**SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-Q**
 
 **x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF**
 **THE
SECURITIES EXCHANGE ACT OF 1934**
 **For
the quarterly period ended March 31, 2005**
 
 **o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934**
 
 **For
the Transition Period from** **____** **to ____**
 
 **Commission
File No.** **0-25020**
 **HERITAGE
OAKS BANCORP** ****
 **(Exact
name of registrant as specified in charter)**
 
 **STATE
OF CALIFORNIA**  ****
 **(State
or other jurisdiction of incorporation or organization)**
 
 **77-0388249**
 **(I.R.S.
Employer Identification Code)**
 
 **545
12th STREET, PASO ROBLES, CA 93446**
 **(Address
of principal office)**
 
 **(805)
239-5200**
 **(Registrant's
telephone number, including area code)**
 
 **Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve (12) months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.**
 **YES** **x** **NO
o**
  **Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).**
 ****YES o********NO
x****
 **Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:**
 
 **As
of April 22, 2005 there were approximately 4,102,987 shares outstanding of the
Registrant’s common stock.**
 
 PAGE
1
 
  **TABLE
OF CONTENTS**
 
 
 Part 1.
Financial Information
 
 Item 1.
Consolidated Financial Statements (Unaudited)
 
 Consolidated
Balance Sheets
 Consolidated
Statements of Operations
 Consolidated
Statements of Cash Flows
 Consolidated
Statement of Changes in Stockholders’ Equity
 Notes to
Consolidated Financial Statements
 
 Item 2.
Management’s Discussion and Analysis of
 Financial
Condition and Results of Operations
 
 Item 3.
Quantitative and Qualitative Disclosure about Market Risk
 
 Item
4.  Controls
and Procedures
 
 Part 2.
Other Information
 
 Item
1.  Legal
Proceedings
 Item 2.
Unregistered Sales of Equity Secuties and Use of Proceeds
 Item
3.  Defaults
Upon Senior Securities
 Item 4.
Submission of Matters to a Vote of Security Holders
 Item
5.  Other
Information
 Item 6.
Exhibits
 
 Signatures
 
 Certifications
 
 Exhibits
 
 PAGE
2
 
 
  PART 1.
FINANCIAL INFORMATION
 Item 1.
Financial Statements
  **HERITAGE
      OAKS BANCORP****CONSOLIDATED
      BALANCE SHEETS****(in
      thousands)****31-Mar-05**
    
    **31-Dec-04**ASSETS
    
    **(Un-audited)**
    
    **(1)**Cash
      and due from banks
    
    $
    12,533
    
    $
    13,092Federal
      funds sold
    
    
    31,420
    
    
    5,775Money
      market funds
    
    
    -
    
    
    3,000Total
      cash and cash equivalents
    
    
    43,953
    
    
    21,867Interest
      bearing deposits other banks
    
    
    498
    
    
    498Securities
      Available for sale
    
    
    53,097
    
    
    57,394Federal
      Home Loan Bank Stock, at cost
    
    
    1,809
    
    
    1,809Loans
      Held For Sale
    
    
    5,541
    
    
    2,253Loans,
      net
    
    
    337,693
    
    
    334,964Property,
      premises and equipment, net
    
    
    10,412
    
    
    10,383Cash
      surrender value life insurance
    
    
    7,491
    
    
    7,130Deferred
      Tax Assets
    
    
    2,140
    
    
    1,918Goodwill
    
    
    4,865
    
    
    4,865Core
      Deposit Intangible
    
    
    1,878
    
    
    2,021Other
      assets
    
    
    2,694
    
    
    2,910TOTAL
      ASSETS
    
    $
    472,071
    
    $
    448,012LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits:Demand,
      non-interest bearing
    
    $
    168,598
    
    $
    143,455Savings,
      NOW, and money market deposits
    
    
    162,767
    
    
    166,015Time
      deposits of $100 or more
    
    
    15,035
    
    
    18,034Time
      deposits under $100
    
    
    46,041
    
    
    42,937Total
      deposits
    
    
    392,441
    
    
    370,441FHLB
      advances and other borrowed money
    
    
    28,500
    
    
    28,500Securities
      Sold under Agreement to Repurchase
    
    
    732
    
    
    766Junior
      subordinated debentures
    
    
    8,248
    
    
    8,248Other
      liabilities
    
    
    3,451
    
    
    2,807Total
      liabilities
    
    
    433,372
    
    
    410,762COMMITMENTS
      AND CONTINGENCIES
    
    
    -
    
    
    -Stockholders'
      equityCommon
      stock, no par value;20,000,000
      shares authorized; issued and outstanding4,102,987
      and 4,008,840 for March 31, 2005and
      December 31, 2004, respectively.
    
    
    28,352
    
    
    24,050Retained
      earnings
    
    
    10,533
    
    
    13,053Accumulated
      other comprehensive income
    
    
    (186
    )
    
    147Total
      stockholders' equity
    
    
    38,699
    
    
    37,250TOTAL
      LIABILITIES & STOCKHOLDERS' EQUITY
    
    $
    472,071
    
    $
    448,012
 (1)
      These numbers have been derived from the audited financial
      statements.See
      notes to condensed financial statements
 PAGE
3
   **HERITAGE
      OAKS BANCORP****CONSOLIDATED
      STATEMENTS OF INCOME****For
      the Three Months Ended****(in
      thousands except per share date)**
    
    **March
      31,****2005**
    
    **2004****(Unaudited)**
    
    **(Unaudited)**Interest
      Income:Interest
      and fees on loans
    
    $
    6,122
    
    $
    4,834Investment
      securities
    
    
    553
    
    
    590Federal
      funds sold and commercial paper
    
    
    70
    
    
    71Time
      certificates of deposit
    
    
    3
    
    
    3Total
      interest income
    
    
    6,748
    
    
    5,498Interest
      Expense:Now
      accounts
    
    
    21
    
    
    5MMDA
      accounts
    
    
    213
    
    
    122Savings
      accounts
    
    
    17
    
    
    23Time
      deposits of $100 or more
    
    
    82
    
    
    61Other
      time deposits
    
    
    231
    
    
    242Other
      borrowed funds
    
    
    421
    
    
    438Total
      interest expense
    
    
    985
    
    
    891Net
      Int. Income Before Prov. for Possible Ln. Losses
    
    
    5,763
    
    
    4,607Provision
      for loan losses
    
    
    180
    
    
    170Net
      interest income after provision for loan losses
    
    
    5,583
    
    
    4,437Non-interest
      Income:Service
      charges on deposit accounts
    
    
    539
    
    
    510Gain
      on Sale of SBA Loans
    
    
    34
    
    
    -Other
      income
    
    
    559
    
    
    526Total
      Non-interest Income
    
    
    1,132
    
    
    1,036Non-interest
      Expense:Salaries
      and employee benefits
    
    
    2,248
    
    
    2,046Occupancy
      and equipment
    
    
    612
    
    
    635Other
      expenses
    
    
    1,563
    
    
    1,419Total
      Noninterest Expenses
    
    
    4,423
    
    
    4,100Income
      before provision for income taxes
    
    
    2,292
    
    
    1,373Provision
      for applicable income taxes
    
    
    875
    
    
    497Net
      Income
    
    $
    1,417
    
    $
    876Earnings
      per share: See Note #4Basic
    
    $
    0.35
    
    $
    0.22Fully
      Diluted
    
    $
    0.33
    
    $
    0.20
 See notes to condensed financial statements PAGE
4
 
 **Consolidated
      Statements of Comprehensive Income****(Unaudited,
      in thousands)**Three
      Month PeriodEnded
      March 31,2005
    
    2004**Net
      Income**
    
    $
    1,417
    
    $
    876**Other
      Comprehensive Income Before Taxes:**Unrealized
      gains (losses) on securities available for sale:Unrealized
      holding gains (losses) arising during period
    
    
    (554
    )
    
    462Reclassification
      adjustments for (gains) included in net income
    
    
    -
    
    
    -Other
      comprehensive income (loss), before taxes
    
    
    (554
    )
    
    462Income
      tax expense (credit) related to itemes in comprehensive
    income
    
    
    221
    
    
    (185
    )**Other
      Comprehensive Income (Loss), Net of Taxes**
    
    
    (333
    )
    
    277**Comprehensive
      Income**
    
    $
    1,084
    
    $
    1,153
 
 PAGE
5
  **HERITAGE
      OAKS BANCORP****CONSOLIDATED
      STATEMENTS OF CASHFLOWS****(in
      thousands)**
    
    **Periods
      ended March 31,****2005**
    
    **2004****(Unaudited)**
    
    **(Unaudited)****Cash
      Flows from Operating Activities**Net
      income
    
    $
    1,417
    
    $
    876Adjustments
      to reconcile net income tonet cash provided by operating
      activitiesNet
      cash provided by operating activitiesDepreciation
      and amortization
    
    
    229
    
    
    231Provision
      for possible loan losses
    
    
    180
    
    
    170Amortization
      of premiums/discounts oninvestment securities,
      net
    
    
    72
    
    
    71Amortization
      of intangible assets
    
    
    143
    
    
    105(Increase)/decrease
      in loans held for sale
    
    
    (3,288
    )
    
    (1,284
    )Net
      increase in cash surrender value of life insurance
    
    
    (61
    )
    
    (69
    )(Increase)/decrease
      in other assets
    
    
    216
    
    
    214Decrease
      in other liabilities
    
    
    644
    
    
    120**NET
      CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES**
    
    
    (448
    )
    
    434**Cash
      Flows From Investing Activities**Purchase
      of securities available-for-sale
    
    
    -
    
    
    (532
    )Purchase
      of mortgage backed securities available-for-sale
    
    
    -
    
    
    (3,078
    )Proceeds
      from principal reductions and maturitiesof securities
      available-for-sale
    
    
    -
    
    
    500Proceeds
      from principal reductions and maturitiesof mortgage backed
      securities available-for-sale
    
    
    3,670
    
    
    2,999Net
      change in FHLB and FRB stock
    
    
    -
    
    
    (310
    )Purchase
      of life insurance policies
    
    
    (300
    )
    
    -Increase
      in loans, net
    
    
    (2,909
    )
    
    (19,671
    )Purchase
      of property, premises and equipment, net
    
    
    (258
    )
    
    (520
    )**NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**
    
    
    203
    
    
    (20,612
    )**Cash
      Flows From Financing Activities**Increase
      in deposits, net
    
    $
    22,000
    
    $
    5,353Net
      increase/(decrease) in other borrowings
    
    
    (34
    )
    
    (71
    )Proceeds
      from exercise of stock options
    
    
    365
    
    
    63**NET
      CASH PROVIDED BY FINANCING ACTIVITIES**
    
    
    22,331
    
    
    5,345**Net
      Increase/(Decrease) in Cash and Cash Equivalents**
    
    
    22,086
    
    
    (14,833
    )**Cash
      and Cash Equivalents**,
      Beginning of year
    
    
    21,867
    
    
    77,114**Cash
      and Cash Equivalents**,
      End of period
    
    $
    43,953
    
    $
    62,281**Supplemental
      Disclosures of Cash Flow Information**Interest
      paid
    
    $
    627
    
    $
    486**See
      notes to condensed financial statements**
 PAGE
6
 
 **HERITAGE
      OAKS BANCORP****CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY****March
      31, 2005 and March 31, 2004****(Unaudited)****(
      in thousands except shares
outstanding)**
  **Accumulated******
    
    
    
    
    
    
    
    **Other**
    
    **Total****Shares**
    
    **Common**
    
    **Retained**
    
    **Comprehensive**
    
    **Stockholders'****Outstanding**
    
    **Stock**
    
    **Earnings**
    
    **Income/(Loss)**
    
    **Equity****(in
      thousands)****Balance
      January 1, 2005**
    
    
    3,817,943
    
    $
    24,050
    
    $
    13,053
    
    $
    147
    
    $
    37,250Exercise
      of Stock Options
    
    
    89,664
    
    
    365
    
    
    -
    
    
    
