**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**


**For
      the quarterly period ended June 30, 2006**





**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 a large accelerated filer, an
      accelerated filer or is a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one.)**





**Large
      Accelerated filer o
      Accelerated filer o
      Non-accelerated filer x**





**Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o No x**





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





**As
      of July 17, 2006 there were approximately 6,348,196 shares outstanding of the
      Registrant’s common stock.**










**TABLE
      OF CONTENTS**


Part
                  1. Financial StatementItem
                  1. Consolidated Financial Statements (Unaudited)Consolidated
                  Balance SheetsConsolidated
                  Statements of OperationsConsolidated
                  Statements of Other Comprehensive IncomeConsolidated
                  Statement of Changes in Stockholders’ EquityConsolidated
                  Statements of Cash FlowsNotes
                  to Consolidated Financial StatementsItem
                  2. Management’s Discussion and Analysis ofFinancial
                  Condition and Results of OperationsItem
                  3. Quantitative and Qualitative Disclosure about Market
                  RiskItem
                  4. Controls and ProceduresPart
                  2. Other InformationItem
                  1.Legal ProceedingsItem
                  1.A. Risk FactorsItem
                  2.Unregistered Sales of Equity Securities and Use of
                  ProceedsItem
                  3.Defaults Upon Senior SecuritiesItem
                  4.Submission of Matters to a Vote of Security HoldersItem
                  5.Other InformationItem
                  6.ExhibitsSignaturesCertificationsExhibits




Page
          2


PART
      1.
      FINANCIAL INFORMATION


Item
      1.
      Financial Statements




**HERITAGE
        OAKS BANCORP**
 **CONSOLIDATED
        BALANCE SHEETS**
  **(in
                  thousands)**
              
              **June
                  30,**
              
              **December
                  31,****2006**
              
              **2005****ASSETS**
              
              **(Unaudited)**
              
              **(1)**Cash
                  and due from banks
              
              $
              21,448
              
              $
              18,279Federal
                  funds sold
              
              
              27,500
              
              
              26,280Total
                  cash and cash equivalents
              
              
              48,948
              
              
              44,559Interest
                  bearing deposits other banks
              
              
              318
              
              
              298Securities
                  Available for sale
              
              
              41,410
              
              
              44,402Federal
                  Home Loan Bank Stock, at cost
              
              
              1,930
              
              
              1,885Loans
                  Held For Sale
              
              
              6,116
              
              
              3,392Loans,
                  net
              
              
              385,808
              
              
              362,635Property,
                  premises and equipment, net
              
              
              14,493
              
              
              11,905Cash
                  surrender value life insurance
              
              
              9,242
              
              
              7,706Deferred
                  Tax Assets
              
              
              2,944
              
              
              2,358Goodwill
              
              
              4,865
              
              
              4,865Core
                  Deposit Intangible
              
              
              1,298
              
              
              1,448Other
                  assets
              
              
              2,847
              
              
              3,048**TOTAL
                  ASSETS**
              
              **$**
              **520,219**
              
              **$**
              **488,501****LIABILITIES**Deposits:Demand,
                  non-interest bearing
              
              $
              163,453
              
              $
              164,014Savings,
                  NOW, and money market deposits
              
              
              155,848
              
              
              170,106Time
                  deposits of $100 or more
              
              
              25,673
              
              
              17,414Time
                  deposits under $100
              
              
              85,186
              
              
              66,263Total
                  deposits
              
              
              430,160
              
              
              417,797FHLB
                  advances and other borrowed money
              
              
              30,000
              
              
              10,000Securities
                  Sold under Agreement to Repurchase
              
              
              2,015
              
              
              3,847Junior
                  subordinated debentures
              
              
              8,248
              
              
              8,248Other
                  liabilities
              
              
              3,217
              
              
              3,764Total
                  liabilities
              
              
              473,640
              
              
              443,656**STOCKHOLDERS'
                  EQUITY**Common
                  stock, no par value;20,000,000
                  shares authorized; issued and outstanding6,348,196
                  and 6,231,982 as of June 30, 2006and
                  December 31, 2005, respectively.
              
              
              29,652
              
              
              29,255Retained
                  earnings
              
              
              17,442
              
              
              15,748Accumulated
                  other comprehensive income/(loss)
              
              
              (515
              )
              
              (158
              )Total
                  stockholders' equity
              
              
              46,579
              
              
              44,845**TOTAL
                  LIABILITIES & STOCKHOLDERS' EQUITY**
              
              **$**
              **520,219**
              
              **$**
              **488,501**




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




See
      notes
      to condensed consolidated financial statements




Page
          3


**HERITAGE
        OAKS BANCORP**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
  (in
                  thousands except per share date)**For
                  the three months**
              
              **For
                  the six months****ended
                  June 30,**
              
              **ended
                  June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**Interest
                  Income:Interest
                  and fees on loans
              
              $
              8,018
              
              $
              6,493
              
              $
              15,507
              
              $
              12,616Investment
                  securities
              
              
              490
              
              
              544
              
              
              978
              
              
              1,097Federal
                  funds sold and commercial paper
              
              
              156
              
              
              99
              
              
              382
              
              
              169Time
                  certificates of deposit
              
              
              2
              
              
              3
              
              
              5
              
              
              5Total
                  interest income
              
              
              8,666
              
              
              7,139
              
              
              16,872
              
              
              13,887Interest
                  Expense:Now
                  accounts
              
              
              23
              
              
              22
              
              
              44
              
              
              42MMDA
                  accounts
              
              
              549
              
              
              329
              
              
              1,120
              
              
              542Savings
                  accounts
              
              
              26
              
              
              25
              
              
              53
              
              
              42Time
                  deposits of $100 or more
              
              
              117
              
              
              91
              
              
              256
              
              
              173Other
                  time deposits
              
              
              846
              
              
              275
              
              
              1,539
              
              
              506Other
                  borrowed funds
              
              
              470
              
              
              382
              
              
              778
              
              
              803Total
                  interest expense
              
              
              2,031
              
              
              1,124
              
              
              3,790
              
              
              2,108Net
                  Interest Income Before Prov. for Possible Loan Losses
              
              
              6,635
              
              
              6,015
              
              
              13,082
              
              
              11,779Provision
                  for loan losses
              
              
              180
              
              
              180
              
              
              300
              
              
              360Net
                  interest income after provision for loan losses
              
              
              6,455
              
              
              5,835
              
              
              12,782
              
              
              11,419Non-interest
                  Income:Service
                  charges on deposit accounts
              
              
              613
              
              
              632
              
              
              1,181
              
              
              1,171Other
                  income
              
              
              598
              
              
              635
              
              
              1,248
              
              
              1,228Total
                  Non-interest Income
              
              
              1,211
              
              
              1,267
              
              
              2,429
              
              
              2,399Non-interest
                  Expense:Salaries
                  and employee benefits
              
              
              2,786
              
              
              2,408
              
              
              5,568
              
              
              4,656Occupancy
                  and equipment
              
              
              665
              
              
              640
              
              
              1,268
              
              
              1,252Other
                  expenses
              
              
              1,597
              
              
              1,515
              
              
              3,195
              
              
              3,078Total
                  Noninterest Expenses
              
              
              5,048
              
              
              4,563
              
              
              10,031
              
              
              8,986Income
                  before provision for income taxes
              
              
              2,618
              
              
              2,539
              
              
              5,180
              
              
              4,832Provision
                  for applicable income taxes
              
              
              945
              
              
              933
              
              
              1,900
              
              
              1,808Net
                  Income
              
              $
              1,673
              
              $
              1,606
              
              $
              3,280
              
              $
              3,024Earnings
                  per share: (See
                  note #4)Basic
              
              $
              0.26
              
              $
              0.26
              
              $
              0.52
              
              $
              0.49Fully
                  Diluted
              
              $
              0.25
              
              $
              0.25
              
              $
              0.49
              
              $
              0.47


See
        notes
        to condensed consolidated financial statements
  Page
            4
  **HERITAGE
          OAKS BANCORP**
 **Consolidated
          Statements of Comprehensive Income**
  **(Unaudited,
                    in thousands)**
                
                **Three
                    Month Period**
                
                **Six
                    Month Period****Ended
                    June 30,**
                
                **Ended
                    June 30,****2006**
                
                **2005**
                
                **2006**
                
                **2005****Net
                    Income**
                
                $
                1,673
                
                $
                1,606
                
                $
                3,280
                
                $
                3,024**Other
                    Comprehensive Income Before Taxes:**Unrealized
                    gains (losses) on securities available for sale:Unrealized
                    holding gains (losses) arising during period
                
                
                (1,102
                )
                
                (260
                )
                
                (701
                )
                
                49Reclassification
                    adjustments for (gains) included in net income
                
                
                -
                
                
                -
                
                
                -
                
                
                -Other
                    comprehensive income (loss), before taxes
                
                
                (1,102
                )
                
                (260
                )
                
                (701
                )
                
                49Income
                    tax expense (benefit) related to items in comprehensive
                    income
                
                
                441
                
                
                103
                
                
                344
                
                
                (20
                )**Other
                    Comprehensive Income (Loss), Net of Taxes**
                
                
                (661
                )
                
                (157
                )
                
                (357
                )
                
                29**Comprehensive
                    Income**
                
                $
                1,012
                
                $
                1,449
                
                $
                2,923
                
                $
                3,053
 See
            notes
            to condensed consolidated financial statements
  Page
              5




**HERITAGE
        OAKS BANCORP**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY**
 **June
        30, 2006 and June 30, 2005**
 **(Unaudited)**
 (
          in
          thousands except shares outstanding)


**Accumulated****Other**
            
            **Total****Shares**
            
            **Common**
            
            **Retained**
            
            **Comprehensive**
            
            **Stockholders'****Outstanding**
            
            **Stock**
            
            **Earnings**
            
            **Income/(Loss)**
            
            **Equity****Balance
                January 1, 2006**
            
            
            6,231,982
            
            $
            29,255
            
            $
            15,748
            
            $
            (158
            )
            $
            44,845Exercise
                of Stock Options
            
            
            46,164
            
            
            323
            
            
            
            
            
            
            
            
            323(including
                $160 tax benefit from exerciseof
                stock options)Cash
                Dividend of $.25 per share paid
            
            
            
            
            
            
            
            
            (1,586
            )
            
            
            
            
            (1,586
            )Stock
                options expense
            
            
            
            
            
            74
            
            
            
            
            
            
            
            
            74Issuance
                of Restricted Stock Awards
            
            
            70,050Comprehensive
                IncomeNet
                Income
            
            
            
            
            
            
            
            
            3,280
            
            
            
            
            
            3,280Unrealized
                security holding losses (net of $344 tax benefit)
            
            
            
            
            
            
            
            
            
            
            
            (357
            )
            
            (357
            )Total
                other comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,923**Balance
                June 30, 2006**
            
            
            **6,348,196**
            
            **$**
            **29,652**
            
            **$**
            **17,442**
            
            **$**
            **(515**
            **)**
            **$**
            **46,579****Other**
            
            
            
            
            
            
            
            
            
            
            
            **Total****Shares**
            
            
            **Common**
            
            
            **Retained**
            
            
            **Comprehensive**
            
            
            **Stockholders'****Outstanding**
            
            
            **Stock**
            
            
            **Earnings**
            
            
            **Income**
            
            
            **Equity****Balance
                January 1, 2005**
            
            
            3,817,943
            
            $
            24,050
            
            $
            13,053
            
            $
            147
            
            $
            37,250Exercise
                of Stock Options
            
            
            101,502
            
            
            748
            
            
            
