**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 **[X]
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 **For
        the quarterly period ended June 30, 2005**
 
 **[
         ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934**
 **For
        the Transition Period from ____** **to
        ____**
 
 **Commission
        File No.** **0-25020**
 **HERITAGE
        OAKS BANCORP** ****
 **(Exact
        name of registrant as specified in charter)**
 **STATE
        OF CALIFORNIA** ****
 **(State
        or other jurisdiction of incorporation or organization)**
 **77-0388249**
 **(I.R.S.
        Employer Identification Code)**
 
 **545
        12th STREET, PASO ROBLES, CA 93446**
 **(Address
        of principal office)**
 **(805)
        239-5200**
 **(Registrant's
        telephone number, including area code)**
 
 **Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding twelve (12) months (or for such shorter period that the registrant
        was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past ninety (90) days.**
 **YES x** **NO
        o**
 
 
 **Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in
        Exchange Act Rule 12b-2).**
 **YES o    **NO
        x****
 
 **Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date:**
 
 **As
        of July 21, 2005 there were approximately 4,114,458 shares outstanding of
        the
        Registrant’s common stock.**
 
 Page
            1
 **TABLE
        OF CONTENTS**
 
 Part
                  1. Financial InformationItem
                  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 of Financial Condition and Results
                  of OperationsItem
                  3. Quantitative and Qualitative Disclosure about Market
                  RiskItem
                  4. Controls and ProceduresPart
                  2. Other InformationItem
                  1. Legal ProceedingsItem
                  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)**30-Jun-05**
                    
                    **31-Dec-04**ASSETS
                    
                    **Un-audited**
                    
                    **(1)**Cash
                        and due from banks
                    
                    $
                    16,460
                    
                    $
                    13,092Federal
                        funds sold
                    
                    
                    30,845
                    
                    
                    5,775Money
                        market funds
                    
                    
                    -
                    
                    
                    3,000Total
                        cash and cash equivalents
                    
                    
                    47,305
                    
                    
                    21,867Interest
                        bearing deposits other banks
                    
                    
                    398
                    
                    
                    498Securities
                        Available for sale
                    
                    
                    49,960
                    
                    
                    57,394Federal
                        Home Loan Bank Stock, at cost
                    
                    
                    1,844
                    
                    
                    1,809Loans
                        Held For Sale
                    
                    
                    7,444
                    
                    
                    2,253Loans,
                        net
                    
                    
                    362,103
                    
                    
                    334,964Property,
                        premises and equipment, net
                    
                    
                    10,797
                    
                    
                    10,383Cash
                        surrender value life insurance
                    
                    
                    7,559
                    
                    
                    7,130Deferred
                        Tax Assets
                    
                    
                    1,898
                    
                    
                    1,918Goodwill
                    
                    
                    4,865
                    
                    
                    4,865Core
                        Deposit Intangible
                    
                    
                    1,734
                    
                    
                    2,021Other
                        assets
                    
                    
                    2,649
                    
                    
                    2,910TOTAL
                        ASSETS
                    
                    $
                    498,556
                    
                    $
                    448,012LIABILITIES
                        AND STOCKHOLDERS' EQUITYLIABILITIESDeposits:Demand,
                        non-interest bearing
                    
                    $
                    192,209
                    
                    $
                    143,455Savings,
                        NOW, and money market deposits
                    
                    
                    164,331
                    
                    
                    166,015Time
                        deposits of $100 or more
                    
                    
                    16,570
                    
                    
                    18,034Time
                        deposits under $100
                    
                    
                    44,757
                    
                    
                    42,937Total
                        deposits
                    
                    
                    417,867
                    
                    
                    370,441FHLB
                        advances and other borrowed money
                    
                    
                    28,000
                    
                    
                    28,500Securities
                        Sold under Agreement to Repurchase
                    
                    
                    799
                    
                    
                    766Notes
                        Payable
                    
                    
                    -
                    
                    
                    -Junior
                        subordinated debentures
                    
                    
                    8,248
                    
                    
                    8,248Other
                        liabilities
                    
                    
                    2,599
                    
                    
                    2,807Total
                        liabilities
                    
                    
                    457,513
                    
                    
                    410,762COMMITMENTS
                        AND CONTINGENCIES
                    
                    
                    -Stockholders'
                        equityCommon
                        stock, no par value;20,000,000
                        shares authorized; issued and outstanding4,114,458
                        and 4,102,987 for June 30, 2005and
                        December 31, 2004, respectively.
                    
                    
                    28,728
                    
                    
                    24,050Retained
                        earnings
                    
                    
                    12,139
                    
                    
                    13,053Accumulated
                        other comprehensive income
                    
                    
                    176
                    
                    
                    147Total
                        stockholders' equity
                    
                    
                    41,043
                    
                    
                    37,250TOTAL
                        LIABILITIES & STOCKHOLDERS' EQUITY
                    
                    $
                    498,556
                    
                    $
                    448,012
  (1)
                        These numbers have been derived from the audited financial
                        statements.See
                        notes to consolidated financial statements
 
 Page
            3
  **HERITAGE
                        OAKS BANCORP****CONSOLIDATED
                        STATEMENTS OF INCOME**(in
                        thousands except per share date)**For
                        the three months**
                    
                    **For
                        the six months****ended
                        June 30,**
                    
                    **ended
                        June 30,****2005**
                    
                    **2004**
                    
                    **2005**
                    
                    **2004****(Unaudited)**
                    
                    **(Unaudited)**
                    
                    **(Unaudited)**
                    
                    **(Unaudited)**Interest
                        Income:Interest
                        and fees on loans
                    
                    $
                    6,493
                    
                    $
                    5,031
                    
                    $
                    12,616
                    
                    $
                    9,866Investment
                        securities
                    
                    
                    544
                    
                    
                    562
                    
                    
                    1,097
                    
                    
                    1,152Federal
                        funds sold and commercial paper
                    
                    
                    99
                    
                    
                    83
                    
                    
                    169
                    
                    
                    154Time
                        certificates of deposit
                    
                    
                    3
                    
                    
                    2
                    
                    
                    5
                    
                    
                    5Total
                        interest income
                    
                    
                    7,139
                    
                    
                    5,678
                    
                    
                    13,887
                    
                    
                    11,177Interest
                        Expense:Now
                        accounts
                    
                    
                    22
                    
                    
                    6
                    
                    
                    42
                    
                    
                    11MMDA
                        accounts
                    
                    
                    329
                    
                    
                    127
                    
                    
                    542
                    
                    
                    249Savings
                        accounts
                    
                    
                    25
                    
                    
                    24
                    
                    
                    42
                    
                    
                    47Time
                        deposits of $100 or more
                    
                    
                    91
                    
                    
                    58
                    
                    
                    173
                    
                    
                    119Other
                        time deposits
                    
                    
                    275
                    
                    
                    216
                    
                    
                    506
                    
                    
                    458Other
                        borrowed funds
                    
                    
                    382
                    
                    
                    402
                    
                    
                    803
                    
                    
                    840Total
                        interest expense
                    
                    
                    1,124
                    
                    
                    833
                    
                    
                    2,108
                    
                    
                    1,724Net
                        Interest Income Before Prov. for Possible Loan Losses
                    
                    
                    6,015
                    
                    
                    4,845
                    
                    
                    11,779
                    
                    
                    9,453Provision
                        for loan losses
                    
                    
                    180
                    
                    
                    35
                    
                    
                    360
                    
                    
                    205Net
                        interest income after provision for loan losses
                    
                    
                    5,835
                    
                    
                    4,810
                    
                    
                    11,419
                    
                    
                    9,248Non-interest
                        Income:Service
                        charges on deposit accounts
                    
                    
                    632
                    
                    
                    589
                    
                    
                    1,171
                    
                    
                    1,098Gain
                        of Sale of Securities
                    
                    
                    -
                    
                    
                    28
                    
                    
                    -
                    
                    
                    28Other
                        income
                    
                    
                    635
                    
                    
                    570
                    
                    
                    1,228
                    
                    
                    1,096Total
                        Non-interest Income
                    
                    
                    1,267
                    
                    
                    1,187
                    
                    
                    2,399
                    
                    
                    2,222Non-interest
                        Expense:Salaries
                        and employee benefits
                    
                    
                    2,408
                    
                    
                    2,129
                    
                    
                    4,656
                    
                    
                    4,174Occupancy
                        and equipment
                    
                    
                    640
                    
                    
                    628
                    
                    
                    1,252
                    
                    
                    1,263Other
                        expenses
                    
                    
                    1,515
                    
                    
                    1,378
                    
                    
                    3,078
                    
                    
                    2,798Total
                        Noninterest Expenses
                    
                    
                    4,563
                    
                    
                    4,135
                    
                    
                    8,986
                    
                    
                    8,235Income
                        before provision for income taxes
                    
                    
                    2,539
                    
                    
                    1,862
                    
                    
                    4,832
                    
                    
                    3,235Provision
                        for applicable income taxes
                    
                    
                    933
                    
                    
                    700
                    
                    
                    1,808
                    
                    
                    1,197Net
                        Income
                    
                    $
                    1,606
                    
                    $
                    1,162
                    
                    $
                    3,024
                    
                    $
                    2,038Earnings
                        per share: (See
                        note #4)Basic
                    
                    $
                    0.39
                    
                    $
                    0.29
                    
                    $
                    0.74
                    
                    $
                    0.51Fully
                        Diluted
                    
                    $
                    0.37
                    
                    $
                    0.27
                    
                    $
                    0.70
                    
                    $
                    0.48
  See
                        notes to consolidated financial statements
  Page
            4
  **HERITAGE
                      OAKS BANCORP****Consolidated
                      Statements of Comprehensive Income**(Unaudited,
                      in thousands)**Three
                      Month Period**
                  
                  **Six
                      Month Period****Ended
                      June 30,**
                  
                  **Ended
                      June 30,****2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004****Net
                      Income**
                  
                  $
                  1,606
                  
                  $
                  1,162
                  
                  $
                  3,024
                  
                  $
                  2,038**Other
                      Comprehensive Income Before Taxes:**Unrealized
                      gains (losses) on securities available for sale:Unrealized
                      holding gains (losses) arising during period
                  
                  
                  362
                  
                  
                  (705
                  )
                  
                  29
                  
                  
                  (428
                  )Reclassification
                      adjustments for (gains) included in net income
                  
                  
                  -
                  
                  
                  (28
                  )
                  
                  -
                  
                  
                  (28
                  )Other
                      comprehensive income (loss), before taxes
                  
                  
                  362
                  
                  
                  (733
                  )
                  
                  29
                  
                  
                  (456
                  )Income
                      tax expense (benefit) related to realized gain in comprehensive
                      income
                  
                  
                  -
                  
                  
                  11
                  
                  
                  -
                  
                  
                  11**Other
                      Comprehensive Income (Loss), Net of Taxes**
                  
                  
                  362
                  
                  
                  (722
                  )
                  
                  29
                  
                  
                  (445
                  )**Comprehensive
                      Income**
                  
                  $
                  1,968
                  
                  $
                  440
                  
                  $
                  3,053
                  
                  $
                  1,593
  See
                      notes to consolidated financial statements
 
 Page
            5
  **June
                        30, 2005 and June 30, 2004****(Unaudited)**(
                        in thousands except shares outstanding)**Accumulated****Other**
                    
                    **Total****Shares**
                    
                    **Common**
                    
                    **Retained**
                    
                    **Comprehensive**
                    
                    **Stockholders'****Outstanding**
                    
                    **Stock**
                    
                    **Earnings**
                    
                    **Income**
                    
                    **Equity**(in
                        thousands)**Balance
                        January 1, 2005**
                    
                    
                    3,817,943
                    
                    $
                    24,050
                    
                    $
                    13,053
                    
                    $
                    147
                    
                    $
                    37,250Exercise
                        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**
  **Other**
                      
                      **Total****Shares**
                      
                      **Common**
                      
                      **Retained**
                      
                      **Comprehensive**
                      
                      **Stockholders'****Outstanding**
                      
                      **Stock**
                      
                      **Earnings**
                      
                      **Income**
                      
                      **Equity**(in
                          thousands)**Balance
                          January 1, 2004**
                      
                      
                      3,604,497
                      
                      $
                      20,649
                      
                      $
                      11,541
                      
                      $
                      98
                      
                      $
                      32,288Exercise
                          of Stock Options
                      
                      
                      15,584
                      
                      
                      102
                      
                      
                      
                      
                      
                      
                      
                      
                      1025%
                          Stock Dividend to be distributed
                      
                      
                      180,301
                      
                      
                      3,065
                      
                      
                      (3,065
                      )
                      
                      
                      
                      
                      0April
                          23, 2004Cash
                          Paid in lieu of fractional shares
                      
                      
                      
                      
                      
                      
                      
                      
                      (7
                      )
                      
                      
                      
                      
                      (7
                      )Comprehensive
                          IncomeNet
                          Income
                      
                      
                      
                      
                      
                      
                      
                      
                      2,038
                      
                      
                      
                      
                      
                      2,038Unrealized
                          Security Holding Losses(net
                          of $285 tax )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (428
                      )
                      
                      (428
                      )Less
                          reclasification adjustment for gain(net
                          of $11 tax)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (17
                      )
                      
                      (17
                      )Total
                          other comprehensive Income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,593**Balance
                          June 30, 2004**
                      
                      
                      **3,800,382**
                      
                      **$**
                      **23,816**
                      
                      **$**
                      **10,507**
                      
                      **$**
                      **(347**
                      **)**
                      **$**
                      **33,976**
  See
                          notes to consolidated financial statements
  Page
            6
  **HERITAGE
                      OAKS BANCORP****CONSOLIDATED
                      STATEMENTS OF CASHFLOWS****Periods
                      ended June 30**(in
                      thousands)2005
                  
                  2004(Unaudited)
                  
                  (Unaudited)**Cash
                      Flows from Operating Activities**Net
                      income
                  
                  $
                  3,024
                  
                  $
                  2,038Adjustments
                      to reconcile net income tonet
                      cash provided by operating activitiesNet
                      cash provided by operating activitiesDepreciation
                      and amortization
                  
                  
                  468
                  
                  
                  441Provision
                      for possible loan losses
                  
                  
                  360
                  
                  
                  205Realized
                      loss on sales of available-for-salesecurities,
                      net
                  
                  
                  0
                  
                  
                  (28
                  )Amortization
                      of premiums/discounts oninvestment
                      securities, net
                  
                  
                  121
                  
                  
                  211FHLB
                      Stock dividends
                  
                  
                  (35
                  )
                  
                  (35
                  )Amortization
                      of intangible assets
                  
                  
                  287
                  
                  
                  210(Increase)/decrease
                      in loans held for sale
                  
                  
                  (5,191
                  )
                  
                  948Net
                      increase in cash surrender value of life insurance
                  
                  
                  (129
                  )
                  
                  (139
                  )Decrease
                      in other assets
                  
                  
                  283
                  
                  
                  362Decrease
                      in other liabilities
                  
                  
                  (208
                  )
                  
                  (592
                  )**NET
                      CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES**
                  
                  
                  (1,020
                  )
                  
                  3,621**Cash
                      Flows From Investing Activities**Purchase
                      of securities available-for-sale
                  
                  
                  0
                  
                  
                  (909
                  )Purchase
                      of mortgage backed securities available-for-sale
                  
                  
                  0
                  
                  
                  (17,295
                  )Proceeds
                      from sales of securities available-for-sale
                  