    
    
    365Stock
      dividend- 5% to be distributed April 22, 2005
    
    
    195,380
    
    
    3,937
    
    
    (3,937
    )
    
    
    
    
    -Comprehensive
      IncomeNet
      Income
    
    
    
    
    
    
    
    
    1,417
    
    
    
    
    
    1,417Unrealized
      Security Holding Gains(net of $221 tax )
    
    
    
    
    
    
    
    
    
    
    
    (333
    )
    
    (333
    )Total
      other comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,084**Balance
      March 31, 2005**
    
    
    **4,102,987**
    
    **$**
    **28,352**
    
    **$**
    **10,533**
    
    **$**
    **(186**
    **)**
    **$**
    **38,699**
  **Other**
    
    **Total****Shares**
    
    **Common**
    
    **Retained**
    
    **Comprehensive**
    
    **Stockholders'****Outstanding**
    
    **Stock**
    
    **Earnings**
    
    **Income/(Loss)**
    
    **Equity****(in
      thousands)****Balance
      January 1, 2004**
    
    
    3,604,497
    
    $
    20,649
    
    $
    11,541
    
    $
    98
    
    $
    32,288Exercise
      of Stock Options
    
    
    9,601
    
    
    63
    
    
    
    
    
    
    
    
    635%
      Stock Dividend distributed
    
    
    180,301
    
    
    3,065
    
    
    (3,065
    )
    
    
    
    
    -April
      23, 2004Comprehensive
      IncomeNet
      Income
    
    
    
    
    
    
    
    
    876
    
    
    
    
    
    876Unrealized
      Security Holding Losses  (net of $185 tax )
    
    
    
    
    
    
    
    
    
    
    
    277
    
    
    277Total
      other comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,153**Balance
      March 31, 2004**
    
    
    **3,794,399**
    
    **$**
    **23,777**
    
    **$**
    **9,352**
    
    **$**
    **375**
    
    **$**
    **33,504**
  PAGE
7
   **Note
1.**  **CONSOLIDATED FINANCIAL STATEMENTS**
 
 The
accompanying unaudited condensed consolidated financial statement of Heritage
Oaks Bancorp and subsidiaries (the “Company”) have been prepared in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and notes required by accounting principles
generally accepted in the United States of America for annual financial
statements are not included herein. In the opinion of Management, all
adjustments (which consist solely of normal recurring accruals) considered
necessary for a fair presentation of results for the interim periods presented
have been included. These interim condensed consolidated financial statements
should be read in conjunction with the financial statements and related notes
contained in the Company’s 2004 Annual Report on Form 10-KSB.
 
 The
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned financial subsidiary, Heritage Oaks Bank (the “Bank”). All
significant inter-company balances and transactions have been eliminated.
Heritage Oaks Capital Trust I is an unconsolidated subsidiary formed solely for
the purpose of issuing trust preferred securities. Operating results for the
three months ended March 31, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. Certain amounts in
the consolidated financial statements for the year ended December 31, 2004 and
the three month period ended March 31, 2004 may have been reclassified to
conform to the presentation of the consolidated financial statement in
2005.
 
 The
preparation of consolidated financial statements in conformity with the
accounting principles generally accepted in the United States of America
requires Management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
 
 Note
2.  INVESTMENT
SECURITIES
 
 In
accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and
Equity Securities”, which addresses the accounting for investments in equity
securities that have readily determinable fair values and for investments in all
debt securities, securities are classified in three categories and accounted for
as follows: debit and equity securities that the Company has the positive intent
and ability to hold to maturity are classified as held-to-maturity and are
measured at amortized cost; debt and equity securities bought and held
principally for the purpose of selling in the near term are classified as
trading securities and are measured at fair value, with the unrealized gains and
losses included in earnings; debt and equity securities not classified as either
held-to-maturity or trading securities are deemed as available-for-sale and are
measured at fair value, with the unrealized gains and losses, net of applicable
taxes, reported in a separate component of stockholders’ equity. Any gains and
losses on sales of investments are computed on a specific identification basis.
 
 PAGE
8
 
 The
      amortized cost and fair values of investment securities available for sale
      at March 31, 2005 andDecember
      31, 2004 :
  **March
      31, 2005**
    
    
    
    **Gross**
    
    **Gross****(in
      thousands)**
    
    **Amortized**
    
    **Unrealized**
    
    **Unrealized**
    
    **Fair****Cost**
    
    **Gains**
    
    **Losses**
    
    **Value**Obligations
      of U.S. government agencies and corporations
    
    $
    1,843
    
    $
    2
    
    $
    (34
    )
    $
    1,811Mortgage-backed
      securities
    
    
    38,868
    
    
    50
    
    
    (508
    )
    
    38,410Obligations
      of State and Political Subdivisions
    
    
    12,687
    
    
    306
    
    
    (126
    )
    
    12,867Other
      Securities
    
    
    9
    
    
    -
    
    
    -
    
    
    9**TOTAL**
    
    **$**
    **53,407**
    
    **$**
    **358**
    
    **$**
    **(668**
    **)**
    **$**
    **53,097**
  **December
      31, 2004**
    
    
    
    
    
    **Gross**
    
    
    **Gross****(in
      thousands)**
    
    
    **Amortized**
    
    
    **Unrealized**
    
    
    **Unrealized**
    
    
    **Fair******
    
    
    **Cost**
    
    
    **Gains**
    
    
    **Losses**
    
    
    **Value**Obligations
      of U.S. government agencies and corporations
    
    $
    1,868
    
    $
    5
    
    $
    (30
    )
    $
    1,843Mortgage-backed
      securities
    
    
    42,622
    
    
    181
    
    
    (239
    )
    
    42,564Obligations
      of State and Political Subdivisions
    
    
    12,651
    
    
    413
    
    
    (86
    )
    
    12,978Other
      Securities
    
    
    9
    
    
    -
    
    
    -
    
    
    9**TOTAL**
    
    **$**
    **57,150**
    
    **$**
    **599**
    
    **$**
    **(355**
    **)**
    **$**
    **57,394**
 
 Note
3.  LOANS AND
ALLOWANCE FOR LOAN LOSSES
 
  Major
      classifications of loans were:
  **March
      31,**
    
    **December
      31,****(in
      thousands)**
    
    **2005**
    
    **2004**Commercial,
      financial, and agricultural
    
    $
    53,786
    
    $
    49,584Real
      estate-construction
    
    
    63,232
    
    
    66,833Commercial
      real estate
    
    
    220,080
    
    
    217,473Installment
      loans to individuals
    
    
    5,157
    
    
    5,538All
      other loans (including overdrafts)
    
    
    299
    
    
    265342,554
    
    
    339,693Less
      - deferred loan fees, net
    
    
    (1,466
    )
    
    (1,482
    )Less
      - reserve for possible loan losses
    
    
    (3,395
    )
    
    (3,247
    )Total
      loans
    
    $
    337,693
    
    $
    334,964Loans
      Held For Sale
    
    $
    5,541
    
    $
    2,253
   Concentration
of Credit Risk
 At March
31, 2005, approximately $283.3 million of the Bank’s loan portfolio was
collateralized by various forms of real estate. Such loans are generally made to
borrowers located in San Luis Obispo and Santa Barbara Counties. The Bank
attempts to reduce its concentration of credit risk by making loans which are
diversified by project type. While Management believes that the collateral
presently securing this portfolio is adequate, there can be no assurances that
significant deterioration in the California real estate market would not expose
the Bank to significantly greater credit risk.
 
 PAGE
9
 
 At March
31, 2005, the Bank was contingently liable for letters of credit accommodations
made to its customers totaling approximately $16.5 million and un-disbursed loan
commitments in the approximate amount of $138 million. The Bank makes
commitments to extend credit in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
outstanding commitment amount does not necessarily represent future cash
requirements. Standby letters of credit written are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as
those involved in extending loan facilities to customers. The Bank anticipates
no losses as a result of such transactions.
 
 Allowance
for Loan Losses
 An
allowance for loan losses has been established by management to provide for
those loans that may not be repaid in their entirety for a variety of reasons.
The allowance is maintained at a level considered by management to be adequate
to provide for probable incurred losses. The allowance is increased by
provisions charged to earnings and is reduced by charge-offs, net of recoveries.
The provision for loan losses is based upon past loan loss experience and
management’s evaluation of the loan portfolio under current economic conditions.
Loans are charged to the allowance for loan losses when, and to the extent, they
are deemed by management to be un-collectible. The allowance for loan losses is
composed of allocations for specific loans and a historical portion for all
other loans.
 
 An
      analysis of the changes in the reserve for possible loan losses is as
      follows:
  **(in
      thousands)**
    
    **March
      31,**
    
    **December
      31,****2005**
    
    **2004**Balance
      at beginning of year
    
    $
    3,247
    
    $
    3,070Additions
      charged to operating expense
    
    
    180
    
    
    410Loans
      charged off
    
    
    (32
    )
    
    (236
    )Recoveries
      of loans previously charged off
    
    
    0
    
    
    3Balance
      at end of year
    
    $
    3,395
    
    $
    3,247
 
 The Bank
recognized that credit losses will be experienced and the risk of loss will vary
with, among other things, general economic conditions; the type of loan being
made; the creditworthiness of the borrower over the term of the loan and in the
case of a collateralized loan, the quality of the collateral for such loan. The
allowance for loan loss represents the Bank’s estimate of the allowance
necessary to provide for probable incurred losses in the portfolio. In making
this determination, the Bank analyzes the ultimate collectability of the loans
in its portfolio by incorporating feedback provided by internal loan staff, an
independent loan review function, and information provided by examinations
performed by regulatory agencies. The Bank makes monthly evaluations as to the
adequacy of the allowance for loan losses.
 
 The
analysis of the allowance for loan losses is comprised of three components:
specific credit allocation; general portfolio allocation; and subjectively by
determined allocation. Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No.114, Accounting by Creditors for Impairment of
a Loan (SFAS 114), as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. These pronouncements
provide that when it is probable that a creditor will be unable to collect all
amounts due in accordance with the terms of the loan that such loan is deemed
impaired. Impaired loans are accounted for differently in that the amount of the
impairment is measured and reflected in the records of the creditor. The
allowance for credit losses related to loans that are identified for evaluation
in accordance with Statement 114 is based on discounted cash flows using the
loan’s initial effect interest rate or the fair value of the collateral for
certain collateral dependent loans. The general portfolio allocation consists of
an assigned reserve percentage based on the credit rating of the loan. The
subjective portion is determined based on loan history and the Bank’s evaluation
of various factors including current economic conditions and trends in the
portfolio including delinquencies and impairment, as well as changes in the
composition of the portfolio.
 
 PAGE
10
 
 The
allowance for loan losses is based on estimates, and ultimate losses will vary
from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for possible loan losses for the
first quarter of 2005 is consistent with prior periods.
 
 The
allowance for loan losses as a percentage of total net loans was 1.01% as of
March 31, 2005 and .97% as of December 31, 2004. Management believes that the
allowance for credit losses at March 31, 2005 is prudent and warranted, based on
information currently available.
  Note
4.  EARNINGS
PER SHARE
 
 Basic
earnings per share are based on the weighted average number of shares
outstanding before any dilution from common stock equivalents. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shares in the
earnings of the entity.
 
 
 On March
25, 2005, the Company’s Board of Directors declared a 5% stock dividend. The
record date for the stock dividend was April 8, 2005 and the pay date was April
22, 2005.
 
 Share
information has been retroactively adjusted for such 5% stock
dividend.
 
