<PAGE>
                         SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549
                                     FORM 10-KSB

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 for the Year ended DECEMBER 31, 1998

                                         OR

     [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________
     to ________

                 Commission file number                      0-25020
<TABLE>
<CAPTION>

                                HERITAGE OAKS BANCORP
                                ---------------------
               (Exact name of registrant as specified in its charter)
<S>                                                                   <C>
   State of California                                                77-0388249
   -------------------                                                ----------
(State or other jurisdiction of                                       (I.R.S. Identification  No.)
employee incorporation or organization)

545 12th Street, Paso Robles, California 93446                        (805) 239-5200
----------------------------------------------                        --------------
(Address of principal executive offices) (Zip Code)                   Registrant's telephone
                                                                      number, including area code

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class                                                  Name of each exchange on which registered
-------------------                                                  -----------------------------------------
Common Stock, (no par value)                                                         None

</TABLE>

Indicate by check mark whether the registrant (1) has riled all reports 
required to be riled by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 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 90 days.  Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-B is not contained herein, and will not be contained, to 
the best of the registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-KSB or any 
amendment to this Form 10-KSB  [X].

Registrant's revenues for 1998 were $14,351,468.  The aggregate market value 
of the voting stock held by non-affiliates of the Registrant at March 1st,  
1999 was  $12,078,804.  As of March 1st, 1999, the Registrant had 1,113,950 
shares of Common Stock outstanding.

The following documents are incorporated by reference into Part III, Items 
9 through 12 of Registrant's definitive proxy statement for the 1999 annual 
meeting of shareholders.

Transitional Small Business Disclosure Format (check one)    Yes [  ]    No[X]

                                                                          1

<PAGE>

                                       PART I
                       ITEM 1.        DESCRIPTION OF BUSINESS

General

Heritage Oaks Bancorp (the "Company") is a California corporation organized 
in 1994 to act as the bank holding company of Heritage Oaks Bank (the 
"Bank"). In 1994, the Company acquired all of the outstanding common stock of 
the Bank in a holding company formation transaction.  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.

Banking Services

The Bank was licensed by the California Department of Financial Institutions 
("DFI") and commenced operation in January 1983.  As a California state bank, 
the Bank is subject to primary supervision, examination and regulation by the 
DFI and the Federal Deposit Insurance Corporation ("FDIC"). The Bank is also 
subject to certain other federal laws and regulations. The deposits of the 
Bank are insured by the FDIC up to the applicable limits thereof. The Bank 
is not a member of the Federal Reserve System. At December 31, 1998, the 
Company had approximately $131.2 million in assets, $69.8 million in net 
loans, $119.4 million in deposits, and $9.4 million in stockholders' equity.

The Bank is headquartered in Paso Robles with a branch office in Paso Robles, 
two branches in San Luis Obispo and a branch office in Cambria, a loan 
production office located in Grover Beach, a new full service branch located 
in Santa Maria which opened February 1, 1999 and a new full service branch 
located in Atascadero scheduled to open March 15, 1999. The Bank conducts a 
commercial banking business in San Luis Obispo County, Northern Santa Barbara 
County and Northern Monterey County, including accepting demand, savings and 
time deposits, and making commercial, real estate, SBA, agricultural, credit 
card, and consumer loans. It also offers installment note collection, 
provides POS terminals and processing, issues cashiers checks and money 
orders, sells travelers checks, and provides bank-by-mail, night depository, 
safe deposit boxes, and other customary banking services. The Bank does not 
offer trust services or international banking services and does not plan to 
do so in the near future.

The Bank's operating policy since its inception has emphasized small business 
commercial and retail banking.  Most of the Bank's customers are retail 
customers, farmers and small to medium-sized businesses.  The Bank takes real 
estate, listed and unlisted securities, savings and time deposits, 
automobiles, machinery and equipment as collateral for loans.  The areas in 
which the Bank has directed virtually all of its lending activities are (i) 
commercial and agricultural loans, (ii) installment loans, (iii) construction 
loans, and (iv) other real estate loans or commercial loans secured by real 
estate.  As of December 31, 1998, these four categories accounted for 
approximately 53.7%, 4.1%, 11.7% and 30.5% respectively, of the Bank's loan 
portfolio.  As of December 31, 1998,  $30,029,859 or 42.2% of the Bank's  
$71,185,609 in gross loans consisted of interim construction and real estate 
loans, primarily for single family residences or for commercial development.  
Additionally, commercial and agricultural loans grew  $12.9 million 
(approximately 50.9%) between year end 1997 and year end 1998.   See "Item 6 
- Management's Discussion and Analysis of Financial Condition and Results of 
Operations."

Most of the Bank's deposits are attracted by local promotional activities and 
advertising in the local media.  A material portion of the Bank's deposits 
have not been obtained from a single person or a few persons, the loss of any 
one or more of which would have a materially adverse effect on the business 
of the Bank.  As of December 31, 1998, the Bank had approximately 9,808 
deposit accounts consisting of non-interest bearing (demand), 
interest-bearing demand and money 

                                                                          2

<PAGE>



market accounts with balances totaling $78,684,513 for an average balance per 
account of approximately $8,022; 4,347 savings accounts with balances 
totaling $11,592,944 for an average balance per account of approximately 
$2,667; and 1,199 time certificate of deposit accounts with balances totaling 
$29,130,249, for an average balance per account of approximately  $24,295.

The principal sources of the Banks revenues are (i) interest and fees on 
loans, (ii) interest on investments, (iii) service charges on deposit 
accounts and other charges and fees, and (iv) ATM transaction fees, 
sponsorship fees and interchange income,  (v) bankcard merchant fees and (vi) 
mortgage organization fees (vii) miscellaneous income.  For the year ended 
December 31, 1998, these sources comprised  45.0%, 10.7%, 4.8%, 29.7%, 5.3%, 
2,1% and 2.4%, respectively, of the Bank's total operating income. ATM 
transaction fees, sponsorship fees and interchange income is anticipated to 
reduce from this level in 1999.

The Bank has arranged to install 58 cash dispensing machines for the purpose 
of dispensing cash at 10 sites on Native American lands where bingo games and 
other gaming operations are conducted, at other commercial locations, and at 
the Bank's 8 offices.  The Bank receives a transaction fee for each completed 
transaction on the cash dispensing machines at the gaming sites.  In previous 
years, the Bank shared a portion of the fees with two individuals who had 
helped to make these arrangements and with the tribes on whose lands the cash 
dispensing machines are installed.  During September 1996, the Bank bought 
out the interest of one of the individuals.  During April 1997, the Bank 
bought out the interest of the other individual.  In prior years, the Bank 
only received the net earnings from the surcharge revenue received from the 
gaming network. After the Bank had purchased the interest of the two 
individuals, it then assumed all direct costs and received all of the revenue 
net of the amounts that are still paid to the tribes on whose land the 
casinos are located.  The contract buy outs are being amortized over a period 
of 18 to 36 months.

     The total amortization expense for 1998 was $260,007 with the remaining 
unamortized cost on the books at December 31, 1998 was $77,917.

The Company has also caused to be incorporated a proposed subsidiary, CCMS 
Systems, Inc. which is currently inactive and has not been capitalized.  The 
Company has no present plans to activate the proposed subsidiary.

The Bank has not engaged in any material research activities relating to the 
development of new services or the improvement of existing bank services.  
There has been no significant change in the types of services offered by the 
Bank since its inception.  The Bank has no present plans regarding "a new 
line of business" requiring the investment of a material amount of total 
assets.  Most of the Banks business originates from San Luis Obispo, Northern 
Santa Barbara and Southern Monterey Counties and there is no emphasis on 
foreign sources and application of funds.  The Banks business, based upon 
performance to date, does not appear to be seasonal.   Management of the Bank 
is unaware of   any material effect upon the Banks capital expenditures, 
earnings or competitive position as a result of federal, state or local 
environmental regulations.

The Bank holds no patents, licenses (other than licenses obtained from bank 
regulatory authorities), franchises or concessions.

When the Company uses or incorporates by reference in this Annual Report on 
Form 10-KSB (The "Annual Report") the words "anticipate", "estimate", 
"expect", "project", "intend", "commit", "believe" and similar expressions, 
the Company intends to identify forward-looking statements. Such statements 
are subject to certain risks, uncertainties and assumptions, including those 
described in this Annual Report. Should one or more of these risks or 
uncertainties materialize, or should underlying assumptions prove incorrect, 
actual results may vary materially from those anticipated, estimated, 
expected, projected, intended, committed or believed.