            
            
            
            
            
            748Stock
                dividend- 5%
            
            
            195,013
            
            
            3,930
            
            
            (3,930
            )
            
            
            
            
            0Cash
                paid to Shareholders' in Lieu offractional
                shares on 5% Stock Dividend
            
            
            
            
            
            
            
            
            (8
            )
            
            
            
            
            (8
            )Comprehensive
                IncomeNet
                Income
            
            
            
            
            
            
            
            
            3,024
            
            
            
            
            
            3,024Unrealized
                Security Holding Gains(net
                of $20 tax )
            
            
            
            
            
            
            
            
            
            
            
            29
            
            
            29Total
                other comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,053**Balance
                June 30, 2005**
            
            
            **4,114,458**
            
            **$**
            **28,728**
            
            **$**
            **12,139**
            
            **$**
            **176**
            
            **$**
            **41,043**




See
      notes
      to condensed consolidated financial statements




Page
          6




**HERITAGE
        OAKS BANCORP**
 **CONSOLIDATED
        STATEMENTS OF CASHFLOWS**


**(in
                thousands)**
            
            **Periods
                ended June 30****2006**
            
            **2005****(Unaudited)**
            
            **(Unaudited)****Cash
                Flows from Operating Activities**Net
                income
            
            $
            3,280
            
            $
            3,024Adjustments
                to reconcile net income tonet
                cash provided by operating activitiesNet
                cash provided by operating activitiesDepreciation
                and amortization
            
            
            430
            
            
            468Provision
                for possible loan losses
            
            
            300
            
            
            360Amortization
                of premiums/discounts onInvestment
                securities, net
            
            
            (2
            )
            
            121FHLB
                stock dividends received
            
            
            (45
            )
            
            (35
            )Amortization
                of intangible assets
            
            
            150
            
            
            287Stock
                based compensation expense
            
            
            74
            
            
            -(Increase)
                in loans held for sale
            
            
            (2,724
            )
            
            (5,191
            )Net
                increase in cash surrender value of life insurance
            
            
            (150
            )
            
            (129
            )(Increase)/Decrease
                in other assets
            
            
            (145
            )
            
            283Excess
                tax benefit related to stock based compensation expense
            
            
            (160
            )
            
            -Decrease
                in other liabilities
            
            
            (387
            )
            
            (208
            )**NET
                CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES**
            
            
            621
            
            
            (1,020
            )**Cash
                Flows From Investing Activities**Net
                Change in time deposits
            
            
            (20
            )
            
            100Purchase
                of securities available-for-sale
            
            
            (1,190
            )
            
            -Proceeds
                from principal reductions and maturitiesof
                mortgage backed securities available-for-sale
            
            
            3,587
            
            
            7,362Purchase
                of life insurance policies
            
            
            (1,386
            )
            
            (300
            )Increase
                in loans, net
            
            
            (23,489
            )
            
            (27,521
            )Net
                ALLL Recoveries
            
            
            16
            
            
            22Purchase
                of property, premises and equipment, net
            
            
            (3,018
            )
            
            (904
            )**NET
                CASH USED IN INVESTING ACTIVITIES**
            
            
            (25,500
            )
            
            (21,241
            )**Cash
                Flows From Financing Activities**Increase
                in deposits, net
            
            $
            12,363
            
            $
            47,426Net
                increase/(decrease) in other borrowings
            
            
            18,168
            
            
            (467
            )Proceeds
                from exercise of stock options
            
            
            163
            
            
            748Excess
                tax benefit related to stock based compensation
            
            
            160
            
            
            -Cash
                Dividend paid
            
            
            (1,586
            )
            
            -Cash
                paid in lieu of fractional shares
            
            
            -
            
            
            (8
            )**NET
                CASH PROVIDED BY FINANCING ACTIVITIES**
            
            
            29,268
            
            
            47,699**Net
                Increase in Cash and Cash Equivalents**
            
            
            4,389
            
            
            25,438**Cash
                and Cash Equivalents**,
                Beginning of year
            
            
            44,559
            
            
            21,867**Cash
                and Cash Equivalents**,
                End of period
            
            $
            48,948
            
            $
            47,305**Supplemental
                Disclosures of Cash Flow Information**Interest
                paid
            
            $
            3,543
            
            $
            2,102Income
                taxes paid
            
            $
            2,015
            
            $
            1,430






Page
          7




**Note
      1.**  **CONSOLIDATED FINANCIAL STATEMENTS**





The
      accompanying un-audited condensed consolidated financial statements 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 2005 Annual Report on Form 10-K.





The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly-owned financial subsidiary, Heritage Oaks Bank (the “Bank”). All
      significant inter-company balances and transactions have been eliminated.
      Heritage Oaks Capital Trust I is an unconsolidated subsidiary formed solely
      for
      the purpose of issuing trust preferred securities. Operating results for the
      three and six months ended June 30, 2006 are not necessarily indicative of
      the
      results that may be expected for the year ending December 31, 2006. Certain
      amounts in the consolidated financial statements for the year ended December
      31,
      2005 and the three and six month period ended June 30, 2005 may have been
      reclassified to conform to the presentation of the consolidated financial
      statement in 2006.





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


Page
          8


The
      amortized cost and fair values of investment securities available for sale
      at
      June 30, 2006 and December 31, 2005:




**(in
      thousands)**





**Balance
                June 30, 2006**
            
            **Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair**
              **Value**Obligations
                of U.S. government agencies and corporations
            
            $
            781
            
            $
            -
            
            $
            (12
            )
            $
            769Mortgage-backed
                securities
            
            
            25,177
            
            
            4
            
            
            (808
            )
            
            24,373Obligations
                of State and Political Subdivisions
            
            
            16,302
            
            
            241
            
            
            (284
            )
            
            16,259Other
                Securities
            
            
            9
            
            
            -
            
            
            -
            
            
            9**TOTAL**
            
            **$**
            **42,269**
            
            **$**
            **245**
            
            **$**
            **(1,104**
            **)**
            **$**
            **41,410**




**As
                of December 31, 2005**
            
            **Amortized**
                  **Cost**
            ****
            **Gross**
                  **Unrealized**
                  **Gains**
            ****
            **Gross**
                  **Unrealized**
                  **Losses**
            ****
            **Fair**
                **Value**Obligations
                of U.S. government agencies and corporations
            
            $
            826
            
            $
            -
            
            $
            (20
            )
            $
            806Mortgage-backed
                securities
            
            
            28,795
            
            
            13
            
            
            (518
            )
            
            28,290Obligations
                of State and Political Subdivisions
            
            
            15,036
            
            
            364
            
            
            (103
            )
            
            15,297Other
                Securities
            
            
            9
            
            
            -
            
            
            -
            
            
            9**TOTAL**
            
            **$**
            **44,666**
            
            **$**
            **377**
            
            **$**
            **(641**
            **)**
            **$**
            **44,402**





Note
      3.  LOANS
      AND
      ALLOWANCE FOR LOAN LOSSES





Major
      classifications of loans were:





**(in
                thousands)**
            
            **June
                30,**
              **2006**
            
            **December
                31,**
              **2005**Commercial,
                financial, and agricultural
            
            $
            67,475
            
            $
            60,050Real
                estate-construction
            
            
            93,919
            
            
            76,981Real
                estate - other
            
            
            211,597
            
            
            210,690Home
                equity lines of credit
            
            
            12,196
            
            
            14,398Installment
                loans to individuals
            
            
            5,376
            
            
            5,620All
                other loans (including overdrafts)
            
            
            368
            
            
            394390,931
            
            
            368,133Less
                - deferred loan fees, net
            
            
            (1,428
            )
            
            (1,617
            )Less
                - reserve for possible loan losses
            
            
            (3,695
            )
            
            (3,881
            )Total
                loans
            
            
            385,808
            
            
            362,635Loans
                Held For Sale
            
            $
            6,116
            
            $
            3,392





Concentration
      of Credit Risk




At
      June
      30, 2006, approximately $305.5 million of the Bank’s loan portfolio was
      collateralized by various forms of real estate. Such loans are generally made
      to
      borrowers located in San Luis Obispo and Santa Barbara Counties. The Bank
      attempts to reduce its concentration of credit risk by making loans which are
      diversified by project type. While Management believes that the collateral
      presently securing this portfolio is adequate, there can be no assurances that
      significant deterioration in the California real estate market would not expose
      the Bank to significantly greater credit risk.


Page
          9





At
      June
      30, 2006, the Bank was contingently liable for letters of credit accommodations
      made to its customers totaling approximately $18.7 million and un-disbursed
      loan
      commitments in the approximate amount of $178 million. The Bank makes
      commitments to extend credit in the normal course of business to meet the
      financing needs of its customers. Commitments to extend credit are agreements
      to
      lend to a customer as long as there is no violation of any condition established
      in the contract. Commitments generally have fixed expiration dates or other
      termination clauses and may require payment of a fee. Since many of the
      commitments are expected to expire without being drawn upon, the total
      outstanding commitment amount does not necessarily represent future cash
      requirements. Standby letters of credit written are conditional commitments
      issued by the Bank to guarantee the performance of a customer to a third party.
      The credit risk involved in issuing letters of credit is essentially the same
      as
      those involved in extending loan facilities to customers. The Bank anticipates
      no losses as a result of such transactions.





Allowance
      for Loan Losses




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





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





**(in
                thousands)**
            
            **June
                30,**
              **2006**
            
            **December
                31,**
              **2005**Balance
                at beginning of year
            
            $
            3,881
            
            $
            3,247Additions
                charged to operating expense
            
            
            300
            
            
            710Loans
                charged off
            
            
            (502
            )
            
            (100
            )Recoveries
                of loans previously charged off
            
            
            16
            
            
            24Balance
                at end of year
            
            $
            3,695
            
            $
            3,881




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





The
      allowance for loan losses is based on estimates, and ultimate losses will vary
      from current estimates. These estimates are reviewed monthly, and as
      adjustments, either positive or negative, become necessary, a corresponding
      increase or decrease is made in the provision for loan losses. The methodology
      used to determine the adequacy of the allowance for possible loan losses for
      the
      three and six months ended June 30, 2006 is consistent with prior periods.




Page
          10




The
      allowance for loan losses as a percentage of total net loans was .95% as of
      June
      30, 2006 and 1.07% as of December 31, 2005. Management believes that the
      allowance for credit losses at June 30, 2006 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. In addition, on October 21, 2005, the Board of Directors declared
      a 3
      for 2 stock split payable on December 2, 2005 to stockholders of record on
      November 10, 2005. Share information has been retroactively adjusted for the
      stock split and dividend.





On
      April
      21, 2006 the Board of Directors declared a special $0.25 per share cash dividend
      that was paid on May 19, 2006 to shareholders of record on May 8, 2006.





On
      July
      21, 2006, the Board of Directors declared a quarterly cash dividend of $.08
      to
      be paid on August 25, 2006 to shareholders of record on August 11, 2006. In
      addition, the Board of Directors adopted a resolution authorizing the repurchase
      of up to 40,000 shares of Company stock. Purchases are to be made, as conditions
      warrant, from time to time in the open market. The duration of the program
      is
      one year and the timing of purchases will depend on market conditions.