 The
following table shows the number of shares used to calculate and the earnings
per share for the three months ending March 31, 2005 and 2004:
 
 **EPS****For
      the Three Months Ending****31-Mar-05**
    
    **31-Mar-04**Net
      Income
    
    $
    1,417,386
    
    $
    875,517Basic
    
    $
    0.35
    
    $
    0.22Diluted
    
    $
    0.33
    
    $
    0.20Shares:Basic
    
    
    4,053,900
    
    
    3,980,382Diluted
    
    
    4,305,622
    
    
    4,282,901
 PAGE
11
 The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provision of SFAS 123,
Accounting for Stock Based Compensation, to stock based employee
compensation:
 
 **Three
      Months Ended**(in
      thousands except per share data)
    
    **31-Mar-05**
    
    **31-Mar-04**Net
      income:As
      reported
    
    $
    1,417
    
    $
    876Stock-based
      compensation using the intrinsic value method
    
    
    -
    
    
    -Stock-based
      compensation that would have been reportedusing the fair value
      method of SFAS 123
    
    
    (48
    )
    
    (23
    )Pro
      forma net income
    
    $
    1,369
    
    $
    853Weighted
      Average Shares Outstanding - Basic
    
    
    4,054
    
    
    3,980Weighted
      Average Shares Outstanding - Diluted
    
    
    4,306
    
    
    4,283Basic
      Earnings per shareAs
      reported
    
    $
    0.35
    
    $
    0.22Pro
      forma
    
    $
    0.34
    
    $
    0.21Earnings
      per share - assuming dilutionAs
      reported
    
    $
    0.33
    
    $
    0.20Pro
      forma
    
    $
    0.32
    
    $
    0.20
 
 Note
5.  RECENT
ACCOUNTING PRONOUNCEMENTS
  In March
2004, the Financial Accounting Standards Board (FASB) issued an exposure draft
entitled "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95."
This proposed statement would eliminate the ability to account for stock-based
compensation using APB 25 and require such transactions be recognized as
compensation expense in the income statement based on their fair values at the
date of grant. Companies transitioning to fair value based accounting for
stock-based compensation will be required to use the "modified prospective"
method whereby companies must recognize equity compensation cost from the
beginning of the year in which the recognition provisions are first applied as
if the fair value method had been used to account for all equity compensation
awards granted, modified, or settled in fiscal years beginning after
December 31, 1994. As proposed, this statement would be effective for the
Corporation on January 1, 2005. In December 2004, the FASB issued SFAS No.
123 (revised 2004). *“Share-Based
Payment”* , which
is a revision of SFAS No. 123, *“Accounting
for Stock-Based Compensation”* . SFAS
No. 123(R) supersedes APB Opinion No. 25, *“Accounting
for Stock Issued to Employees”* and
amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. On April 14,
2005, the SEC announced that public companies will not be required to adopt SFAS
123(R) , which provides for stock option expensing, until their first fiscal
year beginning after June 15, 2005. The Company has not determined if the
adoption of this standard will have a material impact on its financial
statements.
 
 In
January 2003, the FASB issued the Emerging Information Task Force Issue 03-1, *The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investors* (“EITF
03-1”), and in March 2004, FASB issued an update. EITF 03-1 addresses the
meaning of other-than-temporary impairment and its application to certain debt
and equity securities. EITF 03-1 aids in the determination of impairment of an
investment and gives guidance as to the measurement of impairment loss and the
recognition and disclosures of other-than-temporary investments. EITF 03-1 also
provides a model to determine other-than-temporary impairment using
evidence-based judgment about the recovery of the fair value up to the cost of
the investment by considering the severity and duration of the impairment in
relation to the forecasted recovery of the fair value. The March 2004 update to
EITF 03-1 includes application guidance as to the determination of impairment,
disclosures required by an impairment, and guidance for the transition period
and effective dates of disclosure requirements. In March 2004, the FASB also
issued two proposed FASB Staff Positions (“FSP”): FSP EITF Issue 03-1-a, which
gives additional guidance on the determination of impairment for debt securities
impaired because of interest rate and/or sector spread increases, and FSP EITF
Issue 03-1-b, which delays the disclosure effective date for debt securities
impaired because of interest rate and/or sector spread increases. The comment
deadline for the proposed FSPs was October 29, 2004, and the application and
effective dates of portions of EITF 03-1 are deferred until the issuance of FSP
EITF Issue 03-1-a and FSP EITF Issue 03-1-b, which could be as early as November
2004. The 45-day comment period on FSP EITF 03-1-a ended October 29, 2004. The
FASB staff reviewed the comments and identified the issues of most concern to
respondents. The Board will consider adding a project to its agenda to converge
its impairment models for financial instruments with the FASB’s impairment
models at its April 21, 2005 joint meeting with the IASB. Such a project, if
added to the Board’s agenda, could have an impact on the Board’s deliberations
on FSP EITF 03-1-a. Therefore, the FASB staff has deferred asking the Board to
deliberate the staff’s comment letter analysis and its recommendations based on
that analysis until the Board decides whether to add a convergence project for
the impairment of financial instruments. The adoption of EITF 03-1 and FSP EITF
Issues 03-1-a and 03-1-b are not expected to have a material impact on the
financial condition or operating results of the Company.
 
 PAGE
12
 
 Under
FASB Interpretation (FIN) No. 46, *“Consolidation
of Variable Interest Entities, an interpretation of ARB No.
51,”* the
Company is not allowed to consolidate Heritage Oaks Capital Trust I into the
Company’s financial statements. Prior to the issuance of FIN No. 46, Bank
holding companies typically consolidated these entities. On February 28, 2005,
the Federal Reserve Board issued a new rule which provides that, notwithstanding
the deconsolidation of such trusts, junior subordinated debentures, such as
those issued by the Company, may continue to constitute up to 25% of a bank
holding company's Tier 1 capital, subject to certain new limitations which will
not become effective until March 31, 2009 and which, in any event, are not
expected to affect the treatment of the Company's Junior Subordinated Debentures
as Tier 1 capital for regulatory purposes. At March 31, 2005, the Company has
included the net junior subordinated debt in its Tier1 Capital for regulatory
capital purposes.
 
 Note
6.  Reclassifications
 
 Certain
amounts in the 2004 financial statements have been reclassified to conform to
the 2005 presentation.
 
 Forward
Looking Statements
 
 **Certain
statements contained in this Quarterly Report on Form 10-Q (“Quarterly Report”),
including, without limitation, statements containing the words “believes”,
“anticipates”, “intends”, “expects”, and words of similar impact, constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in those areas in which the Company operates, demographic changes,
competition, fluctuations in interest rates, changes in business strategy or
development plans, changes in governmental regulation, credit quality, the
availability of capital to fund the expansion of the Company’s business, as well
as economic, political and global changes arising from the war on terrorism.
(Refer to the Company’s December 31, 2004 10-KSB, ITEM 1. Description of
Business-Factors that May Affect Future Results of Operations.) The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.**
 
 PAGE
13
 
 ITEM
2.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 The
following is an analysis of the results of operations and financial condition of
the Company for the periods ending March 31, 2005 and 2004. The analysis should
be read in connection with the consolidated financial statements and notes
thereto appearing elsewhere in this report.
 
 THE
COMPANY
 
 Heritage
Oaks Bancorp (the "Company") is a California corporation organized in 1994 to
act as a holding company of Heritage Oaks Bank ("Bank"). In 1994, the Company
acquired all of the outstanding common stock of the Bank in a holding company
formation transaction.
 
 In April
2002, the Company formed Heritage Oaks Capital Trust I (the “Trust”). The Trust
is a statutory business trust formed under the laws of the State of Delaware.
The Trust is a wholly-owned, non-financial, non-consolidated subsidiary of the
Company.
 
 On
October 31, 2003, the Company acquired Hacienda Bank and on June 28, 2004,
Hacienda Bank was merged with and into the Bank.
 
 Other
than holding the shares of the Bank, the Company conducts no significant
activities, although it is authorized, with the prior approval of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
Company's principal regulator, to engage in a variety of activities which are
deemed closely related to the business of banking. The Company has also caused
to be incorporated a subsidiary, CCMS Systems, Inc. which is currently inactive
and has not been capitalized. The Company has no present plans to activate the
proposed subsidiary.
 
 Where You
Can Find More Information
 
 Under the
Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current
reports must be filed with the SEC. The Company electronically files the
following reports with the SEC: Form 10-KSB (Annual Report), Form 10-Q
(Quarterly Report), Form 8-K (Report of Unscheduled Material Events), and Form
DEF 14A (Proxy Statement). The Company may file additional forms. The SEC
maintains an Internet site, www.sec.gov, in which all forms filed electronically
may be accessed. Additionally, all forms filed with the SEC and additional
shareholder information is available free of charge on the Company’s website:
www.heritageoaksbancorp.com
 
 The
Company posts these reports to its website as soon as reasonably practicable
after filing them with the SEC. None of the information on or hyperlinked from
the Company’s website is incorporated into this Quarterly Report on Form
10-Q.
 
 PAGE
14
  Executive
Summary and Recent Developments
 
 The table
below provides selected financial data that highlights the Company’s quarterly
performance results:
 SELECTED
FINANCIAL DATA
 For the
Quarter Ended,
  Dec-03
    
    Mar-04
    
    Jun-04
    
    Sep-04
    
    Dec-04
    
    Mar-05Return
      on Average Assets
    
    
    0.99
    %
    
    0.82
    %
    
    1.02
    %
    
    1.06
    %
    
    1.18
    %
    
    1.24
    %Return
      on Average Equity
    
    
    13.59
    %
    
    10.60
    %
    
    13.62
    %
    
    13.62
    %
    
    14.77
    %
    
    14.74
    %Return
      on Average Tangible Equity
    
    
    15.89
    %
    
    13.54
    %
    
    17.25
    %
    
    17.07
    %
    
    18.18
    %
    
    17.91
    %Average
      Equity to Average Assets
    
    
    6.76
    %
    
    7.69
    %
    
    7.58
    %
    
    7.78
    %
    
    6.76
    %
    
    8.40
    %Net
      Interest Margin
    
    
    4.85
    %
    
    4.71
    %
    
    4.87
    %
    
    5.15
    %
    
    5.40
    %
    
    5.55
    %Efficiency
      Ratio*
    
    
    68.94
    %
    
    72.65
    %
    
    68.55
    %
    
    67.36
    %
    
    67.64
    %
    
    64.14
    %Average
      Loans to Average Deposits
    
    
    81.74
    %
    
    80.10
    %
    
    80.63
    %
    
    80.88
    %
    
    85.65
    %
    
    92.82
    %Net
      Income
    
    $
    975
    
    $
    876
    
    $
    1,162
    
    $
    1,193
    
    $
    1,353
    
    $
    1,417Earnings
      Per Share:Basic
    
    $
    0.26
    
    $
    0.22
    
    $
    0.30
    
    $
    0.30
    
    $
    0.33
    
    $
    0.35Diluted
    
    $
    0.24
    
    $
    0.20
    
    $
    0.28
    
    $
    0.28
    
    $
    0.31
    
    $
    0.33Outstanding
      Shares:Basic
    
    
    3,743,258
    
    
    3,980,382
    
    
    3,987,361
    
    
    3,999,395
    
    
    4,007,309
    
    
    4,053,900Diluted
    
    
    4,033,538
    
    
    4,282,901
    
    
    4,271,621
    
    
    4,279,079
    
    
    4,306,783
    
    
    4,305,622
   *The
efficiency ratio is defined as total non-interest expense as a percent of the
combined net interest income plus non-interest income.
 