                  
                  0
                  
                  
                  1,534Proceeds
                      from principal reductions and maturitiesof
                      securities available-for-sale
                  
                  
                  0
                  
                  
                  500Proceeds
                      from principal reductions and maturitiesof
                      mortgage backed securities available-for-sale
                  
                  
                  7,362
                  
                  
                  7,101Net
                      Change in TCDs
                  
                  
                  100
                  
                  
                  0Proceeds
                      from Sale of FHLB stock
                  
                  
                  0
                  
                  
                  166Purchase
                      of life insurance policies
                  
                  
                  (300
                  )
                  
                  0Increase
                      in loans, net
                  
                  
                  (27,521
                  )
                  
                  (19,967
                  )ALLL
                      Recoveries
                  
                  
                  22
                  
                  
                  3Purchase
                      of property, premises and equipment, net
                  
                  
                  (904
                  )
                  
                  (587
                  )**NET
                      CASH USED IN INVESTING ACTIVITIES**
                  
                  
                  (21,241
                  )
                  
                  (29,454
                  )**Cash
                      Flows From Financing Activities**Increase
                      in deposits, net
                  
                  $
                  47,426
                  
                  $
                  21,061Net
                      increase/(decrease) in other borrowings
                  
                  
                  (467
                  )
                  
                  403Proceeds
                      from exercise of stock options
                  
                  
                  748
                  
                  
                  102Cash
                      paid in lieu of fractional shares
                  
                  
                  (8
                  )
                  
                  (7
                  )**NET
                      CASH PROVIDED BY FINANCING ACTIVITIES**
                  
                  
                  47,699
                  
                  
                  21,559**Net
                      Increase/(Decrease) in Cash and Cash Equivalents**
                  
                  
                  25,438
                  
                  
                  (4,274
                  )**Cash
                      and Cash Equivalents**,
                      Beginning of year
                  
                  
                  21,867
                  
                  
                  77,114**Cash
                      and Cash Equivalents**,
                      End of year
                  
                  $
                  47,305
                  
                  $
                  72,840**Supplemental
                      Disclosures of Cash Flow Information**Interest
                      paid
                  
                  $
                  2,102
                  
                  $
                  1,799Income
                      taxes paid
                  
                  $
                  1,430
                  
                  $
                  1,015
  See
                      notes to consolidated financial statements
 Page
            7
  **Note
        1.**  **CONSOLIDATED FINANCIAL STATEMENTS**
 
 The
        accompanying un-audited condensed consolidated financial statement of Heritage
        Oaks Bancorp and subsidiaries (the “Company”) have been prepared in accordance
        with the instructions to Form 10-Q and Article 10 of Regulation S-X.
        Accordingly, certain information and notes required by accounting principles
        generally accepted in the United States of America for annual financial
        statements are not included herein. In the opinion of Management, all
        adjustments (which consist solely of normal recurring accruals) considered
        necessary for a fair presentation of results for the interim periods presented
        have been included. These interim condensed consolidated financial statements
        should be read in conjunction with the financial statements and related notes
        contained in the Company’s 2004 Annual Report on Form 10-KSB.
 
 The
        condensed consolidated financial statements include the accounts of the Company
        and its wholly-owned financial subsidiary, Heritage Oaks Bank (the “Bank”). All
        significant inter-company balances and transactions have been eliminated.
        Heritage Oaks Capital Trust I is an unconsolidated subsidiary formed solely
        for
        the purpose of issuing trust preferred securities. Operating results for
        the
        three and six months ended June 30, 2005 are not necessarily indicative of
        the
        results that may be expected for the year ending December 31, 2005. Certain
        amounts in the consolidated financial statements for the year ended December
        31,
        2004 and the three and six month period ended June 30, 2004 may have been
        reclassified to conform to the presentation of the consolidated financial
        statement in 2005.
 
 The
        preparation of consolidated financial statements in conformity with the
        accounting principles generally accepted in the United States of America
        requires Management to make estimates and assumptions. These estimates and
        assumptions affect the reported amounts of assets and liabilities at the
        date of
        the consolidated financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Actual results could differ from these
        estimates.
  Note
        2.  INVESTMENT
        SECURITIES
 
 In
        accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and
        Equity Securities”, which addresses the accounting for investments in equity
        securities that have readily determinable fair values and for investments
        in all
        debt securities, securities are classified in three categories and accounted
        for
        as follows: debit and equity securities that the Company has the positive
        intent
        and ability to hold to maturity are classified as held-to-maturity and are
        measured at amortized cost; debt and equity securities bought and held
        principally for the purpose of selling in the near term are classified as
        trading securities and are measured at fair value, with the unrealized gains
        and
        losses included in earnings; debt and equity securities not classified as
        either
        held-to-maturity or trading securities are deemed as available-for-sale and
        are
        measured at fair value, with the unrealized gains and losses, net of applicable
        taxes, reported in a separate component of stockholders’ equity. Any gains and
        losses on sales of investments are computed on a specific identification
        basis.
  Page
            8
  The
        amortized cost and fair values of investment securities available for sale
        at
        June 30, 2005 and December 31, 2004:
 **30-Jun-05**
                    
                    
                    
                    **Gross**
                    
                    **Gross****Amortized**
                    
                    **Unrealized**
                    
                    **Unrealized**
                    
                    **Fair****Cost**
                    
                    **Gains**
                    
                    **Losses**
                    
                    **Value**Obligations
                        of U.S. government agencies and corporations
                    
                    $
                    1,838
                    
                    $
                    -
                    
                    $
                    (26
                    )
                    $
                    1,812Mortgage-backed
                        securities
                    
                    
                    35,095
                    
                    
                    88
                    
                    
                    (267
                    )
                    
                    34,916Obligations
                        of State and Political Subdivisions
                    
                    
                    12,724
                    
                    
                    576
                    
                    
                    (77
                    )
                    
                    13,223Other
                        Securities
                    
                    
                    9
                    
                    
                    -
                    
                    
                    -
                    
                    
                    9**TOTAL**
                    
                    **$**
                    **49,666**
                    
                    **$**
                    **664**
                    
                    **$**
                    **(370**
                    **)**
                    **$**
                    **49,960**
   **31-Dec-04**
                    
                    
                    
                    
                    
                    **Gross**
                    
                    
                    **Gross****(in
                        thousands)**
                    
                    
                    **Amortized**
                    
                    
                    **Unrealized**
                    
                    
                    **Unrealized**
                    
                    
                    **Fair****Cost**
                    
                    
                    **Gains**
                    
                    
                    **Losses**
                    
                    
                    **Value**Obligations
                        of U.S. government agencies and corporations
                    
                    $
                    1,868
                    
                    $
                    5
                    
                    $
                    (30
                    )
                    $
                    1,843Mortgage-backed
                        securities
                    
                    
                    42,622
                    
                    
                    181
                    
                    
                    (239
                    )
                    
                    42,564Obligations
                        of State and Political Subdivisions
                    
                    
                    12,651
                    
                    
                    413
                    
                    
                    (86
                    )
                    
                    12,978Other
                        Securities
                    
                    
                    9
                    
                    
                    -
                    
                    
                    -
                    
                    
                    9**TOTAL**
                    
                    **$**
                    **57,150**
                    
                    **$**
                    **599**
                    
                    **$**
                    **(355**
                    **)**
                    **$**
                    **57,394**
 
 Note
        3.  LOANS
        AND
        ALLOWANCE FOR LOAN LOSSES
  Major
                      classifications of loans were:**June
                      30,**
                  
                  **December
                      31,****(in
                      thousands)**
                  
                  **2005**
                  
                  **2004**Commercial,
                      financial, and agricultural
                  
                  $
                  62,883
                  
                  $
                  49,584Real
                      estate-construction
                  
                  
                  74,603
                  
                  
                  66,833Commercial
                      real estate
                  
                  
                  224,060
                  
                  
                  217,473Installment
                      loans to individuals
                  
                  
                  5,164
                  
                  
                  5,538All
                      other loans (including overdrafts)
                  
                  
                  534
                  
                  
                  265367,244
                  
                  
                  339,693Less
                      - deferred loan fees, net
                  
                  
                  (1,556
                  )
                  
                  (1,482
                  )Less
                      - reserve for possible loan losses
                  
                  
                  (3,585
                  )
                  
                  (3,247
                  )Total
                      loans
                  
                  $
                  362,103
                  
                  $
                  334,964Loans
                      Held For Sale
                  
                  $
                  7,444
                  
                  $
                  2,253
  Concentration
        of Credit Risk
 At
        June
        30, 2005, approximately $299 million of the Bank’s loan portfolio was
        collateralized by various forms of real estate. Such loans are generally
        made to
        borrowers located in San Luis Obispo and Santa Barbara Counties. The Bank
        attempts to reduce its concentration of credit risk by making loans which
        are
        diversified by project type. While Management believes that the collateral
        presently securing this portfolio is adequate, there can be no assurances
        that
        significant deterioration in the California real estate market would not
        expose
        the Bank to significantly greater credit risk.
  Page
            9
 At
        June
        30, 2005, the Bank was contingently liable for letters of credit accommodations
        made to its customers totaling approximately $16.5 million and un-disbursed
        loan
        commitments in the approximate amount of $133 million. The Bank makes
        commitments to extend credit in the normal course of business to meet the
        financing needs of its customers. Commitments to extend credit are agreements
        to
        lend to a customer as long as there is no violation of any condition established
        in the contract. Commitments generally have fixed expiration dates or other
        termination clauses and may require payment of a fee. Since many of the
        commitments are expected to expire without being drawn upon, the total
        outstanding commitment amount does not necessarily represent future cash
        requirements. Standby letters of credit written are conditional commitments
        issued by the Bank to guarantee the performance of a customer to a third
        party.
        The credit risk involved in issuing letters of credit is essentially the
        same as
        those involved in extending loan facilities to customers. The Bank anticipates
        no losses as a result of such transactions.
 
 Allowance
        for Loan Losses
 An
        allowance for loan losses has been established by management to provide for
        those loans that may not be repaid in their entirety for a variety of reasons.
        The allowance is maintained at a level considered by management to be adequate
        to provide for probable incurred losses. The allowance is increased by
        provisions charged to earnings and is reduced by charge-offs, net of recoveries.
        The provision for loan losses is based upon past loan loss experience and
        management’s evaluation of the loan portfolio under current economic conditions.
        Loans are charged to the allowance for loan losses when, and to the extent,
        they
        are deemed by management to be un-collectible. The allowance for loan losses
        is
        composed of allocations for specific loans and a historical portion for all
        other loans.
  An
              analysis of the changes in the reserve for possible loan losses is
              as
              follows:
 **(in
                      thousands)**
                  
                  **June
                      30,**
                  
                  **December
                      31,****2005**
                  
                  **2004**Balance
                      at beginning of year
                  
                  $
                  3,247
                  
                  $
                  3,070Additions
                      charged to operating expense
                  
                  
                  360
                  
                  
                  410Loans
                      charged off
                  
                  
                  (33
                  )
                  
                  (236
                  )Recoveries
                      of loans previously charged off
                  
                  
                  11
                  
                  
                  3Balance
                      at end of year
                  
                  $
                  3,585
                  
                  $
                  3,247
 
 The
        Bank
        recognized that credit losses will be experienced and the risk of loss will
        vary
        with, among other things, general economic conditions; the type of loan being
        made; the creditworthiness of the borrower over the term of the loan and
        in the
        case of a collateralized loan, the quality of the collateral for such loan.
        The
        allowance for loan loss represents the Bank’s estimate of the allowance
        necessary to provide for probable incurred losses in the portfolio. In making
        this determination, the Bank analyzes the ultimate collectability of the
        loans
        in its portfolio by incorporating feedback provided by internal loan staff,
        an
        independent loan review function, and information provided by examinations
        performed by regulatory agencies. The Bank makes monthly evaluations as to
        the
        adequacy of the allowance for loan losses.
 
 The
        analysis of the allowance for loan losses is comprised of three components:
        specific credit allocation; general portfolio allocation; and subjectively
        by
        determined allocation. Effective January 1, 1995, the Bank adopted Statement
        of
        Financial Accounting Standards No.114, Accounting by Creditors for Impairment
        of
        a Loan (SFAS 114), as amended by SFAS No. 118, Accounting by Creditors for
        Impairment of a Loan - Income Recognition and Disclosures. These pronouncements
        provide that when it is probable that a creditor will be unable to collect
        all
        amounts due in accordance with the terms of the loan that such loan is deemed
        impaired. Impaired loans are accounted for differently in that the amount
        of the
        impairment is measured and reflected in the records of the creditor. The
        allowance for credit losses related to loans that are identified for evaluation
        in accordance with Statement 114 is based on discounted cash flows using
        the
        loan’s initial effect interest rate or the fair value of the collateral for
        certain collateral dependent loans. The general portfolio allocation consists
        of
        an assigned reserve percentage based on the credit rating of the loan. The
        subjective portion is determined based on loan history and the Bank’s evaluation
        of various factors including current economic conditions and trends in the
        portfolio including delinquencies and impairment, as well as changes in the
        composition of the portfolio.
 
 Page
            10
 The
        allowance for loan losses is based on estimates, and ultimate losses will
        vary
        from current estimates. These estimates are reviewed monthly, and as
        adjustments, either positive or negative, become necessary, a corresponding
        increase or decrease is made in the provision for loan losses. The methodology
        used to determine the adequacy of the allowance for possible loan losses
        for the
        three and six months ended June 30, 2005 is consistent with prior periods.
 
 The
        allowance for loan losses as a percentage of total net loans was .99% as
        of June
        30, 2005 and .97% as of December 31, 2004. Management believes that the
        allowance for credit losses at June 30, 2005 is prudent and warranted, based
        on
        information currently available.
  Note
        4.  EARNINGS
        PER SHARE
 
 Basic
        earnings per share are based on the weighted average number of shares
        outstanding before any dilution from common stock equivalents. Diluted earnings
        per share reflects the potential dilution that could occur if securities
        or
        other contracts to issue common stock were exercised or converted into common
        stock or resulted in the issuance of common stock that then shares in the
        earnings of the entity.
 
 On
        March
        25, 2005, the Company’s Board of Directors declared a 5% stock dividend. The
        record date for the stock dividend was April 8, 2005 and the pay date was
        April
        22, 2005.
 
 Share
        information has been retroactively adjusted for such 5% stock
        dividend.
 