The
      following table shows the number of shares used to calculate and the earnings
      per share for the three and six months ending June 30, 2006 and
      2005:




**For
                  the Three Months Ending****June
                30,**
            
            **For
                  the Six Months Ending****June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                Income
            
            $
            1,673,467
            
            $
            1,606,322
            
            $
            3,279,723
            
            $
            3,023,708Basic
            
            $
            0.26
            
            $
            0.26
            
            $
            0.52
            
            $
            0.49Diluted
            
            $
            0.25
            
            $
            0.25
            
            $
            0.49
            
            $
            0.47Shares:Basic
            
            
            6,337,712
            
            
            6,167,571
            
            
            6,300,499
            
            
            6,127,520Diluted
            
            
            6,670,942
            
            
            6,524,849
            
            
            6,653,951
            
            
            6,520,259




Note
      5.  RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
      109* (FIN 48)
      which clarifies the accounting and disclosure for uncertainty in tax positions,
      as defined. FIN 48 seeks to reduce the diversity in practice associated with
      certain aspects of the recognition and measurement related to accounting for
      income taxes. This interpretation is effective for fiscal years beginning after
      December 15, 2006. The Company has not yet determined the impact this
      interpretation will have on our results from operations or financial position.





SHARE-BASED
      PAYMENT: Effective January 1, 2006, we adopted the fair value recognition
      provisions of statement of Financial Accounting Standards (SFAS) No. 123
      (revised 2004), "Share-Based Payment" (SFAS No.123(R)), using the modified
      prospective transition method and, therefore, have not restated results for
      prior periods. Under this transition method, stock-based compensation expense
      for the six months ending June 30, 2006 included compensation expense for all
      stock-based compensation awards granted prior to, but not yet vested as of
      January 1, 2006, based on the grant date fair value estimated in accordance
      with
      the original provision of SFAS No. 123, "Accounting for Stock-Based
      Compensation" ("SFAS No.123"). Stock-based compensation expense for all
      stock-based compensation awards granted after January 1, 2006 is based on the
      grant-date fair value estimated in accordance with the provisions of SFAS
      No.123(R). The Company recognizes these compensation costs on a straight-line
      basis over the requisite service period of the award. Prior to the January
      1,
      2006 adoption of SFAS No.123(R), the Company recognized stock-based compensation
      expense in accordance with Accounting Principles Board (APB) Opinion No. 25,
      "Accounting for Stock Issued to Employees" (APB No. 25). In March 2005, the
      Securities and Exchange Commission (the SEC) issued Staff Accounting Bulletin
      No. 107 (SAB No. 107) regarding the SEC's interpretation of SFAS No.123(R)
      and
      the valuation of share-based payments for public companies. The Company has
      applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). See
      Note 6 to the Un-audited Consolidated Financial Statements for a further
      discussion on stock-based compensation.




Page
          11





ACCOUNTING
      FOR SERVICING OF FINANCIAL ASSETS: In March 2006, the Financial Accounting
      Standards Board (FASB) issued SFAS No. 156, "Accounting for Servicing of
      Financial Assets- an amendment of FASB Statement No. 140." SFAS No.156 requires
      an entity to recognize a servicing asset or servicing liability each time it
      undertakes an obligation to service a financial asset by entering into a
      servicing contract in specific situations. Additionally, the servicing asset
      or
      servicing liability shall be initially measured at fair value; however, an
      entity may elect the "amortization method" or "fair value method" for subsequent
      balance sheet reporting periods. SFAS No.156 is effective as of an entity's
      first fiscal year beginning after September 15, 2006. Early adoption is
      permitted as of the beginning of an entity's fiscal year, provided the entity
      has not yet issued financial statements, including interim financial statements,
      for any period of that fiscal year. The Company does not expect the adoption
      of
      this statement to have a material impact on its financial condition, results
      of
      operations or cash flows.





ACCOUNTING
      FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS: In February 2006, the FASB issued
      SFAS
      No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment
      of
      FASB Statements No. 133 and 140." SFAS No. 155 simplifies accounting for certain
      hybrid instruments currently governed by SFAS No. 133, "Accounting for
      Derivative Instruments and Hedging Activities," by allowing fair value
      re-measurement of hybrid instruments that contain an embedded derivative that
      otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance
      in SFAS No.133 Implementation Issue No. D1, "Application of Statement 133 to
      Beneficial Interests in Securitized Financial Assets," which provides such
      beneficial interests are not subject to SFAS No.133. SFAS No. 155 amends SFAS
      No. 140, "Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities - a Replacement of FASB Statement No. 125,"
      by
      eliminating the restriction on passive derivative instruments that a qualifying
      special-purpose entity may hold. This statement is effective for financial
      instruments acquired or issued after the beginning of the Company’s fiscal year
      2007. The Company does not expect the adoption of this statement to have a
      material impact on the Company’s financial condition, results of operations or
      cash flows.





Note
      6.
      Stock-Based Compensation





As
      of
      June 30, 2006, the Company had three stock-based employee compensation plans,
      which are more fully described in Note 14 of the Consolidated Financial
      Statements in the Company's Annual Report on Form 10-K for the year ended
      December 31, 2005. These plans include two stock option plans and the 2005
      Equity Based Compensation Plan.





Effective
      January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
      123(R), using the modified prospective transition method and, therefore, have
      not restated results for prior periods. Under this transition method,
      stock-based compensation expense for the first six months of 2006 included
      compensation expense for all stock-based compensation awards granted prior
      to,
      but that remained unvested as of, January 1, 2006. Compensation expense was
      based on the grant date fair value estimated in accordance with the original
      provision of SFAS No. 123.





Prior
      to
      January 1, 2006, the Company accounted for stock-based compensation under the
      recognition, measurement and pro forma disclosure provisions of APB No. 25,
      the
      original provisions of SFAS No. 123, and SFAS No. 148, "Accounting for
      Stock-Based Compensation-Transition and Disclosure" (SFAS 148). No stock-based
      compensation expense was reflected in net income as all options are required
      by
      the plan to be granted with an exercise price equal to the estimated fair value
      of the underlying common stock on the date of grant.




Stock-based
      compensation expense for all stock-based compensation awards granted after
      January 1, 2006, is based on the grant-date fair value. For all awards except
      stock option awards, the grant date fair value is either the fair market value
      per share or book value per share (corresponding to the type of stock awarded)
      as of the grant date. For stock option awards, the grant date fair value is
      estimated using the Black-Scholes option pricing model. For all awards the
      Company recognizes these compensation costs only for those shares expected
      to
      vest on a straight-line basis over the requisite service period of the award,
      for which we use the related vesting term. The Company estimates forfeiture
      rates based on historical employee option exercise and employee termination
      experience.


Page
          12





As
      a
      result of the Company’s January 1, 2006, adoption of SFAS No.123(R), the impact
      to the Consolidated Financial Statements for the six months ended June 30,
      2006
      on income before income taxes and on net income were reductions of $74 thousand
      and $47 thousand, respectively. The cumulative effect of the change in
      accounting was $74 thousand before income taxes and $47 thousand, after income
      taxes. The change had no impact on basic and $.01 on diluted earnings per share
      for the three months ended June 30, 2006. In addition, prior to the adoption
      of
      SFAS No. 123(R), the Company presented the tax benefit of stock option exercises
      as operating cash flows, upon the adoption of SFAS No. 123(R), tax benefits
      resulting from tax deductions in excess of the compensation cost recognized
      for
      those options are classified as financing cash flows.





PRO
      FORMA
      INFORMATION UNDER SFAS NO. 123





Pro
      forma
      information regarding the effect on the net income and basic and diluted income
      per share for the three and six months ended June 30, 2005, had the Company
      applied the fair value recognition provisions of SFAS No. 123, are as
      follows:




**For
                    the**
                  **3
                    months ended**
                  **June
                    30, 2005**
            
            **For
                    the**
                  **6
                    months ended**
                  **June
                    30, 2005**Net
                income:As
                reported
            
            $
            1,606,322
            
            $
            3,023,708Stock-based
                compensation using the intrinsic value method
            
            
            -
            
            
            -Stock-based
                compensation that would have been reportedusing
                the fair value method of SFAS 123
            
            
            (22,446
            )
            
            (70,933
            )Pro
                forma net income
            
            $
            1,583,876
            
            $
            2,952,775Weighted
                Average Shares Outstanding - Basic
            
            
            6,167,571
            
            
            6,127,520Weighted
                Average Shares Outstanding - Diluted
            
            
            6,524,849
            
            
            6,520,259Basic
                Earnings per shareAs
                reported
            
            $
            0.26
            
            $
            0.49Pro
                forma
            
            $
            0.26
            
            $
            0.48Earnings
                per share - assuming dilutionAs
                reported
            
            $
            0.25
            
            $
            0.47Pro
                forma
            
            $
            0.24
            
            $
            0.45




The
      stock-based compensation expense recognized in the condensed consolidated
      statement of operations for the six months ended June 30, 2006 is based on
      awards ultimately expected to vest, and accordingly has been adjusted by the
      amount of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
      estimated at the time of grant and revised, if necessary, in subsequent periods
      if actual forfeitures differ from those estimates. Forfeitures were estimated
      based partially on historical experience.





The
      aggregate intrinsic value in the table below represents the total pretax
      intrinsic value (the difference between the Company’s closing stock price on the
      last trading day of the second quarter of 2006 (June 30, 2006) and the exercise
      price, multiplied by the number of in-the-money options that would have been
      received by the option holders had all option holders exercised their options
      on
      June 30, 2006, this amount changes based on the fair market value of the
      Company's stock. Total intrinsic value of options exercised for the three and
      six months ended June 30, 2006 was $184 thousand and $703 thousand,
      respectively. Total fair value of options vested and expensed was $47 thousand,
      net of tax, for the six months ended June 30, 2006. No options were granted
      during the six months ended June 30, 2006 and there were 11,250 options issued
      during the same period in 2005.


Page
          13





**Number
                of**
              **Shares**
            
            **Weighted**
                **Average**
                **Exercise**
              **Price**
            
            **Average**
                **Remaining**
                **Contractual**
                **Term**
              **(in
                years)**
            
            **Total**
                **Intrinsic**
                **Value**
              **(in
                000's)**Options
                outstanding, January 1, 2006
            
            
            525,916
            
            $
            5.19Granted
            
            
            -
            
            
            -Exercised
            
            
            (46,162
            )
            
            3.5351Forfeited
            
            
            (2
            )
            
            4.3603Options
                outstanding, June 30, 2006
            
            
            479,752
            
            $
            5.35
            
            
            4.1
            
            $
            5,351Vested
                and expected to vest at June 30, 2006
            
            
            479,752
            
            $
            5.35
            
            
            4.4
            
            $
            5,351Exercisable
                at June 30, 2006
            
            
            410,661
            
            $
            4.45
            
            
            3.7
            
            $
            4,948




As
      of
      June 30, 2006, there was $522,804 of total unrecognized compensation cost
      related to non-vested share-based compensation arrangements. That cost is
      expected to be recognized over a weighted-average period of 4.4
      years.