 Certainly,
one of the Company’s most notable recent events was the acquisition of Hacienda
Bank that took place on October 31, 2003. This acquisition was the culmination
of many years effort to have a greater presence in the city of Santa Maria. In
reviewing market share data (provided by the FDIC as of June every year) within
the Company’s primary service area of San Luis Obispo and Northern Santa Barbara
counties, it was very clear that the city of Santa Maria with 28% of the total
deposit base provided opportunity for growth. In order to obtain more market
share, the Company needed a greater presence than the existing one branch office
that was opened in 1999. The Company views this acquisition as a positive step
to enhancing market share and shareholder return. Initially, the Company
anticipated that the acquisition would be accretive to earnings in the fourth
quarter of 2004. However, the acquisition became accretive to diluted earnings
per share for the three months ending June 30, 2004 and subsequent quarters.
 
 In 1999,
Heritage put into action a Corporate Culture Survey that allows employees to
respond anonymously to nearly 100 questions regarding communication, training,
management effectiveness and many other pertinent areas. This survey is
conducted annually during the fourth quarter. The results of the survey provide
Senior Management and the Board with information that assists in future
endeavors to address areas where there is an opportunity to improve. During the
past five years, the overall “rating” has shown measured improvement. Senior
Management and the Board of Directors consider this to be one of the most
important achievements for the Company.
 
 PAGE
15
 
 The
Company continues to focus on increased market share in each city within its
primary market area. In 2002, marketing plans were initiated to reach the long
term goal of at least a pro rata share of deposits in each market. Measured
calling programs for both lending and operational staff have been implemented
utilizing among other resources a Customer Relationship Management (CRM) system.
While competition remains robust in the Central Coast with numerous independent
banks headquartered here and the typical plethora of major financial
institutions, the Company believes that our unique corporate culture that
concentrates on our staff will ultimately be our best tool to accomplish our
market share goals. From June 1998 to June 2004, the Company’s market share in
San Luis Obispo County grew from 5.9% to 7.5%. This growth represented a move
from the eighth position among fifteen other commercial banks to fourth among
fourteen commercial banks. The Compound Annual Growth Rate (CAGR) for the
company over a ten year period (1994 through 2004) was 20.6% compared to a CAGR
of 6.4% for total deposits in San Luis Obispo County.
 
 In July
2003, the Bank purchased a property immediately adjacent to its Headquarters
facility. It is the intention to build approximately 20,000 square feet of
office space to house all administrative functions of the Company. Completion of
the project was originally anticipated to be sometime during the fourth quarter
of 2005; however, recent weather conditions have pushed this out until February
2006.
 
 On
September 27, 2004, the Company commenced trading under the symbol HEOP on the
Nasdaq SmallCap Market.
 
 In early
October 2004, the Bank began the process of converting the previous Hacienda
Bank computer systems and changing the name from Hacienda Bank, a Division of
Heritage Oaks Bank to the Bank’s. The computer conversion took place on March 4,
2005. At that same time, the Bank relocated its original branch office in Santa
Maria to one of the acquired branch locations. These two branch offices were
located within one mile of one another. The Bank is in the process of
sub-leasing the vacated facility. The underlying lease expires in October 2008.
 
 Local
Economy
 
 The
economy in the Company’s service area is based primarily on agriculture,
tourism, light industry, oil and retail trade. Services supporting these
industries have also developed in the areas of medical, financial and
educational. The population of San Luis Obispo County and the City of Santa
Maria (in Northern Santa Barbara County) totaled 258,200 and 85,000,
respectively, according to economic data provided by local county and title
company sources. The moderate climate allows a year round growing season for
numerous vegetables and fruits. Vineyards and cattle ranches also contribute
largely to the local economy. Vineyards in production have grown significantly
over the past several years throughout the Company’s service area. Access to
numerous recreational activities, including lakes, mountains and beaches,
provide a relatively stable tourist industry from many areas including the Los
Angeles/Orange County basin, the San Francisco Bay area and the San Joaquin
Valley. Principally due to the diversity of the various industries in the
Company’s service area, the area, while not immune from economic fluctuations,
does tend to enjoy a more stable level of economic activity from many other
areas of California.
 
 The
Central Coast’s leading agricultural industry is the production of high quality
wine grapes and production of premium quality wines. Through the late 1990’s and
into the year 2000, production of new vineyard land led to an over capacity of
wine grapes. By the end of 2000, excess production of wine grapes led to a
decrease in the processing of grapes sold and in some cases, the inability of
farmers to sell grapes at prices necessary to break even. Wineries, on the other
had, were able to purchase grapes at existing contract prices and in some cases,
below contract prices. In situations where wineries purchased grape inventories
at existing contract prices, wineries demanded that farmers thin crop level,
thereby producing a product of extremely high quality.
 
 Over the
past two years, the number of premium wine producers in the Paso Robles
appellation has more than doubled. Paso Robles wines have continually achieved
high recognition for outstanding quality and in 2003 Forbes Magazine recognized
the area as the next “Napa Valley.”
 
 The Bank
recognized in 2000 that the farming end of the wine industry held the highest
level of risk and that the increased levels of grape production would negatively
impact commodity prices for the growers. At that time, the Bank strategically
moved its portfolio of vineyard development loans out of the Bank’s portfolio
and into the Farmer Mac government guaranteed program. As a result of this
strategy, the Bank now has a very small and manageable portfolio of vineyard
development loans amounting to approximately $1.7 million at March 31, 2005. In
the opinion of Management, another negative turn in the wine grape industry is
expected to have very little impact on the overall risk of the Bank’s loan
portfolio.
 
 PAGE
16
 
 Critical
Accounting Policies
 
 The
Company’s significant accounting policies are set forth in the 2004 Annual
Report, Note 1 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, which was
filed on Form 10-KSB.
 
 The
following is a brief description of our current accounting policies involving
significant management valuation judgments.
 
 Allowance
for Loan and Lease Losses
 The
Company considers its policy regarding the allowance for loan losses to be its
most critical accounting policy, because it requires management's most
subjective and complex judgments. In addition, changes in economic conditions
can have a significant impact on the allowance for loan losses and therefore the
provision for loan losses and results of operations. The Company has developed
appropriate policies and procedures for assessing the adequacy of the allowance
for loan losses, recognizing that this process requires a number of assumptions
and estimates with respect to its loan portfolio. The Company's assessments may
be impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers, which is not known to management at the time of the issuance of the
consolidated financial statements.
 
 The
allowance for loan and lease losses represents management’s best estimate of
losses inherent in the existing loan portfolio. The allowance for loan and lease
losses is increased by the provision for loan and lease losses charged to
expense and reduced by loans charged-off, net of recoveries. The allowance for
loan and lease losses is determined based on management’s assessment of several
factors: reviews and evaluation of individual loans, changes in the nature and
volume of the loan portfolio, current economic conditions and the related impact
on specific borrowers and industry groups, historical loan loss experiences and
the level of classified and nonperforming loans.
 
 Loans are
considered impaired if, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. The
measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate
stipulated in the loan agreement, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. In measuring
the fair value of the collateral, management uses assumptions and methodologies
consistent with those that would be utilized by unrelated third parties.
 
 Changes
in the financial condition of individual borrowers, economic conditions,
historical loss experience and the condition of the various markets in which
collateral may be sold may all affect the required level of the allowance for
loan and lease losses and the associated provision for loan and lease losses.
 
 Securities
Available for Sale
 The fair
value of most securities that are designated available for sale are based on
quoted market prices. If quoted market prices are not available, fair values are
extrapolated from the quoted prices of similar instruments.
  Goodwill
and Other Intangible Assets
 As
discussed in the 2004 Annual Report, Note 6 of the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, we assess goodwill and other intangible assets each year
for impairment. This assessment involves estimating cash flows for future
periods. If the future cash flows were materially less than the recorded
goodwill and other intangible assets balances, we would be required to take a
charge against earnings to write down the assets to the lower value. The Company
determined that there was no impairment at December 31, 2004.
 
 PAGE
17
 
 RESULTS
OF OPERATIONS
 
 Earnings
Overview
 
 The
Company reported net income for the three months ended March 31, 2005 of $1.4
million compared to $876 thousand during the same period in 2004. This
represents an increase of 62%. Basic earnings per share for the three months
ended March 31, 2005 and March 31, 2004, were $.35 and $.22, respectively.
Diluted earnings per share for the three months ended March 31, 2005 and March
31, 2004, were $.33 and $.20, respectively.
 
 Net
Interest Income and Interest Margin
 
 Net
interest income, the primary component of the net earnings of a financial
institution, refers to the difference between the interest paid on deposits and
borrowings, and the interest earned on loans and investments. The net interest
margin is the amount of net interest income expressed as a percentage of average
earning assets. Factors considered in the analysis of net interest income are
the composition and volume of earning assets and interest-bearing liabilities,
the amount of non-interest bearing liabilities and non-accrual loans, and
changes in market interest rates.
 
 The table
below sets forth changes for the three months ended March 31, 2005 compared to
the same period in 2004 in regard to volume and rate associated with interest
earning assets and interest bearing deposits.
 
 Analysis
of Changes in Net Interest Income
 Three
      months endedMarch
      31. 2005 over 2004Volume
    
    Rate
    
    TotalInterest
      income:Loans
      (1)
    
    $
    1,020
    
    $
    268
    
    $
    1,288Investment
      securities taxable
    
    
    (50
    )
    
    -
    
    
    (50
    )Investment
      securities non-taxable (2):
    
    
    33
    
    
    (13
    )
    
    20Taxable
      equivalent adjustment (2):
    
    
    (11
    )
    
    4
    
    
    (7
    )Interest-bearing
      deposits
    
    
    -
    
    
    -
    
    
    -Federal
      funds sold
    
    
    (1
    )
    
    -
    
    
    (1
    )Net
      increase (decrease)
    
    
    991
    
    
    259
    
    
    1,250Interest
      expense:Savings,
      now, money market
    
    
    (13
    )
    
    114
    
    
    101Time
      deposits
    
    
    2
    
    
    8
    
    
    10Other
      borrowings
    
    
    7
    
    
    (46
    )
    
    (39
    )Long
      term borrowings
    
    
    -
    
    
    22
    
    
    22Net
      increase (decrease)
    
    
    (4
    )
    
    98
    
    
    94Total
      net increase (decrease)
    
    $
    995
    
    $
    161
    
    $
    1,156
 (1)
      Loan fees of $353 and $220 for the three months ended March 31, 2005 and
      2004, respectively have been included
      in the interest income computation.(2)
      Adjusted to a fully taxable equivalent basis using a tax rate of
      34%.Note
      A: Average balances of all categories in each period were included in the
      volume computations.Note
      B: Average yield rates in each period were used in rate computations.
      Change attributable to both volume and
      rate have been allocated in proportion to the relationship between their
      absolute dollar amounts.
   PAGE
18
 The
tables below sets forth changes from March 31, 2004 to March 31, 2005 for
average interest earning assets and their respective average yields. The Company
was able to grow the loan portfolio with continued market penetration by a team
of seasoned loan officers who are compensated for production. The growth in the
loan portfolio was achieved under the Company’s established Loan Policy. The
average yield on loans improved by 36 basis points due to action by the Federal
Reserve Bank of raising rates by 175 basis points from June 2004 through March
2005. See “Item 3. Quantitative and Qualitative Disclosure about Market Risk”
for further discussion.
 
 The
tax-exempt portion of the investment portfolio also increased, however, it
experienced a 21 basis point decrease in average yield. At March 31, 2005, the
tax equivalent yield was 6.97% compared to 6.99% for the same period in 2004.
The Company has significant room to grow in tax-exempts before bumping up
against the Alternative Minimum Tax issue with the IRS. The taxable investment
portfolio gained in average yield due to extension caused by rising rates.
Taxable investment securities decreased due to regular principal reductions on
Mortgage Backed Securities (MBS). There were no securities purchased during the
first three months of 2005.
 