 The
        following table shows the number of shares used to calculate and the earnings
        per share for the three and six months ending June 30, 2005 and
        2004:
 
 **EPS**
                
                **EPS****For
                    the Three Months Ending:**
                
                **For
                    the Six Months Ending:****30-Jun-05**
                
                **30-Jun-04**
                
                **30-Jun-05**
                
                **30-Jun-04**Net
                    Income
                
                $
                1,606,322
                
                $
                1,162,079
                
                $
                3,023,708
                
                $
                2,037,596Basic
                
                $
                0.39
                
                $
                0.29
                
                $
                0.74
                
                $
                0.51Diluted
                
                $
                0.37
                
                $
                0.27
                
                $
                0.70
                
                $
                0.48Shares:Basic
                
                
                4,111,714
                
                
                3,987,768
                
                
                4,085,013
                
                
                3,984,287Diluted
                
                
                4,349,899
                
                
                4,272,027
                
                
                4,346,839
                
                
                4,280,444
  Page
              11
 The
        following table illustrates the effect on net income and earnings per share
        if
        the Company had applied the fair value recognition provision of SFAS 123,
        Accounting for Stock Based Compensation, to stock based employee
        compensation:
 
 Three
                    Months Ended
                
                Six
                    Months EndedJune
                    30, 2005
                
                June
                    30, 2004
                
                June
                    30, 2005
                
                June
                    30, 2004Net
                    income:As
                    reported
                
                $
                1,606,322
                
                $
                1,162,079
                
                $
                3,023,708
                
                $
                2,037,594Stock-based
                    compensation using the intrinsic value method
                
                
                -
                
                
                -
                
                
                -
                
                
                -Stock-based
                    compensation that would have been reportedusing
                    the fair value method of SFAS 123
                
                
                (22,446
                )
                
                (22,456
                )
                
                (70,933
                )
                
                (45,176
                )Pro
                    forma net income
                
                $
                1,583,876
                
                $
                1,139,623
                
                $
                2,952,775
                
                $
                1,992,418Weighted
                    Average Shares Outstanding - Basic
                
                
                4,111,714
                
                
                3,987,768
                
                
                4,085,013
                
                
                3,984,287Weighted
                    Average Shares Outstanding - Diluted
                
                
                4,349,899
                
                
                4,272,027
                
                
                4,346,839
                
                
                4,280,444Basic
                    Earnings per shareAs
                    reported
                
                $
                0.39
                
                $
                0.29
                
                $
                0.74
                
                $
                0.51Pro
                    forma
                
                $
                0.39
                
                $
                0.29
                
                $
                0.72
                
                $
                0.50Earnings
                    per share - assuming dilutionAs
                    reported
                
                $
                0.37
                
                $
                0.27
                
                $
                0.70
                
                $
                0.48Pro
                    forma
                
                $
                0.36
                
                $
                0.27
                
                $
                0.68
                
                $
                0.47
 
 Note
        5.  RECENT
        ACCOUNTING PRONOUNCEMENTS
  In
        March
        2004, the Financial Accounting Standards Board (FASB) issued an exposure
        draft
        entitled "Share-Based Payment, an Amendment of FASB Statements No. 123 and
        95."
        This proposed statement would eliminate the ability to account for stock-based
        compensation using APB 25 and require such transactions be recognized as
        compensation expense in the income statement based on their fair values at
        the
        date of grant. Companies transitioning to fair value based accounting for
        stock-based compensation will be required to use the "modified prospective"
        method whereby companies must recognize equity compensation cost from the
        beginning of the year in which the recognition provisions are first applied
        as
        if the fair value method had been used to account for all equity compensation
        awards granted, modified, or settled in fiscal years beginning after
        December 31, 1994. As proposed, this statement would have been effective
        for the Corporation on January 1, 2005. In December 2004, the FASB
        issued
        SFAS No. 123 (revised 2004). *“Share-Based
        Payment”* ,
        which
        is a revision of SFAS No. 123, *“Accounting
        for Stock-Based Compensation”* .
        SFAS
        No. 123(R) supersedes APB Opinion No. 25, *“Accounting
        for Stock Issued to Employees”* and
        amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS
        No.
        123(R) is similar to the approach described in SFAS No. 123. However, SFAS
        No.
        123(R) requires all share-based payments to employees, including grants of
        employee stock options, to be recognized in the income statement based on
        their
        fair values. Pro forma disclosure is no longer an alternative. On April 14,
        2005, the SEC announced that public companies will not be required to adopt
        SFAS
        123(R) , which provides for stock option expensing, until their first fiscal
        year beginning after June 15, 2005. The Company has not determined if the
        adoption of this standard will have a material impact on its financial
        statements.
 
 In
        January 2003, the FASB issued the Emerging Information Task Force Issue 03-1, *The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investors* (“EITF
        03-1”), and in March 2004, FASB issued an update. EITF 03-1 addresses the
        meaning of other-than-temporary impairment and its application to certain
        debt
        and equity securities. EITF 03-1 aids in the determination of impairment
        of an
        investment and gives guidance as to the measurement of impairment loss and
        the
        recognition and disclosures of other-than-temporary investments. EITF 03-1
        also
        provides a model to determine other-than-temporary impairment using
        evidence-based judgment about the recovery of the fair value up to the cost
        of
        the investment by considering the severity and duration of the impairment
        in
        relation to the forecasted recovery of the fair value. In July 2005, FASB
        adopted the recommendation of its staff to nullify key parts of Emerging
        Issues
        Task Force (“EITF”) Issue 03-1. The staff’s recommendations were to nullify the
        guidance on the determination of whether an investment is impaired as set
        forth
        in paragraphs 10-18 of Issue 03-1 and not to provide additional guidance
        on the
        meaning of other-than-temporary impairment. Instead, the staff recommends
        entities recognize other-than-temporary impairments by applying
        existing accounting literature such as paragraph 16 of SFAS 115.
 
 Page
            12
 Under
        FASB Interpretation (FIN) No. 46, *“Consolidation
        of Variable Interest Entities, an interpretation of ARB No.
        51,”* the
        Company is not allowed to consolidate Heritage Oaks Capital Trust I into
        the
        Company’s financial statements. Prior to the issuance of FIN No. 46, Bank
        holding companies typically consolidated these entities. On February 28,
        2005,
        the Federal Reserve Board issued a new rule which provides that, notwithstanding
        the deconsolidation of such trusts, junior subordinated debentures, such
        as
        those issued by the Company, may continue to constitute up to 25% of a bank
        holding company's Tier 1 capital, subject to certain new limitations which
        will
        not become effective until March 31, 2009 and which, in any event, are not
        expected to affect the treatment of the Company's Junior Subordinated Debentures
        as Tier 1 capital for regulatory purposes. At June 30, 2005, the Company
        has
        included the net junior subordinated debt in its Tier1 Capital for regulatory
        capital purposes.
 
 Note
        6.  Reclassifications
 
 Certain
        amounts in the 2004 financial statements have been reclassified to conform
        to
        the 2005 presentation.
  Page
            13
  Forward
        Looking Statements
 
 **Certain
        statements contained in this Quarterly Report on Form 10-Q (“Quarterly Report”),
        including, without limitation, statements containing the words “believes”,
“anticipates”, “intends”, “expects”, and words of similar impact, constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
        Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such
        forward-looking statements involve known and unknown risks, uncertainties
        and
        other factors that may cause the actual results, performance or achievements
        of
        the Company to be materially different from any future results, performance
        or
        achievements expressed or implied by such forward-looking statements. Such
        factors include, among others, the following: general economic and business
        conditions in those areas in which the Company operates, demographic changes,
        competition, fluctuations in interest rates, changes in business strategy
        or
        development plans, changes in governmental regulation, credit quality, the
        availability of capital to fund the expansion of the Company’s business, as well
        as economic, political and global changes arising from the war on terrorism.
        (Refer to the Company’s December 31, 2004 10-KSB, ITEM 1. Description of
        Business-Factors that May Affect Future Results of Operations.) The Company
        disclaims any obligation to update any such factors or to publicly announce
        the
        results of any revisions to any of the forward-looking statements contained
        herein to reflect future events or developments.**
 
 ITEM
        2.  MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS
 
 The
        following is an analysis of the results of operations and financial condition
        of
        the Company for the periods ending June 30, 2005 and 2004. The analysis should
        be read in connection with the consolidated financial statements and notes
        thereto appearing elsewhere in this report.
 
 THE
        COMPANY
 
 Heritage
        Oaks Bancorp (the "Company") is a California corporation organized in 1994
        to
        act as a holding company of Heritage Oaks Bank ("Bank"). In 1994, the Company
        acquired all of the outstanding common stock of the Bank in a holding company
        formation transaction.
 
 In
        April
        2002, the Company formed Heritage Oaks Capital Trust I (the “Trust”). The Trust
        is a statutory business trust formed under the laws of the State of Delaware.
        The Trust is a wholly-owned, non-financial, non-consolidated subsidiary of
        the
        Company.
 
 On
        October 31, 2003, the Company acquired Hacienda Bank and on June 28, 2004,
        Hacienda Bank was merged with and into the Bank.
 
 Other
        than holding the shares of the Bank, the Company conducts no significant
        activities, although it is authorized, with the prior approval of the Board
        of
        Governors of the Federal Reserve System (the "Federal Reserve Board"), the
        Company's principal regulator, to engage in a variety of activities which
        are
        deemed closely related to the business of banking. The Company has also caused
        to be incorporated a subsidiary, CCMS Systems, Inc. which is currently inactive
        and has not been capitalized. The Company has no present plans to activate
        the
        proposed subsidiary.
 
 Where
        You
        Can Find More Information
 
 Under
        the
        Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current
        reports must be filed with the SEC. The Company electronically files the
        following reports with the SEC: Form 10-KSB (Annual Report), Form 10-Q
        (Quarterly Report), Form 8-K (Report of Unscheduled Material Events), and
        Form
        DEF 14A (Proxy Statement). The Company may file additional forms. The SEC
        maintains an Internet site, www.sec.gov, in which all forms filed electronically
        may be accessed. Additionally, all forms filed with the SEC and additional
        shareholder information is available free of charge on the Company’s website:
        www.heritageoaksbancorp.com
 
 Page
            14
 The
        Company posts these reports to its website as soon as reasonably practicable
        after filing them with the SEC. None of the information on or hyperlinked
        from
        the Company’s website is incorporated into this Quarterly Report on Form
        10-Q.
 
 Executive
        Summary and Recent Developments
 
 The
        table
        below provides selected financial data that highlights the Company’s quarterly
        performance results:
  **SELECTED
                    FINANCIAL DATA****For
                    the Quarter Ended,**Dec-03
                
                Mar-04
                
                Jun-04
                
                Sep-04
                
                Dec-04
                
                Mar-05
                
                Jun-05Return
                    on Average Assets
                
                
                0.99%
                
                
                0.82%
                
                
                1.02%
                
                
                1.06%
                
                
                1.18%
                
                
                1.24%
                
                
                1.37%Return
                    on Average Equity
                
                
                13.59%
                
                
                10.60%
                
                
                13.62%
                
                
                13.62%
                
                
                14.77%
                
                
                14.74%
                
                
                15.94%Average
                    Equity to Average Assets
                
                
                6.76%
                
                
                7.69%
                
                
                7.58%
                
                
                7.78%
                
                
                6.76%
                
                
                8.40%
                
                
                8.60%Net
                    Interest Margin
                
                
                4.85%
                
                
                4.71%
                
                
                4.87%
                
                
                5.15%
                
                
                5.40%
                
                
                5.55%
                
                
                5.68%Efficiency
                    Ratio*
                
                
                68.94%
                
                
                72.65%
                
                
                68.55%
                
                
                67.36%
                
                
                67.64%
                
                
                64.14%
                
                
                62.66%Average
                    Loans to Average Deposits
                
                
                81.74%
                
                
                80.10%
                
                
                80.63%
                
                
                80.88%
                
                
                85.65%
                
                
                92.82%
                
                
                91.91%Net
                    Income
                
                $
                975
                
                $
                876
                
                $
                1,162
                
                $
                1,193
                
                $
                1,353
                
                $
                1,417
                
                $
                1,606Earnings
                    Per Share:Basic
                
                $
                0.26
                
                $
                0.22
                
                $
                0.29
                
                $
                0.30
                
                $
                0.33
                
                $
                0.35
                
                $
                0.39Diluted
                
                $
                0.24
                
                $
                0.20
                
                $
                0.27
                
                $
                0.28
                
                $
                0.31
                
                $
                0.33
                
                $
                0.37Outstanding
                    Shares:Basic
                
                
                3,743,258
                
                
                3,980,382
                
                
                3,987,768
                
                
                3,999,395
                
                
                4,007,309
                
                
                4,053,900
                
                
                4,111,714Diluted
                
                
                4,033,538
                
                
                4,282,901
                
                
                4,272,027
                
                
                4,279,079
                
                
                4,306,783
                
                
                4,305,622
                
                
                4,349,899
  *The
        efficiency ratio is defined as total non-interest expense as a percent of
        the
        combined net interest income plus non-interest income.
 
 Certainly,
        one of the Company’s most notable events was the acquisition of Hacienda Bank
        that took place on October 31, 2003. This acquisition was the culmination
        of
        many years effort to have a greater presence in the city of Santa Maria.
        In
        reviewing market share data (provided by the FDIC as of June every year)
        within
        the Company’s primary service area of San Luis Obispo and Northern Santa Barbara
        counties, it was very clear that the city of Santa Maria with 28% of the
        total
        deposit base provided opportunity for growth. In order to obtain more market
        share, the Company needed a greater presence than the existing one branch
        office
        that was opened in 1999. The Company views this acquisition as a positive
        step
        to enhancing market share and shareholder return. Initially, the Company
        anticipated that the acquisition would be accretive to earnings in the fourth
        quarter of 2004. However, the acquisition became accretive to diluted earnings
        per share for the three months ending June 30, 2004 and subsequent quarters.
 
 In
        1999,
        Heritage put into action a Corporate Culture Survey that allows employees
        to
        respond anonymously to nearly 100 questions regarding communication, training,
        management effectiveness and many other pertinent areas. This survey is
        conducted annually during the fourth quarter. The results of the survey provide
        Senior Management and the Board with information that assists in future
        endeavors to address areas where there is an opportunity to improve. During
        the
        past five years, the overall “rating” has shown measured improvement. Senior
        Management and the Board of Directors consider this to be one of the most
        important achievements for the Company.
 
 Page
            15
 The
        Company continues to focus on increased market share in each city within
        its
        primary market area. In 2002, marketing plans were initiated to reach the
        long
        term goal of at least a pro rata share of deposits in each market. Measured
        calling programs for both lending and operational staff have been implemented
        utilizing among other resources a Customer Relationship Management (CRM)
        system.
        While competition remains robust in the Central Coast with numerous independent
        banks headquartered here and the typical plethora of major financial
        institutions, the Company believes that our unique corporate culture that
        concentrates on our staff will ultimately be our best tool to accomplish
        our
        market share goals. From June 1998 to June 2004, the Company’s market share in
        San Luis Obispo County grew from 5.9% to 7.5%. This growth represented a
        move
        from the eighth position among fifteen other commercial banks to fourth among
        fourteen commercial banks. The Compound Annual Growth Rate (CAGR) for the
        Company over a ten year period (1994 through 2004) was 20.6% compared to
        a CAGR
        of 6.4% for total deposits in San Luis Obispo County.
 
 In
        July
        2003, the Bank purchased a property immediately adjacent to its Headquarters
        facility. It is the intention to build approximately 20,000 square feet of
        office space to house all administrative functions of the Company. Completion
        of
        the project is anticipated to be late in the first quarter of 2006.
 
 On
        September 27, 2004, the Company commenced trading under the symbol HEOP on
        the
        Nasdaq SmallCap Market.
 
 In
        early
        October 2004, the Bank began the process of converting the previous Hacienda
        Bank computer systems and changing the name from Hacienda Bank, a Division
        of
        Heritage Oaks Bank to the Bank’s. The computer conversion took place on March 4,
        2005. At that same time, the Bank relocated its original branch office in
        Santa
        Maria to one of the acquired branch locations. These two branch offices were
        located within one mile of one another. The Bank is in the process of
        sub-leasing the vacated facility. The underlying lease expires in October
        2008.
 