The
      following table summarizes information about stock options outstanding at June
      30, 2006:





**Range
                of**
              **Exercise**
              **Prices**
            
            **Number**
              **of
                shares**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                (years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **of
                shares**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$2.55
                to $5.74
            
            
            350,599
            
            
            2.95
            
            $
            3.67
            
            
            350,595
            
            $
            3.67$5.80
                to $10.27
            
            
            39,653
            
            
            6.25
            
            
            6.91
            
            
            27,744
            
            
            6.68$10.79
                to $13.84
            
            
            89,500
            
            
            7.86
            
            
            11.22
            
            
            32,321
            
            
            11.02**Totals**
            
            
            **479,752**
            
            
            **4.14**
            
            
            **5.35**
            
            
            **410,660**
            
            
            **4.45**




The
      fair
      value of each stock option was estimated on the date of grant using the
      Black-Scholes option-pricing model with the weighed average assumptions included
      on the table above, under the header "Stock Based Option Valuation and Expense
      Information under SFAS No.123(R)".




Note
      7.  Reclassifications





Certain
      amounts in the 2005 financial statements have been reclassified to conform
      to
      the 2006 presentation.




Page
          14




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, 2005 10-K, ITEM 1A. Risk Factors.) The
      Company disclaims any obligation to update any such factors or to publicly
      announce the results of any revisions to any of the forward-looking statements
      contained herein to reflect future events or developments.**





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





The
      following is an analysis of the results of operations and financial condition
      of
      the Company for the periods ending June 30, 2006 and 2005. 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"), an 11 branch bank
      serving San Luis Obispo and northern Santa Barbara Counties. 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-K (Annual Report), Form 10-Q (Quarterly
      Report), Form 8-K (Current Report), 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
          15




Executive
      Summary and Recent Developments





On
      July
      21, 2006, the Board of Directors declared a quarterly cash dividend of $.08
      to
      be paid on August 25, 2006 to shareholders of record on August 11, 2006. In
      addition, the Board of Directors adopted a resolution authorizing the repurchase
      of up to 40,000 shares of Company stock. Purchases are to be made, as conditions
      warrant, from time to time in the open market. The duration of the program
      is
      one year and the timing of purchases will depend on market conditions.





On
      April
      21, 2006 the Company declared a $0.25 per share special cash dividend that
      paid
      on May 19, 2006 to shareholders of record on May 8, 2006. The special dividend
      was declared in lieu of recent annual stock dividends the Company has declared.




In
      July
      2003, the Bank purchased a property immediately adjacent to its Headquarters
      facility. Construction was completed in May 2006 on the approximate 20 thousand
      square feet of office space. This facility houses all administrative functions
      of the Company and has enabled the Company to vacate two leased facilities.





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





**Selected
        Financial Data**
 **For
        the Quarter Ended,**
  Jun-06
              
              Mar-06
              
              Dec-05
              
              Sep-05
              
              Jun-05
              
              Mar-05
              
              Dec-04Return
                  on Average Assets
              
              
              1.37
              %
              
              1.33
              %
              
              1.47
              %
              
              1.44
              %
              
              1.37
              %
              
              1.24
              %
              
              1.18
              %Return
                  on Average Equity
              
              
              14.33
              %
              
              13.92
              %
              
              16.38
              %
              
              17.03
              %
              
              15.94
              %
              
              14.74
              %
              
              14.77
              %Average
                  Equity to Average Assets
              
              
              9.59
              %
              
              9.58
              %
              
              8.97
              %
              
              8.47
              %
              
              8.60
              %
              
              8.40
              %
              
              6.76
              %Net
                  Interest Margin
              
              
              6.04
              %
              
              5.90
              %
              
              6.06
              %
              
              5.80
              %
              
              5.68
              %
              
              5.55
              %
              
              5.40
              %Efficiency
                  Ratio*
              
              
              64.34
              %
              
              65.02
              %
              
              60.65
              %
              
              61.08
              %
              
              62.66
              %
              
              64.14
              %
              
              67.64
              %Average
                  Loans to Average Deposits
              
              
              94.37
              %
              
              90.15
              %
              
              89.84
              %
              
              89.60
              %
              
              91.91
              %
              
              92.82
              %
              
              85.65
              %Net
                  Income
              
              $
              1,673
              
              $
              1,606
              
              $
              1,808
              
              $
              1,805
              
              $
              1,606
              
              $
              1,417
              
              $
              1,353Earnings
                  Per Share:Basic
              
              $
              0.26
              
              $
              0.26
              
              $
              0.29
              
              $
              0.29
              
              $
              0.26
              
              $
              0.23
              
              $
              0.23Diluted
              
              $
              0.25
              
              $
              0.24
              
              $
              0.27
              
              $
              0.28
              
              $
              0.25
              
              $
              0.22
              
              $
              0.21Outstanding
                  Shares:Basic
              
              
              6,337,712
              
              
              6,283,890
              
              
              6,223,500
              
              
              6,186,045
              
              
              6,167,571
              
              
              6,080,805
              
              
              6,010,964Diluted
              
              
              6,670,942
              
              
              6,643,432
              
              
              6,592,000
              
              
              6,499,178
              
              
              6,524,849
              
              
              6,458,433
              
              
              6,460,174







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





The
      Company’s earnings are highly influenced by changes in short term interest
      rates. The nature of the Company’s balance sheet can be summarily described as
      of short duration and asset sensitive. The balance sheet is of short duration
      because a large percentage of its interest sensitive assets and liabilities
      re-price immediately with changes in the Federal Funds and Prime interest rates.
      The Company is asset sensitive, primarily due to its large volume of
      non-interest bearing demand deposit accounts which effectively never re-price.
      Therefore, an upward movement in short term interest rates will generally result
      in higher net interest margin and, conversely, a reduction in short term
      interest rates will result in reduced net interest margin.





Historically,
      the largest and most variable source of income for the Company is net interest
      income. The results of operations for the three and six months ended June 30,
      2006 and June 30, 2005 reflect the impact of increases in short term rates
      as
      well as growth in the volume of both interest earning assets and interest
      bearing liabilities during these periods.





Page
          16




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 services. The population of San Luis Obispo County and the City
      of
      Santa Maria (in Northern Santa Barbara County) in 2005 **** totaled
      approximately 260,000 and 90,000, 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. The Central Coast’s
      leading agricultural industry is the production of high quality wine grapes
      and
      production of premium quality wines. 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 than
      many other areas of California.





Critical
      Accounting Policies





The
      Company’s significant accounting policies are set forth in the 2005 Annual
      Report, Note 1 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, which was
      filed on Form 10-K.





The
      following is a brief description of the Company’s 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.





See
      Note
      3 to the Consolidated Financial Statements for further discussion on Allowance
      for Loan Losses.




Page
          17




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 2005 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, the Company 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,
      2005.





RESULTS
      OF OPERATIONS





Earnings
      Overview





The
      Company reported net income for the three months ended June 30, 2006 of $1.7
      million compared to $1.6 million during the same period in 2005. This represents
      an increase of 4%. Basic earnings per share for both the three months ended
      June
      30, 2006 and June 30, 2005, were $0.26. Diluted earnings per share for both
      the
      three months ended June 30, 2006 and June 30, 2005, were $0.25.





The
      Company reported net income for the six months ended June 30, 2006 of $3.3
      million compared to $3.0 million during the same period in 2005. This represents
      an increase of 8%. Basic earnings per share for the six months ended June 30,
      2006 and June 30, 2005, were $.52 and $0.49, respectively. Diluted earnings
      per
      share for the six months ended June 30, 2006 and June 30, 2005, were $.49 and
      $0.47, respectively.





The
      earnings increase for 2006 was primarily attributable to a favorable interest
      rate environment, increases in and changes to the mix of average earning assets
      as well as an increase in non-interest bearing demand deposits.





At
      the
      end of 2005 the Company began a branding initiative which included an extensive
      assessment, both internally and externally of all bank delivery channels.
      Recommended actions were incorporated into a comprehensive Marketing Strategic
      Plan which is currently in process of implementation.




Year-to-date,
      non-interest expenses increased to $10.0 million, compared to $9.0 million
      in
      the same period a year ago. The increase was primarily a result of increased
      expenses related to the branding project, the addition of staff including the
      EVP / Human Resources and full service branch expansion within the bank’s
      existing footprint in the town of Templeton. The Company has invested
      significant resources in these new initiatives during the first half of 2006
      in
      an effort to improve our service delivery and image and expect to continue
      the
      investment with the expectation of returns on these investments adding to
      shareholder value this year.





As
      a
      result of the increase in expenses, the efficiency ratio was 64.34% for the
      second quarter of 2006 compared to 62.66% for the second quarter of 2005 and
      65.02% for the first quarter of 2006. The efficiency ratio measures non-interest
      expenses as a percent of revenues.





While
      earnings increased year over year for the second quarter of 2006 compared to
      the
      same period in 2005, earnings performance compared to quarter three and four
      in
      2005 has been impacted by the above noted strategic issues that have been
      implemented by the Company. These new initiatives are designed to improve future
      profitability through enhanced customer relationship management, service
      delivery and branding.





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.




Page
          18




The
      table
      below sets forth changes for the three and six months ended June 30, 2006
      compared to the same period in 2005 in regard to volume and rate associated
      with
      interest earning assets and interest bearing deposits.





Analysis
        of Changes in Net Interest Income (in thousands)
  Three
                  months ended
              
              Six
                  months endedJune
                  30. 2006 over 2005
              
              June
                  30. 2006 over 2005Volume
              
              Rate
              
              Total
              
              Volume
              
              Rate
              
              TotalInterest
                  income:Loans
                  (1)
              
              $
              491
              
              $
              1,033
              
              $
              1,524
              
              $
              972
              
              $
              1,919
              
              $
              2,891Investment
                  securities taxable
              
              
              (143
              )
              
              54
              
              
              (89
              )
              
              (320
              )
              
              155
              
              
              (165
              )Investment
                  securities non-taxable (2):
              
              
              57
              
              
              (1
              )
              
              56
              
              
              100
              
              
              (5
              )
              
              95Taxable
                  equivalent adjustment (2):
              
              
              (19
              )
              
              -
              
              
              (19
              )
              
              (34
              )
              
              2
              
              
              (32
              )Interest-bearing
                  deposits
              
              
              (1
              )
              
              (1
              )
              
              (2
              )
              
              (14
              )
              
              (6
              )
              
              (20
              )Federal
                  funds sold
              
              
              (7
              )
              
              64
              
              
              57
              
              
              68
              
              
              146
              
              
              214Net
                  increase (decrease)
              
              
              378
              
              
              1,149
              
              
              1,527
              
              
              772
              
              
              2,211
              
              
              2,983Interest
                  expense:Savings,
                  now, money market
              
              
              (1
              )
              
              224
              
              
              223
              
              
              13
              
              
              578
              
              
              591Time
                  deposits
              
              
              272
              
              
              325
              
              
              597
              
              
              465
              
              
              651
              
              
              1,116Other
                  borrowings
              
              
              (32
              )
              
              79
              
              
              47
              
              
              (299
              )
              
              190
              
              
              (109
              )Long
                  term borrowings
              
              
              -
              
              
              40
              
              
              40
              
              
              -
              
              
              84
              
              
              84Net
                  increase (decrease)
              
              
              239
              
              
              668
              
              
              907
              
              
              179
              
              
              1,503
              
              
              1,682Total
                  net increase (decrease)
              
              $
              139
              
              $
              481
              
              $
              620
              
              $
              593
              
              $
              708
              
              $
              1,301


(1)
          Loan
          fees of $307 and $333 for the three months ending June 30, 2006 and 2005
          ,
          respectively, and loan fees of $657 and
          $686
          for the six months ending June 30, 2006 and 2005, respectively been included
          in
          the interest income computation.