 **Average
      Balance****for
      three months ending****(in
      thousands)**
    
    **March
      31,**Interest
      Earning Assets:
    
    **2005**
    
    **2004**
    
    **$
      Variance**
    
    **%
      Variance**Time
      deposits with other banks
    
    $
    1,998
    
    $
    498
    
    $
    1,500
    
    
    301.20
    %Investment
      securities taxable
    
    
    44,483
    
    
    47,219
    
    
    (2,736
    )
    
    -5.79
    %Investment
      securities non-taxable
    
    
    13,062
    
    
    11,144
    
    
    1,918
    
    
    17.21
    %Federal
      funds sold
    
    
    11,630
    
    
    30,157
    
    
    (18,527
    )
    
    -61.44
    %Loans
    
    
    344,499
    
    
    286,473
    
    
    58,026
    
    
    20.26
    %Total
      interest earning assets
    
    $
    415,672
    
    $
    375,491
    
    $
    40,181
    
    
    10.70
    %
  **Average
      Yield****for
      three months ending****March
      31,**Interest
      Earning Assets:
    
    **2005**
    
    **2004**
    
    **Variance**Time
      deposits with other banks
    
    
    0.60
    %
    
    2.41
    %
    
    -1.81
    %Investment
      securities taxable
    
    
    3.70
    %
    
    3.91
    %
    
    -0.21
    %Investment
      securities non-taxable
    
    
    4.32
    %
    
    4.59
    %
    
    -0.27
    %Federal
      funds sold
    
    
    2.41
    %
    
    0.94
    %
    
    1.47
    %Loans
    
    
    7.11
    %
    
    6.75
    %
    
    0.36
    %Total
      interest earning assets
    
    
    6.49
    %
    
    5.86
    %
    
    0.63
    %
  From June
2004 through March 2005, the Federal Reserve Bank increased rates by a total of
175 basis points. Due to the asset sensitive nature of the Company’s balance
sheet, these increases, coupled with the Company’s substantial volume of
non-interest bearing deposits and low average rates on interest bearing
deposits, are the primary factors for the increase in net interest
margin.
 
 PAGE
19
  The
tables below sets forth changes from March 31, 2004 to March 31, 2005 for
average interest bearing liabilities and their respective average rates paid.
 
 **Average
      Balance****for
      three months ending**(dollars
      in thousands)
    
    **March
      31,**Interest
      -bearing liabilities:
    
    **2005**
    
    **2004**
    
    **$
      Variance**
    
    **%
      Variance**Savings/NOW/money
      market
    
    $
    165,675
    
    $
    153,736
    
    $
    11,939
    
    
    7.77
    %Time
      deposits
    
    
    60,721
    
    
    74,387
    
    $
    (13,666
    )
    
    -18.37
    %Other
      borrowings
    
    
    36,674
    
    
    32,414
    
    $
    4,260
    
    
    13.14
    %Long
      Term Debt
    
    
    8,248
    
    
    8,248
    
    $
    -
    
    
    0.00
    %Total
      interest-bearing liabilities
    
    $
    271,318
    
    $
    268,785
    
    $
    2,533
    
    
    0.94
    %


**Average
      Yield****for
      three months ending****March
      31,**Interest
      -bearing liabilities:
    
    **2005**
    
    **2004**
    
    **Variance**Savings/NOW/money
      market
    
    
    0.61
    %
    
    0.39
    %
    
    0.22
    %Time
      deposits
    
    
    2.06
    %
    
    1.63
    %
    
    0.43
    %Other
      borrowings
    
    
    3.24
    %
    
    4.15
    %
    
    -0.91
    %Long
      Term Debt
    
    
    6.01
    %
    
    4.95
    %
    
    1.06
    %Total
      interest-bearing liabilities
    
    
    1.45
    %
    
    1.33
    %
    
    0.12
    %
 The
Company continues to enjoy a low cost of funds, specifically in regard to
interest bearing deposits. The ability to attract low cost deposits is part of
the Company’s marketing plans that have been in place for numerous years. While
this remains Management’s main objective, in February 2005 the company
implemented a Time Deposit/Money Market promotion to run for a period of
approximately 60 days. This was done to provide appropriate liquidity for
current and anticipated loan funding. This will likely result in an increase in
interest bearing deposits as well as an increase in deposit costs over the next
few months.
 
 The
Company was able to increase the Net Interest Margin as the result of an
increase of 63 basis points in average yield on average interest earning assets
while the average yield on average interest earning liabilities increased by
only 12 basis points. The projected change in Net Interest Margin as a result of
the Time Deposit/ Money Market promotion is anticipated to be minimal since
borrowing with the FHLB, currently at an average yield of 3.47% will mature in
April 2005. At the time of maturity, Management will determine how much, if any
new FHLB borrowing will be necessary.
 
 PAGE
20
 
 **Average
Balance Sheet Information for the three months ended March
31,**
 **(in
      thousands)****2005**
    
    
    
    
    
    **2004****Average**
    
    **Yield/**
    
    
    
    **Average**
    
    **Yield/**
    
    **Amount**Interest
      Earning Assets:
    
    **Balance**
    
    **Rate**
    
    **Interest**
    
    **Balance**
    
    **Rate**
    
    **Interest**Interest
      Bearing Dep with other Banks
    
    $
    1,998
    
    
    0.60
    %
    $
    3
    
    $
    498
    
    
    2.41
    %
    $
    3Investment
      securities taxable
    
    
    44,483
    
    
    3.70
    %
    
    412
    
    
    47,219
    
    
    3.91
    %
    
    462Investment
      securities non-taxable
    
    
    13,062
    
    
    4.32
    %
    
    141
    
    
    11,144
    
    
    4.59
    %
    
    128Federal
      funds sold
    
    
    11,630
    
    
    2.41
    %
    
    70
    
    
    30,157
    
    
    0.94
    %
    
    71Loans
      (1) (2)
    
    
    344,499
    
    
    7.11
    %
    
    6,122
    
    
    286,473
    
    
    6.75
    %
    
    4,834Total
      interest earning assets
    
    
    415,672
    
    
    6.49
    %
    
    6,748
    
    
    375,491
    
    
    5.86
    %
    
    5,498Allowance
      for possible loan losses
    
    
    (3,326
    )
    
    
    
    
    
    
    
    (3,145
    )Other
      assets
    
    
    45,547
    
    
    
    
    
    
    
    
    57,408TOTAL
      ASSETS
    
    $
    457,893
    
    
    
    
    
    
    
    $
    429,754Interest
      -bearing liabilities:Savings/NOW/money
      market
    
    
    165,675
    
    
    0.61
    %
    
    251
    
    
    153,736
    
    
    0.39
    %
    
    150Time
      deposits
    
    
    60,721
    
    
    2.06
    %
    
    313
    
    
    74,387
    
    
    1.63
    %
    
    303Other
      borrowings
    
    
    36,674
    
    
    3.24
    %
    
    297
    
    
    32,414
    
    
    4.15
    %
    
    336Long
      Term Debt
    
    
    8,248
    
    
    6.01
    %
    
    124
    
    
    8,248
    
    
    4.95
    %
    
    102Total
      interest-bearing liabilities
    
    
    271,318
    
    
    1.45
    %
    
    985
    
    
    268,785
    
    
    1.33
    %
    
    891Demand
      deposits
    
    
    144,718
    
    
    
    
    
    
    
    
    125,594Other
      liabilities
    
    
    3,396
    
    
    
    
    
    
    
    
    2,329Stockholders'
      equityCommon
      stock
    
    
    25,603
    
    
    
    
    
    
    
    
    20,702Retained
      earnings
    
    
    12,721
    
    
    
    
    
    
    
    
    12,125Valuation
      Allowance Investments
    
    
    137
    
    
    
    
    
    
    
    
    219Total
      stockholders' equity
    
    
    38,461
    
    
    
    
    
    
    
    
    33,046TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
    
    $
    457,893
    
    
    
    
    
    
    
    $
    429,754Net
      Interest Income
    
    
    
    
    
    
    
    $
    5,763
    
    
    
    
    
    
    
    $
    4,607Net
      Interest Margin (3)
    
    
    
    
    
    5.55
    %
    
    
    
    
    
    
    
    4.91
    %
  **(1)**
    **Nonaccrual
      loans have been included in total loans.****(2)**
    **Loan
      fees of $353 and $220 for 2005 and 2004, respectively, have **been
      included in the interest income
      computation.**********(3)**
    **Net
      interest margin has been calculated by dividing the net interest **income
      by total average earning
  assets.****
 
 PAGE
21
  Non-Interest
Income
 
 The table
below sets forth changes for the three months ending March 31, 2005 to March 31,
2004 for non-interest income.


Non-Interest
Income Components
 **For
      Three Months Ended****March
      31,****(
      in thousands)**
    
    **2005**
    
    **2004**
    
    **$
      Variance**
    
    **%
      Variance**Service
      Charges on Deposit Accounts
    
    $
    539
    
    $
    510
    
    $
    29
    
    
    5.69
    %ATM/Debit
      Card Transaction/Interchange Fees
    
    
    148
    
    
    125
    
    $
    23
    
    
    18.40
    %Bancard
    
    
    31
    
    
    25
    
    $
    6
    
    
    24.00
    %Mortgage
      Origination Fees
    
    
    197
    
    
    179
    
    $
    18
    
    
    10.06
    %Earnings
      on Cash Surrender Value Life Ins
    
    
    72
    
    
    80
    
    $
    (8
    )
    
    -10.00
    %Gain
      on Sale SBA Loans
    
    
    34
    
    
    45
    
    $
    (11
    )
    
    -24.44
    %Other
    
    
    111
    
    
    72
    
    
    39
    
    
    54.17
    %**TOTAL**
    
    **$**
    **1,132**
    
    **$**
    **1,036**
    
    **$**
    **96**
    
    
    **9.27**
    **%**
 
 Increases
in Service Charges on Deposit Accounts and ATM/Debit Card related transactions
were favorably impacted by the 17% growth in Demand Deposits over a one year
period.
 
 Non-Interest
Expenses
 
 The
tables below set forth changes for the three months ending March 31, 2005 to
March 31, 2004 for non-interest expense.
 Non-Interest
      Expense Components**For
      Three Months Ended****March
      31,****(
      in thousands)**
    
    **2005**
    
    **2004**
    
    **$
      Variance**
    
    **%
      Variance**Salaries
      and Employee Benefits
    
    $
    2,248
    
    $
    2,046
    
    $
    202
    
    
    9.87
    %Occupany
      and Equipment
    
    
    612
    
    
    635
    
    $
    (23
    )
    
    -3.62
    %Data
      Processing
    
    
    579
    
    
    476
    
    $
    103
    
    
    21.64
    %Advertising
      and promotional
    
    
    127
    
    
    169
    
    $
    (42
    )
    
    -24.85
    %Regulatory
      fees
    
    
    25
    
    
    30
    
    $
    (5
    )
    
    -16.67
    %Other
      professional fees and outside services
    
    
    119
    
    
    144
    
    $
    (25
    )
    
    -17.36
    %Legal
      fees and other litigation expense
    
    
    37
    
    
    15
    
    $
    22
    
    
    146.67
    %Loan
      Department Costs
    
    
    42
    
    
    35
    
    $
    7
    
    
    20.00
    %Stationery
      and supplies
    
    
    86
    
    
    91
    
    $
    (5
    )
    
    -5.49
    %Director
      fees
    
    
    48
    
    
    58
    
    $
    (10
    )
    
    -17.24
    %Core
      Deposit Intangible Amortization
    
    
    143
    
    
    105
    
    $
    38
    
    
    36.19
    %Other
    
    
    357
    
    
    296
    
    
    61
    
    
    20.61
    %**$**
    **4,423**
    
    **$**
    **4,100**
    
    **$**
    **323**
    
    
    **7.88**
    **%**
 Salary/Related
Expense
 Salaries
and employee related expense incurred the greatest dollar increase of any
non-interest expense category for the three months ending March 31, 2005 and
2004. Approximately half of the increase is due to the increased bonus accrual
as the result of the outstanding record earnings for the first quarter of 2005..
 