                                                                          3

<PAGE>


Employees

As of February 1, 1999, the Bank had a total of 68 full-time equivalent 
employees.  The management of the Bank believes that its employee relations 
are satisfactory. The Company has only one salaried employee (the internal 
auditor).  The Company's officers all hold similar positions at the Bank and 
receive compensation from the Bank.

Competition

The banking and financial services business in California generally, and in 
the Banks market area specifically, is highly competitive.  The increasingly 
competitive environment is a result primarily of changes in regulation, 
changes in technology and product delivery systems, and the accelerating pace 
of consolidation among financial services providers.

The Bank's business is concentrated in its service area, which encompasses  
San Luis Obispo County, Northern Santa Barbara County and Northern Monterey 
County. In order to compete with other financial institutions in its service 
area, the Bank relies principally upon local advertising programs; direct 
personal contact by officers, directors, employees, and shareholders; and 
specialized services such as courier pick-up and delivery of non-cash banking 
items.  The Bank emphasizes to its customers the advantages of dealing with a 
locally owned and community oriented institution.  The Bank also seeks to 
provide special services and programs for individuals in its primary service 
area who are employed in the agricultural, professional and business fields, 
such as loans for equipment, furniture, tools of the trade or expansion of 
practices or businesses.  Larger banks may have a competitive advantage 
because of higher lending limits and major advertising and marketing 
campaigns.  They also perform services, such as trust services, international 
banking, discount brokerage and insurance services which the Bank is not 
authorized or prepared to offer currently.  The Bank has made arrangements 
with its correspondent banks and with others to provide such services for its 
customers.  For borrowers requiring loans in excess of the Bank's legal 
lending limits, the Bank has offered, and intends to offer in the future, 
such loans on a participating basis with its correspondent banks and with 
other independent banks, retaining the portion of such loans which is within 
its lending limits.  As of December 31, 1998, the Bank's legal lending limits 
to a single borrower and such borrower's related parties were $1,443,725 on 
an unsecured basis and $2,406,209 on a fully secured basis based on 
regulatory capital of $9,624,836.

Commercial banks compete with savings and loan associations, credit unions, 
other financial institutions, securities and brokerage firms, and other 
entities for funds.  For instance, yields on corporate and government debt 
securities and other commercial paper affect the ability of commercial banks 
to attract and hold deposits. Commercial banks also compete for loans with 
savings and loan associations, credit unions, consumer finance companies, 
mortgage companies and other lending institutions.

In recent years competition for cash dispensing machines on Native American 
lands in connection with gaming operations has increased and no assurance can 
be given that the Bank will be able to continue to provide these services at 
as many locations and with the same degree of profitability as in the past. 
The Company believes that the profitability on such business will reduce in 
1999 from the levels of 1998.

Effect of Governmental Policies and Recent Legislation

Banking is a business that depends on rate differentials.  In general, the 
difference between the interest rate paid by the Bank on its deposits and its 
other borrowings and the interest rate received by the Bank on loans extended 
to its customers and securities held in the Bank's portfolio comprise the 
major portion of the Bank's earnings.  These rates are highly sensitive to 
many factors that are beyond the control of the Bank.  Accordingly, the 
earnings and growth of the Bank are subject to the influence of domestic and 
foreign economic conditions, including inflation, recession and unemployment.

The commercial banking business is not only affected by general economic 
conditions but is also influenced by 
                                                                          4

<PAGE>

the monetary and fiscal policies of the federal government and the policies 
of regulatory agencies, particularly the Federal Reserve Board. The Federal 
Reserve Board implements national monetary policies (with objectives such as 
curbing inflation and combating recession) by its open-market operations in 
United States Government securities, by adjusting the required level of 
reserves for financial institutions subject to its reserve requirements and 
by varying the discount rates applicable to borrowings by depository 
institutions.  The actions of the Federal Reserve Board in these areas 
influence the growth of bank loans, investments and deposits and also affect 
interest rates charged on loans and paid on deposits.  The nature and impact 
of any future changes in monetary policies cannot be predicted.

From time to time, legislation is enacted which has the effect of increasing 
the cost of doing business, limiting or expanding permissible activities or 
affecting the competitive balance between banks and other financial 
institutions.  Proposals to change the laws and regulations governing the 
operations and taxation of banks, bank holding companies and other financial 
institutions are frequently made in Congress, in the California legislature 
and before various bank regulatory and other professional agencies.  For 
example, legislation has been introduced in Congress that would repeal the 
current statutory restrictions on affiliations between commercial banks and 
securities firms. See "Financial Modernization Legislation." 

Supervision and Regulation

The Company and the Bank is extensively regulated under both federal and 
state law.  Set forth below is a summary description of certain laws which 
relate to the regulation of the Company and the Bank.  The description does 
not purport to be complete and is qualified in its entirety by reference to 
the applicable laws and regulations.

The Company

The Company is a bank holding company within the meaning of the Bank Holding 
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is 
registered as such with, and subject to the supervision of, the Federal 
Reserve Board.  The Company is required to file with the Federal Reserve 
Board quarterly and annual reports and such additional information as the 
Federal Reserve Board may require pursuant to the Bank Holding Company Act.  
The Federal Reserve Board may conduct examinations of bank holding companies 
and their subsidiaries.

The Company is required to obtain the approval of the Federal Reserve Board 
before it may acquire all or substantially all of the assets of any bank, or 
ownership or control of the voting shares of any bank if, after giving effect 
to such acquisition of shares, the Company would own or control more than 5% 
of the voting shares of such bank.  Prior approval of the Federal Reserve 
Board is also required for the merger or consolidation of the Company and 
another bank holding company.

The Company is prohibited by the Bank Holding Company Act, except in certain 
statutorily prescribed instances, from acquiring direct or indirect ownership 
or control of more than 5% of the outstanding voting shares of any company 
that is not a bank or bank holding company and from engaging , directly or 
indirectly, in activities other than those of banking, managing or 
controlling banks or furnishing services to its subsidiaries.  However, the 
Company may, subject to the prior approval of the Federal Reserve Board, 
engage in any, or acquire shares of companies engaged in, activities that are 
deemed by the Federal Reserve Board to be so closely related to banking or 
managing or controlling banks as to be a proper incident thereto.

The Federal Reserve Board may require that the Company terminate an activity 
or terminate control of or liquidate or divest subsidiaries or affiliates 
when the Federal Reserve Board determines that the activity or the control or 
the subsidiary or affiliates constitutes a significant risk to the financial 
safety, soundness or stability of any of its banking subsidiaries.  The 
Federal Reserve Board also has the authority to regulate provisions of 
certain bank holding company debt, including authority to impose interest 
ceilings and reserve requirements on such debt.  Under certain circumstances, 
the Company must file written notice and obtain approval from the Federal 
Reserve Board prior to purchasing or redeeming its equity securities.

                                                                          5

<PAGE>

Under the Federal Reserve Board's regulations, a bank holding company is 
required to serve as a source of financial and managerial strength to its 
subsidiary banks and may not conduct its operations in an unsafe and unsound 
manner.  In addition, it is the Federal Reserve Board's policy that in 
serving as a source of strength to its subsidiary banks, a bank holding 
company should stand ready to use available resources to provide adequate 
capital funds to its subsidiary banks during periods of financial stress or 
adversity and should maintain the financial flexibility and capital-raising 
capacity to obtain additional resources for assisting its subsidiary banks.  
A bank holding company's failure to meet its obligations to serve as a source 
of strength to its subsidiary banks will generally be considered by the 
Federal Reserve Board to be an unsafe and unsound banking practice or a 
violation of the Federal Reserve Board's  regulations or both.

The Company is subject to the periodic reporting requirements of the 
Securities Exchange Act of 1934, as amended, and filed reports and proxy 
statements pursuant to such Act with the Securities and Exchange Commission 
("SEC")

The Bank

The Bank is chartered under the laws of the State of California and its 
deposits are insured by the FDIC to the extent provided by law.  The Bank is 
subject to the supervision of, and is regularly examined by, the DFI and the 
FDIC.  Such supervision and regulation include comprehensive reviews of all 
major aspects of the Banks business and condition.

Various requirements and restrictions under the laws of the United States and 
the State of California affect the operations of the Bank.  Federal and 
California statutes relate to many aspects of  the Banks operations, 
including reserves against deposits, interest rates payable on deposits, 
loans, investments, mergers and acquisitions, borrowings, dividends and 
locations of branch offices.  Further, the Bank is required to maintain 
certain levels of capital.