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




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





Page
          19




The
      table
      below sets for the average balance sheet information, interest income and
      expense, average yields and rates and net interest income and margin for the
      three and six months ended June 30, 2006 and June 30, 2005. The average balance
      of non-accruing loans has been included in loan totals.




**AVERAGE
      BALANCE SHEET INFORMATION**





**(dollars
                in thousands)**
            
            **For
                the three months ending June 30,**
            
            **For
                the six months ending June 30,****2006**
            
            
            
            
            
            **2005**
            
            
            
            
            
            **2006**
            
            
            
            
            
            **2005****Avg.**
            
            **Yield/**
            
            **Amt.**
            
            **Avg.**
            
            **Yield/**
            
            **Amt.**
            
            **Avg.**
            
            **Yield/**
            
            **Amt.**
            
            **Avg.**
            
            **Yield/**
            
            **Amt.**Interest
                Earning Assets:
            
            **Balance**
            
            **Rate**
            
            **Interest**
            
            **Balance**
            
            **Rate**
            
            **Interest**
            
            **Balance**
            
            **Rate**
            
            **Interest**
            
            **Balance**
            
            **Rate**
            
            **Interest**Time
                deposits with other banks
            
            $
            318
            
            
            2.52
            %
            $
            2
            
            $
            452
            
            
            3.55
            %
            $
            4
            
            $
            312
            
            
            2.59
            %
            $
            4
            
            $
            1,221
            
            
            3.96
            %
            $
            24Investment
                securities taxable
            
            
            28,309
            
            
            4.41
            %
            
            311
            
            
            40,529
            
            
            3.96
            %
            
            400
            
            
            29,250
            
            
            4.34
            %
            
            630
            
            
            42,494
            
            
            3.77
            %
            
            795Investment
                securities non-taxable
            
            
            16,446
            
            
            4.37
            %
            
            179
            
            
            13,042
            
            
            4.37
            %
            
            142
            
            
            16,078
            
            
            4.36
            %
            
            348
            
            
            13,053
            
            
            4.37
            %
            
            283Federal
                funds sold
            
            
            11,791
            
            
            5.31
            %
            
            156
            
            
            12,736
            
            
            3.12
            %
            
            99
            
            
            16,195
            
            
            4.77
            %
            
            383
            
            
            12,185
            
            
            2.80
            %
            
            169Loans
                (1) (2)
            
            
            382,470
            
            
            8.41
            %
            
            8,018
            
            
            356,686
            
            
            7.30
            %
            
            6,494
            
            
            376,308
            
            
            8.31
            %
            
            15,507
            
            
            350,626
            
            
            7.26
            %
            
            12,616Total
                interest earning assets
            
            
            439,334
            
            
            7.91
            %
            
            8,666
            
            
            423,445
            
            
            6.76
            %
            
            7,139
            
            
            438,143
            
            
            7.77
            %
            
            16,872
            
            
            419,579
            
            
            6.67
            %
            
            13,887Allowance
                for possible loan losses
            
            
            (4,077
            )
            
            
            
            
            
            
            
            (3,479
            )
            
            
            
            
            
            
            
            (4,010
            )
            
            
            
            
            
            
            
            (3,403
            )Other
                assets
            
            
            51,573
            
            
            
            
            
            
            
            
            48,386
            
            
            
            
            
            
            
            
            50,299
            
            
            
            
            
            
            
            
            47,351TOTAL
                ASSETS
            
            $
            486,830
            
            
            
            
            
            
            
            $
            468,352
            
            
            
            
            
            
            
            $
            484,432
            
            
            
            
            
            
            
            $
            463,527Interest
                -bearing liabilities:Savings/NOW/money
                market
            
            
            163,633
            
            
            1.47
            %
            
            598
            
            
            163,949
            
            
            0.92
            %
            
            375
            
            
            168,064
            
            
            1.46
            %
            
            1,217
            
            
            164,807
            
            
            0.77
            %
            
            626Time
                deposits
            
            
            94,605
            
            
            4.08
            %
            
            963
            
            
            60,320
            
            
            2.43
            %
            
            366
            
            
            92,301
            
            
            3.92
            %
            
            1,795
            
            
            60,519
            
            
            2.26
            %
            
            679Other
                borrowings
            
            
            22,652
            
            
            5.01
            %
            
            283
            
            
            28,944
            
            
            3.31
            %
            
            239
            
            
            17,688
            
            
            4.82
            %
            
            423
            
            
            32,548
            
            
            3.29
            %
            
            531FF
                Purchased
            
            
            257
            
            
            6.24
            %
            
            4
            
            
            107
            
            
            3.75
            %
            
            1
            
            
            129
            
            
            6.25
            %
            
            4
            
            
            293
            
            
            3.44
            %
            
            5Long
                Term Debt
            
            
            8,248
            
            
            8.90
            %
            
            183
            
            
            8,248
            
            
            6.95
            %
            
            143
            
            
            8,248
            
            
            8.58
            %
            
            351
            
            
            8,248
            
            
            6.53
            %
            
            267Total
                interest-bearing liabilities
            
            
            289,395
            
            
            2.81
            %
            
            2,031
            
            
            261,568
            
            
            1.72
            %
            $
            1,124
            
            
            286,430
            
            
            2.67
            %
            
            3,790
            
            
            266,415
            
            
            1.60
            %
            
            2,108Demand
                deposits
            
            
            147,058
            
            
            
            
            
            
            
            
            163,817
            
            
            
            
            
            
            
            
            147,642
            
            
            
            
            
            
            
            
            154,684Other
                liabilities
            
            
            3,683
            
            
            
            
            
            
            
            
            2,665
            
            
            
            
            
            
            
            
            3,941
            
            
            
            
            
            
            
            
            3,042Stockholders'
                equityCommon
                stock
            
            
            29,577
            
            
            
            
            
            
            
            
            28,639
            
            
            
            
            
            
            
            
            29,465
            
            
            
            
            
            
            
            
            27,121Retained
                earnings
            
            
            17,424
            
            
            
            
            
            
            
            
            11,652
            
            
            
            
            
            
            
            
            17,159
            
            
            
            
            
            
            
            
            12,191Valuation
                Allowance Investments
            
            
            (307
            )
            
            
            
            
            
            
            
            11
            
            
            
            
            
            
            
            
            (205
            )
            
            
            
            
            
            
            
            74Total
                stockholders' equity
            
            
            46,694
            
            
            
            
            
            
            
            
            40,302
            
            
            
            
            
            
            
            
            46,419
            
            
            
            
            
            
            
            
            39,386TOTAL
                LIABILITIES AND STOCKHOLDERS'EQUITY
            
            $
            486,830
            
            
            
            
            
            
            
            $
            468,352
            
            
            
            
            
            
            
            $
            484,432
            
            
            
            
            
            
            
            $
            463,527Net
                Interest Income
            
            
            
            
            
            
            
            $
            6,635
            
            
            
            
            
            
            
            $
            6,015
            
            
            
            
            
            
            
            $
            13,082
            
            
            
            
            
            
            
            $
            11,779Net
                Interest Margin (3)
            
            
            
            
            
            6.04
            %
            
            
            
            
            
            
            
            5.68
            %
            
            
            
            
            
            
            
            5.97
            %
            
            
            
            
            
            
            
            5.61
            %




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


**(2)**
                **Loan
                    fees of $307 and $333 for the three months ending June 30, 2006
                    and 2005,
                    respectively, and loan fees of $657****and
                    $686 for the six months ending June 30, 2006 and 2005, espectively
                    been
                    included in the interest income
                    computation.**


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






Page
          20




The
      tables below set forth changes for the three and six months ending June 30,
      2006
      compared to the same periods in 2005 for average interest earning assets and
      their respective average yields.





The
      Company has been able to increase the loan portfolio with continued market
      penetration by a team of seasoned loan officers who are compensated for
      production. Additions to the loan portfolio for both the three and six months
      ending June 30, 2006 were achieved under the Company’s established Loan Policy.





For
      the
      three and six months ending June 30, 2006 compared to the same period in 2005,
      the average yield on loans improved by 111 and 105 basis points, respectively.
      This has been primarily due to action by the Federal Reserve Bank of raising
      rates by 225 basis points from June 2005 through June 2006. See “Item 3.
      Quantitative and Qualitative Disclosure about Market Risk” for further
      discussion.





The
      tax-exempt portion of the investment portfolio also increased as the Company
      selectively purchased securities available in the marketplace. The Company
      has
      significant ability to increase its holdings of tax-exempt securities before
      becoming subject to the Alternative Minimum Tax. The taxable investment
      portfolio gained in average yield due to extension of average life as the result
      of rising rates. Taxable investment securities decreased due to regular
      principal reductions on Mortgage Backed Securities (MBS).


Average
                  Balance
              
              
              
              
              
              Average
                  Yieldfor
                  the three months ending
              
              
              
              
              
              for
                  the three months ending(dollars in thousands)
              
              June
                  30,
              
              $
              
              %
              
              June
                  30,Interest
                  Earning Assets:
              
              2006
              
              2005
              
              Variance
              
              Variance
              
              2006
              
              2005
              
              VarianceTime
                  deposits with other banks
              
              $
              318
              
              $
              452
              
              $
              (134
              )
              
              -29.65
              %
              
              2.52
              %
              
              3.55
              %
              
              -1.03
              %Investment
                  securities taxable
              
              
              28,309
              
              
              40,529
              
              
              (12,220
              )
              
              -30.15
              %
              
              4.41
              %
              
              3.96
              %
              
              0.45
              %Investment
                  securities non-taxable
              
              
              16,446
              
              
              13,042
              
              
              3,404
              
              
              26.10
              %
              
              4.37
              %
              
              4.37
              %
              
              0.00
              %Federal
                  funds sold
              
              
              11,791
              
              
              12,736
              
              
              (945
              )
              
              -7.42
              %
              
              5.31
              %
              
              3.12
              %
              
              2.19
              %Loans
                  (1) (2)
              
              
              382,470
              
              
              356,686
              
              
              25,784
              
              
              7.23
              %
              
              8.41
              %
              
              7.30
              %
              
              1.11
              %Total
                  interest earning assets
              
              $
              439,334
              
              $
              423,445
              
              $
              15,889
              
              
              3.75
              %
              
              7.91
              %
              
              6.76
              %
              
              1.15
              %
  Average
                  Balance
              
              
              
              
              
              Average
                  Yieldfor
                  the six months ending
              
              
              
              
              
              for
                  the six months ending(dollars in thousands)
              
              June
                  30,
              
              $
              
              %
              
              June
                  30,Interest Earning Assets:
              
              2006
              
              2005
              
              Variance
              
              Variance
              
              2006
              
              2005
              
              VarianceTime
                  deposits with other banks
              
              $
              312
              
              $
              1,221
              
              $
              (909
              )
              
              -74.45
              %
              
              2.59
              %
              
              3.96
              %
              
              -1.37
              %Investment
                  securities taxable
              
              
              29,250
              
              
              42,494
              
              
              (13,244
              )
              
              -31.17
              %
              
              4.34
              %
              
              3.77
              %
              
              0.57
              %Investment
                  securities non-taxable
              
              
              16,078
              
              
              13,053
              
              
              3,025
              
              
              23.17
              %
              
              4.36
              %
              
              4.37
              %
              
              -0.01
              %Federal
                  funds sold
              
              
              16,195
              
              
              12,185
              
              
              4,010
              
              
              32.91
              %
              
              4.77
              %
              
              2.80
              %
              
              1.97
              %Loans
                  (1) (2)
              
              
              376,308
              
              
              350,626
              
              
              25,682
              
              
              7.32
              %
              
              8.31
              %
              
              7.26
              %
              
              1.05
              %Total
                  interest earning assets
              
              $
              438,143
              
              $
              419,579
              
              $
              18,564
              
              
              4.42
              %
              
              7.77
              %
              
              6.67
              %
              
              1.10
              %





From
      June
      2004 through June 2006, the Federal Reserve Bank increased rates by a total
      of
      425 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
          21




The
      tables below sets forth changes for the three and six months ending June 30,
      2006 compared to the same periods in 2005 for average interest bearing
      liabilities and their respective average rates paid.