 Data
Processing Expense
 Approximately
58% of the change in this category is the result of the increase in Escrow
Accounting costs related to three long-time deposit customers of the Bank. The
remainder of the change is attributable to 1) increased correspondent bank fees
as the result of converting to explicit float thereby creating greater daily
liquidity and 2) increased account activity and associated data processing
costs.
 
 PAGE
22
 
 Provision
for Income Taxes
 
 The
provision for income taxes was 38.2% and 36.2% of net pre-tax income for the
three months ending March 2005, and 2004, respectively.
 
 
 FINANCIAL
CONDITION ANALYSIS
 
 Total
assets of the Company were $448.0 million at December 31, 2004 compared to
$472.1 million at March 31, 2005. This represents an increase of $24.1 million
or 5.0%.
 
 Loans
 
 The table
below sets forth changes from December 31, 2004 to March 31, 2005 for the
composition of the loan portfolio.
 
 **March
      31,**
    
    **December
      30,****2005**
    
    **2004**
    
    **$Variance**
    
    **%Variance****(in
      thousands)**Commercial,
      financial, and agricultural
    
    $
    53,786
    
    $
    49,584
    
    
    4,202
    
    
    8.47
    %Real
      estate-construction
    
    
    63,232
    
    
    66,833
    
    
    (3,601
    )
    
    -5.39
    %Commercial
      real estate
    
    
    220,080
    
    
    217,473
    
    
    2,607
    
    
    1.20
    %Installment
      loans to individuals
    
    
    5,157
    
    
    5,538
    
    
    (381
    )
    
    -6.88
    %All
      other loans (including overdrafts)
    
    
    299
    
    
    265
    
    
    34
    
    
    12.83
    %342,554
    
    
    339,693
    
    
    2,861
    
    
    0.84
    %Less
      - deferred loan fees, net
    
    
    (1,466
    )
    
    (1,482
    )
    
    16
    
    
    -1.08
    %Less
      - reserve for possible loan losses
    
    
    (3,395
    )
    
    (3,247
    )
    
    (148
    )
    
    4.36
    %Total
      loans
    
    $
    337,693
    
    $
    334,964
    
    $
    2,729
    
    
    0.81
    %Loans
      Held For Sale
    
    $
    5,541
    
    $
    2,253
    
    $
    3,288
    
    
    145.94
    %
 
 While
gross loans grew by less than 1% in the first quarter of 2005, commitments
outstanding, specifically in regard to construction loans, continue to remain
robust. During the first quarter of 2005, there were numerous construction
projects that were completed resulting in either 1) the sale of the properties
and pay-downs on the outstanding loans or 2) conversion to mini-perm commercial
real estate loans. In addition, commercial real estate loans experienced some
early pay-off activity during the first quarter. Most of this activity was the
result of customers selling properties to out of the area borrowers who chose
out of the area lenders offering rates and terms with which we did not wish to
compete.
  The
increase in commercial, financial and agricultural loans is attributed primarily
to draws on existing and new lines of credit.
 
 The
decrease in real estate-construction loans can be attributed to two large
construction projects converting to amortizing mini-perms, to two large
condo/single family construction projects completed and homes sold and to
several construction loans paid off by other lenders. Several new construction
loans and funding of existing construction projects also occurred during the
first quarter. New loans include a retail/office building for $1.4 million,
additions to a strip center for $2.2 million, a restaurant/wine shop for $1.7
million, a retail/office building for $4.2 million, a motel addition for $4.3
million, a gas station for $1 million and numerous other smaller projects.
Construction loans are typically granted for a one year period and then, with
income properties, are amortized over not more than 25 years with 10 to 15 year
maturities.
 
 PAGE
23
 
 The Bank
presently has a concentration of loans in construction/land in the amount of $63
million which represents 152% of the Bank’s Total Risk Based capital. At March
31, 2005 there were 78 construction loans with outstanding balances and
remaining commitments of approximately $44 million and $34 million,
respectively. The single largest construction loan has a commitment amount of
approximately $4.8 million with a balance of approximately $1.7 million at March
31, 2005. This is an apartment complex on the outskirts of Santa Maria, Ca. At
March 31, 2005, there were 50 land loans with balances of approximately $18.8
million. The single largest land loan accounts for approximately $2.1 million of
the total and is for a single family home tract development. The
construction/land loans are spread throughout our market area and have
consistently performed in a satisfactory manner.
 
 The
increase in commercial real estate loans is attributed to several of the
construction loans moving into amortizing loans and new commercial property
loans including an office/warehouse building for $2.1 million, a hotel for $4.3
million and a commercial warehouse for $2.7 million.
 
 Hotel
loans are once again considered to be a concentration due to a large new loan
and increases in existing loans for expansion/improvements. Hotel loans
presently total $42.4 million, up $5.8 million from 2004 year end, which
represents 103% of the Bank’s Total Risk Based capital. At March 31, 2005, there
were 31 motel loans. The single largest loan with a balance of approximately
$4.3 million, was made to an upscale resort hotel located in Avila Beach, Ca.
The hotel loans are also made to clients throughout our market. These loans have
also typically paid as agreed. The Bank had one out of area hotel participation
loan that was in default. This loan, in the original amount of $1 million, was
paid down by $900 thousand in April 2004 and the remaining $95 thousand charged
off. A small recovery of $1 thousand was received with no further payment
expected.
 
 In
September 2004, the Bank issued an $11.7 million irrevocable standby letter of
credit to guarantee the payment of Taxable Variable Rate Demand Bonds. The
primary purpose of the bond issue was to refinance existing debt and provide
funds for the expansion of an assisted living facility in San Luis Obispo.
Approximately $6.6 million of the funds have been deposited with the Bank with
$5.1 million remaining. These funds are being used for capital improvements to
the assisted living facility. The letter of credit will expire in September
2007.
 
 Construction
loan demand for both single family and commercial real estate was strong during
2004 and has continued during 2005. Area home prices continue to increase
however they remain considerably lower than the metropolitan areas to our North
and South. Low mortgage rates and a multitude of financing options (interest
only mortgages, 40 year loans, etc.) have kept many in the market. The continued
availability of land for subdivision use also continues to drive the
market.
 
 Business
properties are also in demand with low vacancies and favorable loan rates.
Commercial property values and rental rates increased substantially during 2004.
Investors, many seeking exchange properties, continue to seek properties in our
market area. The Bank expects to experience continued growth in commercial real
estate loans during 2005.
 
 Loans
held for sale consist of mortgage originations that have already been sold
pursuant to Correspondent Mortgage Loan Agreements. There is no interest rate
risk associated with these loans as the commitments are in place at the time
that the Bank funds them. Settlement from the correspondents is typically within
30 to 45 days.
 
 At March
31, 2005, the Bank had no foreign loans outstanding. The Bank did not have any
concentrations of loans except as disclosed above.
 
 The
Bank’s management is responsible for monitoring loan performance that is done
through various methods, including a review of loan delinquencies and personal
knowledge of customers. Additionally, the Bank maintains both a “watch” list of
loans that, for a variety of reasons, management believes requires regular
review as well as an internal loan classification process. Annually, the loan
portfolio is also reviewed by an experienced, outside loan reviewer not
affiliated with the Bank. A list of delinquencies, the watch list, loan grades
and the outside loan review are reviewed regularly by the Bank’s Board of
Directors.
 
 PAGE
24
 
 The
Bank’s provision for loan losses was $180,000 for the first quarter of 2005,
compared to $170,000 for the same period 2004.  The
provision amount is based on the Bank’s monthly allowance for loan losses
calculation including current plans for recovery collection.
 
 The Bank
has a non-accrual policy that requires a loan greater than 90 days past due to
be placed on non-accrual status unless such loan is well-collateralized and in
the process of collection. When loans are placed on non-accrual status, all
uncollected interest accrued is reversed from earnings. Once on non-accrual
status, interest on a loan is only recognized on a cash basis. Payments that are
received may also be applied to reduce the principal balance. Loans may be
returned to accrual status if management believes that all remaining principal
and interest is fully collectible and there has been at least six months of
sustained repayment performance since the loan was placed on
non-accrual.
 
 If a
loan’s credit quality deteriorates to the point that collection of principal is
believed by management to be doubtful and the value of collateral securing the
obligation is sufficient, the Bank generally takes steps to protect and
liquidate the collateral. Any loss resulting from the difference between the
loan balance and the fair market value of the property is recognized by a charge
to the reserve for loan losses. When the property is held for sale after
foreclosure, it is subject to a periodic appraisal. If the appraisal indicates
that the property will sell for less than its recorded value, the Bank
recognizes the loss by a charge to non-interest expense.
 
 Loans on
non-accrual status totaled $0.9 million and $0.5 million at December 31, 2004
and March 31, 2005, respectively. Typically, these loans have adequate
collateral protection and/or personal guaranties to provide a source of
repayment to the Bank. Most of the loans on non-accrual are related to several
commercial loans that are being addressed by specific workout plans at this
time. Interest income that would have been recognized on non-accrual loans if
they had performed in accordance with the terms of the loans was approximately
$126 thousand and $24 thousand  for the
period ended December 31, 2004 and March 31, 2005, respectively.
 
 Non-performing
loans include non-accrual loans, restructured loans and accruing loans that are
90 days or more delinquent. Non-performing loans totaled $0.9 million at
December 31, 2004 and $0.5 million at March 31, 2005. There were no loans past
due 90 days or more and still accruing interest at March 31, 2005.
 
 Non-performing
loans were .20% and .10% of total assets as of December 31, 2004 and March 31,
2005, respectively. The allowance for loan loss to non-performing loans was 3.6x
and 6.8x at December 31, 2004 and March 31, 2005, respectively.
 
  Total
Cash and Due from Banks
 
 Total
cash and due from banks were $13.1 million and $12.5 million at December 31,
2004 and March 31, 2005, respectively. This line item will vary depending on
cash letters from the previous night and actual cash on hand in the branches.
 
 Investment
Securities and Other Earning Assets
 
 Other
earning assets are comprised of Federal Home Loan Bank, Federal Funds sold
(funds lent on a short-term basis to other banks), investments in securities and
short-term interest bearing deposits at other financial institutions. These
assets are maintained for liquidity needs of the Bank, collateralization of
public deposits, and diversification of the earning asset mix.
 
 PAGE
25
 
 The table
below sets forth changes from December 31, 2004 to March 31, 2005 for the
composition of other earning assets. Interest bearing deposits with other
financial institutions decreased by $3 million due to the return of funds which
were previously placed in a short term (14 days) pool of money market accounts.
Fed Funds Sold have increased due to 1) the return of the $3 million in money
market accounts, 2) 6% deposit growth, including $23.1 million growth in three
volatile deposit relationships, 3) a decrease in the Investment Portfolio and 4)
a 1% increase in the Loan Portfolio.
  **COMPOSITION
OF OTHER EARNING ASSETS**
 **March
      31,**
    
    **December
      31,****2005**
    
    **2004**
    
    **$
      Variance**
    
    **%
      Variance****(in
      thousands)**Federal
      Home Loan Bank, and other stock
    
    $
    1,810
    
    $
    1,809
    
    $
    1
    
    
    0.06
    %Available-for-Sale
      Investments
    
    
    53,097
    
    
    57,394
    
    $
    (4,297
    )
    
    -7.49
    %Federal
      Funds Sold
    
    
    31,420
    
    
    5,775
    
    $
    25,645
    
    
    444.07
    %Interest
      Bearing Deposits other fin inst.
    