Capital Standards

The Federal Reserve Board and the FDIC have adopted risk-based minimum 
capital guidelines intended to provide a measure of capital that reflects the 
degree of risk associated with a banking organization's operations for both 
transactions reported on the balance sheet as assets and transactions, such 
as letters of credit and recourse arrangements, which are recorded as off 
balance sheet items. Under these guidelines, nominal dollar amounts of assets 
and credit equivalent amounts of off balance sheet items are multiplied by 
one of several risk adjustment percentages, which range from 0% for assets 
with low credit risk, such as certain U.S. Treasury securities, to 100% for 
assets with relatively high credit risk, such as business loans.

A banking organization's risk-based capital ratios are obtained by dividing 
its qualifying capital by its total risk adjusted assets.  The regulators 
measure risk-adjusted assets, which includes off balance sheet items, against 
both total qualifying capital (the sum of Tier 1 capital and limited amounts 
of Tier 2 capital) and Tier 1 capital.  Tier 1 capital consists primarily of 
common stock, retained earnings, noncumulative perpetual preferred stock 
(cumulative perpetual preferred stock for bank holding companies) and 
minority interests in certain subsidiaries, less most intangible assets.  
Tier 2 capital may consist of a limited amount of the allowance for possible 
loan and lease losses, cumulative preferred stock,  long term preferred 
stock, eligible term subordinated debt and certain other instruments with 
some characteristics of equity.  The inclusion of elements of Tier 2 capital 
is subject to certain other requirements and limitations of the federal 
banking agencies.  The federal banking agencies require a minimum ratio of 
qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of 
Tier 1 capital to risk-adjusted assets of 4%.

In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio.  For a banking organization rated in

                                                                          6

<PAGE>

the highest of the five categories used by regulators to rate banking 
organizations, the minimum leverage ratio of Tier 1 capital to total assets  
is 3%. For all banking organizations not rated in the highest category, the 
minimum leverage ratio must be at least 100 to 200 basis points above the 3% 
minimum, or 4% to 5%. In addition to these uniform risk-based capital 
guidelines and leverage ratios that apply across the industry, the regulators 
have the discretion to set individual minimum capital requirements for 
specific institutions at rates significantly above the minimum guidelines and 
ratios.

Future changes in regulations or practices could further reduce the amount of 
capital recognized for purposes of capital adequacy.  Such a change could 
affect the ability of the Bank to grow and could restrict the amount of 
profits, if any, available for the payment of dividends

The following table presents the amounts of regulatory capital and the 
capital ratios for the  Bank, compared to its minimum regulatory capital 
requirements as of December 31, 1998.


                                  DECEMBER 31, 1998
<TABLE>
<CAPTION>

                                                         MINIMUM
                                        ACTUAL      CAPITAL REQUIREMENTS
                                        ------      --------------------
          <S>                           <C>         <C>
          LEVERAGE RATIO                7.55%             4.0%
          TIER 1 RISK-BASED RATIO       9.69%             4.0%
          TOTAL RISK-BASED RATIO        10.81%            8.0%
</TABLE>

Under applicable regulatory guidelines, the Bank was considered "Well 
Capitalized" at December 31, 1998. ] Under existing regulations of the 
Federal Reserve Board, the capital ratios of the bank holding company with 
total assets of less than $150 million, such as the Company, are deemed to be 
the same as those of the Bank.

On January 1, 1998 new legislation became effective which, among other 
things, gave the power to the DFI to take possession of the business and 
properties of a bank in the event that the tangible shareholders' equity of 
the bank is less than the greater of (i) 3% of the banks total assets or (ii) 
$1,000,000.

Prompt Corrective Action and Other Enforcement Mechanisms

Federal law requires each federal banking agency to take prompt corrective 
action to resolve the problems of insured depository institutions, including 
but not limited to those that fall below one or more prescribed minimum 
capital ratios.  The law required each federal banking agency to promulgate 
regulations defining the following five categories in which an insured 
depository institution will be placed, based on the level of its capital 
ratios: well capitalized, adequately capitalized, undercapitalized, 
significantly undercapitalized and critically undercapitalized.

An insured depository institution generally will be classified in the 
following categories based on capital  measures indicated below:


"Well capitalized"                           "Adequately capitalized"
------------------                           ------------------------

                                                                          7

<PAGE>

Total risk-based capital of 10%;             Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and         Tier 1 risk-based capital of 4%; 
Leverage ratio of 5%.                        and Leverage ratio of 4%.

"Undercapitalized"                           "Significantly undercapitalized"
------------------                           --------------------------------

Total risk-based capital less than 8%;       Total risk-based capital less than
Tier 1 risk-based capital less than 4%; or   6%; Tier 1 risk-based capital less
Leverage ratio less than 4%.                 than 3%; or Leverage ratio less
                                             than 3%.

"Critically undercapitalized"
-----------------------------

Tangible equity to total assets less than 2%.


An institution that, based upon its capital levels, is classified as "well 
capitalized," "adequately capitalized" or undercapitalized" may be treated as 
though it were in the next lower capital category if the appropriate federal 
banking agency, after notice and opportunity for hearing, determines that an 
unsafe or unsound condition or an unsafe or unsound practice warrants such 
treatment.  At each successive lower capital category, an insured depository 
institution is subject to more restrictions.  The federal banking agencies, 
however, may not treat an institution as "critically undercapitalized" unless 
its capital ratio actually warrants such treatment.

The law prohibits insured depository institutions from paying management fees 
to any controlling persons or, with certain limited exceptions, making 
capital distributions if after such transaction the institution would be 
undercapitalized.  If an insured depository institution is undercapitalized, 
it will be closely monitored by the appropriate federal banking agency, 
subject to asset growth restrictions and required to obtain prior regulatory 
approval for acquisitions, branching and engaging in new lines of business.  
Any undercapitalized depository institution must submit an acceptable capital 
restoration plan to the appropriate federal banking agency 45 days after 
becoming undercapitalized.  The appropriate federal banking agency cannot 
accept a capital plan unless, among other things, it determines that the plan 
(i) specifies the steps the institution will take to become adequately 
capitalized, (ii) is based on realistic assumptions and (iii) is likely to 
succeed in restoring the depository institution's capital.  In addition, each 
company controlling an undercapitalized depository institution must guarantee 
that the institution will comply with the capital plan until the depository 
institution has been adequately capitalized on an average basis during each 
of four consecutive calendar quarters and must otherwise provide adequate 
assurances of performance.  The aggregate liability of such guarantee is 
limited to the lesser of (a) an amount equal to 5% of the depository 
institution's total assets at the time the institution became 
undercapitalized or (b) the amount which is necessary to bring the 
institution into compliance with all capital standards applicable to such 
institution as of the time the institution fails to comply with its capital 
restoration plan.  Finally, the appropriate federal banking agency may impose 
any of the additional restrictions or sanctions that it may impose on 
significantly undercapitalized institutions if it determines that such action 
will further the purpose of the prompt correction action provisions.

An insured depository institution that is significantly undercapitalized, or 
is undercapitalized and fails to submit, or in a material respect to 
implement, an acceptable capital restoration plan, is subject to additional 
restrictions and sanctions.  These include, among other things: (i) a forced 
sale of voting shares to raise capital or, if grounds exist for appointment 
of a receiver or conservator, a forced merger; (ii) restrictions on 
transactions with affiliates; (iii) further limitations on interest rates 
paid on deposits; (iv) further restrictions on growth or required shrinkage; 
(v) modification or termination of specified activities; (vi) replacement of 
directors or senior executive officers; (vii) prohibitions on the receipt of 
deposits from correspondent institutions; (viii) restrictions on capital 
distributions by the holding companies of such institutions; (ix) required 
divestiture of subsidiaries by the institution; or (x) other restrictions as 
determined by the appropriate federal banking agency.  Although the 
appropriate federal banking 
                                                                          8

<PAGE>

agency has discretion to determine which of the foregoing restrictions or 
sanctions it will seek to impose, it is required to force a sale of voting 
shares or merger, impose restrictions on affiliate transactions and impose 
restrictions on rates paid on deposits unless it determines that such actions 
would not further the purpose of the prompt corrective action provisions.  In 
addition, without the prior written approval of the appropriate federal 
banking agency, a significantly undercapitalized institution may not pay any 
bonus to its senior executive officers or provide compensation to any of them 
at a rate that exceeds such officer's average rate of base compensation 
during the 12 calendar months preceding the month in which the institution 
became undercapitalized.