 In
        July
        2005, the Company finalized a sale/leaseback of the Atascadero Branch Office
        real property. The property was sold to a non affiliated party for the appraised
        value. A five year lease with four five year options to renew was executed
        and
        became effective July 15, 2005. The triple net lease cost of $1.43 per square
        foot is consistent with market rates and the appraisal. The gain on sale
        of the
        property of approximately $283 thousand will be amortized over a period of
        five
        years and is not considered to be material to the net income of the Company.
 
 Local
        Economy
 
 The
        economy in the Company’s service area is based primarily on agriculture,
        tourism, light industry, oil and retail trade. Services supporting these
        industries have also developed in the areas of medical, financial and
        educational. The Company’s primary market area consists of the following four
        distinct areas:
 
 1.
              Our
                  Growing Home Market
 San
        Luis
        Obispo County
 Paso
        Robles with two branches and Atascadero
 -
              Small
                  Town environment with transitioning culture and diverse
                  industry
 -
              A
                  pocket of relatively affordable housing and one of California’s least
                  populated Coastal Communities
 -
              Halfway
                  between SF and LA on US 101 and the main Hwy 46 corridor to the
                  coast from
                  rapidly growing Fresno and
                  Bakersfield
 
 2.
              The
                  Progressive Village
 San
        Luis
        Obispo
 San
        Luis
        Obispo County
 -
              California
                  State Polytechnic University that is tops in the nation and in
                  the Ca
                  State University System
 -
              Booming
                  Real Estate Market with a highly attractive mix of Culture, Country
                  and
                  coast
 -
              Dynamic
                  environment of growth and cultural
                  evolution
  Page
            16
  3.
              The
                  Gold Coast
 San
        Luis
        Obispo County
 Cambria,
        San Simeon, Morro Bay, Pismo and Arroyo Grande
 -
              Some
                  of the finest and most underdeveloped and accessible coastline
                  left in
                  California
 -
              At
                  the terminus of Hwy 46 from the Central Valley, these enclaves
                  have
                  attracted second home investment by many living in growing Fresno,
                  Bakersfield and other Valley
                  communities
 -
              All
                  the ingredients intact for economic transition and
                  development
 
 4.
              Sideways
                  Country
 Northern
        Santa Barbara County
 Santa
        Maria, Orcutt
 -
              Combination
                  of family communities, resort destinations and agricultural
                  zones
 -
              Largest
                  developable coastal area in the
                  region
 -
              Santa
                  Maria is the largest city in the Central Coast
                  Region
 
 The
        population of San Luis Obispo County and the City of Santa Maria (in Northern
        Santa Barbara County) totaled 258,200 and 85,000, respectively, according
        to
        recent economic data provided by local county and title company sources.
        The
        moderate climate allows a year round growing season for numerous vegetables
        and
        fruits. Vineyards and cattle ranches also contribute largely to the local
        economy. Vineyards in production have grown significantly over the past several
        years throughout the Company’s service area. Access to numerous recreational
        activities, including lakes, mountains and beaches, provide a relatively
        stable
        tourist industry from many areas including the Los Angeles/Orange County
        basin,
        the San Francisco Bay area and the San Joaquin Valley. Principally due to
        the
        diversity of the various industries in the Company’s service area, the area,
        while not immune from economic fluctuations, does tend to enjoy a more stable
        level of economic activity from many other areas of California.
 
 Critical
        Accounting Policies
 
 The
        Company’s significant accounting policies are set forth in the 2004 Annual
        Report, Note 1 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, which was
        filed on Form 10-KSB.
 
 The
        following is a brief description of our current accounting policies involving
        significant management valuation judgments.
 
 Allowance
        for Loan and Lease Losses
 The
        Company considers its policy regarding the allowance for loan losses to be
        its
        most critical accounting policy, because it requires management's most
        subjective and complex judgments. In addition, changes in economic conditions
        can have a significant impact on the allowance for loan losses and therefore
        the
        provision for loan losses and results of operations. The Company has developed
        appropriate policies and procedures for assessing the adequacy of the allowance
        for loan losses, recognizing that this process requires a number of assumptions
        and estimates with respect to its loan portfolio. The Company's assessments
        may
        be impacted in future periods by changes in economic conditions, the impact
        of
        regulatory examinations, and the discovery of information with respect to
        borrowers, which is not known to management at the time of the issuance of
        the
        consolidated financial statements.
 
 The
        allowance for loan and lease losses represents management’s best estimate of
        losses inherent in the existing loan portfolio. The allowance for loan and
        lease
        losses is increased by the provision for loan and lease losses charged to
        expense and reduced by loans charged-off, net of recoveries. The allowance
        for
        loan and lease losses is determined based on management’s assessment of several
        factors: reviews and evaluation of individual loans, changes in the nature
        and
        volume of the loan portfolio, current economic conditions and the related
        impact
        on specific borrowers and industry groups, historical loan loss experiences
        and
        the level of classified and nonperforming loans.
 
 Page
            17
 Loans
        are
        considered impaired if, based on current information and events, it is probable
        that we will be unable to collect the scheduled payments of principal or
        interest when due according to the contractual terms of the loan agreement.
        The
        measurement of impaired loans is generally based on the present value of
        expected future cash flows discounted at the historical effective interest
        rate
        stipulated in the loan agreement, except that all collateral-dependent loans
        are
        measured for impairment based on the fair value of the collateral. In measuring
        the fair value of the collateral, management uses assumptions and methodologies
        consistent with those that would be utilized by unrelated third parties.
  Changes
        in the financial condition of individual borrowers, economic conditions,
        historical loss experience and the condition of the various markets in which
        collateral may be sold may all affect the required level of the allowance
        for
        loan and lease losses and the associated provision for loan and lease losses.
 
 Securities
        Available for Sale
 The
        fair
        value of most securities that are designated available for sale are based
        on
        quoted market prices. If quoted market prices are not available, fair values
        are
        extrapolated from the quoted prices of similar instruments.
 
 Goodwill
        and Other Intangible Assets
 As
        discussed in the 2004 Annual Report, Note 6 of the NOTES TO CONSOLIDATED
        FINANCIAL STATEMENTS, we assess goodwill and other intangible assets each
        year
        for impairment. The Company determined that there was no impairment at December
        31, 2004.
 
 RESULTS
        OF OPERATIONS
 
 Earnings
        Overview
 
 The
        Company reported net income for the three months ended June 30, 2005 of $1.6
        million compared to $1.1 million during the same period in 2004. This represents
        an increase of 38%. Basic earnings per share for the three months ended June
        30,
        2005 and June 30, 2004, were $.39 and $.29, respectively. Diluted earnings
        per
        share for the three months ended June 30, 2005 and June 30, 2004, were $.37
        and
        $.27, respectively.
 
 The
        Company reported net income for the six months ended June 30, 2005 of $3.0
        million compared to $2.0 million during the same period in 2004. This represents
        an increase of 48%. Basic earnings per share for the six months ended June
        30,
        2005 and June 30, 2004, were $.74 and $.51, respectively. Diluted earnings
        per
        share for the six months ended June 30, 2005 and June 30, 2004, were $.70
        and
        $.48, respectively.
 
 Net
        Interest Income and Interest Margin
 
 Net
        interest income, the primary component of the net earnings of a financial
        institution, refers to the difference between the interest paid on deposits
        and
        borrowings, and the interest earned on loans and investments. The net interest
        margin is the amount of net interest income expressed as a percentage of
        average
        earning assets. Factors considered in the analysis of net interest income
        are
        the composition and volume of earning assets and interest-bearing liabilities,
        the amount of non-interest bearing liabilities and non-accrual loans, and
        changes in market interest rates.
 
 Page
            18
  The
        table
        below sets forth changes for the three and six months ended June 30, 2005
        compared to the same period in 2004 in regard to volume and rate associated
        with
        interest earning assets and interest bearing deposits.
 
 Analysis
                    of Changes in Net Interest Income (in thousands)Three
                    months ended
                
                Six
                    months endedJune
                    30. 2005 over 2004
                
                June
                    30. 2005 over 2004Volume
                
                Rate
                
                Total
                
                Volume
                
                Rate
                
                TotalInterest
                    income:Loans
                    (1)
                
                $
                928
                
                $
                535
                
                $
                1,463
                
                $
                1,997
                
                $
                753
                
                $
                2,750Investment
                    securities taxable
                
                
                (152
                )
                
                108
                
                
                (44
                )
                
                (192
                )
                
                81
                
                
                (111
                )Investment
                    securities non-taxable (2):
                
                
                30
                
                
                6
                
                
                36
                
                
                66
                
                
                (11
                )
                
                55Taxable
                    equivalent adjustment (2):
                
                
                (10
                )
                
                (2
                )
                
                (12
                )
                
                (22
                )
                
                4
                
                
                (18
                )Interest-bearing
                    deposits
                
                
                2
                
                
                -
                
                
                2
                
                
                20
                
                
                (1
                )
                
                19Federal
                    funds sold
                
                
                14
                
                
                2
                
                
                16
                
                
                20
                
                
                (5
                )
                
                15Net
                    increase (decrease)
                
                
                812
                
                
                649
                
                
                1,461
                
                
                1,889
                
                
                821
                
                
                2,710Interest
                    expense:Savings,
                    now, money market
                
                
                (27
                )
                
                245
                
                
                218
                
                
                1,549
                
                
                (1,230
                )
                
                319Time
                    deposits
                
                
                23
                
                
                69
                
                
                92
                
                
                42
                
                
                60
                
                
                102Other
                    borrowings
                
                
                (8
                )
                
                (48
                )
                
                (56
                )
                
                2
                
                
                (98
                )
                
                (96
                )Long
                    term borrowings
                
                
                -
                
                
                37
                
                
                37
                
                
                -
                
                
                59
                
                
                59Net
                    increase (decrease)
                
                
                (12
                )
                
                303
                
                
                291
                
                
                1,593
                
                
                (1,209
                )
                
                384Total
                    net increase (decrease)
                
                $
                824
                
                $
                346
                
                $
                1,170
                
                $
                296
                
                $
                2,030
                
                $
                2,326
 
 (1)
          Loan
          fees of $333 and $272 for the three months ending June 30, 2005 and 2004
          ,
          respectively, and loan fees of $686 and $492 for the six months ending
          June 30,
          2005 and 2004, respectively been included in the interest income
          computation.
 (2)
          Adjusted to a fully taxable equivalent basis using a tax rate of
          34%.
  Note
          A:
          Average balances of all categories in each period were included in the
          volume
          computations.
 Note
          B:
          Average yield rates in each period were used in rate computations. Change
          attributable to both volume and rate have been allocated in proportion
          to the
          relationship between their absolute dollar amounts.
 The
        tables below sets forth changes for the three and six months ending June
        30,
        2005 compared to the same periods in 2004 for average interest earning assets
        and their respective average yields.
  Average
                    Balance
                
                
                
                
                
                Average
                    Yieldfor
                    the three months ending
                
                
                
                
                
                for
                    the three months ending(dollars
                    in thousands)
                
                June
                    30,
                
                $
                
                %
                
                June
                    30,Interest
                    Earning Assets:
                
                2005
                
                2004
                
                Variance
                
                Variance
                
                2005
                
                2004
                
                VarianceTime
                    deposits with other banks
                
                $
                452
                
                $
                803
                
                $
                (351
                )
                
                -43.71
                %
                
                3.55
                %
                
                1.00
                %
                
                2.55
                %Investment
                    securities taxable
                
                
                40,529
                
                
                49,535
                
                
                (9,006
                )
                
                -18.18
                %
                
                3.96
                %
                
                3.60
                %
                
                0.36
                %Investment
                    securities non-taxable
                
                
                13,042
                
                
                11,182
                
                
                1,860
                
                
                16.63
                %
                
                4.37
                %
                
                4.23
                %
                
                0.14
                %Federal
                    funds sold
                
                
                12,736
                
                
                31,981
                
                
                (19,245
                )
                
                -60.18
                %
                
                3.12
                %
                
                1.04
                %
                
                2.08
                %Loans
                    (1) (2)
                
                
                356,686
                
                
                304,063
                
                
                52,623
                
                
                17.31
                %
                
                7.30
                %
                
                6.64
                %
                
                0.66
                %Total
                    interest earning assets
                
                $
                423,445
                
                $
                397,564
                
                $
                25,881
                
                
                6.51
                %
                
                6.76
                %
                
                5.73
                %
                
                1.03
                %
 
 Average
                    Balance
                
                
                
                
                
                Average
                    Yieldfor
                    the six months ending
                
                
                
                
                
                for
                    the six months ending(dollars
                    in thousands)
                
                June
                    30,
                
                $
                
                %
                
                June
                    30,Interest
                    Earning Assets:
                
                2005
                
                2004
                
                Variance
                
                Variance
                
                2005
                
                2004
                
                VarianceTime
                    deposits with other banks
                
                $
                1,221
                
                $
                498
                
                $
                723
                
                
                145.18
                %
                
                3.96
                %
                
                2.02
                %
                
                1.94
                %Investment
                    securities taxable
                
                
                42,494
                
                
                48,177
                
                
                (5,683
                )
                
                -11.80
                %
                
                3.77
                %
                
                3.79
                %
                
                -0.02
                %Investment
                    securities non-taxable
                
                
                13,053
                
                
                11,151
                
                
                1,902
                
                
                17.06
                %
                
                4.37
                %
                
                4.45
                %
                
                -0.08
                %Federal
                    funds sold
                
                
                12,185
                
                
                31,069
                
                
                (18,884
                )
                
                -60.78
                %
                
                2.80
                %
                
                1.00
                %
                
                1.80
                %Loans
                    (1) (2)
                
                
                350,626
                
                
                293,921
                
                
                56,705
                
                
                19.29
                %
                
                7.26
                %
                
                6.77
                %
                
                0.49
                %Total
                    interest earning assets
                
                $
                419,579
                
                $
                384,816
                
                $
                34,763
                
                
                9.03
                %
                
                6.67
                %
                
                5.86
                %
                
                0.81
                %
  Page
              19
  The
        Company has been able to grow the loan portfolio with continued market
        penetration by a team of seasoned loan officers who are compensated for
        production. The growth in the loan portfolio for both the three and six months
        ending June 30, 2005 was achieved under the Company’s established Loan Policy.
        For the three month and six months ending June 30, 2005 compared to the same
        period in 2004, the average yield on loans improved by 66 and 49 basis points,
        respectively. This has been primarily due to action by the Federal Reserve
        Bank
        of raising rates by 225 basis points from June 2004 through June 30 2005.
        See
“Item 3. Quantitative and Qualitative Disclosure about Market Risk” for further
        discussion.
 
 Other
        than loans and the tax-exempt portion of the investment portfolio all other
        categories of interest earning assets decreased and provided funds for the
        robust loan demand. Since there is significant room to grow in tax-exempts
        before bumping up against the Alternative Minimum Tax issue with the IRS
        the
        Company has increased this particular portfolio by approximately 17% in the
        past
        year. For the three months ending June 30, 2005, both the non-taxable and
        taxable investment portfolio gained in average yield due to extension caused
        by
        rising rates. Taxable investment securities decreased due to regular principal
        reductions on Mortgage Backed Securities (MBS). There were no securities
        purchased during the first six months of 2005.
 