Average
                  Balance
              
              
              
              
              
              Average
                  Ratefor
                  the three months ending
              
              
              
              
              
              for
                  the three months ending(dollars
                  in thousands)
              
              June
                  30,
              
              $
              
              %
              
              June
                  30,Interest
                  bearing liabilities:
              
              2006
              
              2005
              
              Variance
              
              Variance
              
              2006
              
              2005
              
              VarianceSavings/NOW/money
                  market
              
              $
              163,633
              
              $
              163,949
              
              $
              (316
              )
              
              -0.19
              %
              
              1.47
              %
              
              0.92
              %
              
              0.55
              %Time
                  deposits
              
              
              94,605
              
              
              60,320
              
              
              34,285
              
              
              56.84
              %
              
              4.08
              %
              
              2.43
              %
              
              1.65
              %Other
                  borrowings
              
              
              22,652
              
              
              28,944
              
              
              (6,292
              )
              
              -21.74
              %
              
              5.01
              %
              
              3.31
              %
              
              1.70
              %FF
                  Purchased
              
              
              257
              
              
              107
              
              
              150
              
              
              140.19
              %
              
              6.24
              %
              
              3.75
              %
              
              2.49
              %Long
                  Term Debt
              
              
              8,248
              
              
              8,248
              
              
              -
              
              
              0.00
              %
              
              8.90
              %
              
              6.95
              %
              
              1.95
              %Total
                  interest-bearing liabilities
              
              $
              289,395
              
              $
              261,568
              
              $
              27,827
              
              
              10.64
              %
              
              2.81
              %
              
              1.72
              %
              
              1.09
              %Average
                  Balance
              
              
              
              
              
              
              
              
              Average
                  Ratefor
                  the six months ending
              
              
              
              
              
              
              
              
              for
                  the six months ending(dollars
                  in thousands)
              
              
              June
                  30,
              
              
              $
              
              
              %
              
              
              June
                  30,Interest
                  bearing liabilities:
              
              
              2006
              
              
              2005
              
              
              Variance
              
              
              Variance
              
              
              2006
              
              
              2005
              
              
              VarianceSavings/NOW/money
                  market
              
              $
              168,064
              
              $
              164,807
              
              $
              3,257
              
              
              1.98
              %
              
              1.46
              %
              
              0.77
              %
              
              0.69
              %Time
                  deposits
              
              
              92,301
              
              
              60,519
              
              
              31,782
              
              
              52.52
              %
              
              3.92
              %
              
              2.26
              %
              
              1.66
              %Other
                  borrowings
              
              
              17,688
              
              
              32,548
              
              
              (14,860
              )
              
              -45.66
              %
              
              4.82
              %
              
              3.29
              %
              
              1.53
              %FF
                  Purchased
              
              
              129
              
              
              293
              
              
              (164
              )
              
              -55.97
              %
              
              6.25
              %
              
              3.44
              %
              
              2.81
              %Long
                  Term Debt
              
              
              8,248
              
              
              8,248
              
              
              -
              
              
              0.00
              %
              
              8.58
              %
              
              6.53
              %
              
              2.05
              %Total
                  interest-bearing liabilities
              
              $
              286,430
              
              $
              266,415
              
              $
              20,015
              
              
              7.51
              %
              
              2.67
              %
              
              1.60
              %
              
              1.07
              %





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 2005, due to intensified competition, the Company implemented
      a
      Time Deposit/Money Market promotion that continues today. This has resulted
      in
      an increase in interest bearing deposits as well as an increase in deposit
      costs.




For
      the
      three months ending June 30, 2006 compared to the same period in 2005, the
      Company’s average yield on average interest earnings assets and average yield on
      average interest bearing liabilities increased by 115 basis points and 109
      basis
      points, respectively. For the six months ending June 30, 2006 compared to the
      same period in 2005, the Company’s average yield on average interest earnings
      assets and average yield on average interest bearing liabilities increased
      by
      110 basis points and 107 basis points, respectively.





The
      Company’s net interest margin improved as a result of the larger balances of
      interest earning assets as compared to interest bearing liabilities during
      both
      periods. This result is primarily driven by the presence of non-interest bearing
      deposits that also fund earning assets.





Page
          22




Non-Interest
      Income





The
      tables below set forth changes for the three and six months ending June 30,
      2006
      compared to the same period in 2005 for non-interest income.


Non-Interest
        Income Components
  **For
                  Three Months Ended****June
                  30,****(dollars
                  in thousands)**
              
              **2006**
              
              **2005**
              
              **$
                  Variance**
              
              **%
                  Variance**Service
                  Charges on Deposit Accounts
              
              $
              613
              
              $
              632
              
              $
              (19
              )
              
              -3.0
              %ATM/Debit
                  Card Transaction/Interchange Fees
              
              
              185
              
              
              145
              
              
              40
              
              
              27.6
              %Bancard
              
              
              29
              
              
              39
              
              
              (10
              )
              
              -25.6
              %Mortgage
                  Origination Fees
              
              
              157
              
              
              226
              
              
              (69
              )
              
              -30.5
              %Earnings
                  on Cash Surrender Value Life Ins
              
              
              92
              
              
              79
              
              
              13
              
              
              16.5
              %Other
              
              
              135
              
              
              146
              
              
              (11
              )
              
              -7.5
              %**TOTAL**
              
              **$**
              **1,211**
              
              **$**
              **1,267**
              
              **$**
              **(56**
              **)**
              
              **-4.4**
              **%****For
                  Six Months Ended****June
                  30,****(dollars
                  in thousands)**
              
              
              **2006**
              
              
              **2005**
              
              
              **$Variance**
              
              
              **%
                  Variance**Service
                  Charges on Deposit Accounts
              
              $
              1,181
              
              $
              1,171
              
              $
              10
              
              
              0.9
              %ATM/Debit
                  Card Transaction/Interchange Fees
              
              
              359
              
              
              293
              
              
              66
              
              
              22.5
              %Bancard
              
              
              54
              
              
              71
              
              
              (17
              )
              
              -23.9
              %Mortgage
                  Origination Fees
              
              
              300
              
              
              423
              
              
              (123
              )
              
              -29.1
              %Earnings
                  on Cash Surrender Value Life Ins
              
              
              175
              
              
              151
              
              
              24
              
              
              15.9
              %Other
              
              
              360
              
              
              290
              
              
              70
              
              
              24.1
              %**TOTAL**
              
              **$**
              **2,429**
              
              **$**
              **2,399**
              
              **$**
              **30**
              
              
              **1.3**
              **%**





For
      both
      the three and six months ending June 30, 2006 as compared to the same period
      in
      2005, non-interest income overall has remained relatively flat. The Company
      has
      experienced a modest increase in the electronic activity category of ATM/Debit
      Card Transaction/Interchange Fees due to the continuing migration of consumers
      to paperless transactions.





For
      both
      the three and six months ended June 30, 2006 compared to the same period in
      2005, Mortgage Origination Fees have been negatively impacted by reduced
      mortgage volumes as the result of rising interest rates. Activity in terms
      of
      both number of loans and dollar volume is down approximately 24% and 27%,
      respectively, for the three and six months ended June 30, 2006 compared to
      the
      same period in 2005.




Page
          23




Non-Interest
      Expenses





The
      tables below set forth changes for the three and six months ending June 30,
      2006
      compared to the same period in 2005 for non-interest expense.





Non-Interest
        Expense Components
  **For
                  Three Months Ended****June
                  30,****(dollars
                  in thousands)**
              
              **2006**
              
              **2005**
              
              **$
                  Variance**
              
              **%
                  Variance**Salaries
                  and Employee Benefits
              
              $
              2,786
              
              $
              2,408
              
              $
              378
              
              
              15.7
              %Occupany
                  and Equipment
              
              
              665
              
              
              640
              
              
              25
              
              
              3.9
              %Data
                  Processing
              
              
              534
              
              
              538
              
              
              (4
              )
              
              -0.7
              %Advertising
                  and promotional
              
              
              169
              
              
              137
              
              
              32
              
              
              23.4
              %Regulatory
                  fees
              
              
              28
              
              
              25
              
              
              3
              
              
              12.0
              %Other
                  professional fees and outside services
              
              
              172
              
              
              186
              
              
              (14
              )
              
              -7.5
              %Legal
                  fees and other litigation expense
              
              
              43
              
              
              21
              
              
              22
              
              
              104.8
              %Loan
                  Department Costs
              
              
              49
              
              
              29
              
              
              20
              
              
              69.0
              %Stationery
                  and supplies
              
              
              68
              
              
              80
              
              
              (12
              )
              
              -15.0
              %Director
                  fees
              
              
              73
              
              
              52
              
              
              21
              
              
              40.4
              %Core
                  Deposit Intangible Amortization
              
              
              75
              
              
              143
              
              
              (68
              )
              
              -47.6
              %Other
              
              
              386
              
              
              304
              
              
              82
              
              
              27.0
              %**$**
              **5,048**
              
              **$**
              **4,563**
              
              **$**
              **485**
              
              
              **10.6**
              **%**
  **For
                  Six Months Ended****June
                  30,****(dollars
                  in thousands)**
              
              **2006**
              
              **2005**
              
              **$****Variance**
              
              **%
                  Variance**Salaries
                  and Employee Benefits
              
              $
              5,568
              
              $
              4,656
              
              $
              912
              
              
              19.6
              %Occupany
                  and Equipment
              
              
              1,268
              
              
              1,252
              
              
              16
              
              
              1.3
              %Data
                  Processing
              
              
              1,062
              
              
              1,117
              
              
              (55
              )
              
              -4.9
              %Advertising
                  and promotional
              
              
              354
              
              
              263
              
              
              91
              
              
              34.6
              %Regulatory
                  fees
              
              
              57
              
              
              50
              
              
              7
              
              
              14.0
              %Other
                  professional fees and outside services
              
              
              408
              
              
              229
              
              
              179
              
              
              78.2
              %Legal
                  fees and other litigation expense
              
              
              60
              
              
              58
              
              
              2
              
              
              3.4
              %Loan
                  Department Costs
              
              
              82
              
              
              71
              
              
              11
              
              
              15.5
              %Stationery
                  and supplies
              
              
              137
              
              
              166
              
              
              (29
              )
              
              -17.5
              %Director
                  fees
              
              
              148
              
              
              106
              
              
              42
              
              
              39.6
              %Core
                  Deposit Intangible Amortization
              
              
              150
              
              
              287
              
              
              (137
              )
              
              -47.7
              %Other
              
              
              737
              
              
              731
              
              
              6
              
              
              0.8
              %**$**
              **10,031**
              
              **$**
              **8,986**
              
              **$**
              **1,045**
              
              
              **11.6**
              **%**




Salary
      and Employee Benefits




Salaries
      and employee related expense incurred the greatest dollar increase of any
      non-interest expense category for the three and six months ending June 30,
      2006
      and 2005. The increase was primarily a result of increased expenses related
      to
      the the addition of staff to enhance relationship management and the expansion
      of a full service branch within the bank’s existing footprint in the town of
      Templeton. The Bank hired the three Templeton staff members in April and May
      to
      allow time for intense training. In addition, the Bank instituted a new
      executive position in Human Resources and brought a seasoned professional on
      board in mid June to fill that position.