Further restrictions and sanctions are required to be imposed on insured 
depository institutions that are critically undercapitalized.  For example, a 
critically undercapitalized institution generally would be prohibited from 
engaging in any material transaction other than in the ordinary course of 
business without prior regulatory approval and could not, with certain 
exceptions, make any payment of principal or interest on its subordinated 
debt beginning 60 days after becoming critically undercapitalized.  Most 
importantly, however, except under limited circumstances, the appropriate 
federal banking agency, not later than 90 days after an insured depository 
institution becomes critically undercapitalized, is required to appoint a 
conservator or receiver for the institution.  The board of directors of an 
insured depository institution would not be liable to the institution's 
shareholders or creditors for consenting in good faith to the appointment of 
a receiver or conservator or to an acquisition or merger as required by the 
regulator.

In addition to measures taken under the prompt corrective action provisions, 
commercial banking organizations may be subject to potential enforcement 
actions by the federal regulators for unsafe or unsound practices in 
conducting their businesses or for violations of any law, rule, regulation or 
any condition imposed in writing by the agency or any written agreement with 
the agency. Enforcement actions may include the imposition of a conservator 
or receiver, the issuance of a cease and desist order that can be judicially 
enforced, the termination of insurance of deposits (in the case of a 
depository institution), the imposition of civil money penalties, the 
issuance of directives to increase capital, the issuance of formal and 
informal agreements, the issuance of removal and prohibition orders against 
institution-affiliated parties and the enforcement of such actions through 
injunctions or restraining orders based upon a judicial determination that 
the agency would be harmed if such equitable relief was not granted.

Premiums for Deposit Insurance

All deposits of the Bank are insured by the FDIC through the Bank Insurance 
Fund ("BIF") which are subject to FDIC insurance assessment.  The amount of 
FDIC assessment paid by individual insured depository institutions is based 
upon their relative risk as measured by regulatory capital ratios and certain 
other factors.  During 1995, the FDIC significantly reduced premium rates 
assessed on deposits insured by the BIF.   As a result of its "Well 
Capitalized" status, the Bank paid $20,153 in 1998.

Financial Modernization Legislation

Various proposals to adopt comprehensive financial modernization legislation 
have been introduced in Congress which include, among other things, 
elimination of the federal thrift charter, creation of a uniform financial 
institutions charter, expansion of bank powers, and integration of banking, 
commerce, securities activities and insurance. In May 1998, the House passed 
legislation that would have overhauled the financial services industry and 
would have, among other things, allowed mergers among banking, securities and 
insurance firms. Congress adjourned for 1998 without the passage of similar 
legislation by the Senate.  Similar legislation has already been introduced 
in both houses of Congress in the current session.  It is currently 
impossible to predict whether and in 
                                                                          9

<PAGE>

what form financial reform legislation will be passed in 1999 or in the 
future or what the impact of such legislation might be on the Company, its 
financial condition and business as well as its results of operations.

Community Reinvestment Act

The Bank is subject to certain fair lending requirements and reporting 
obligations involving home mortgage lending operations and Community 
Reinvestment Act ("CRA") activities.  The CRA generally requires the federal 
banking agencies to evaluate the record of a financial institution in meeting 
the credit needs of their local communities, including low and moderate 
income neighborhoods.  In addition to substantial penalties and corrective 
measures that may be required for a violation of certain fair lending laws, 
the federal banking agencies may take compliance with such laws and CRA into 
account when regulating and supervising other activities.

In connection with its assessment of CRA performance, the appropriate bank 
regulatory agency assigns a rating of  "outstanding." "satisfactory," "needs 
to improve" or "substantial noncompliance."  At its last examination by the 
FDIC, the Bank received a CRA rating of "Satisfactory."

Accounting Changes

From time to time the Financial Accounting Standards Board ("FASB") issues 
pronouncements which govern the accounting treatment for the Company's 
financial statements.  For a description of the recent pronouncements 
applicable to the Company (see the Notes to the Financial Statements included 
in Item 7 of this Report).  The FASB recently proposed for comment a change 
in the accounting rules relating to mergers and acquisitions.  Specifically, 
the "pooling method" of accounting for mergers would be eliminated.  
Financial institutions often prefer to account for mergers using this method 
and many of the mergers in the financial institutions industry in the last 
several years have been accounted for using the pooling method.  The impact 
of such accounting change, if adopted, on mergers and acquisitions involving 
financial institutions and upon the Company and the value of its Common Stock 
can not presently be predicted.

Potential Enforcement Actions

Commercial banking organizations, such as the Company and the Bank, may be 
subject to potential enforcement actions by the Federal Reserve Board, the 
DFI and the FDIC for unsafe or unsound practices in conducting their 
businesses or for violations of any law, rule, regulation or any condition 
imposed in writing by the agency or any written agreement with the agency.  
Enforcement actions may include the imposition of a conservator or receiver, 
the issuance of a cease and desist order that can be judicially enforced, the 
termination of insurance of deposits (in the case of a depository 
institution), the imposition of civil money penalties, the issuance of 
directives to increase capital, the issuance of formal and informal 
agreements, the issuance of removal and prohibition orders against 
institution-affiliated parties and the enforcement of such actions through 
injunctions or restraining orders based upon a judicial determination that 
the agency would be harmed if such equitable relief was not granted.

ITEM 2.   DESCRIPTION OF PROPERTIES

The Bank and the Company occupy a permanent headquarters facility which is 
located at 545 Twelfth Street, Paso Robles, Ca.  The purchase price for the 
headquarters, was approximately $1,000,000 for the building and land.  This 
building has approximately 9,000 square feet of space and off-street parking. 
The Bank has remodeled this building at an approximate cost of $300,000.

                                                                          10

<PAGE>

The Bank has a non-banking office, located at 600 Twelfth Street, Paso Robles 
(directly across from its present headquarters) which was purchased by the 
Bank on December 23, 1986, for approximately $400,000 from an unaffiliated 
party.

In June of 1994, the Bank opened a branch at 171 Niblick Rd., Paso Robles, 
Ca. The Bank leases this 1,400 square foot branch for $2,135 per month. On 
March 6, 1997, the Bank renewed the lease for an additional three year term.

On June 26, 1997 the Bank executed a lease for its branch office at 297 
Madonna Road, San Luis Obispo.  The branch was previously located in premises 
which were acquired from La Cumbre Savings which lease expired in 1997.  The 
new branch lease is for 6,200 square feet of which the Bank subleases 
approximately 58% to another firm and uses 42%.  The other firm pays 58% of 
the rent and expenses and the Bank pays 42%.  The rent under the lease for 
the entire space starts at $6,200/month for the first year; $6,280/month for 
the next two years; $7,750/month for the next two years the rent is then 
repriced in year six of the lease to 95% of the prevailing fair market value 
and then increases each year thereafter at the greater of the consumer price 
index or 2.5% until the lease expires on June 30, 2009.

The Bank opened a branch office  at 1135 Santa Rosa Street in downtown San 
Luis Obispo, Ca  in April 1996.  The Bank is leasing a building containing 
approximately 5,618 square feet for $5,555 per month for the next four years. 
The lease payment will increase by approximately $500 per month during the 
next 4 years.  The lease will expire on  February 28, 2001 at which time the 
Bank has an option to renew the lease for an additional 5 years.

On February 21, 1997, the Bank acquired the Cambria branch of Wells Fargo 
Bank located at 1276 Tamson Drive, Cambria.   The Bank leases this 2,916 
square foot branch for  rent of $2,208 per month, subject to adjustments for 
cost of living increases and certain pass-throughs.  The lease will expire in 
2004 at which time the Bank has an option to renew the lease for two 
additional five year terms.

On August 26, 1998, the Company purchased property located at 9900 El Camino 
Real, Atascadero.  The purchase price was $271,160.  The corporation has 
entered into a contract with Sabaloni Construction to construct a building  
with a total of 3,500 square feet of floor space.  The total costs of 
improvements will be $363,000 plus furniture and fixtures.  Once complete, 
the bank will enter into a long term lease with the corporation to occupy the 
building.

On November 1, 1998, the bank entered into a 10 year lease with an affiliated 
party to lease property known as 1660 South Broadway, Santa Maria, Ca.  The 
lease calls for monthly payments based on a  triple net price of $1.15 per 
square foot or $5,395 per month.  The rent will adjust each November by the 
Consumer Price Index or a maximum of 6%. The lease will expire on October 31, 
2008, with the banking having three five year options to renew.

On August 1, 1998 the bank entered into a one year lease agreement to lease 
property located at 960 Grand Ave, Suite 1, Grover Beach, Ca..  The lease 
calls for a payment of $1,000 per month triple net.  At the maturity, the 
lease will convert to a month to month lease at the same payment terms. The 
bank operates a loan production office out of this facility.