 The
        tables below sets forth changes for the three and six months ending June
        30,
        2005 compared to the same periods in 2004 for average interest bearing
        liabilities and their respective average rates paid.
  Average
                    Balance
                
                
                
                
                
                Average
                    Ratefor
                    the three months ending
                
                
                
                
                
                for
                    the three months ending(dollars
                    in thousands)
                
                June
                    30,
                
                $
                
                %
                
                June
                    30,Interest
                    bearing liabilities:
                
                2005
                
                2004
                
                Variance
                
                Variance
                
                2005
                
                2004
                
                VarianceSavings/NOW/money
                    market
                
                $
                163,949
                
                $
                156,309
                
                $
                7,640
                
                
                4.89
                %
                
                0.92
                %
                
                0.40
                %
                
                0.52
                %Time
                    deposits
                
                
                60,320
                
                
                72,502
                
                
                (12,182
                )
                
                -16.80
                %
                
                2.43
                %
                
                1.52
                %
                
                0.91
                %Other
                    borrowings
                
                
                28,944
                
                
                32,716
                
                
                (3,772
                )
                
                -11.53
                %
                
                3.30
                %
                
                3.63
                %
                
                -0.33
                %FF
                    Purchased
                
                
                107
                
                
                0
                
                
                107
                
                
                100.00
                %
                
                3.75
                %
                
                0.00
                %
                
                3.75
                %Long
                    Term Debt
                
                
                8,248
                
                
                8,248
                
                
                -
                
                
                0.00
                %
                
                6.95
                %
                
                5.15
                %
                
                1.80
                %Total
                    interest-bearing liabilities
                
                $
                261,568
                
                $
                269,775
                
                $
                (8,207
                )
                
                -3.04
                %
                
                1.72
                %
                
                1.24
                %
                
                0.48
                %
 
 Average
                    Balance
                
                
                
                
                
                Average
                    Ratefor
                    the six months ending
                
                
                
                
                
                for
                    the six months ending(dollars
                    in thousands)
                
                June
                    30,
                
                $
                
                %
                
                June
                    30,Interest
                    bearing liabilities:
                
                2005
                
                2004
                
                Variance
                
                Variance
                
                2005
                
                2004
                
                VarianceSavings/NOW/money
                    market
                
                $
                164,807
                
                $
                154,345
                
                $
                10,462
                
                
                6.78
                %
                
                0.77
                %
                
                0.40
                %
                
                0.37
                %Time
                    deposits
                
                
                60,519
                
                
                73,218
                
                
                (12,699
                )
                
                -17.34
                %
                
                2.26
                %
                
                1.59
                %
                
                0.67
                %Other
                    borrowings
                
                
                32,548
                
                
                32,523
                
                
                25
                
                
                0.08
                %
                
                3.29
                %
                
                3.92
                %
                
                -0.63
                %FF
                    Purchased
                
                
                293
                
                
                0
                
                
                293
                
                
                100.00
                %
                
                3.44
                %
                
                0.00
                %
                
                3.44
                %Long
                    Term Debt
                
                
                8,248
                
                
                8,248
                
                
                -
                
                
                0.00
                %
                
                6.53
                %
                
                5.09
                %
                
                1.44
                %Total
                    interest-bearing liabilities
                
                $
                266,415
                
                $
                268,334
                
                $
                (1,919
                )
                
                -0.72
                %
                
                1.60
                %
                
                1.30
                %
                
                0.30
                %
 The
        Company continues to enjoy a low cost of funds, specifically in regard to
        interest bearing deposits. The ability to attract low cost deposits is part
        of
        the Company’s marketing plans that have been in place for numerous years. While
        this remains Management’s main objective, in February 2005 the company
        implemented a Time Deposit/Money Market promotion to run for a period of
        approximately 60 days. This was done to provide appropriate liquidity for
        current and anticipated loan funding. This has resulted in an increase in
        deposit costs.
 
 From
        June
        2004 through June 2005, the Federal Reserve Bank increased rates by a total
        of
        225 basis points. Due to the asset sensitive nature of the Company’s balance
        sheet, these increases, coupled with the Company’s substantial volume of
        non-interest bearing deposits and low average rates on interest bearing
        deposits, are the primary factors for the increase in net interest
        margin.
 
 Page
            20
 For
        the
        three months ending June 30, 2005 compared to the same period in 2004, the
        Company was able to increase the Net Interest Margin as the result of an
        increase of 103 basis points in average yield on average interest earning
        assets
        while the average yield on average interest earning liabilities increased
        by
        only 48 basis points.
  **AVERAGE
                      BALANCE SHEET INFORMATION**
  **(dollars
                      in thousands)**
                  
                  **For
                      the three months ending June 30,**
                  
                  **For
                      the six months ending June 30,****2005**
                  
                  
                  
                  
                  
                  **2004**
                  
                  
                  
                  
                  
                  **2005**
                  
                  
                  
                  
                  
                  **2004****Avg.**
                  
                  **Yield/**
                  
                  **Amt.**
                  
                  **Avg.**
                  
                  **Yield/**
                  
                  **Amt.**
                  
                  **Avg.**
                  
                  **Yield/**
                  
                  **Amt.**
                  
                  **Avg.**
                  
                  **Yield/**
                  
                  **Amt.**Interest
                      Earning Assets:
                  
                  **Balance**
                  
                  **Rate**
                  
                  **Interest**
                  
                  **Balance**
                  
                  **Rate**
                  
                  **Interest**
                  
                  **Balance**
                  
                  **Rate**
                  
                  **Interest**
                  
                  **Balance**
                  
                  **Rate**
                  
                  **Interest**Time
                      deposits with other banks
                  
                  $
                  452
                  
                  
                  3.55%
                  
                  $
                  4
                  
                  $
                  803
                  
                  
                  1.00%
                  
                  $
                  2
                  
                  $
                  1,221
                  
                  
                  3.96%
                  
                  $
                  24
                  
                  $
                  498
                  
                  
                  2.02%
                  
                  $
                  5Investment
                      securities taxable
                  
                  
                  40,529
                  
                  
                  3.96%
                  
                  
                  400
                  
                  
                  49,535
                  
                  
                  3.60%
                  
                  
                  444
                  
                  
                  42,494
                  
                  
                  3.77%
                  
                  
                  795
                  
                  
                  48,177
                  
                  
                  3.79%
                  
                  
                  906Investment
                      securities non-taxable
                  
                  
                  13,042
                  
                  
                  4.37%
                  
                  
                  142
                  
                  
                  11,182
                  
                  
                  4.23%
                  
                  
                  118
                  
                  
                  13,053
                  
                  
                  4.37%
                  
                  
                  283
                  
                  
                  11,151
                  
                  
                  4.45%
                  
                  
                  246Federal
                      funds sold
                  
                  
                  12,736
                  
                  
                  3.12%
                  
                  
                  99
                  
                  
                  31,981
                  
                  
                  1.04%
                  
                  
                  83
                  
                  
                  12,185
                  
                  
                  2.80%
                  
                  
                  169
                  
                  
                  31,069
                  
                  
                  1.00%
                  
                  
                  154Loans
                      (1) (2)
                  
                  
                  356,686
                  
                  
                  7.30%
                  
                  
                  6,494
                  
                  
                  304,063
                  
                  
                  6.64%
                  
                  
                  5,031
                  
                  
                  350,626
                  
                  
                  7.26%
                  
                  
                  12,616
                  
                  
                  293,921
                  
                  
                  6.77%
                  
                  
                  9,866Total
                      interest earning assets
                  
                  
                  423,445
                  
                  
                  6.76%
                  
                  
                  7,139
                  
                  
                  397,564
                  
                  
                  5.73%
                  
                  
                  5,678
                  
                  
                  419,579
                  
                  
                  6.67%
                  
                  
                  13,887
                  
                  
                  384,816
                  
                  
                  5.86%
                  
                  
                  11,177Allowance
                      for possible loan losses
                  
                  
                  (3,479
                  )
                  
                  
                  
                  
                  
                  
                  
                  (3,100
                  )
                  
                  
                  
                  
                  
                  
                  
                  (3,403
                  )
                  
                  
                  
                  
                  
                  
                  
                  (3,133
                  )Other
                      assets
                  
                  
                  48,386
                  
                  
                  
                  
                  
                  
                  
                  
                  61,867
                  
                  
                  
                  
                  
                  
                  
                  
                  47,351
                  
                  
                  
                  
                  
                  
                  
                  
                  59,345TOTAL
                      ASSETS
                  
                  $
                  468,352
                  
                  
                  
                  
                  
                  
                  
                  $
                  456,331
                  
                  
                  
                  
                  
                  
                  
                  $
                  463,527
                  
                  
                  
                  
                  
                  
                  
                  $
                  441,028Interest
                      -bearing liabilities:Savings/NOW/money
                      market
                  
                  
                  163,949
                  
                  
                  0.92%
                  
                  
                  375
                  
                  
                  156,309
                  
                  
                  0.40%
                  
                  
                  157
                  
                  
                  164,807
                  
                  
                  0.77%
                  
                  
                  626
                  
                  
                  154,345
                  
                  
                  0.40%
                  
                  
                  307Time
                      deposits
                  
                  
                  60,320
                  
                  
                  2.43%
                  
                  
                  366
                  
                  
                  72,502
                  
                  
                  1.52%
                  
                  
                  274
                  
                  
                  60,519
                  
                  
                  2.26%
                  
                  
                  679
                  
                  
                  73,218
                  
                  
                  1.59%
                  
                  
                  577Other
                      borrowings
                  
                  
                  28,944
                  
                  
                  3.31%
                  
                  
                  239
                  
                  
                  32,716
                  
                  
                  3.63%
                  
                  
                  296
                  
                  
                  32,548
                  
                  
                  3.29%
                  
                  
                  531
                  
                  
                  32,523
                  
                  
                  3.92%
                  
                  
                  632FF
                      Purchased
                  
                  
                  107
                  
                  
                  3.75%
                  
                  
                  1
                  
                  
                  0
                  
                  
                  0.00%
                  
                  
                  -
                  
                  
                  293
                  
                  
                  3.44%
                  
                  
                  5
                  
                  
                  -
                  
                  
                  0.00%
                  
                  
                  -Long
                      Term Debt
                  
                  
                  8,248
                  
                  
                  6.95%
                  
                  
                  143
                  
                  
                  8,248
                  
                  
                  5.15%
                  
                  
                  106
                  
                  
                  8,248
                  
                  
                  6.53%
                  
                  
                  267
                  
                  
                  8,248
                  
                  
                  5.09%
                  
                  
                  208Total
                      interest-bearing liabilities
                  
                  
                  261,568
                  
                  
                  1.72%
                  
                  
                  1,124
                  
                  
                  269,775
                  
                  
                  1.24%
                  
                  $
                  833
                  
                  
                  266,415
                  
                  
                  1.60%
                  
                  
                  2,108
                  
                  
                  268,334
                  
                  
                  1.30%
                  
                  
                  1,724Demand
                      deposits
                  
                  
                  163,817
                  
                  
                  
                  
                  
                  
                  
                  
                  149,763
                  
                  
                  
                  
                  
                  
                  
                  
                  154,684
                  
                  
                  
                  
                  
                  
                  
                  
                  136,948Other
                      liabilities
                  
                  
                  2,665
                  
                  
                  
                  
                  
                  
                  
                  
                  2,672
                  
                  
                  
                  
                  
                  
                  
                  
                  3,042
                  
                  
                  
                  
                  
                  
                  
                  
                  2,322Stockholders'
                      equityCommon
                      stock
                  
                  
                  28,639
                  
                  
                  
                  
                  
                  
                  
                  
                  23,797
                  
                  
                  
                  
                  
                  
                  
                  
                  27,121
                  
                  
                  
                  
                  
                  
                  
                  
                  22,249Retained
                      earnings
                  
                  
                  11,652
                  
                  
                  
                  
                  
                  
                  
                  
                  10,108
                  
                  
                  
                  
                  
                  
                  
                  
                  12,191
                  
                  
                  
                  
                  
                  
                  
                  
                  11,116Valuation
                      Allowance Investments
                  
                  
                  11
                  
                  
                  
                  
                  
                  
                  
                  
                  216
                  
                  
                  
                  
                  
                  
                  
                  
                  74
                  
                  
                  
                  
                  
                  
                  
                  
                  59Total
                      stockholders' equity
                  
                  
                  40,302
                  
                  
                  
                  
                  
                  
                  
                  
                  34,121
                  
                  
                  
                  
                  
                  
                  
                  
                  39,386
                  
                  
                  
                  
                  
                  
                  
                  
                  33,424TOTAL
                      LIABILITIES AND STOCKHOLDERS'EQUITY
                  
                  $
                  468,352
                  
                  
                  
                  
                  
                  
                  
                  $
                  456,331
                  
                  
                  
                  
                  
                  
                  
                  $
                  463,527
                  
                  
                  
                  
                  
                  
                  
                  $
                  441,028Net
                      Interest Income
                  
                  
                  
                  
                  
                  
                  
                  $
                  6,015
                  
                  
                  
                  
                  
                  
                  
                  $
                  4,845
                  
                  
                  
                  
                  
                  
                  
                  $
                  11,779
                  
                  
                  
                  
                  
                  
                  
                  $
                  9,453Net
                      Interest Margin (3)
                  
                  
                  
                  
                  
                  5.68%
                  
                  
                  
                  
                  
                  
                  
                  
                  4.87%
                  
                  
                  
                  
                  
                  
                  
                  
                  5.61%
                  
                  
                  
                  
                  
                  
                  
                  
                  4.91%
  **Nonaccrual
          loans have been included in total loans.**
 **Loan
          fees of $333 and $272 for the three months ending June 30, 2005 and 2004
          ,
          respectively, and loan fees of $686 and $492 for the six months ending
          June 30,
          2005 and 2004, respectively been included in the interest income
          computation.**
 **Net
          interest income has been calculated by dividing the net interest income
          by total
          average earning assets.**
 
 Page
              21
  Non-Interest
        Income
 
 The
        tables below set forth changes for the three and six months ending June 30,
        2005
        compared to the same period in 2004 for non-interest income excluding loss
        on
        sale of investment.
  Non-Interest
                        Income Components**For
                        Three Months Ended****June
                        30,****(dollars
                        in thousands)**
                    
                    **2005**
                    
                    **2004**
                    
                    **$
                        Variance**
                    
                    **%
                        Variance**Service
                        Charges on Deposit Accounts
                    
                    $
                    632
                    
                    $
                    589
                    
                    $
                    43
                    
                    
                    7.3
                    %ATM/Debit
                        Card Transaction/Interchange Fees
                    
                    
                    145
                    
                    
                    153
                    
                    
                    (8
                    )
                    
                    -5.2
                    %Bancard
                    
                    
                    39
                    
                    
                    33
                    
                    
                    6
                    
                    
                    18.2
                    %Mortgage
                        Origination Fees
                    
                    
                    226
                    
                    
                    198
                    
                    
                    28
                    
                    
                    14.1
                    %Earnings
                        on Cash Surrender Value Life Ins
                    
                    
                    79
                    
                    
                    80
                    
                    
                    (1
                    )
                    
                    -1.3
                    %Other
                    
                    
                    146
                    
                    
                    106
                    
                    
                    40
                    
                    
                    37.7
                    %**TOTAL**
                    
                    **$**
                    **1,267**
                    
                    **$**
                    **1,159**
                    
                    **$**
                    **108**
                    
                    
                    **9.3**
                    **%**
   **For
                        Six Months Ended****June
                        30,****(dollars
                        in thousands)**
                    
                    
                    **2005**
                    
                    
                    **2004**
                    
                    **$**
                    **Variance**
                    
                    
                    **%
                        Variance**Service
                        Charges on Deposit Accounts
                    
                    $
                    1,171
                    
                    $
                    1,098
                    
                    $
                    73
                    
                    
                    6.6
                    %ATM/Debit
                        Card Transaction/Interchange Fees
                    
                    
                    293
                    
                    
                    278
                    
                    
                    15
                    
                    
                    5.4
                    %Bancard
                    
                    
                    71
                    
                    
                    58
                    
                    
                    13
                    
                    
                    22.4
                    %Mortgage
                        Origination Fees
                    
                    
                    423
                    
                    
                    377
                    
                    
                    46
                    
                    
                    12.2
                    %Earnings
                        on Cash Surrender Value Life Ins
                    
                    
                    151
                    
                    
                    160
                    
                    
                    (9
                    )
                    
                    -5.6
                    %Other
                    
                    
                    290
                    
                    
                    223
                    
                    
                    67
                    
                    
                    30.0
                    %**TOTAL**
                    
                    **$**
                    **2,399**
                    
                    **$**
                    **2,194**
                    
                    **$**
                    **205**
                    
                    
                    **9.3**
                    **%**
 
 Mortgage
        origination fee income remains strong as we continue to experience favorable
        long term rates in the current flat yield curve environment. Service charges
        on
        deposit accounts have improved due to the growth of transactional deposit
        accounts.
 