    
    498
    
    
    3,498
    
    
    (3,000
    )
    
    -85.76
    %Total
      Other Earning Assets
    
    $
    86,825
    
    $
    68,476
    
    $
    18,349
    
    
    26.80
    %
 
 The
Company manages its securities portfolio to provide a source of both liquidity
and earnings. The Bank has an asset/liability committee that develops current
investment policies based upon its operating needs and market circumstance. The
Bank’s investment policy is formally reviewed and approved annually by the board
of directors. The asset/liability committee of the Bank is responsible for
reporting and monitoring compliance with the investment policy. Reports are
provided to the Bank’s boards of directors on a regular basis.
 
 Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. As of December 31, 2004, net unrealized gains in the portfolio were
$147 thousand compared to a net unrealized loss of $186 thousand at March 31,
2005. This change in market value was driven by FRB action of raising rates
starting in June 2004. The portfolio decreased in size due to principle
reductions on Mortgage Backed Securities.
 
 At March
31, 2005, available-for-sale securities in the portfolio included obligations of
state and political subdivisions, obligations of US government agencies and
corporations and mortgaged backed securities issued by various agencies.
 
 All fixed
and adjustable rate mortgage pools contain a certain amount of risk related to
the uncertainty of prepayments of the underlying mortgages. Interest rate
changes have a direct impact upon prepayment rates. The Bank uses computer
simulation models to test the average life, duration, market volatility and
yield volatility of adjustable rate mortgage pools under various interest rate
assumptions to monitor volatility. Stress tests are performed quarterly.
 
 PAGE
26
 
 Deposits
and Borrowed Funds
 
 The table
below sets forth changes from December 31, 2004 to March 31, 2005 for the
composition of deposit categories.
 
 **March
      31,**
    
    **December
      31,****(in
      thousands)**
    
    **2005**
    
    **2004**
    
    **$Variance**
    
    **%Variance**Deposits:Demand,
      non-interest bearing
    
    $
    168,598
    
    $
    143,455
    
    
    25,143
    
    
    17.53
    %Interest
      bearing demand
    
    
    54,458
    
    
    60,256
    
    
    (5,798
    )
    
    -9.62
    %Savings
    
    
    34,275
    
    
    36,232
    
    
    (1,957
    )
    
    -5.40
    %Money
      market
    
    
    74,034
    
    
    69,527
    
    
    4,507
    
    
    6.48
    %Time
      deposits of $100 or more
    
    
    15,035
    
    
    18,034
    
    
    (2,999
    )
    
    -16.63
    %Time
      deposits under $100
    
    
    46,041
    
    
    42,937
    
    
    3,104
    
    
    7.23
    %Total
      deposits
    
    $
    392,441
    
    $
    370,441
    
    $
    22,000
    
    
    5.94
    %
 
 The
Company has been able to increase deposits due to a well planned marketing
strategy and incentive based compensation that has been in place for several
years. Like all good strategies, this one is fluid and is subject to the
changing dynamics within the Company’s balance sheet and staffing along with
changes in its primary market area. Friendly competition between the branch
offices to increase deposit totals has been in place for two years. The branch
offices are all given goals for each deposit category type and results are
measured monthly. Lending and Operational staff work together to meet or beat
their goals. This program has generated a significant amount of pride for the
entire staff and resulted in growth for the Company.
 
 For the
Company, at March 31, 2005, non-interest bearing demand deposits provide 43% of
total deposits compared to 38.7% at December 31, 2004. The Bank has three
deposit relationships that it considers to be volatile. These deposits are held
by three, long time customers of the Bank that engage in mortgage related
activities. The volatile nature of these relationships was evidenced by an
increase of $23.1 million in these account balances from December 31, 2004 to
March 31, 2005. As a percentage of total deposits, these accounts represented
13.6% at December 31, 2004 compared to 18.7% at March 31, 2005. These volatile
account relationships are included in the volatile liability dependency report
that the Bank produces on a monthly basis. Typically, a material increase in
balances held by these three customers is reflected in Federal Funds Sold and is
recognized by Management to potentially be short term in nature. Therefore, any
material increase in these balances is not considered to be a funding source for
any form of long-term investment. Management and the Board of Directors of the
Bank are keenly aware that as the mortgage market conditions change, these
relationships will be impacted.
 
 Core
deposits (time deposits less than $100,000, demand, and savings) gathered in the
local communities served by the Company continue to be the primary source of
funds for loans and investments. Core deposits of $377.4 million represented
96.2% of total deposits at March 31, 2005. The Company does not purchase funds
through deposit brokers.
 
 In
October 2003, the Company executed a Promissory Note with Pacific Coast Bankers
Bank (PCBB) for a revolving line of credit in the amount of $3.5 million. As
discussed in the paragraph below, at March 31, 2005, the Company had a zero
balance outstanding on this loan. The note was obtained to assist with the cash
and capital needs for the acquisition of Hacienda. The Company pledged 646,598
shares (51%) of the Bank’s stock as collateral for the loan. The note is
revolving in nature for the first two years. The terms of the note call for
quarterly interest only payments for the first two years with subsequent
principal and interest payments for eight years on a fully amortized basis. At
March 31, 2005, the interest rate on the note was 5.75% and is variable and
moves with prime. Under the terms of the agreement, the Company will not incur
any additional debt over $2 million exclusive of inter-company debt and existing
debt without the prior written consent of PCBB. In addition, the Bank must be
“well” capitalized on an on-going basis as defined by bank Regulators.
 
 One of
the benefits of merging Hacienda Bank with and into the Bank on June 28, 2004
was the enhanced capital position of the resultant bank. On July 22, 2004, the
Bank’s Board of Directors declared a dividend of $3.5 million to the Company to
enable the Company to pay the PCBB line of credit down to zero. This was done on
July 23, 2004. The line of credit in the amount of $3.5 million is still
available to the Company until September 2005.
 
 PAGE
27
 
 The Bank
has established borrowing lines with the Federal Home Loan Bank (FHLB). At March
31, 2005, the Bank had borrowings with the FHLB of $9.5 million and $19 million
collateralized by loans and securities, respectively. The $28.5 million in
borrowing matures in April 2005. At maturity, Management will assess balance
sheet needs and determine how much if any and at what term it will borrow from
the FHLB. On September 17, 2004, the Bank issued a Letter of Credit in the
amount of approximately $11.7 million to a customer in regard to a senior care
facility. The Letter of Credit was issued pursuant to a Letter of Credit
Reimbursement Agreement between the Bank and the FHLB. It is collateralized by a
blanket lien with the FHLB that includes all qualifying loans on the Bank’s
balance sheet.
 
 At March
31, 2005, the Bank has a remaining borrowing capacity with existing collateral
of approximately $71.2 million and $1.2 million secured by loans and securities,
respectively.
 
 The Bank
utilizes securities sold under repurchase agreements as a source of funds. The
Bank had $766 thousand in securities sold under repurchase agreements at
December 31, 2004 compared to $732 thousand at March 31, 2005.
 
 Capital
 
 The
Company's total stockholders equity was $37.2 million at December 31, 2004
compared to $38.7 million at March 31, 2005. The increase in capital was due to
net income of $1,417 thousand, stock options exercised in the amount of $365
thousand, and a decrease in accumulated other comprehensive income of $333
thousand.
 
 On March
25, 2005 the Board of Directors of the Company announced a 5% stock dividend to
shareholders of record on April 8, 2005 that will be distributed on April 22,
2005. The Consolidated Statements of Stockholders’ Equity found under “Item 1.
Financial Statements” in this document reflects the 5% stock dividend.
 
 On April
10, 2002, the Company issued $8,248,000 of Floating Rate Junior Subordinated
Deferrable Interest Debentures (the “debt securities”) to Heritage Oaks Capital
Trust I, a statutory trust created under the laws of the State of Delaware.
These debt securities are subordinated to effectively all borrowings of the
Company and are due and payable on April 22, 2032. Interest is payable
semi-annually on these debt securities at 6-Month LIBOR plus 3.7% for an
effective rate of 6.00% as of March 31, 2005. The debt securities can be called
at any time commencing on April 22, 2007, at par. The debt securities can also
be redeemed at par if certain events occur that impact the tax treatment,
regulatory treatment or the capital treatment of the issuance. The Company also
purchased a 3% minority interest totaling $248,000 in Heritage Oaks Capital
Trust I. The balance of the equity of Heritage Oaks Capital Trust I is comprised
of mandatorily redeemable preferred securities and is included in other
assets.
 
 If the
Company elects to defer interest payments pursuant to terms of the agreement,
then the Company may not (i) declare or pay any dividends or distributions on,
or redeem, purchase, acquire or make a liquidation payment with respect to any
of the Company’s capital stock, or (ii) make any payment of principal of or
premium, if any, or interest on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Debt Securities, other than, among other items, a dividend in the form of stock,
warrants, options or other rights in the same stock as that on which the
dividend is being paid or ranks pari passu with or junior to such stock. The
prohibition on payment of dividends and payments on pari passu or junior debt
also applies in the case of an event of default under the
agreements.
 
 The
Company used the proceeds from the sale of the securities for general corporate
purposes, including the repayment of outstanding indebtedness of $1.9 million on
April 11, 2002 and capital contributions to the Bank for future
growth.
 
 Under
FASB Interpretation (FIN) No. 46, *“Consolidation
of Variable Interest Entities, an interpretation of ARB No.
51,”* the
Company is not allowed to consolidate Heritage Oaks Capital Trust I into the
Company’s financial statements. Prior to the issuance of FIN No. 46, Bank
holding companies typically consolidated these entities. On February 28, 2005,
the Federal Reserve Board issued a new rule which provides that, notwithstanding
the deconsolidation of such trusts, junior subordinated debentures, such as
those issued by the Company, may continue to constitute up to 25% of a bank
holding company's Tier 1 capital, subject to certain new limitations which will
not become effective until March 31, 2009 and which, in any event, are not
expected to affect the treatment of the Company's Junior Subordinated Debentures
as Tier 1 capital for regulatory purposes. At March 31, 2005, the Company has
included the net junior subordinated debt in its Tier1 Capital for regulatory
capital purposes.
 
 PAGE
28
 
 Management
believes that organic growth in 2005 for the Company can be accomplished without
further borrowing for capital or cash flow purposes. At March 31, 2005, the
Company had sufficient cash to service the $8.2 million in junior subordinated
debenture interest payments for approximately six quarters without dividends
from subsidiaries. The Bank’s capacity to provide cash to the Company, while
remaining “well-capitalized”, was $1.8 million at March 31, 2005.
  Capital
ratios for commercial banks in the United States are generally calculated using
three different formulas. These calculations are referred to as the “Leverage
Ratio” and two “risk based” calculations known as: “Tier One Risk Based Capital
Ratio” and the “Total Risk Based Capital Ratio.” These standards were developed
through joint efforts of banking authorities from 12 different countries around
the world. The standards essentially take into account the fact that different
types of assets have different levels of risk associated with them. Furthermore,
they take into account the off-balance sheet exposures of banks when assessing
capital adequacy.
 
 The
Leverage Ratio calculation simply divides common stockholders’ equity (reduced
by any goodwill a bank may have) by the total assets. In the Tier One Risk Based
Capital Ratio, the numerator is the same as the leverage ratio, but the
denominator is the total “risk-weighted assets”. Risk weighted assets are
determined by segregating all the assets and off balance sheet exposures into
different risk categories and weighting them by a percentage ranging from 0%
(lowest risk) to 100% (highest risk). The Total Risk Based Capital Ratio again
uses “risk-weighted assets” in the denominator, but expands the numerator to
include other capital items besides equity such as a limited amount of the loan
loss reserve, long-term capital debt, preferred stock and other instruments.
 