ITEM 3.   LEGAL PROCEEDINGS

The Bank is, from time to time, subject to various pending and threatened 
legal actions which arise out of the normal course of its business.  Neither 
the Company nor the Bank is a party to any pending legal or administrative 
proceedings (other than ordinary routine litigation incidental to the 
Company's or the Bank's business) and no such proceedings are known to be 
contemplated.

There are no material proceedings adverse to the Company or the Bank to which 
any director, officer, affiliate of the Company or 5 % shareholder of the 
Company or the Bank, or any associate of any such director, officer, 
affiliate or 5% 
                                                                          11


<PAGE>

shareholder of the Company or Bank is a party, and none of the above persons 
has a material interest adverse to the Company or the Bank.

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

NO MATTERS WERE SUBMITTED TO A VOTE OF SECURITY HOLDERS DURING THE FOURTH 
QUARTER OF 1998.


                                      PART II

ITEM  5.  MARKET FOR COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS

Market Information

There is a limited over-the-counter market for the Company's Common Stock.  
The Company's Common Stock is not listed on any exchange or market.  However, 
Maguire Investments, Inc., Hoefer & Arnett, Inc., Pacfic Crest Securities and 
Sutro & Co. make a market  in the Company's Common Stock.  Certain 
information concerning the Common Stock is reported on the NASDAQ electronic 
bulletin board under the symbol "HEOP."

The information in the following table indicates the high and low bid prices 
of the Company's Common Stock for each quarterly period during the last two 
years based upon information provided by Maguire Investments, Inc., Hoefer & 
Arnett, Inc., Pacific Crest Securities and Sutro & Co..  These prices do not 
include retail mark-ups, mark-downs or commission.

<TABLE>
<CAPTION>

Quarter Ended                          Bid Prices (1)
1998                                 Low          High
<S>                                <C>           <C>
March 31                           $13.50        $16.00
June 30                            15.75          16.75
September 30                       16.00          17.75
December 31                        16.00          17.00

1997                                 Low          High


                                                                          12

<PAGE>


March 31                           $8.00          $10.00
June 30                            10.00           11.33
September 30                       10.33           11.33
December 31                        11.50           12.67

</TABLE>

(1) All per share information has been retroactively adjusted for the 
three-for-two stock split paid on November 5, 1997

Holders

As of February 1, 1999, there were approximately 550 holders of the Company's 
Common Stock.  There are no other classes of equity outstanding.

Dividends

The Company is a legal entity separate and distinct from the Bank.  The 
Company's shareholders are entitled to receive dividends when and as declared 
by its Board of Directors, out of funds legally available therefore, subject 
to the restrictions set forth in the California General Corporation Law (the 
"Corporation Law").  The Corporation Law provides that a corporation may make 
a distribution to its shareholders if the corporation's retained earnings 
equal at least the amount  of the proposed distribution.  The Corporation Law 
also provides that, in the event that sufficient retained earnings are not 
available for the proposed distribution, a corporation may nevertheless make 
a distribution to its shareholders if it meets two conditions, which 
generally stated are as follows: (i) the corporation's assets equal at least 
1-1/4 times its liabilities, and (ii) the corporation's current assets equal 
at least its current liabilities or, if the average of the corporation's 
earnings before taxes on income and before interest expenses for the two 
preceding fiscal years was less than the average of the corporation's 
interest expenses for such fiscal years, then the corporation's current 
assets  must equal at least 1-1/4 times its current liabilities.

The ability of the Company to pay a cash dividend depends largely on the 
Bank's ability to pay a cash dividend to the Company.  The payment of cash 
dividends by the Bank is subject to restrictions set forth in the California 
Financial Code (the "Financial Code").  The Financial Code provides that a 
bank may not make a cash distribution to its shareholders in excess of the 
lesser of (a) the bank's retained earnings; or (b) the bank's net income for 
its last three fiscal years, less the amount of any distributions made by the 
bank or by any majority-owned subsidiary of the bank to the shareholders of 
the bank during such period. However, a bank may, with the approval of the 
DFI, make a distribution to its shareholders in an amount not exceeding the 
greater of (x) its retained earnings; (y) its net income for its last fiscal 
year; or (z) its net income for its current fiscal year.  In the event that 
the DFI determines that the shareholders' equity of a bank is inadequate or 
that the making of a distribution by the bank would be unsafe or unsound, the 
DFI may order the bank to refrain from making a proposed distribution.  The 
FDIC may also restrict the payment of dividends if such payment would be 
deemed unsafe or unsound or if after the payment of such dividends, the Bank 
would be included in one of the "undercapitalized" categories for capital 
adequacy purposes pursuant to federal law. (See,  "Item 1 - Description of 
Business - Prompt Corrective Action and Other Enforcement Mechanisms.")  
Additionally, while the Federal Reserve Board has no general restriction with 
respect to the payment of cash dividends by an adequately capitalized bank to 
its parent holding company, the Federal Reserve Board might, under certain 
circumstances, place restrictions on the ability of a particular bank to pay 
dividends based upon peer group averages and the performance and maturity of 
the particular bank, or object to management fees to be paid by a subsidiary 
bank to its holding company on the basis that such fees cannot be supported 
by the value of the services rendered or are not the result of an arm's 
length transaction.

Under these provisions and considering minimum regulatory capital 
requirements, the amount available for distribution from the Bank to the 
Company was approximately $2,450,800 at December 31, 1998.

                                                                          13

<PAGE>

The following table sets forth the per share amount and month of payment for 
all cash dividends paid since January 1, 1997:

<TABLE>
<CAPTION>

Month Paid                         Amount Per Share (2)
<S>                                <C>
     February, 1997                       .33
     February, 1998                       .50
</TABLE>


2) Per share information has been retroactively adjusted for the 
three-for-two stock split paid on November 5, 1997.

On January 28, 1999, the Board of Directors declared a 4% stock dividend for 
shareholders of record as of February 15, 1999. The stock dividend will be 
distributed on February 26, 1999.

Whether or not stock dividends or any cash dividends will be paid in the 
future will be determined by the Board of Directors after consideration of 
various factors.  The Company's profitability and regulatory capital ratios 
in addition to other financial conditions will be key factors considered by 
the Board of Directors in making such determinations regarding the payment of 
dividends by the Company.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

The following is an analysis of the financial condition and results of 
operations of the Company for the two years ended December 31, 1998.  The 
analysis should be read in connection with the  consolidated financial 
statements and notes thereto appearing elsewhere in this report.

On November 15, 1994, the Company acquired all of the assets and assumed  all 
of the liabilities of the Bank.  Each shareholder of the Bank received one 
share of stock in the Company in exchange for one share of Bank stock.  The 
Bank became a wholly owned subsidiary of the Company.  The Bank is the only 
active subsidiary owned by the Company.

EARNINGS OVERVIEW

The Company reported net income for 1998 of $1,346,595. This was a 6.8% 
increase from the $1,261,064 reported in 1997.  Net income reported for 1997 
represented an increase of $347,233 or 38.0% more than 1996 net income of 
$913,831.  Basic earnings per share were $1.24, $1.18 and $0.88 at December 
31, 1998, 1997 and 1996, respectively. Diluted earnings per share were $1.24, 
$1.18 and $0.88 at December 31, 1998, 1997 and 1996, respectively.

                             RETURN ON EQUITY AND ASSETS

                                     DECEMBER 31,

<TABLE>
<CAPTION>
                                                       1998      1997
                                                       ----      ----
     <S>                                              <C>        <C>
     Return on Average Assets                          1.24%      1.41%

     Return on Average Equity                         16.11%     16.61%

     Dividend Payout Ratio                            40.32%     43.98%

     Average Equity to

                                                                          14

<PAGE>

     Average Assets Ratio                              8.04%      8.48%


     Return on Average Interest
     Bearing Assets                                    5.94%      6.02%

     Average Loans to Average Deposits                65.84%     65.79%

</TABLE>

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 nonaccrual loans, and changes in market interest rates.

Net interest income before provision for possible loan losses for 1998 was 
$5,446,365 an increase of $973,362 or 21.7% more than the $4,473,003 in 1997. 
The increase in net interest income for 1998 compared to 1997 was 
attributable to a $17,392,000 increase in average earning assets at an 
average rate of 8.7%. The average interest-bearing liabilities for 1998 
increased by $10,848,000. The increase in net interest income resulted 
primarily from the large increase in interest earning assets over the 
increase in interest bearing liabilities.  The average rate paid on interest 
bearing liabilities in 1998 was 3.37% compared to 3.42% in 1997.  The average 
non-interest bearing demand deposits increased by $6,463,000 over 1997. Other 
low cost deposits such as savings, now and money market accounts grew an 
average $6,978,000 with a weighted average rate of 2.35%. The higher cost 
time deposits increased an average of $3,739,000. These changes reflect a 
major effort by the Bank to adjust its liability mix to increase its level of 
demand deposits and savings accounts. Total income on the loan portfolio 
increased  from $5,505,740 in 1997 to $6,459,394 in 1998.  This was due to an 
average increase in the loan portfolio of $11,661,000.