 Page
            22
  Non-Interest
        Expenses
 
 The
        tables below set forth changes for the three and six months ending June 30,
        2005
        compared to the same period in 2004 for non-interest expense.
  Non-Interest
                      Expense Components**For
                      Three Months Ended****June
                      30,****(dollars
                      in thousands)**
                  
                  **2005**
                  
                  **2004**
                  
                  **$
                      Variance**
                  
                  **%
                      Variance**Salaries
                      and Employee Benefits
                  
                  $
                  2,408
                  
                  $
                  2,128
                  
                  $
                  280
                  
                  
                  13.2
                  %Occupany
                      and Equipment
                  
                  
                  640
                  
                  
                  628
                  
                  
                  12
                  
                  
                  1.9
                  %Data
                      Processing
                  
                  
                  538
                  
                  
                  491
                  
                  
                  47
                  
                  
                  9.6
                  %Advertising
                      and promotional
                  
                  
                  137
                  
                  
                  123
                  
                  
                  14
                  
                  
                  11.4
                  %Regulatory
                      fees
                  
                  
                  25
                  
                  
                  33
                  
                  
                  (8
                  )
                  
                  -24.2
                  %Other
                      professional fees and outside services
                  
                  
                  186
                  
                  
                  125
                  
                  
                  61
                  
                  
                  48.8
                  %Legal
                      fees and other litigation expense
                  
                  
                  21
                  
                  
                  32
                  
                  
                  (11
                  )
                  
                  -34.4
                  %Loan
                      Department Costs
                  
                  
                  29
                  
                  
                  43
                  
                  
                  (14
                  )
                  
                  -32.6
                  %Stationery
                      and supplies
                  
                  
                  80
                  
                  
                  95
                  
                  
                  (15
                  )
                  
                  -15.8
                  %Director
                      fees
                  
                  
                  52
                  
                  
                  57
                  
                  
                  (5
                  )
                  
                  -8.8
                  %Core
                      Deposit Intangible Amortization
                  
                  
                  143
                  
                  
                  106
                  
                  
                  37
                  
                  
                  34.9
                  %Other
                  
                  
                  304
                  
                  
                  274
                  
                  
                  30
                  
                  
                  10.9
                  %**$**
                  **4,563**
                  
                  **$**
                  **4,135**
                  
                  **$**
                  **428**
                  
                  
                  **10.4**
                  **%**
   **For
                      Six Months Ended****June
                      30,****(dollars
                      in thousands)**
                  
                  **2005**
                  
                  **2004**
                  
                  **$
                      Variance**
                  
                  **%
                      Variance**Salaries
                      and Employee Benefits
                  
                  $
                  4,656
                  
                  $
                  4,174
                  
                  $
                  482
                  
                  
                  11.5
                  %Occupany
                      and Equipment
                  
                  
                  1,252
                  
                  
                  1,263
                  
                  
                  (11
                  )
                  
                  -0.9
                  %Data
                      Processing
                  
                  
                  1,117
                  
                  
                  967
                  
                  
                  150
                  
                  
                  15.5
                  %Advertising
                      and promotional
                  
                  
                  263
                  
                  
                  292
                  
                  
                  (29
                  )
                  
                  -9.9
                  %Regulatory
                      fees
                  
                  
                  50
                  
                  
                  63
                  
                  
                  (13
                  )
                  
                  -20.6
                  %Other
                      professional fees and outside services
                  
                  
                  229
                  
                  
                  269
                  
                  
                  (40
                  )
                  
                  -14.9
                  %Legal
                      fees and other litigation expense
                  
                  
                  58
                  
                  
                  47
                  
                  
                  11
                  
                  
                  23.4
                  %Loan
                      Department Costs
                  
                  
                  71
                  
                  
                  78
                  
                  
                  (7
                  )
                  
                  -9.0
                  %Stationery
                      and supplies
                  
                  
                  166
                  
                  
                  186
                  
                  
                  (20
                  )
                  
                  -10.8
                  %Director
                      fees
                  
                  
                  106
                  
                  
                  115
                  
                  
                  (9
                  )
                  
                  -7.8
                  %Core
                      Deposit Intangible Amortization
                  
                  
                  287
                  
                  
                  211
                  
                  
                  76
                  
                  
                  36.0
                  %Other
                  
                  
                  731
                  
                  
                  570
                  
                  
                  161
                  
                  
                  28.2
                  %**$**
                  **8,986**
                  
                  **$**
                  **8,235**
                  
                  **$**
                  **751**
                  
                  
                  **9.1**
                  **%**
 
 Salary/Related
        Expense
 Salaries
        and employee related expense incurred the greatest dollar increase of any
        non-interest expense category for the three and six months ending June 30,
        2005
        and 2004. Approximately 45% of the increase is due to the increased bonus
        accrual as the result of the outstanding record earnings for the first two
        quarters of 2005. The remaining variance is due to an overall 6% increase
        in
        salary of which, approximately 4% would relate to annual merit increases
        for
        staff.
 
 Data
        Processing Expense
 For
        the
        three months ending June 30, 2005 compared to the same period in 2004, there
        was
        an $80 thousand increase in Escrow Accounting costs related to three long-time
        deposit customers of the Bank and a $33 thousand decrease in all other
        categories of data processing expense.
 
 Provision
        for Income Taxes
 
 The
        provision for income taxes was 36.7% and 37.6% of net pre-tax income for
        the
        three months ending June 30 2005, and 2004, respectively. The provision for
        income taxes was 37.4% and 37.0% of net pre-tax income for the six months
        ending
        June 30 2005, and 2004, respectively.
 
 Page
            23
 
 FINANCIAL
        CONDITION ANALYSIS
 
 Total
        assets of the Company were $448.0 million at December 31, 2004 compared to
        $498.6 million at June 30, 2005. This represents an increase of $50.6 million
        or
        11.3%.
 
 Loans
 
 The
        table
        below sets forth changes from December 31, 2004 to June 30, 2005 for the
        composition of the loan portfolio.
  Major
                    classifications of loans were:**June
                    30,**
                
                **December
                    30,****2005**
                
                **2004**
                
                **$
                    Variance**
                
                **%
                    Variance****(in
                    thousands)**Commercial,
                    financial, and agricultural
                
                $
                62,883
                
                $
                49,584
                
                
                13,299
                
                
                26.82
                %Real
                    estate-construction
                
                
                74,603
                
                
                66,833
                
                
                7,770
                
                
                11.63
                %Commercial
                    Real Estate
                
                
                224,060
                
                
                217,473
                
                
                6,587
                
                
                3.03
                %Installment
                    loans to individuals
                
                
                5,164
                
                
                5,538
                
                
                (374
                )
                
                -6.75
                %All
                    other loans (including overdrafts)
                
                
                534
                
                
                265
                
                
                269
                
                
                101.51
                %367,244
                
                
                339,693
                
                
                27,551
                
                
                8.11
                %Less
                    - deferred loan fees, net
                
                
                (1,556
                )
                
                (1,482
                )
                
                (74
                )
                
                4.99
                %Less
                    - reserve for possible loan losses
                
                
                (3,585
                )
                
                (3,247
                )
                
                (338
                )
                
                10.41
                %Total
                    loans
                
                $
                362,103
                
                $
                334,964
                
                
                27,139
                
                
                8.10
                %Loans
                    Held For Sale
                
                $
                7,444
                
                $
                2,253
                
                
                5,191
                
                
                230.40
                %
 
 Gross
        loans grew by over 8% in the first one-half of 2005 with most of the growth
        in
        the second quarter. During the first quarter of 2005, there were numerous
        construction projects that were completed resulting in either 1) the sale
        of the
        properties and pay-downs on the outstanding loans or 2) conversion to mini-perm
        commercial real estate loans. In addition, commercial real estate loans
        experienced some early pay-off activity during the first quarter. During
        the
        second quarter numerous new loans were made on commercial properties, for
        acquisition of residential development properties and for residential and
        commercial construction.
 
 The
        increase in commercial, financial and agricultural loans is attributed primarily
        to draws on existing and new lines of credit.
 
 The
        increase in real estate-construction loans can be attributed to several new
        large construction projects and funding of existing construction projects
        during
        the period. New loans include a hotel for $6.3 million, a strip center for
        $2.2
        million, an office building for $3.3 million, a residential development for
        $3.3
        million, retail/office building for $1.4 million, additions to a strip center
        for $2.2 million, a restaurant/wine shop for $1.7 million, a retail/office
        building for $4.2 million, a motel addition for $4.3 million, a gas station
        for
        $1 million and numerous other smaller projects. Construction loans are typically
        granted for a one year period and then, with income properties, are amortized
        over not more than 25 years with 10 to 15 year maturities.
 
 The
        Bank
        presently has a concentration of loans in construction/land in the amount
        of
        $74.6 million which represents 171% of the Bank’s Total Risk Based capital. At
        June 30, 2005 there were 87 construction loans with outstanding balances
        and
        remaining commitments of approximately $52.2 million and $43 million,
        respectively. The single largest construction loan has a commitment amount
        of
        approximately $6.3 million with a balance of approximately $.6 million at
        June
        30, 2005. This is a hotel near Paso Robles, Ca. At June 30, 2005, there were
        51
        land loans with balances of approximately $22.4 million. The single largest
        land
        loan accounts for approximately $3.3 million of the total and is for a single
        family home tract development. The construction/land loans are spread throughout
        our market area and have consistently performed in a satisfactory manner.
 
 Page
            24
 The
        increase in commercial real estate loans is attributed to several of the
        construction loans moving into amortizing loans and new commercial property
        loans including an office/warehouse building for $2.1 million, a hotel for
        $4.3
        million, commercial building for $2.2 million, several new property loans
        to one
        client for $3.7 million and a commercial warehouse for $2.7 million.
 
 Hotel
        loans are not presently considered to be a concentration due to the increase
        in
        Risk based Capital. Hotel loans presently total $43.4 million, up $6.8 million
        from 2004 year end, which represents 99.25% of the Bank’s Total Risk Based
        capital. At June 30, 2005, there were 31 motel loans. The single largest
        loan
        with a balance of approximately $4.3 million was made to an upscale resort
        hotel
        located in Avila Beach, Ca. The hotel loans are also made to clients throughout
        our market. These loans have also typically paid as agreed. The Bank had
        one out
        of area hotel participation loan that was in default. This loan, in the original
        amount of $1 million, was paid down by $900 thousand in April 2004 and the
        remaining $95 thousand charged off. A small recovery of $1 thousand was received
        with no further payment expected.
 
 In
        September 2004, the Bank issued an $11.7 million irrevocable standby letter
        of
        credit to guarantee the payment of Taxable Variable Rate Demand Bonds. The
        primary purpose of the bond issue was to refinance existing debt and provide
        funds for the expansion of an assisted living facility in San Luis Obispo.
        Approximately $6.6 million of the funds have been deposited with the Bank
        with
        $5.1 million remaining. These funds are being used for capital improvements
        to
        the assisted living facility. The letter of credit will expire in September
        2007.
 
 Construction
        loan demand for both single family and commercial real estate was strong
        during
        2004 and has continued during 2005. Area home prices continue to increase
        however they remain considerably lower than the metropolitan areas to our
        North
        and South. Low mortgage rates and a multitude of financing options (interest
        only mortgages, 40 year loans, etc.) have kept many in the market. The continued
        availability of land for subdivision use also continues to drive the
        market.
 
 Business
        properties are also in demand with low vacancies and favorable loan rates.
        Commercial property values and rental rates increased substantially during
        2004.
        Investors, many seeking exchange properties, continue to seek properties
        in our
        market area. The Bank has and expects to experience continued growth in
        commercial real estate loans during 2005.
 
 Loans
        held for sale consist of mortgage originations that have already been sold
        pursuant to Correspondent Mortgage Loan Agreements. There is no interest
        rate
        risk associated with these loans as the commitments are in place at the time
        that the Bank funds them. Settlement from the correspondents is typically
        within
        30 to 45 days.
 
 At
        June
        30, 2005, the Bank had no foreign loans outstanding. The Bank did not have
        any
        concentrations of loans except as disclosed above.
 
 The
        Bank’s management is responsible for monitoring loan performance that is done
        through various methods, including a review of loan delinquencies and personal
        knowledge of customers. Additionally, the Bank maintains both a “watch” list of
        loans that, for a variety of reasons, management believes requires regular
        review as well as an internal loan classification process. Annually, the
        loan
        portfolio is also reviewed by an experienced, outside loan reviewer not
        affiliated with the Bank. A list of delinquencies, the watch list, loan grades
        and the outside loan review are reviewed regularly by the Bank’s Board of
        Directors.
 
 The
        Bank’s provision for loan losses was $180,000 for the second quarter of 2005,
        compared to $35,000 for the same period 2004.  The
        provision amount is based on the Bank’s monthly allowance for loan losses
        calculation including current plans for recovery collection.
 
 The
        Bank
        has a non-accrual policy that requires a loan greater than 90 days past due
        to
        be placed on non-accrual status unless such loan is well-collateralized and
        in
        the process of collection. When loans are placed on non-accrual status, all
        uncollected interest accrued is reversed from earnings. Once on non-accrual
        status, interest on a loan is only recognized on a cash basis. Payments that
        are
        received may also be applied to reduce the principal balance. Loans may be
        returned to accrual status if management believes that all remaining principal
        and interest is fully collectible and there has been at least six months
        of
        sustained repayment performance since the loan was placed on
        non-accrual.
 
 Page
            25
 If
        a
        loan’s credit quality deteriorates to the point that collection of principal is
        believed by management to be doubtful and the value of collateral securing
        the
        obligation is sufficient, the Bank generally takes steps to protect and
        liquidate the collateral. Any loss resulting from the difference between
        the
        loan balance and the fair market value of the property is recognized by a
        charge
        to the reserve for loan losses. When the property is held for sale after
        foreclosure, it is subject to a periodic appraisal. If the appraisal indicates
        that the property will sell for less than its recorded value, the Bank
        recognizes the loss by a charge to non-interest expense.
 
 Loans
        on
        non-accrual status totaled $0.9 million and $0.5 million at December 31,
        2004
        and June 30, 2005, respectively. Typically, these loans have adequate collateral
        protection and/or personal guaranties to provide a source of repayment to
        the
        Bank. Most of the loans on non-accrual are related to several commercial
        loans
        that are being addressed by specific workout plans at this time. Interest
        income
        that would have been recognized on non-accrual loans if they had performed
        in
        accordance with the terms of the loans was approximately $126 thousand and
        $49
        thousand  for
        the
        period ended December 31, 2004 and June 30, 2005, respectively.
 