Other
      Professional Fees and Outside Services




Other
      professional fees and outside services expenses increased for the quarter as
      a
      result of increases in a number of sub-categories including executive search
      expenses, consulting fees, audit fees, compliance and insurance costs. As
      competition within the primary market area has intensified, the Company has
      found it necessary to use the service of executive search firms when looking
      to
      either replace or add staff. In addition to this, during the second quarter
      of
      2006, the Company engaged a consulting firm to assist with compensation programs
      including base salary and bonus program assessment.


Page
          24





Advertising
      and Promotional




The
      increase in advertising and promotional expenses was primarily a result of
      increases in professional fees related to the new marketing initiatives designed
      to enhance customer relationship management, service delivery and
      branding.





Provision
      for Income Taxes





The
      provision for income taxes was 36.1% and 36.7% of net pre-tax income for the
      three months ending June 30, 2006, and 2005, respectively. The provision for
      income taxes was 36.7% and 37.4% of net pre-tax income for the six months ending
      June 30 2006, and 2005, respectively.





FINANCIAL
      CONDITION ANALYSIS





Total
      assets of the Company were $488.5 million at December 31, 2005 compared to
      $520.2 million at June 30, 2006. This represents an increase of $31.7 million
      or
      approximately 6%.





Loans





The
      table
      below sets forth changes from December 31, 2005 to June 30, 2006 for the
      composition of the loan portfolio.


Major
                  classifications of loans were:**June
                  30,**
              
              **December
                  30,****2006**
              
              **2005**
              
              **$
                  Variance**
              
              **%
                  Variance****(in
                  thousands)**Commercial,
                  financial, and agricultural
              
              $
              67,475
              
              $
              60,050
              
              
              7,425
              
              
              12.36
              %Real
                  estate-construction
              
              
              93,919
              
              
              76,981
              
              
              16,938
              
              
              22.00
              %Real
                  estate - other
              
              
              211,597
              
              
              210,690
              
              
              907
              
              
              0.43
              %Home
                  equity lines of credit
              
              
              12,196
              
              
              14,398
              
              
              (2,202
              )
              
              -15.29
              %Installment
                  loans to individuals
              
              
              5,376
              
              
              5,620
              
              
              (244
              )
              
              -4.34
              %All
                  other loans (including overdrafts)
              
              
              368
              
              
              394
              
              
              (26
              )
              
              -6.60
              %390,931
              
              
              368,133
              
              
              22,798
              
              
              6.19
              %Less
                  - deferred loan fees, net
              
              
              (1,428
              )
              
              (1,617
              )
              
              189
              
              
              -11.69
              %Less
                  - reserve for possible loan losses
              
              
              (3,695
              )
              
              (3,881
              )
              
              186
              
              
              -4.79
              %Total
                  loans
              
              
              385,808
              
              
              362,635
              
              
              23,173
              
              
              6.39
              %Loans
                  Held For Sale
              
              $
              6,116
              
              $
              3,392
              
              
              2,724
              
              
              80.31
              %





The
      increase in commercial, financial and agricultural loans is attributed primarily
      to a $2.3 million new line of credit to a winery, a $5 million line of credit
      to
      a financial services company and several other new $.5 to $1 million business
      credit lines to medical groups, contractors and others.





The
      increase in real estate-construction and land loans can be attributed to several
      large new construction projects and the funding of existing construction
      projects. New loans include a strip center for $4.0 million, an office complex
      for $1.7 million, an office building for $1.2 million, a spec residence for
      $1.6
      million, an apartment construction loan increase of $1.8 million, a meat
      processing facility for $1.2 million, a 4 home development for $2.2 million,
      a
      spec residence for $1.2 million, 4 loans on land for tract development of $2.4,
      $1.3, $1.2 & $1.2 million and numerous other smaller projects. Construction
      loans are typically granted for a one year period and then, with income
      properties, are amortized over not more than 25 years with 10 to 15 year
      maturities.





The
      small
      increase in real estate-mortgage loans is attributed to several new loans
      booked. During the period, numerous loans were also refinanced and paid off
      through out of area lenders and mortgage brokers. Several new loans were booked
      during the period including a hotel for $5.4 million, a gas station for $2
      million, an auto dealership for $1.2 million, a RV park for $1.2 million, an
      office building for $1.0 million and several smaller real estate loans.


Page
          25





The
      Bank
      presently has a concentration of loans in construction/land in the amount of
      $93.9 million which represents 184% of the Bank’s Total Risk Based capital. Of
      this, 49% are owner occupied. Un-disbursed commitments total $54.1 million
      which
      combined with disbursed represent 289% of the Bank’s Total Risk based Capital
      with 96% owner occupied. At June 30, 2006 there were 86 construction loans
      with
      outstanding balances and remaining commitments of approximately $71.4 million
      and $54.1 million, respectively. The single largest construction loan has a
      commitment amount of approximately $10.7 million with a balance of approximately
      $5.2 million at June 30, 2006. This is an office complex in San Luis Obispo,
      Ca.
      At June 30, 2006, there were 59 land loans with balances of approximately $22.6
      million. The single largest land loan accounts for approximately $1.6 million
      of
      the total and is for a mixed use development. While these loans may be
      considered somewhat riskier than certain other real estate loans, the
      construction/land loans are spread throughout the Company’s market area and have
      consistently performed in a satisfactory manner.





Hotel
      loans disbursed are not considered to be a concentration with balances of $40.0
      million which represents 78% of the Bank’s Total Risk Based Capital. However,
      there are several hotel construction loans that increase total outstanding
      to
      $54.2 million and total commitments to $62.2 million which represents a
      concentration at 121.5% of the Bank’s Total Risk Based Capital. At June 30,
      2006, there were 31 motel loans. The single largest loan has a commitment of
      approximately $6.3 million, was made to a nationally known chain and is located
      in Paso Robles, California. The hotel loans are also made to clients throughout
      the Company’s markets. These loans have also typically paid as agreed.





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 were deposited with the Bank with $1.7
      million remaining at June 30, 2006. These funds are being used for capital
      improvements to the assisted living facility. The project is approximately
      75%
      complete and should be finished in Sept-October 2006. The letter of credit
      will
      expire in September 2007.





Construction
      loan demand for both single family and commercial real estate moderated during
      the first quarter of 2006 and then increased during the second quarter.
      Increased interest rates and construction costs impacted commercial real estate
      activity. Area home prices continue to increase however they remain considerably
      lower than the major metropolitan areas to the Company’s North and South.
      Reasonable mortgage rates and financing options such as interest only mortgages
      and 40 year loans have kept many in the market. The continued availability
      of
      land for subdivision use also continued to drive the market in the North San
      Luis Obispo County and Santa Maria markets. Builders are moving to the more
      rural communities in order to construct more affordable homes. .





Business
      properties are also in demand with low vacancies and competitive but increasing
      loan rates. Commercial property values and rental rates increased substantially
      during 2005 and have slowed somewhat thus far in 2006. Investors, many seeking
      exchange properties, continue to seek properties in the Company’s market area.
      Capitalization rates have steadily decreased with increased demand.
      Capitalization rate ( the rate at which a stream of future cash flows is
      discounted to find the present value) ranges over the last three years are:
      2003- 7.0% to 8.0%, 2004- 6.5% to 7.5% and 2005- 5.5% to 6.5%. Commercial
      properties typically require larger down payments in order to satisfy bank
      debt
      coverage requirements. The Bank expects to experience continued growth in
      commercial real estate loans during 2006 but most likely at a slower pace than
      2005. Interest rate margins are expected to decrease somewhat do to competitive
      pressures.





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





At
      June
      30, 2006, the Bank had no foreign loans outstanding. The Bank did not have
      any
      concentrations of loans except as disclosed above.





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





The
      Bank’s provision for loan losses was $180 thousand for both the three months
      ended June 30, 2006 and 2005.  The
      provision amount is based on the Bank’s monthly allowance for loan losses
      calculation including current plans for recovery collection.


Page
          26


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.





During
      the second quarter of 2006, the Bank recognized a $500,000 write down on a
      single account receivable loan. The bank has identified this as not indicative
      of a deterioration of overall loan quality. Management believes that the
      allowance for credit losses at June 30, 2006 is adequate based on information
      currently available.





Loans
      on
      non-accrual status totaled $54 thousand and $232 thousand at December 31, 2005
      and June 30, 2006, 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 $87 thousand and $29
      thousand  for
      the
      period ended December 31, 2005 and June 30, 2006, respectively.





Non-performing
      loans include non-accrual loans, restructured loans and accruing loans that
      are
      90 days or more delinquent. Non-performing loans totaled $52 thousand at
      December 31, 2005 and $232 thousand at June 30, 2006. There were no loans past
      due 90 days or more and still accruing interest at June 30, 2006.




Non-performing
      loans were 0.01% and 0.04% of total assets as of December 31, 2005 and June
      30,
      2006, respectively. The allowance for loan loss to non-performing loans was
      74.6x and 15.9x at December 31, 2005 and June 30, 2006, respectively.





Total
      Cash and Due from Banks





Total
      cash and due from banks were $18.3 million and $21.4 million at December 31,
      2005 and June 30, 2006, 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
          27





The
      table
      below sets forth changes from December 31, 2005 to June 30, 2006 for the
      composition of other earning assets. Investments available-for-sale decreased
      due to cash flow on Mortgage Backed Securities (MBS) and Collateralized Mortgage
      Obligations (CMO).





**COMPOSITION
        OF OTHER EARNING ASSETS**
  **June
                  30,**
              
              **December
                  31,****2006**
              
              **2005**
              
              **$
                  Variance**
              
              **%
                  Variance****(in
                  thousands)**Federal
                  Home Loan Bank, and other stock
              
              $
              1,930
              
              $
              1,885
              
              $
              45
              
              
              2.39
              %Available-for-Sale
                  Investments
              
              
              41,410
              
              
              44,402
              
              $
              (2,992
              )
              
              -6.74
              %Federal
                  Funds Sold
              
              
              27,500
              
              
              26,280
              
              $
              1,220
              
              
              4.64
              %Interest
                  Bearing Deposits other fin inst.
              
              
              318
              
              
              298
              
              
              20
              
              
              6.71
              %Total
                  Other Earning Assets
              
              $
              71,158
              
              $
              72,865
              
              $
              (1,707
              )
              
              -2.34
              %





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, 2005, net unrealized losses in the portfolio were
      $158 thousand compared to a net unrealized loss of $515 thousand at June 30,
      2006. This change in market value was driven by rising interest rates resulting
      in portfolio extension and not by deterioration in quality . The portfolio
      decreased in size due to principle reductions on MBS and CMOs .





At
      June
      30, 2006, 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.





Deposits
      and Borrowed Funds





The
      table
      below sets forth changes from December 31, 2005 to June 30, 2006 for the
      composition of deposit categories.