 Summarized
below are the Company’s and the Bank’s capital ratios at March 31, 2005.
  Regulatory
      StandardAdequately
    
    Well
    
    Heritage
      Oaks
    
    Heritage
      OaksCapitalized
    
    Capitalized
    
    Bancorp
    
    BankLeverage
      Ratio
    
    
    4.00
    %
    
    5.00
    %
    
    8.77
    %
    
    8.35
    %Tier
      One Risk Based Captial Ratio
    
    
    4.00
    %
    
    6.00
    %
    
    10.10
    %
    
    9.55
    %Total
      Risk Based Captial Ratio
    
    
    8.00
    %
    
    10.00
    %
    
    11.00
    %
    
    10.44
    %
 For the
Company, all $8 million of the trust preferred securities are accounted for as
Tier I and Tier II Capital, respectively, for purposes of calculating Regulatory
Capital.
  
 Liquidity
 
 The
objective of liquidity management is to ensure the continuous availability of
funds to meet the demands of depositors, investors and borrowers. Asset
liquidity is primarily derived from loan payments and the maturity of other
earning assets. Liquidity from liabilities is obtained primarily from the
receipt of new deposits. The Bank’s Asset Liability Committee (ALCO) is
responsible for managing the on and off-balance sheet commitments to meet the
needs of customers while achieving the Bank’s financial objectives. ALCO meets
regularly to assess the projected funding requirements by reviewing historical
funding patterns, current and forecasted economic conditions and individual
customer funding needs. Deposits generated from Bank customers serve as the
primary source of liquidity. The Bank has credit arrangements with correspondent
banks that serve as a secondary liquidity source in the amount of $7 million. At
March 31, 2005, the Bank had no borrowings against credit arrangements with
these correspondent banks. The Bank is a member of the FHLB and has a
collateralized borrowing capacity remaining of approximately $72.4 million.
 
 PAGE
29
 
 The Bank
manages liquidity by maintaining a majority of the investment portfolio in
federal funds sold and other liquid investments. At December 31, 2004, the ratio
of liquid assets not pledged for collateral and other purposes to deposits and
other liabilities was 12.7% compared to 18.0% at March 31, 2005. The ratio of
net loans to deposits, another key liquidity ratio, was 90.4% at December 31,
2004 compared to 86.0% at March 31, 2005.
  
 Inflation
 
 The
assets and liabilities of a financial institution are primarily monetary in
nature. As such they represent obligations to pay or receive fixed and
determinable amounts of money that are not affected by future changes in prices.
Generally, the impact of inflation on a financial institution is reflected by
fluctuations in interest rates, the ability of customers to repay debt and
upward pressure on operating expenses. The effect of inflation during the
three-year period ended March 31, 2005 has been significant to the Company’s
financial position and results of operations in regard to fluctuation in
interest rates creating in the decreasing rate environment a narrowing of the
net interest margin and in the increasing rate environment for the past four
quarters, a widening of the net interest margins. However, inflation has not
been a factor in the customer’s ability to repay debt or in upward pressure on
operation expenses.
 
 Off-Balance
Sheet Arrangements
 
 Off-balance
sheet arrangements are any contractual arrangement to which an unconsolidated
entity is a party, under which the Company has: (1) any obligation under a
guarantee contract; (2) a retained or contingent interest in assets transferred
to an unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets; (3) any
obligation under certain derivative instruments; or (4) any obligation under a
material variable interest held by the Company in an unconsolidated entity that
provides financing, liquidity, market risk or credit risk support to the
Company, or engages in leasing, hedging or research and development services
with the Company.
 
 In the
ordinary course of business, the Company has entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commercial
letter of credit, and standby letter of credit. Such financial instruments are
recorded in the financial statement when they are funded or related fees are
incurred or received. For a fuller discussion of these financial instruments,
refer to Note 10 of the Company’s consolidated financial statements contained in
Item 7 of Part II of the Company’s December 31, 2004 10-KSB.
 
 In the
ordinary course of business, the Bank is a party to various operating leases.
For a fuller discussion of these financial instruments, refer to Note 5 of the
Company’s consolidated financial statements contained in Item 7 of Part II of
the Company’s December 31, 2004 10-KSB.
 
 In
connection with the $8.2 million in debt securities discussed in “Capital,” the
Company issued the full and unconditional payment guarantee of certain accrued
distributions.
 
 Item
3.  Quantitative
and Qualitative Disclosure about Market Risk
 
 As a
financial institution, the Company’s primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both the level of interest income and interest expense recorded on a large
portion of the Company’s assets and liabilities, and the market value of all
interest earning assets and interest bearing liabilities, other than those which
possess a short term to maturity. Virtually all of the Company’s interest
earning assets and interest bearing liabilities are located at the banking
subsidiary level. Thus, virtually all of the Company’s interest rate risk
exposure lies at the banking subsidiary level other than $8 million in
subordinated debentures issued by the Company’s subsidiary grantor trust. As a
result, all significant interest rate risk procedures are performed at the
banking subsidiary level. The subsidiary bank’s real estate loan portfolio,
concentrated primarily within Northern Santa Barbara County and San Luis Obispo
County, California, are subject to risks associated with the local
economy.
 
 PAGE
30
 
 The
fundamental objective of the Company’s management of its assets and liabilities
is to maximize the Company’s economic value while maintaining adequate liquidity
and an exposure to interest rate risk deemed by Management to be acceptable.
Management believes an acceptable degree of exposure to interest rate risk
results from the management of assets and liabilities through maturities,
pricing and mix to attempt to neutralize the potential impact of changes in
market interest rates. The Company’s profitability is dependent to a large
extent upon its net interest income, which is the difference between its
interest income on interest-earning assets, such as loans and investments, and
its interest expense on interest-bearing liabilities, such as deposits and
borrowings. The Company is subject to interest rate risk to the degree that its
interest-earning assets re-price differently than its interest-bearing
liabilities. The Company manages its mix of assets and liabilities with the
goals of limiting its exposure to interest rate risk, ensuring adequate
liquidity, and coordinating its sources and uses of funds.
 
 The
Company seeks to control interest rate risk exposure in a manner that will allow
for adequate levels of earnings and capital over a range of possible interest
rate environments. The Company has adopted formal policies and practices to
monitor and manage interest rate risk exposure.  Management believes
historically it has effectively managed the effect of changes in interest rates
on its operating results.  Management believes that it can continue to
manage the short-term effect of interest rate changes under various interest
rate scenarios.
 
 Management
employs the use of an Asset Liability Management software that is used to
measure the Bank’s exposure to future changes in interest rates. This model
measures the expected cash flows and re-pricing of each financial
asset/liability separately in measuring the Bank’s interest sensitivity. Based
on the results of this model, management believes the Bank’s balance sheet is
“asset sensitive”. This means the Company expects (all other things being
equal) to expand its net interest income if rates rise and expects it conversely
to contract if rates fall.  The level of potential or expected contraction
indicated by the tables below is considered acceptable by management and is
compliant with the Bank’s ALCO policies.  Management will continue to
perform this analysis each quarter to further validate the expected results
against actual data.
 
 The
hypothetical impacts of sudden interest rate movements applied to the Company’s
asset and liability balances are modeled monthly. The results of this movement
indicate how much of the Company’s net interest income is “at risk” from various
rate changes over a one year horizon. This exercise is valuable in identifying
risk exposures. The results for the Company’s March 31, 2005 balances indicate
that the net interest income at risk over a one year time horizon for a 1%, 2%
and 3% rate increase and 1% rate decrease are within the Company’s policy
guidelines for such changes.
 
 (dollars
in thousands)
 **Shock
      Rate Scenarios****-1.0%**
    
    **Base**
    
    **+1.0%**
    
    **+2.0%**
    
    **+3.0%****Net
      Interest****Income
      (NII)**
    
    $
    22,634
    
    $
    24,013
    
    $
    25,546
    
    $
    27,134
    
    $
    28,733**$
      Change from Base**
    
    $
    (1,379
    )
    $
    -
    
    $
    1,533
    
    $
    3,121
    
    $
    4,720**%
      Change from Base**
    
    
    -5.74
    %
    
    0.00
    %
    
    6.38
    %
    
    13.00
    %
    
    19.66
    %
 
 PAGE
31
 
 It is
important to note that the above table is a summary of several forecasts and
actual results may vary. The forecasts are based on estimates and assumptions of
management that may turn out to be different and may change over time. Factors
affecting these estimates and assumptions include, but are not limited to 1)
competitor behavior, 2) economic conditions both locally and nationally, 3)
actions taken by the Federal Reserve Board, 4) customer behavior and 5)
management’s responses. Changes that vary significantly from the assumptions and
estimates may have significant effects on the Company’s net interest income,
therefore, the results of this analysis should not be relied upon as indicative
of actual future results.
  
 The
following table shows Management’s estimate of how the loan portfolio is broken
out between variable-daily, variable-daily but at floor, variable at various
time lines and fixed rate loans.  It further identifies when and at what
rate increase scenario the variable rate loans at floors will most likely come
off their floor and re-price.
 
 (dollars
in thousands)
 **%
      of****Loans**
    
    **Balance**
    
    **Total**Variable-Daily
    
    $
    149,168
    
    
    44
    %Variable-Daily
      withFloor*
    
    
    9,621
    
    
    3
    %Variable
      every 3 months
    
    
    7,133
    
    
    2
    %Variable
      > 3 months
    
    
    119,604
    
    
    35
    %Fixed
    
    
    57,029
    
    
    17
    %Total
      Gross Loans
    
    $
    342,555
    
    
    100
    %


***Variable
      Loans with Floors****Coming
      off****Rate
      Increase**
    
    **Floor**0.25%
    
    $
    4,3200.50%
    
    
    1,3090.75%
    
    
    3,9721.00%
    
    
    20$
    9,621


PAGE
32
 
 The table
above identifies approximately 47% of the loan portfolio that will re-price
immediately in a rising rate environment. The following table shows Management’s
estimates of re-pricing opportunities for the entire loan
portfolio.
 
 (dollars
in thousands)
 **Total
      Gross Loans**
    
    
    
    **%
      of****Re-Pricing**
    
    **Balance**
    
    **Total**<
      1 Year
    
    $
    234,062
    
    
    68
    %1-3
      Years
    
    
    62,305
    
    
    18
    %3-5
      Years
    
    
    34,536
    
    
    10
    %>
      5 Years
    
    
    11,652
    
    
    3
    %$
    342,555
    
    
    100
    %
   Item
4.  Controls
and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of its management, including
the Company’s Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective to provide reasonable
assurances that information required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
 
 There was
no change in the Company’s internal controls over financial reporting during the
quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal controls over financial
reporting.
 
 In
designing and evaluating disclosure controls and procedures, the Company’s
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, not absolute, assurances of
achieving the desired control objectives and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
 
 
 
 PART 2.
OTHER INFORMATION
 
 Item
1.  Legal
Proceedings
 The
Company is not a party to any material legal proceeding.
 
 Item
2.  Changes
in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
 N/A
 
 Item
3.  Defaults
Upon Senior Securities
 N/A
 
 Item
4.  Submission
of Matters to a Vote of Security Holders
 N/A
 
 Item
5.  Other
Information
 N/A
 
 PAGE
33
 
 Item
6.  Exhibits
 (a)Exhibits :
  Exhibit
      (31.1)
    
    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002Exhibit
      (31.2)
    
    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002Exhibit
      (32.1)
    
    Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002Exhibit
      (32.2)
    
    Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
 PAGE
34
 
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 HERITAGE
OAKS BANCORP
 
 DATE: April
20, 2005
 ****/s/ Lawrence P.
  WardLawrence P. WardPresidentChief Executive Officer
 ****/s/ Margaret A. TorresMargaret A. Torres Chief Financial OfficerExecutive
      Vice President
 PAGE
35
 
 EXHIBITINDEX
 
 Exhibit
      (31.1)
    
    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002Exhibit
      (31.2)
    
    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002Exhibit
      (32.1)
    
    Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002Exhibit
      (32.2)
    
    Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
  PAGE
36