 Non-performing
        loans include non-accrual loans, restructured loans and accruing loans that
        are
        90 days or more delinquent. Non-performing loans totaled $0.9 million at
        December 31, 2004 and $0.5 million at June 30, 2005. There were no loans
        past
        due 90 days or more and still accruing interest at June 30, 2005.
  Non-performing
        loans were .20% and .10% of total assets as of December 31, 2004 and June
        30,
        2005, respectively. The allowance for loan loss to non-performing loans was
        3.6x
        and 7.3x at December 31, 2004 and June 30, 2005, respectively.
 
 
 Total
        Cash and Due from Banks
 
 Total
        cash and due from banks were $13.1 million and $16.4 million at December
        31,
        2004 and June 30, 2005, respectively. This line item will vary depending
        on cash
        letters from the previous night and actual cash on hand in the branches.
 
 Investment
        Securities and Other Earning Assets
 
 Other
        earning assets are comprised of Federal Home Loan Bank, Federal Funds sold
        (funds lent on a short-term basis to other banks), investments in securities
        and
        short-term interest bearing deposits at other financial institutions. These
        assets are maintained for liquidity needs of the Bank, collateralization
        of
        public deposits, and diversification of the earning asset mix.
 
 Page
            26
  The
        table
        below sets forth changes from December 31, 2004 to June 30, 2005 for the
        composition of other earning assets. Interest bearing deposits with other
        financial institutions decreased by $3 million due to the return of funds
        which
        were previously placed in a short term (14 days) pool of money market accounts.
        Fed Funds Sold have increased due to 1) the return of the $3 million in money
        market accounts, 2) 13% deposit growth, including $40.5 million net increase
        in
        three volatile deposit relationships and, 3) a 13% decrease in the Investment
        Portfolio.
  **COMPOSITION
                    OF OTHER EARNING ASSETS****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004**
                
                **$
                    Variance**
                
                **%
                    Variance****(in
                    thousands)**Federal
                    Home Loan Bank, and other stock
                
                $
                1,844
                
                $
                1,809
                
                $
                35
                
                
                1.93
                %Available-for-Sale
                    Investments
                
                
                49,960
                
                
                57,394
                
                $
                (7,434
                )
                
                -12.95
                %Federal
                    Funds Sold
                
                
                30,845
                
                
                5,775
                
                $
                25,070
                
                
                434.11
                %Interest
                    Bearing Deposits other fin inst.
                
                
                398
                
                
                3,498
                
                
                (3,100
                )
                
                -88.62
                %Total
                    Other Earning Assets
                
                $
                83,047
                
                $
                68,476
                
                $
                14,571
                
                
                21.28
                %
 The
        Company manages its securities portfolio to provide a source of both liquidity
        and earnings. The Bank has an asset/liability committee that develops current
        investment policies based upon its operating needs and market circumstance.
        The
        Bank’s investment policy is formally reviewed and approved annually by the board
        of directors. The asset/liability committee of the Bank is responsible for
        reporting and monitoring compliance with the investment policy. Reports are
        provided to the Bank’s boards of directors on a regular basis.
 
 Securities
        available-for-sale are carried at fair value, with related unrealized net
        gains
        or losses, net of deferred income taxes, recorded as an adjustment to equity
        capital. As of December 31, 2004, net unrealized gains in the portfolio were
        $147 thousand compared to a net unrealized gain of $176 thousand at June
        30,
        2005. This change in market value was driven by the flattening of the yield
        curve with lower long term rates even though the FRB continued increasing
        rates
        on short term investments. The portfolio decreased in size due to principle
        reductions on Mortgage Backed Securities.
 
 At
        June
        30, 2005, available-for-sale securities in the portfolio included obligations
        of
        state and political subdivisions, obligations of US government agencies and
        corporations and mortgaged backed securities issued by various agencies.
 
 All
        fixed
        and adjustable rate mortgage pools contain a certain amount of risk related
        to
        the uncertainty of prepayments of the underlying mortgages. Interest rate
        changes have a direct impact upon prepayment rates. The Bank uses computer
        simulation models to test the average life, duration, market volatility and
        yield volatility of adjustable rate mortgage pools under various interest
        rate
        assumptions to monitor volatility. Stress tests are performed quarterly.
 
 Page
            27
  Deposits
        and Borrowed Funds
 
 The
        table
        below sets forth changes from December 31, 2004 to June 30, 2005 for the
        composition of deposit categories.
  **June
                    30,**
                
                **December
                    31,**
                
                
                
                
                
                **%
                    of Total****(in
                    thousands)**
                
                **2005**
                
                **2004**
                
                **$Variance**
                
                **%Variance**
                
                **Deposits**Deposits:Demand,
                    non-interest bearing
                
                $
                192,209
                
                $
                143,455
                
                
                48,754
                
                
                33.99
                %
                
                46
                %Interest
                    bearing demand
                
                
                54,527
                
                
                60,256
                
                
                (5,729
                )
                
                -9.51
                %
                
                13
                %Savings
                
                
                35,008
                
                
                36,232
                
                
                (1,224
                )
                
                -3.38
                %
                
                8
                %Money
                    market
                
                
                74,796
                
                
                69,527
                
                
                5,269
                
                
                7.58
                %
                
                18
                %Time
                    deposits of $100 or more
                
                
                16,570
                
                
                18,034
                
                
                (1,464
                )
                
                -8.12
                %
                
                4
                %Time
                    deposits under $100
                
                
                44,757
                
                
                42,937
                
                
                1,820
                
                
                4.24
                %
                
                11
                %Total
                    deposits
                
                $
                417,867
                
                $
                370,441
                
                $
                47,426
                
                
                12.80
                %
                
                100
                %
 
 The
        Company has been able to increase deposits due to a well planned marketing
        strategy and incentive based compensation that has been in place for several
        years. Like all good strategies, this one is fluid and is subject to the
        changing dynamics within the Company’s balance sheet and staffing along with
        changes in its primary market area. Friendly competition between the branch
        offices to increase deposit totals has been in place for two years. The branch
        offices are all given goals for each deposit category type and results are
        measured monthly. Lending and Operational staff work together to meet or
        beat
        their goals. This program has generated a significant amount of pride for
        the
        entire staff and resulted in growth for the Company.
 
 For
        the
        Company, at June 30, 2005, non-interest bearing demand deposits provide 46%
        of
        total deposits compared to 38.7% at December 31, 2004. At December 31, 2004
        and
        June 30, 2005, the Bank had three and two deposit relationships, respectively,
        that it considers to be volatile. The smallest of the three deposit
        relationships that accounted for approximately 1% of total deposits at December
        31, 2005 closed during the second quarter of 2005. The current volatile deposits
        are held by two, long time customers of the Bank that engage in mortgage
        related
        activities. The volatile nature of these relationships was evidenced by a
        net
        increase of $40.5 million in these account balances from December 31, 2004
        to
        June 30, 2005. As a percentage of total deposits, these accounts represented
        13.6% at December 31, 2004 compared to 21.7% at June 30, 2005. These volatile
        account relationships are included in the volatile liability dependency report
        that the Bank produces on a monthly basis. Typically, a material increase
        in
        balances held by these three customers is reflected in Federal Funds Sold
        and is
        recognized by Management to potentially be short term in nature. Therefore,
        any
        material increase in these balances is not considered to be a funding source
        for
        any form of long-term investment. Management and the Board of Directors of
        the
        Bank are keenly aware that as the mortgage market conditions change, these
        relationships will be impacted.
 
 Core
        deposits (time deposits less than $100,000, demand, and savings) gathered
        in the
        local communities served by the Company continue to be the primary source
        of
        funds for loans and investments. Core deposits of $401.3 million represented
        96%
        of total deposits at June 30, 2005. The Company does not purchase funds through
        deposit brokers.
 
 In
        October 2003, the Company executed a Promissory Note with Pacific Coast Bankers
        Bank (PCBB) for a revolving line of credit in the amount of $3.5 million.
        As
        discussed in the paragraph below, at June 30, 2005, the Company had a zero
        balance outstanding on this loan. The note was obtained to assist with the
        cash
        and capital needs for the acquisition of Hacienda. The Company pledged 646,598
        shares (51%) of the Bank’s stock as collateral for the loan. The note is
        revolving in nature for the first two years. The terms of the note call for
        quarterly interest only payments for the first two years with subsequent
        principal and interest payments for eight years on a fully amortized basis.
        At
        June 30, 2005, the interest rate on the note was 6.25% and is variable and
        moves
        with prime. Under the terms of the agreement, the Company will not incur
        any
        additional debt over $2 million exclusive of inter-company debt and existing
        debt without the prior written consent of PCBB. In addition, the Bank must
        be
“well” capitalized on an on-going basis as defined by bank Regulators.
 
 Page
            28
 One
        of
        the benefits of merging Hacienda Bank with and into the Bank on June 28,
        2004
        was the enhanced capital position of the resultant bank. On July 22, 2004,
        the
        Bank’s Board of Directors declared a dividend of $3.5 million to the Company to
        enable the Company to pay the PCBB line of credit down to zero. This was
        done on
        July 23, 2004. The line of credit in the amount of $3.5 million is still
        available to the Company until September 2005.
 
 The
        Bank
        has established borrowing lines with the Federal Home Loan Bank (FHLB). At
        June30, 2005, the Bank had borrowings with the FHLB of $28 million
        collateralized by loans. The borrowing consists of the following:
 
 a)
        $10
        million in borrowing with an initial term of 3 months and a fixed rate of
        3.14%
        matured on July 25, 2005 and was renewed for a period of one year at a variable
        rate of interest indexed to 3 month LIBOR. The initial rate is 3.61%.
 b)
        $18
        million in borrowing with a term of 6 months and a fixed rate of 3.35% matures
        on October 25, 2005.
 
 On
        September 17, 2004, the Bank issued a Letter of Credit in the amount of
        approximately $11.7 million to a customer in regard to a senior care facility.
        The Letter of Credit was issued pursuant to a Letter of Credit Reimbursement
        Agreement between the Bank and the FHLB. It is collateralized by a blanket
        lien
        with the FHLB that includes all qualifying loans on the Bank’s balance sheet.
 
 At
        June
        30, 2005, the Bank has a remaining borrowing capacity with existing collateral
        of approximately $56.9 million and $17.5 million secured by loans and
        securities, respectively.
 
 The
        Bank
        utilizes securities sold under repurchase agreements as a source of funds.
        The
        Bank had $766 thousand in securities sold under repurchase agreements at
        December 31, 2004 compared to $799 thousand at June 30, 2005.
 
 Capital
 
 The
        Company's total stockholders equity was $37.2 million at December 31, 2004
        compared to $41.0 million at June 30, 2005. The increase in capital was due
        to
        net income of $3,024 thousand, stock options exercised in the amount of $748
        thousand, ($8) thousand cash paid in lieu of fractional shares for the April
        22,
        2005 distribution of the 5% stock dividend, and a decrease in accumulated
        other
        comprehensive income of $29 thousand.
 
 On
        March
        25, 2005 the Board of Directors of the Company announced a 5% stock dividend
        to
        shareholders of record on April 8, 2005 that was distributed on April 22,
        2005.
        The Consolidated Statements of Stockholders’ Equity found under “Item 1.
        Financial Statements” in this document reflects the 5% stock dividend.
 
 On
        April
        10, 2002, the Company issued $8,248,000 of Floating Rate Junior Subordinated
        Deferrable Interest Debentures (the “debt securities”) to Heritage Oaks Capital
        Trust I, a statutory trust created under the laws of the State of Delaware.
        These debt securities are subordinated to effectively all borrowings of the
        Company and are due and payable on April 22, 2032. Interest is payable
        semi-annually on these debt securities at 6-Month LIBOR plus 3.7% for an
        effective rate of 7.11375% as of June 30, 2005. The debt securities can be
        called at any time commencing on April 22, 2007, at par. The debt securities
        can
        also be redeemed at par if certain events occur that impact the tax treatment,
        regulatory treatment or the capital treatment of the issuance. The Company
        also
        purchased a 3% minority interest totaling $248,000 in Heritage Oaks Capital
        Trust I. The balance of the equity of Heritage Oaks Capital Trust I is comprised
        of mandatorily redeemable preferred securities and is included in other
        assets.
 
 Page
            29
 If
        the
        Company elects to defer interest payments pursuant to terms of the agreement,
        then the Company may not (i) declare or pay any dividends or distributions
        on,
        or redeem, purchase, acquire or make a liquidation payment with respect to
        any
        of the Company’s capital stock, or (ii) make any payment of principal of or
        premium, if any, or interest on or repay, repurchase or redeem any debt
        securities of the Company that rank pari passu with or junior in interest
        to the
        Debt Securities, other than, among other items, a dividend in the form of
        stock,
        warrants, options or other rights in the same stock as that on which the
        dividend is being paid or ranks pari passu with or junior to such stock.
        The
        prohibition on payment of dividends and payments on pari passu or junior
        debt
        also applies in the case of an event of default under the
        agreements.
  The
        Company used the proceeds from the sale of the securities for general corporate
        purposes, including the repayment of outstanding indebtedness of $1.9 million
        on
        April 11, 2002 and capital contributions to the Bank for future
        growth.
 
 Under
        FASB Interpretation (FIN) No. 46, *“Consolidation
        of Variable Interest Entities, an interpretation of ARB No.
        51,”* the
        Company is not allowed to consolidate Heritage Oaks Capital Trust I into
        the
        Company’s financial statements. Prior to the issuance of FIN No. 46, Bank
        holding companies typically consolidated these entities. On February 28,
        2005,
        the Federal Reserve Board issued a new rule which provides that, notwithstanding
        the deconsolidation of such trusts, junior subordinated debentures, such
        as
        those issued by the Company, may continue to constitute up to 25% of a bank
        holding company's Tier 1 capital, subject to certain new limitations which
        will
        not become effective until March 31, 2009 and which, in any event, are not
        expected to affect the treatment of the Company's Junior Subordinated Debentures
        as Tier 1 capital for regulatory purposes. At June 30, 2005, the Company
        has
        included the net junior subordinated debt in its Tier1 Capital for regulatory
        capital purposes.
 
 Management
        believes that organic growth in 2005 for the Company can be accomplished
        without
        further borrowing for capital or cash flow purposes. At June 30, 2005, the
        Company had sufficient cash to service the $8.2 million in junior subordinated
        debenture interest payments for approximately ten quarters without dividends
        from subsidiaries. The Bank’s capacity to provide cash to the Company, while
        remaining “well-capitalized”, was $1.2 million at June 30, 2005.
 
 
 Capital
        ratios for commercial banks in the United States are generally calculated
        using
        three different formulas. These calculations are referred to as the “Leverage
        Ratio” and two “risk based” calculations known as: “Tier One Risk Based Capital
        Ratio” and the “Total Risk Based Capital Ratio.” These standards were developed
        through joint efforts of banking authorities from 12 different countries
        around
        the world. The standards essentially take into account the fact that different
        types of assets have different levels of risk associated with them. Furthermore,
        they take into account the off-balance sheet exposures of banks when assessing
        capital adequacy.
 