**%
                  of Total****June
                  30,**
              
              **December
                  31,**
              
              
              
              
              
              **Deposits****(in
                  thousands)**
              
              **2006**
              
              **2005**
              
              **$Variance**
              
              **%Variance**
              
              **30-Jun-06**Deposits:Demand,
                  non-interest bearing
              
              $
              163,453
              
              $
              164,014
              
              
              (561
              )
              
              -0.34
              %
              
              38
              %Interest
                  bearing demand
              
              
              48,909
              
              
              50,598
              
              
              (1,689
              )
              
              -3.34
              %
              
              11
              %Savings
              
              
              25,438
              
              
              29,386
              
              
              (3,948
              )
              
              -13.43
              %
              
              6
              %Money
                  market
              
              
              81,501
              
              
              90,122
              
              
              (8,621
              )
              
              -9.57
              %
              
              19
              %Time
                  deposits of $100 or more
              
              
              25,673
              
              
              17,414
              
              
              8,259
              
              
              47.43
              %
              
              6
              %Time
                  deposits under $100
              
              
              85,186
              
              
              66,263
              
              
              18,923
              
              
              28.56
              %
              
              20
              %Total
                  deposits
              
              $
              430,160
              
              $
              417,797
              
              $
              12,363
              
              
              2.96
              %
              
              100
              %


Page
          28





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





For
      the
      Company, at June 30, 2006, non-interest bearing demand deposits provide 38%
      of
      total deposits compared to 39% at December 31, 2005. At December 31, 2005 and
      June 30, 2006, the Bank had three deposit relationships that it considers to
      be
      volatile. These deposits are held by three customers of the Bank that engage
      in
      mortgage related activities. As a percentage of total deposits, these accounts
      represented 12.5% or $52.2 million at December 31, 2005 compared to 12% or
      $51.9
      million at June 30, 2006. 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 thousand, 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 $404.5 million represented
      94.0% of total deposits at June 30, 2006. The Company does not purchase funds
      through deposit brokers.





In
      October 2005, the Company renewed a Promissory Note with Pacific Coast Bankers
      Bank (PCBB) for a revolving line of credit in the amount of $3.5 million. At
      June 30, 2006, the Company had a zero balance outstanding on this note. The
      Company pledged 646,598 shares (51%) of the Bank’s stock as collateral for the
      loan. The note is revolving in nature for the first two years. The terms of
      the
      note call for quarterly interest only payments for the first two years with
      subsequent principal and interest payments for eight years on a fully amortized
      basis. At June 30, 2006, the interest rate on the note was 8.25% and is variable
      and moves with prime. Under the terms of the agreement, the Company will not
      incur any additional debt over $2 million exclusive of inter-company debt and
      existing debt without the prior written consent of PCBB. In addition, the Bank
      must be “well” capitalized on an on-going basis as defined by bank regulators.





The
      Bank
      has established borrowing lines with the Federal Home Loan Bank (FHLB). At
      June
      30, 2006, the Bank had borrowings with the FHLB of $30.0 million collateralized
      by loans. There are three separate $10 million borrowings that mature in July,
      August and November 2006. 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
      June
      30, 2006, the Bank has a remaining borrowing capacity with existing collateral
      of approximately $60.4 million and $10.6 million secured by loans and
      securities, respectively.





The
      Bank
      utilizes securities sold under repurchase agreements as a source of funds.
      The
      Bank had $3.8 million in securities sold under repurchase agreements at December
      31, 2005 compared to $2.0 million at June 30, 2006.





Capital





The
      Company's total stockholders equity was $44.8 million at December 31, 2005
      compared to $46.6 million at June 30, 2006. The increase in capital was due
      to
      net income of $3.3 million, stock options exercised in the amount of $323
      thousand, the capital impact of stock options expense of $74 thousand, $1.6
      million paid for a cash dividend, and a decrease in accumulated other
      comprehensive income of $357 thousand.


Page
          29





On
      July
      21, 2006, the Board of Directors declared a quarterly cash dividend of $.08
      to
      be paid on August 25, 2006 to shareholders of record on August 11, 2006. In
      addition, the Board of Directors adopted a resolution authorizing the repurchase
      of up to 40,000 shares of Company stock. Purchases are to be made, as conditions
      warrant, from time to time in the open market. The duration of the program
      is
      one year and the timing of purchases will depend on market conditions.





On
      April
      21, 2006 the Company declared a $0.25 per share special cash dividend to be
      paid
      on May 19, 2006 to shareholders of record on May 8, 2006. The special dividend
      was declared in lieu of recent annual stock dividends the Company has declared.





On
      March
      25, 2005 the Board of Directors of the Company announced a 5% stock dividend
      to
      shareholders of record on April 8, 2005 that was distributed on April 22, 2005.
      On October 21, 2005, the Board of Directors declared a 50% stock split payable
      on December 2, 2005 to stockholders of record on November 10, 2005. The
      Consolidated Statements of Stockholders’ Equity found under “Item 1. Financial
      Statements” in this document reflects the 5% stock dividend and the 50% stock
      split.





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 8.99% as of June 30, 2006. 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 thousand 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 June 30, 2006, the Company has
      included the net junior subordinated debt in its Tier1 Capital for regulatory
      capital purposes.





Management
      believes that organic growth in 2006 for the Company can be accomplished without
      further borrowing for capital or cash flow purposes. At June 30, 2006, 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 $6.2 million at June 30, 2006.





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.


Page
          30





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





Summarized
      below are the Company’s and the Bank’s capital ratios at June 30, 2006.




Regulatory
                  StandardAdequately
              
              Well
              
              Heritage
                  Oaks
              
              Heritage
                  OaksCapitalized
              
              Capitalized
              
              Bancorp
              
              BankLeverage
                  Ratio
              
              
              4.00
              %
              
              5.00
              %
              
              9.83
              %
              
              9.99
              %Tier
                  One Risk Based Captial Ratio
              
              
              4.00
              %
              
              6.00
              %
              
              10.73
              %
              
              10.51
              %Total
                  Risk Based Captial Ratio
              
              
              8.00
              %
              
              10.00
              %
              
              11.58
              %
              
              11.35
              %




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 $13.4 million.
      At June 30, 2006, 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 $71.0 million.





The
      Bank
      manages liquidity by maintaining a majority of the investment portfolio in
      federal funds sold and other liquid investments. At June 30, 2006, the ratio
      of
      liquid assets not pledged for collateral and other purposes to deposits and
      other liabilities was 16.1% compared to 16.1% at December 31, 2005. The ratio
      of
      net loans to deposits, another key liquidity ratio, was 89.7% at June 30, 2006
      compared to 86.8% at December 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 June 30, 2006 has been significant to the Company’s
      financial position and results of operations in regard to fluctuation in
      interest rates creating in the decreasing rate environment a narrowing of the
      net interest margin and in the increasing rate environment for the past four
      quarters, a widening of the net interest margin. However, inflation has not
      been
      a factor in the customer’s ability to repay debt or in upward pressure on
      operation expenses.


Page
          31





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, 2005 10-K.





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, 2005 10-K.





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 $8.2 million in
      subordinated debentures issued by the Company’s subsidiary grantor trust. As a
      result, all significant interest rate risk procedures are performed at the
      banking subsidiary level. The subsidiary bank’s real estate loan portfolio,
      concentrated primarily within Northern Santa Barbara County and San Luis Obispo
      County, California, are subject to risks associated with the local
      economy.




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




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




Management
      employs the use of an Asset and 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.


Page
          32


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. Management believes the results for the Company’s June 30, 2006
      balances indicate that the net interest income at risk over a one year time
      horizon for a 1% and 2% rate increase and decrease is acceptable at this
      time.


(dollars
      in thousands)




**Shock
                  Rate Scenarios****-200bp**
              
              **-100bp**
              
              **Base**
              
              **+100bp**
              
              **+200bp****Net
                    Interest**Income
                  (NII)
              
              $
              23,381
              
              $
              24,588
              
              $
              25,915
              
              $
              27,140
              
              $
              28,361**$
                  Change from Base**
              
              $
              (2,535
              )
              $
              (1,328
              )
              $
              -
              
              $
              1,225
              
              $
              2,446**%
                  Change from Base**
              
              
              -9.78
              %
              
              -5.12
              %
              
              0.00
              %
              
              4.73
              %
              
              9.44
              %





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 tables show Management’s estimates of how the loan portfolio is broken
      out between variable-daily, variable at various time lines, fixed rate loans
      and
      estimates of re-pricing opportunities for the entire loan portfolio.




(dollars
      in thousands)


**%
                  of****Loans**
              
              **Balance**
              
              **Total**Variable-Daily
              
              $
              172,887
              
              
              44
              %Variable
                  Other than Daily
              
              
              165,364
              
              
              42
              %Fixed
              
              
              52,680
              
              
              14
              %Total
                  Gross Loans
              
              $
              390,931
              
              
              100
              %




**Total
                  Gross Loans**
              
              
              
              **%
                  of****Re-Pricing**
              
              **Balance**
              
              **Total**<
                  1 Year
              
              $
              239,416
              
              
              61
              %1-3
                  Years
              
              
              93,844
              
              
              24
              %3-5
                  Years
              
              
              42,410
              
              
              11
              %>
                  5 Years
              
              
              15,261
              
              
              4
              %$
              390,931
              
              
              100
              %




The
      table
      above identifies approximately 44% of the loan portfolio that will re-price
      immediately in a changing rate environment.


Page
          33


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 June 30, 2006 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
      1A.Risk Factors


During
      the period covered by this report there were no material changes from risk
      factors as previously disclosed in the Company’s December 31, 2005 10k in
      response to Item A to Part I of Form 10k.





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


N/A





Item
      3.  Defaults
      Upon Senior Securities


N/A





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





The
      following items were submitted to the security holders for approval at the
      annual meeting held on May 25, 2006:





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





For
            
            WithheldDr.
                B. R. Bryant
            
            
            5,539,904
            
            
            5,563Donald
                H. Campbell
            
            
            5,138,293
            
            
            407,264Kenneth
                L. Dewar
            
            
            5,541,649
            
            
            3,908Mark
                C. Fugate
            
            
            5,540,984
            
            
            4,573Dolores
                T. Lacey
            
            
            5,541,649
            
            
            3,908Merle
                F. Miller
            
            
            5,541,849
            
            
            3,708Michael
                J. Morris
            
            
            5,541,649
            
            
            3,908Daniel
                J. O’Hare
            
            
            5,541,649
            
            
            3,908Alexander
                F. Simas
            
            
            5,540,949
            
            
            4,608Ole
                K. Viborg
            
            
            5,289,194
            
            
            256,363Lawrence
                P. Ward
            
            
            5,527,369
            
            
            18,188





Page
          34








***2.***
            ***Ratification
                of Independent Accountants.***To
                ratify the appointment of Vavrinek, Trine, Day & Co. LLP as the
                Company’s independent accountants for the 2006 fiscal
                year.


***For***  ***5,534,122***  ***Against***  ***4,682***  ***Abstained***  ***6,753***


N/A





Item
      5.  Other
      Information


N/A





Item
      6.  Exhibits


(a)Exhibits :





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


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


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


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




Page
          35


SIGNATURES





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





HERITAGE
      OAKS BANCORP





DATE:
      August 3, 2006





/s/ Lawrence
                P. WardLawrence
                P. WardPresident
                Chief
                  Executive Officer


/s/ Margaret
              A. TorresMargaret
              A. TorresChief
                  Financial Officer
                Executive
                  Vice President




Page
          36





EXHIBIT
      INDEX





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


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


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


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








Page
          37