The average yield on earning assets was 8.71% and 9.00%  for 1998 and 1997, 
respectively.  The average yield on interest bearing liabilities was 3.37% 
for 1998, compared to 3.42%  for 1997.  The net interest margin was 5.94% in 
1998 compared to 6.02% in 1997.

The following tables set forth average balance sheet information, interest 
income and expense, average yields and rates and net interest income and 
margin for the years ended December 31, 1998 and 1997.  The average balance 
of nonaccruing loans has been included in loan totals.

                          AVERAGE BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>

          1998                                   1997
(dollars in thousands)                          Average        Avg. Yield    Interest        Average    Avg. Yield     Interest
Interest Earning Assets:                        Balance        Rate paid      Amount         Balance     Rate paid      Amount
                                              ---------        ---------      -------        -------     ---------      -------
<S>                                           <C>               <C>           <C>           <C>          <C>            <C> 

  Time deposits with other Banks              $     425          5.65%        $    24       $    190          5.79%     $    11
  Investment securities taxable                  17,522          5.97%          1,058         15,732          5.71%         899
  Investment securities non-taxable               5,266          4.80%            253          2,716          4.68%         127
  Federal funds sold                              3,749          5.25%            197          2,593          5.48%         142
  Loans (1)(2)                                   64,734          9.98%          6,459         53,073         10.37%       5,506
                                              ---------                       -------        -------                    -------
    Total interest earning assets                91,696          8.71%          7,991         74,304          9.00%       6,685
Allowance for possible loan losses                 (974)                                        (849)
Non-earning assets:
   Cash and due from banks                       11,993                                       10,638
   Property, premises, & equipment                2,245                                        1,981
   Other assets                                   3,258                                        3,387
                                              ---------                                      ------- 
TOTAL ASSETS                                   $108,218                                      $89,461
                                              ---------                                      ------- 
                                              ---------                                      ------- 

                                                                          15

<PAGE>

Interest-bearing liabilities:
   Savings, now, & money market                 $48,509          2.35%         $1,142        $41,531          2.53%      $1,050
   Time deposits                                 25,923          5.16%          1,338         22,184          4.99%       1,106
   Other borrowings                               1,104          5.80%             64            973          5.76%          56
                                              ---------                       -------        -------                    -------
      Total interest-bearing liabilities         75,536          3.37%          2,544         64,688          3.42%       2,212
                                              ---------                       -------        -------                    -------
Non-interest-bearing liabilities:
   Demand deposits                               22,445                                       15,982
   Other liabilities                              1,876                                        1,201
                                              ---------                                      -------
      Total liabilities                          99,857                                       81,871
Stockholders' equity:
   Common stock                                                                 4,232                                     4,135
   Retained earnings                              4,468                                        3,867
   Valuation allowance investments                 (339)                                        (412)
                                              ---------                                      -------
    Total stockholders' equity                    8,361                                        7,590
                                              ---------                                      -------
TOTAL LIABILITIES AND
   STOCKHOLDERS' EQUITY                        $108,218                                      $89,461
                                              ---------                                      -------
                                              ---------                                      -------
Net interest income                                                            $5,447                                    $4,473
                                                                               ------                                    ------
                                                                               ------                                    ------
Net interest margin(3)                                           5.94%                                        6.02%
</TABLE>

(1) Nonaccruing loans have been included in total loans.
(2) Loan fees of $312 and $265 for 1998 and 1997, respectively have been
    included in the interest income computation.
(3) Net interest margin has been calculated by dividing the net interest
    income by total earning assets.

Note: All average balances have been computing using daily balances.



                                RATE/VOLUME ANALYSIS


<TABLE>
<CAPTION>
                                                           1998                                         1997
                                                           ----                                         ----  
                                          Average         Average                      Average         Average
Increase (decrease) in:                   Bal/Vol           Rate          Total        Bal/Vol           Rate          Total
<S>                                       <C>             <C>             <C>          <C>             <C>            <C>   
Interest income:
   Loans (1)                               $1,154          $(201)          $953         $1,082          $(156)        $  926
   Investment securities taxable              115             44            159            109             29            138
   Investment Sec. (Non-taxable)(2)           189              6            195             (5)          ( 12)           (17)
   Taxable equivalent adjustment(2)           (67)            (2)           (69)             2              4              6
   Interest-bearing deposits                   14             (1)            13              8            ( 2)             6
   Federal funds sold                          60            ( 5)            55             40            ( 6)           346
                                           ------          -----          -----         ------          -----         ------
     Total                                  1,465           (159)         1,306          1,236           (143)         1,093

Interest expense:
   Savings, now, money market                 156           ( 64)            92            357           ( 11)           346

                                                                    16

<PAGE>

   Time deposits                              192             40            232            (97)          ( 45)         (142)
   Other borrowings                             8              0              8             30          (   4)           26
                                           ------          -----          -----         ------          -----         ------
  Total                                       356           ( 24)           332            290           ( 60)          230
                                           ------          -----          -----         ------          -----         ------
Increase (decrease) in net
   Interest income                         $1,109          $(135)          $974           $946          $( 83)         $863
                                           ------          -----          -----         ------          -----         ------
                                           ------          -----          -----         ------          -----         ------

</TABLE>

(1) Loan fees of $312 and $265 for 1998 and 1997, respectively have been
    included in the interest income computation.

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

Note A: Average balances of all categories in each period were included in 
the volume computations.

Note B: Average yield rates in each period were used in rate computations.  
Any change attributable to changes in both volume and rate which cannot be 
segregated has been allocated.

Non-Interest Income

Non-interest income consists of bankcard merchant fees, automatic teller 
machines ("ATM") transactions, and other fees, service charges, and gains on 
other real estate owned.  Non-interest income for 1998 was $6,360,803 
compared to $4,966,182 for 1997.  The primary increase in non-interest income 
is attributable to ATM transaction fees, ATM interchange income, and ATM 
sponsorship fees.  These fees increased by $881,245 from 1997. ATM 
transaction fees, interchange income, and sponsorship fees were $4,262,825 
for 1998 compared to $3,381,580 for 1997. In previous years the Bank shared a 
portion of the fees with two individuals who had helped to make these 
arrangements and with the tribes on whose lands the cash dispensing machines 
are installed.  During September 1996, the Bank bought out the interest of 
one of the individuals. During April 1997, the Bank bought out the interest 
of the other individual.  In prior years, the Bank only received the net 
earnings from the surcharge revenue received from the gaming network.  After 
the bank had purchased the interest of the two individuals, it then assumed 
all direct costs and received all of the revenue net of the amounts that are 
still paid to the tribes on whose land the casinos are located.  The contract 
buy outs are being amortized over a period of 18 to 36 months.  The Bank 
receives income for each transaction and as the volume increases so does the 
related income. The competition related to the installation of ATM machines 
has been increasing and the increased competition could reduce future income 
from existing machines. To offset this lost revenue the Bank is actively 
seeking new locations. During the fourth quarter of 1998, 6 ATMs in a 
particular gaming facility were shut down due to the owners  change in 
operating policy. These machines were removed at an expense of approximately 
$125,000 to the bank. The net earnings from All ATM operations before 
deducting for overhead expenses and salaries were $1,506,032, $1,493,778, and 
$1,419,244, for the years ended December 31, 1998, 1997, and 1996, 
respectively.  Bankcard merchant fees were $757,380 in 1998 compared to 
$697,159 in 1997.  The increase in merchant fees was due to an expansion in 
the number of merchants added by the Bank during the year.

Non-Interest Expenses

Non-interest  expenses have increased as a result of the Bank's growth in its 
branches and ATM network. Several new retail ATM locations were opened during 
the year.  The bank opened a new loan production office in August, 1998, 
opened escrow to purchase property for a new branch in Atascadero, Ca. in 
April, 1998 and entered into a new lease to open a new branch in Santa Maria, 
Ca. in November, 1998. On February 1, 1999, the Bank opened a full service 
branch office  in the newly leased facility in Santa Maria.