 The
        Leverage Ratio calculation simply divides common stockholders’ equity (reduced
        by any goodwill a bank may have) by the total assets. In the Tier One Risk
        Based
        Capital Ratio, the numerator is the same as the leverage ratio, but the
        denominator is the total “risk-weighted assets”. Risk weighted assets are
        determined by segregating all the assets and off balance sheet exposures
        into
        different risk categories and weighting them by a percentage ranging from
        0%
        (lowest risk) to 100% (highest risk). The Total Risk Based Capital Ratio
        again
        uses “risk-weighted assets” in the denominator, but expands the numerator to
        include other capital items besides equity such as a limited amount of the
        loan
        loss reserve, long-term capital debt, preferred stock and other instruments.
 
 Page
            30
  Summarized
        below are the Company’s and the Bank’s capital ratios at June 30, 2005.
  Regulatory
                    StandardAdequately
                
                Well
                
                Heritage
                    Oaks
                
                Heritage
                    OaksCapitalized
                
                Capitalized
                
                Bancorp
                
                BankLeverage
                    Ratio
                4.00%
                
                5.00%
                
                9.03%
                
                8.66%Tier
                    One Risk Based Captial Ratio
                4.00%
                
                6.00%
                
                9.95%
                
                9.40%Total
                    Risk Based Captial Ratio
                8.00%
                
                10.00%
                
                10.83%
                
                10.28%
 
 For
        the
        Company, all $8 million of the trust preferred securities are accounted for
        as
        Tier I and Tier II Capital, respectively, for purposes of calculating Regulatory
        Capital.
  Liquidity
 
 The
        objective of liquidity management is to ensure the continuous availability
        of
        funds to meet the demands of depositors, investors and borrowers. Asset
        liquidity is primarily derived from loan payments and the maturity of other
        earning assets. Liquidity from liabilities is obtained primarily from the
        receipt of new deposits. The Bank’s Asset Liability Committee (ALCO) is
        responsible for managing the on and off-balance sheet commitments to meet
        the
        needs of customers while achieving the Bank’s financial objectives. ALCO meets
        regularly to assess the projected funding requirements by reviewing historical
        funding patterns, current and forecasted economic conditions and individual
        customer funding needs. Deposits generated from Bank customers serve as the
        primary source of liquidity. The Bank has credit arrangements with correspondent
        banks that serve as a secondary liquidity source in the amount of $7 million.
        At
        June 30, 2005, the Bank had no borrowings against credit arrangements with
        these
        correspondent banks. The Bank is a member of the FHLB and has a collateralized
        borrowing capacity remaining of approximately $74.4 million.
 
 The
        Bank
        manages liquidity by maintaining a majority of the investment portfolio in
        federal funds sold and other liquid investments. At December 31, 2004, the
        ratio
        of liquid assets not pledged for collateral and other purposes to deposits
        and
        other liabilities was 12.7% compared to 17.5% at June 30, 2005. The ratio
        of net
        loans to deposits, another key liquidity ratio, was 90.4% at December 31,
        2004
        compared to 86.7% at June 30, 2005.
 
 Inflation
 
 The
        assets and liabilities of a financial institution are primarily monetary
        in
        nature. As such they represent obligations to pay or receive fixed and
        determinable amounts of money that are not affected by future changes in
        prices.
        Generally, the impact of inflation on a financial institution is reflected
        by
        fluctuations in interest rates, the ability of customers to repay debt and
        upward pressure on operating expenses. The effect of inflation during the
        three-year period ended June 30, 2005 has been significant to the Company’s
        financial position and results of operations in regard to fluctuation in
        interest rates creating in the decreasing rate environment a narrowing of
        the
        net interest margin and in the increasing rate environment for the past four
        quarters, a widening of the net interest margin. However, inflation has not
        been
        a factor in the customer’s ability to repay debt or in upward pressure on
        operation expenses.
  Off-Balance
        Sheet Arrangements
 
 Off-balance
        sheet arrangements are any contractual arrangement to which an unconsolidated
        entity is a party, under which the Company has: (1) any obligation under
        a
        guarantee contract; (2) a retained or contingent interest in assets transferred
        to an unconsolidated entity or similar arrangement that serves as credit,
        liquidity or market risk support to that entity for such assets; (3) any
        obligation under certain derivative instruments; or (4) any obligation under
        a
        material variable interest held by the Company in an unconsolidated entity
        that
        provides financing, liquidity, market risk or credit risk support to the
        Company, or engages in leasing, hedging or research and development services
        with the Company.
 
 Page
            31
 In
        the
        ordinary course of business, the Company has entered into off-balance sheet
        financial instruments consisting of commitments to extend credit, commercial
        letter of credit, and standby letter of credit. Such financial instruments
        are
        recorded in the financial statement when they are funded or related fees
        are
        incurred or received. For a fuller discussion of these financial instruments,
        refer to Note 10 of the Company’s consolidated financial statements contained in
        Item 7 of Part II of the Company’s December 31, 2004 10-KSB.
 
 In
        the
        ordinary course of business, the Bank is a party to various operating leases.
        For a fuller discussion of these financial instruments, refer to Note 5 of
        the
        Company’s consolidated financial statements contained in Item 7 of Part II of
        the Company’s December 31, 2004 10-KSB.
 
 In
        connection with the $8.2 million in debt securities discussed in “Capital,” the
        Company issued the full and unconditional payment guarantee of certain accrued
        distributions.
 
 Item
        3.  Quantitative
        and Qualitative Disclosure about Market Risk
 
 As
        a
        financial institution, the Company’s primary component of market risk is
        interest rate volatility. Fluctuations in interest rates will ultimately
        impact
        both the level of interest income and interest expense recorded on a large
        portion of the Company’s assets and liabilities, and the market value of all
        interest earning assets and interest bearing liabilities, other than those
        which
        possess a short term to maturity. Virtually all of the Company’s interest
        earning assets and interest bearing liabilities are located at the banking
        subsidiary level. Thus, virtually all of the Company’s interest rate risk
        exposure lies at the banking subsidiary level other than $8 million in
        subordinated debentures issued by the Company’s subsidiary grantor trust. As a
        result, all significant interest rate risk procedures are performed at the
        banking subsidiary level. The subsidiary bank’s real estate loan portfolio,
        concentrated primarily within Northern Santa Barbara County and San Luis
        Obispo
        County, California, are subject to risks associated with the local
        economy.
  The
        fundamental objective of the Company’s management of its assets and liabilities
        is to maximize the Company’s economic value while maintaining adequate liquidity
        and an exposure to interest rate risk deemed by Management to be acceptable.
        Management believes an acceptable degree of exposure to interest rate risk
        results from the management of assets and liabilities through maturities,
        pricing and mix to attempt to neutralize the potential impact of changes
        in
        market interest rates. The Company’s profitability is dependent to a large
        extent upon its net interest income, which is the difference between its
        interest income on interest-earning assets, such as loans and investments,
        and
        its interest expense on interest-bearing liabilities, such as deposits and
        borrowings. The Company is subject to interest rate risk to the degree that
        its
        interest-earning assets re-price differently than its interest-bearing
        liabilities. The Company manages its mix of assets and liabilities with the
        goals of limiting its exposure to interest rate risk, ensuring adequate
        liquidity, and coordinating its sources and uses of funds.
  The
        Company seeks to control interest rate risk exposure in a manner that will
        allow
        for adequate levels of earnings and capital over a range of possible interest
        rate environments. The Company has adopted formal policies and practices
        to
        monitor and manage interest rate risk exposure.  Management believes
        historically it has effectively managed the effect of changes in interest
        rates
        on its operating results.  Management believes that it can continue
        to
        manage the short-term effect of interest rate changes under various interest
        rate scenarios.
  Management
        employs the use of an Asset Liability Management software that is used to
        measure the Bank’s exposure to future changes in interest rates. This model
        measures the expected cash flows and re-pricing of each financial
        asset/liability separately in measuring the Bank’s interest sensitivity. Based
        on the results of this model, management believes the Bank’s balance sheet is
“asset sensitive”. This means the Company expects (all other things being
        equal) to expand its net interest income if rates rise and expects it conversely
        to contract if rates fall.  The level of potential or expected contraction
        indicated by the tables below is considered acceptable by management and
        is
        compliant with the Bank’s ALCO policies.  Management will continue to
        perform this analysis each quarter to further validate the expected results
        against actual data.
  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. The results for the Company’s June 30, 2005 balances indicate
        that the net interest income at risk over a one year time horizon for a 1%,
        2%
        and 3% rate increase and 1% rate decrease are within the Company’s policy
        guidelines for such changes.
 (dollars
        in thousands)
 **Shock
                      Rate Scenarios****-100bp**
                  
                  **Base**
                  
                  **+100bp**
                  
                  **+200bp**
                  
                  **+300bp****Net
                      Interest****Income
                      (NII)**
                  
                  $
                  24,089
                  
                  $
                  25,647
                  
                  $
                  27,418
                  
                  $
                  29,282
                  
                  $
                  31,155**$
                      Change from Base**
                  
                  $
                  1,558
                  
                  $
                  -
                  
                  $
                  1,771
                  
                  $
                  3,634
                  
                  $
                  5,508**%
                      Change from Base**
                  
                  
                  -6.08%
                  
                  
                  0.00%
                  
                  
                  6.90%
                  
                  
                  14.17%
                  
                  
                  21.48%
 
 It
        is
        important to note that the above table is a summary of several forecasts
        and
        actual results may vary. The forecasts are based on estimates and assumptions
        of
        management that may turn out to be different and may change over time. Factors
        affecting these estimates and assumptions include, but are not limited to
        1)
        competitor behavior, 2) economic conditions both locally and nationally,
        3)
        actions taken by the Federal Reserve Board, 4) customer behavior and 5)
        management’s responses. Changes that vary significantly from the assumptions and
        estimates may have significant effects on the Company’s net interest income,
        therefore, the results of this analysis should not be relied upon as indicative
        of actual future results.
 
 Page
            33
  The
        following table shows Management’s estimate of how the loan portfolio is broken
        out between variable-daily, variable-daily but at floor, variable at various
        time lines and fixed rate loans.  It further identifies when and at
        what
        rate increase scenario the variable rate loans at floors will most likely
        come
        off their floor and re-price.
 (dollars
        in thousands)
  **%
                      of****Loans**
                  
                  **Balance**
                  
                  **Total**Variable-Daily
                  
                  $
                  154,117
                  
                  
                  42%Variable-Daily
                      withFloor*
                  
                  
                  2,546
                  
                  
                  1%Variable
                      every 3 months
                  
                  
                  19,827
                  
                  
                  5%Variable
                      > 3 months
                  
                  
                  128,777
                  
                  
                  35%Fixed
                  
                  
                  61,976
                  
                  
                  17%Total
                      Gross Loans
                  
                  $
                  367,243
                  
                  
                  100%
 
 ***Daily
                    Variable Loans with Floors****Coming
                    off****Rate
                    Increase**
                
                **Floor**0.25%
                
                $
                2,4310.50%
                
                
                190.75%
                
                
                961.00%
                
                
                -$
                2,546
  The
        table
        above identifies approximately 42% of the loan portfolio that will re-price
        immediately in a rising rate environment. The following table shows Management’s
        estimates of re-pricing opportunities for the entire loan
        portfolio.
 (dollars
        in thousands)
  **Total
                    Gross Loans**
                
                **%
                    of****Re-Pricing**
                
                **Balance**
                
                **Total**<
                    1 Year
                
                $
                244,875
                
                
                67
                %1-3
                    Years
                
                
                67,229
                
                
                18
                %3-5
                    Years
                
                
                37,493
                
                
                10
                %>
                    5 Years
                
                
                17,645
                
                
                5
                %$
                367,243
                
                
                100
                %
 
 Item
        4.  Controls
        and Procedures
 
 Evaluation
        of Disclosure Controls and Procedures
 As
        of the
        end of the period covered by this report, the Company carried out an evaluation,
        under the supervision and with the participation of its management, including
        the Company’s Chief Executive Officer and Chief Financial Officer, of the
        effectiveness of the design and operation of the Company’s disclosure controls
        and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
        the Chief Executive Officer and Chief Financial Officer concluded that the
        Company’s disclosure controls and procedures are effective to provide reasonable
        assurances that information required to be disclosed in the reports the Company
        files or submits under the Securities Exchange Act of 1934 is recorded,
        processed, summarized and reported within the time periods specified in the
        SEC’s rules and forms.
 
 Page
            34
 There
        was
        no change in the Company’s internal controls over financial reporting during the
        quarter ended June 30, 2005 that has materially affected, or is reasonably
        likely to materially affect, the Company’s internal controls over financial
        reporting.
 
 In
        designing and evaluating disclosure controls and procedures, the Company’s
        management recognized that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable, not absolute, assurances
        of
        achieving the desired control objectives and management necessarily was required
        to apply its judgment in evaluating the cost-benefit relationship of possible
        controls and procedures.
 
 PART
        2.
        OTHER INFORMATION
 
 Item
        1. Legal
        Proceedings
 The
        Company is not a party to any material legal proceeding.
 
 Item
        2. Changes
        in Securities, Use of Proceeds and Issuer Purchases of Equity
        Securities
 N/A
 
 Item
        3. Defaults
        Upon Senior Securities
 N/A
 
 Item
        4. Submission
        of Matters to a Vote of Security Holders
 The
        following items were submitted to the security holders for approval at the
        annual meeting held on May 26, 2005:
 
 1.***Election
                  of Directors.***To
                  elect ten (10) persons to the Board of Directors of the Company
                  to serve
                  until the 2006 Annual Meeting of Shareholders and until their successors
                  are elected and have qualified. The following persons
                  elected:
 
 ForDr.
                  B. R. Bryant
              3,575,673Donald
                  H. Campbell
              3,578,146Kenneth
                  L. Dewar
              3,575,574Mark
                  C. Fugate
              3,578,005Dolores
                  T. Lacey
              3,572,840Merle
                  F. Miller
              3,578,146Michael
                  J. Morris
              3,578,146Daniel
                  J. O’Hare
              3,578,146Alexander
                  F. Simas
              3,575,574Ole
                  K. Viborg
              3,380,112Lawrence
                  P. Ward
              3,564,275
 
 2. **2005
        Equity Based compensation Plan****.** To
        approve the adoption of the 2005 Equity Based Compensation Plan.
  ***For***
              ***2,552,385***
              ***Against***
              ***332,219***
              ***Abstained***
              ***66,115***
 
 3.
              ***Ratification
                  of Independent Accountants.***To
                  ratify the appointment of Vavrinek, Trine, Day & Co. LLP as the
                  Company’s independent accountants for the 2005 fiscal
                  year.
 ***For***
                ***3,568,072***
                ***Against***
                ***3,867***
                ***Abstained***
                ***26,209***
 
 Page
            35
 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 2002Exhibit
                  (31.2)
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002Exhibit
                  (32.1)
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002Exhibit
                  (32.2)
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002
 
 Page
            36
  SIGNATURES
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 HERITAGE
        OAKS BANCORP
 
 DATE:
        August 5 , 2005
 By:
                /s/ Lawrence
                  P. WardLawrence
                  P. WardChief
                  Executive Officer
  By:
                /s/ Margaret
                  A. TorresMargaret
                  A. TorresChief
                    Financial Officer
                  Executive
                    Vice President
 
 EXHIBITINDEX
 
 Exhibit
                  (31.1)
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002Exhibit
                  (31.2)
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002Exhibit
                  (32.1)
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002Exhibit
                  (32.2)
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002






Page
          37