Tier One Risk Based  Capital Ratio | 6.00                 | %      | 9.13       | %      | 9.59          | %      |
| Total Risk Based  Capital Ratio    | 10.00                | %      | 10.11      | %      | 10.57         | %      |

It is the intent ofManagement to maintain a  “WellCapitalized” status.

LIQUIDITY

The objective ofliquidity management is to ensure the continuous availability of funds to meetthe demands of depositors, investors and borrowers.  Asset liquidity is primarily derived from loan payments and thematurity of other earning assets. Liquidity from liabilities is obtained primarily from the receipt of newdeposits.  The Bank's Asset LiabilityCommittee (ALCO) is responsible for managing the on-and off-balance sheetcommitments to meet the needs of customers while achieving the Bank's financialobjectives. ALCO meets regularly to assess the projected funding requirementsby reviewing historical funding patterns, current and forecasted economicconditions, and individual customer funding needs.  Deposits generated from Bank customers serve as the primarysource of liquidity.  The Bank hascredit arrangements with correspondent banks that serve as a secondaryliquidity source in the amount of $5 million. During the first six months of2001, the average funds borrowed from correspondent banks was $30,539.

As of July 1999, thebank became a member of the Federal Home Loan Bank of San Francisco. Certainsecurities and loans were pledged as collateral during the first quarter of2000. The average funds borrowed through these facilities during the first sixmonths of 2001 was $.5 million.

The Bank manages itsliquidity by maintaining a majority of its investment portfolio in federalfunds sold and other liquid investments. At June 30, 2001, the ratio of liquidassets to deposits and other liabilities was 16.4%. The ratio of gross loans todeposits, another key liquidity ratio, was 81.5% at June 30, 2001.

INFLATION

The assets andliabilities of a financial institution are primarily monetary in nature.  As such, they represent obligations to payor receive fixed and determinable amounts of money, which are not affected byfuture changes in prices.  Generally,the impact of inflation on a financial institution is reflected by fluctuationsin interest rates, the ability of customers to repay debt and upward pressureon operating expenses.  In addition,inflation affects the growth of total assets by increasing the level of loandemand, and may potentially adversely affect the Bank's capital adequacybecause loan growth in inflationary periods may increase more rapidly thancapital.  The effect on inflation duringthe period ended June 30, 2001 has not been significant to the Bank's financialposition or result of operations.

CALIFORNIA ENERGY CRISIS

The recent Californiaenergy crisis has resulted in higher energy costs to consumers, who have alsoseen disruptions in service and face uncertainty about the future availabilityand cost of power.  Various legislative,regulatory and legal remedies to the California crisis are being pursued, buttheir outcome is uncertain and far-reaching and the solution is not likely tobe immediate.  Continued deteriorationof the California energy resources could have a material adverse affect on theCompany’s customers, which may result in adverse affects in the Company’sbusiness, financial condition and results of operations.

As of this writing, theCompany has not experienced negative impacts as the result of the Californiaenergy situation. As a proactive step the Bank has included the energy issue asa line item in the calculation for the Loan Loss Reserve. In addition to this,in order to conserve energy consumption during peak usage times, the Bankimplemented a “Save With Us” program for the months of July and August in whichthe branch offices of the Bank closed from 1:00pm to 2:30 pm every weekday.Branches with drive-up facilities provided this service during the mid-dayclosing time. This has been well received by the customer base and public ingeneral.

PART 2.  OTHERINFORMATIONITEM 1. LEGAL PROCEEDINGS

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

ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS

The Company has nothing to report.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

The Company has nothing to report.

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

The Company has nothing to report.

ITEM 5.             OTHERINFORMATION

Heritage Oaks Bank (“Bank”), banking subsidiary of Heritage OaksBancorp (“Company”) entered into a Branch Purchase and Assumption Agreement asof July 16, 2001 with Westamerica Bank to purchase the assets of and assume theliabilities of its four branches in San Luis Obispo County. In addition, theBank is acquiring all of Westamerica’s interests in the real estate for each ofthe Branches, whether leased or owned. This was subject to a separate RealProperty Purchase Agreement (both agreements are collectively referred to asthe “Agreements”). The terms and conditions of the transaction are contained inthe Agreements which are attached as Exhibits to this Report. No furtherinformation about the terms of the transaction was disclosed.

The Branches are located in Paso Robles, Arroyo Grande, San LuisObispo and Morro Bay. The transaction is subject to regulatory approval and isexpected to close during the fourth quarter of 2001.

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

|   | **(a)** | **Exhibit 2.1      **Branch Purchase and Assumption Agreement  dated as of July 16, 2001 by and between Heritage Oaks Bank and Westamerica  Bank |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    | **Exhibit 2.2      **Real  Property Purchase Agreement dated as of July 16, 2001 by and between Heritage  Oaks Bank and Westamerica Bank.        |
|   |    | **Exhibit 99       **Press Release                                                                                                          |

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

HERITAGE OAKS BANCORP

DATE: August 10, 2001

|   | S/  Lawrence P. Ward      |
|--------|---------------------------|
|   |                           |
|   | Lawrence  P. Ward         |
|   | President                 |
|   | Chief  Executive Officer  |
|   |                      |
|   | S/  Margaret A. Torres    |
|   |                           |
|   | Margaret  A. Torres       |
|   | Chief  Financial Officer  |
|   | Executive  Vice President |