Salaries and employee benefit expenses were $2,892,921 and $2,402,600 for 
1998 and 1997 respectively.  Full time equivalent employees were 68 for 1998 
and 62 for 1997.  The increase in salary and benefit expense is attributable 
to increased staffing attributable to the bank's growth during the year. 
Staff for the Atascadero and Santa Maria branches were brought on board late 
in 1998 for training and business development. Bonus expense and related 
payroll tax expense increased approximately $80,000 over the previous year. 
The ratio of "assets per employee," one of the measures of operational 
efficiency, was $1,924,245 and 
                                                                          17

<PAGE>

$1,504,923 for 1998, and 1997 respectively. Occupancy, furniture and 
equipment expenses were $923,207 during 1998, compared to $782,217 incurred 
in 1997. As is noted elsewhere in this document, preparation for Year 2000 
compliance has added to the equipment expense for 1998.

Other expenses increased to $5,752,419 in 1998 as compared to $4,047,572 in 
1997. The increase in other expenses reflects costs associated with growth of 
the Bank, and $1,008,619 increase in cost associated with the growth of the 
ATM network.  The ATM cost increased as a result of the purchase of the 
interest of two participants in the ATM network in 1997.  Previously, the 
Bank only received the net income from these ATM networks and now they are 
directly responsible for paying all of the expenses associated with the 
operation of the ATM networks.

Bankcard merchant expenses were $864,970 for 1998, compared to $604,011 for 
1997 the increase resulted from the expansion in the number of merchants 
processed by the Bank. A $103,000 provision for possible Point Of Sale Loss 
was made in 1998 to provide adequate protection against possible losses 
associated with merchant processing activities.

Provision for Income Taxes

The provision for income taxes was $728,026 for 1998 compared to $781,732 in 
1997.  The decrease in the provision is the result of increased tax-exempt 
investments. The Bank's effective tax rate was 35.1% and 38.3% in 1998 and 
1997, respectively.

Provision and Allowance for Credit Losses

The allowance for credit losses is based upon management's evaluation of the 
adequacy of the existing allowance for outstanding loans.  This allowance is 
increased by provisions charged to expense and reduced by loan charge-offs 
net of recoveries.  Management determines an appropriate provision based upon 
loan growth during the period, a comprehensive grading and review formula for 
loans outstanding and historical loss experience.  In addition, management 
periodically reviews the condition of the loan portfolio including the value 
of security interest related to portfolio loans and the economic 
circumstances which may affect the value of portfolio loans to determine the 
adequacy of the allowance.  The evaluation of the allowance is reviewed by 
management and reported on an ongoing basis to the Company's Loan Committee, 
Audit Committee and Board of Directors.  A provision for credit losses of 
$164,000 was expended in both 1998 and 1997. Net loan charge-offs (loans 
charged off, net of loans recovered) were $24,749 in 1998. Net charge-offs 
were $5,641 during 1997. The allowance for credit losses as a percent of 
total gross loans at year-end 1998 and 1997 was 1.47% and 1.67%, 
respectively. Monitoring of all credits enables management to analyze any 
inherent risks in the portfolio which may result from changes in economic 
conditions.

The following table summarizes the analysis of the allowance for loan losses as
of December 31, 1998 and 1997.


                        Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
                                                      1998          1997
                                                      ----          ----
<S>                                                 <C>           <C>
Balance at Beginning of Period                      $930,284      $771,925

Charge-offs:
  Commercial, Financial and Agricultural              32,431             0
  Real Estate - Construction                               0             0
  Installment Loans to Individuals:
       Money Plus                                          0         1,381

                                                                          18

<PAGE>


       Credit Cards                                    6,801        37,658
       Other Installment                               6,045         9,810
                                                 -----------   -----------
Total charge-offs                                     45,277        48,849
                                                 -----------   -----------

Recoveries:
  Commercial, Financial and Agricultural               8,632        20,021
  Real Estate - Construction                               0           590
  Installment Loans to Individuals:
       Money Plus                                         25           466
       Credit Cards                                    5,160         2,329
       Other Installment                               6,711        19,802
                                                 -----------   -----------
Total Recoveries                                      20,528        43,208
                                                 -----------   -----------
  Net Charge-offs                                     24,749         5,641
Additions Charged to Operations                      164,000       164,000
                                                 -----------   -----------
Balance at End of Period                          $1,069,535     $ 930,284
                                                 -----------   -----------
                                                 -----------   -----------
Gross Loans at End of Period                     $72,840,372   $55,627,768

Ratio of Net Charge-offs During the
Year to Average Loans outstanding                      0.03%         0.01%

Ratio of Reserves to Gross Loans                       1.47%         1.67%

Ratio of Non-performing Loans to
the Allowance for Credit Losses                       93.17%       109.13%
</TABLE>

The Bank adopted SFAS No. 114 (as amended by SFAS No. 118), "Accounting by 
Creditors for Impairment of a Loan" on January 1, 1996.  In accordance with 
SFAS No. 114, those loans identified as "impaired" are measured on the 
present value of expected future cash flows, discounted at the loan's 
effective interest rate or the fair value of the collateral if the loan is 
collateral dependent. A loan is impaired when it is probable the creditor 
will not be able to collect all contractual principal and interest payments 
due in accordance with terms of the loan agreement.

Loans are placed on nonaccrual when a loan is specifically determined to be 
impaired or when principal or interest is delinquent for 90 days or more. Any 
unpaid interest previously accrued on those loans is reversed from income. 
Interest income generally is not recognized on specific impaired loans unless 
the likelihood of further loss is remote. Interest payments received on such 
loans are applied as a reduction on the loan principal balance.

Included in non- performing loans for the last three years is a loan for 
$758,115.  This loan is secured by real estate with an appraised value of 
approximately $1,500,000.  Even though this loan is on a nonaccrual status, 
management doesn't believe that there will be any loss of the principal due.

                                                                          19

<PAGE>


ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                        1998                                    1997
                                                  % OF LOANS                              % OF LOANS

                                                             IN EACH CATEGORY                       IN EACH CATEGORY 
                                                             TO TOTAL LOANS                         TO TOTAL LOANS

                                                      AMOUNT               LOANS              AMOUNT               LOANS
<S>                                        <C>                          <C>                <C>                  <C>
Commercial, Financial
  and Agricultural                                  $537,238              50.23%            $428,341              46.04%

Real Estate -
 Construction                                        192,001              17.95%             190,804              20.51%

Real Estate -
 Mortgage                                            260,665              24.37%             249,875              26.86%

Installment Loans
 to individuals                                      $75,819               7.09%             $59,295               6.37%

All Other Loans
 (Including overdrafts)                                3,812                .36%               1,969                .22%
                                                  ----------             ------             --------             ------
                                                  $1,069,535             100.00%            $930,284             100.00%
                                                  ----------             ------             --------             ------
                                                  ----------             ------             --------             ------
</TABLE>

In evaluating the allowance for the credit losses, management takes into 
consideration the composition of its loan portfolio, loan growth during the 
period, risk and collectibility of loans, and economic conditions.  The 
allowance is maintained at a sufficient level to cover all potential loan 
charge-offs in addition to a cumulative, annual amount based upon the factors 
outlined above. Management utilizes an internal loan classification system to 
grade portfolio loans as a part of its analysis of the adequacy of the 
allowance.  In addition, management periodically reviews the condition of the 
loan portfolio including the value of security interests related to the 
portfolio loan to determine the adequacy of the allowance.  The evaluation of 
the adequacy of the allowance is reviewed by management and reported on an 
ongoing basis to the Bank's Loan Committee, Audit Committee and Board of 
Directors.

Local Economy

The California economy is expected to continue to grow at a modest rate 
during 1999, with the local economy in the Bank's primary service area 
anticipated to show higher rates of growth than the state as a whole.   
During 1998, the bank expanded its market into the South San Luis Obispo 
County area through the operations of a new Loan Production Office.  The bank 
also began plans to expand into Northern Santa Barbara County with a new full 
service branch office in Santa Maria which opened on February 1, 1999.  
Continued market expansion will take place with the opening of a new full 
service branch office located in the city of Atascadero, Ca. Scheduled 
opening is set for March 15, 1999.

Business and retail activity has increased throughout the Central Coast over 
the past two years.  The economic outlook is for continues expansion in the 
economy for at least the next two to three years.  Real  estate prices have 
stabilized and began to show signs of increasing at a moderate rate.  New 
home construction has shown strong increases.  with interest rates at a 
record low level, home construction and mortgage organization should be 
strong sectors of the local economy for some time to come.

                                                                          20

<PAGE>

<PAGE>

FINANCIAL CONDITION ANALYSIS

Total assets of the Company were $131,033,498 at December 31, 1998 compared 
to $93,319,422 in 1997.

A major portion of the Bank's loans are adjustable.  Approximately 73% of the 
loans are adjustable.  The majority of those loans that reprice are tied to 
changes in the prime rate.  If interest rates change, the yield on these 
loans will also change. A 1.00% increase in the prime rate would increase net 
interest income approximately $193,116 a year and a 1.00% decrease in the 
prime rate would decrease net interest income by $142,464 a year.

The following table summarizes the composition of the loan portfolio as of 
December 31, 1998 and 1997.

                            COMPOSITION OF LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                              1998                                1997
                                              ----                                ----
LOAN CATEGORY                               AMOUNT        PERCENT       AMOUNT         PERCENT
                                      --------------------------------------------------------
<S>                                    <C>               <C>         <C>               <C>
COMMERCIAL, FINANCIAL
  AND AGRICULTURAL                     $38,220,932         53.69%    $24,830,234         44.84%

REAL ESTATE-CONSTRUCTION                 8,357,701         11.74%      6,953,512         12.56%

REAL ESTATE-MORTGAGE                    21,672,158         30.44%     19,143,755         34.57%

INSTALLMENT LOANS TO INDIVIDUALS         2,611,325          3.68%      4,296,204          7.76%

ALL OTHER (INCLUDING OVERDRAFTS)           323,493          0.45%        152,606          0.27%
                                      --------------------------------------------------------
TOTAL LOANS, GROSS                      71,185,609        100.00%     55,376,311        100.00%
                                                          ------                        ------
                                                          ------                        ------
DEFERRED LOAN FEES                        (313,032)                     (243,893)

RESERVE FOR POSSIBLE                    (1,069,535)                     (930,284)
                                       -----------                   -----------
  LOAN LOSSES

TOTAL LOANS, NET                       $69,803,042                   $54,202,134
                                       -----------                   -----------
                                       -----------                   -----------
</TABLE>

Net loans totaled $69,803,042 at December 31, 1998, compared to $54,202,134 at
December 31, 1997. Loans increased during the year as the result of our downtown
San Luis Obispo branch and moderate growth at the head office.  The primary
growth was approximately $13,390,698 in commercial and agricultural loans.

The following are the approximate maturities and sensitivity to change in
interest rates for the loans at December 31, 1998.

<TABLE>
<CAPTION>

                                                       After One
                                        Due Within     Year but         After
Loan Category                             One Year    Within Five     Five Years         Totals
-------------
(Dollars in thousands)
<S>                                       <C>            <C>           <C>             <C>
Commercial, Financial
 and Agricultural                          $ 9,536        $ 9,741       $ 18,944       $ 38,221

Real Estate -
 Construction                                6,423            348          1,587          8,358

Real Estate -
 Mortgage                                    2,434          5,335         13,903         21,672

Installment Loans
 to individuals                                196          1,113          1,303          2,612

All Other loans

                                                                          21

<PAGE>


 (including overdrafts)                        323              -              -            323
                                           -------        -------        -------        -------
TOTALS                                     $18,912        $16,537        $35,737        $71,186
                                           -------        -------        -------        -------
                                           -------        -------        -------        -------


                                                        After One
                                        Due Within       Year but          After
                                          One Year    Within Five     Five Years         Totals

Predetermined rates                         $5,684        $ 4,656        $10,641        $20,986

Floating or adjustable
 rates                                      13,323         11,880         25,096         50,199
                                           -------        -------        -------        -------
TOTALS                                    $ 18,912       $ 16,537        $35,737       $ 71,186
                                           -------        -------        -------        -------
                                           -------        -------        -------        -------

</TABLE>

Risk Elements

Risk elements on loans are presented in the following table for December 31:

<TABLE>
<CAPTION>
                                                             1998           1997
                                                             ----           ----
<S>                                                      <C>            <C>
Nonaccrual Loans (impaired loans)                        $934,389       $864,488

Accruing Loans Past Due 90 days                              $-0-        $95,536

Restructured Loans                                       $396,506       $407,929

Interest Excluded on Nonaccrual Loans                    $103,164        $94,762

Interest Recognized on Nonaccrual and Troubled
 Debt Restructured Loans                                  $31,723        $40,753

</TABLE>

At December 31, 1998, 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 which 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 which, for a variety of reasons, management believes 
requires regular review as well as an internal loan classification process. 
Yearly, 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 
Board of Directors.  Except as set forth in the preceding table, there are no 
loans which management has serious doubts as to the borrower's ability to 
comply with present loan repayment terms.

The Bank has a nonaccrual policy which requires a loan greater than 90 days 
past due to be placed on nonaccrual status unless such loan is 
well-collateralized and in the process of collection.  When loans are placed 
on nonaccrual status, all uncollected interest accrued is reversed from 
earnings.  Once on nonaccrual status, interest on a loan is only recognized 
on a cash basis.  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 nonaccrual.

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.

Total Cash and Due from Banks

                                                                          22

<PAGE>

Total cash and due from banks increased from $12,491,388 at December 31, 1997 
to $17,239,179 at December 31, 1998.  The large amount of cash and due from 
banks is to fund the operations of the Bank's two ATM networks.  If the Bank 
were to sell these two networks, the amount of cash would then be invested in 
securities and loans.

Other earning assets are comprised of Federal Funds sold (funds lent on a 
short term basis to other banks), investment securities and short term 
certificates of deposit at other financial institutions.  These assets are 
maintained for short term liquidity needs of thnk, collateralization of 
public deposits, and diversification of the earning asset mix.

                                                                          23

<PAGE>

Other earning assets increased to $36,988,232 at December 31, 1998 compared 
to $21,003,929 at December 31, 1997. The increase in 1997 represents an 
increase in the overall size of the Bank and the investment of excess funds.  
Other earning assets represented 33.7% of the earning asset portfolio at 
December 31, 1998, compared to 27.3% in 1997. On December 31, 1998, one 
particular customer of the bank had an extraordinary deposit of approximately 
$5 million. These excess funds remained on deposit for less than one week.

The following table summarizes the composition of other earning assets at 
December 31:

                         COMPOSITION OF OTHER EARNING ASSETS

<TABLE>
<CAPTION>
                                                        1998                          1997
                                                AMOUNT        PERCENT         AMOUNT        PERCENT
                                           ---------------------------------------------------------
<S>                                        <C>                 <C>        <C>                <C>
HELD TO MATURITY INVESTMENTS                $15,758,151         42.60%    $11,590,592         55.19%

AVAILABLE FOR SALE INVESTMENTS               12,863,106         34.78%      8,303,218         39.53%

FEDERAL FUNDS SOLD                            7,700,000         20.82%        500,000          2.38%

CERTIFICATE OF DEPOSITS                         666,975          1.80%        610,119          2.90%
                                           ---------------------------------------------------------
TOTAL OTHER EARNING ASSETS                  $36,988,232        100.00%    $21,003,929        100.00%
                                           ---------------------------------------------------------
                                           ---------------------------------------------------------

</TABLE>

The Amortized cost, fair value, and maturities at December 31, 1998 are as
follows:

<TABLE>
<CAPTION>

                            Securities Available            Securities Held
                                   For Sale                   To Maturity
                            Amortized     Fair           Amortized     Fair
                             Cost         Value           Cost         Value
                         -----------   -----------     -----------    -----------
<S>                       <C>          <C>               <C>           <C>
DUE IN ONE YEAR OR LESS   $7,973,633   $ 7,973,633       $ 279,194     $  279,191

DUE AFTER ONE YEAR
  THROUGH FIVE YEARS               0             0       1,343,142      1,352,728

DUE AFTER FIVE YEARS
  THROUGH TEN YEARS                0             0       1,921,440      1,936,737

DUE AFTER TEN YEARS        1,650,875     1,814,420       4,045,680      4,051,411

MORTGAGE-BACKED
  SECURITIES               3,286,605     3,075,053       8,168,695      8,438,940
                         -----------   -----------     -----------    -----------
   TOTAL                 $12,911,113   $12,863,106     $15,758,151    $16,059,007
                         -----------   -----------     -----------    -----------
                         -----------   -----------     -----------    -----------
</TABLE>

Deposits

Total deposits increased to $119,407,706 at December 31, 1998.  Total deposits
at December 31, 1997 were $83,549,657. As is indicated elsewhere in this
document, one particular customer had an extraordinary deposit on December 31,
1998 in the approximate amount of $5 million. These funds remained on deposit
for less than one week.

                                       -1-

<PAGE>

The following table sets forth information for the last two fiscal years
regarding the composition of deposits at December 31, and the average rates paid
on each of these categories.

                               COMPOSITION OF DEPOSITS

<TABLE>
<CAPTION>
                                    1998                          1997


                                                AVERAGE                       AVERAGE
DEPOSIT TYPE                     BALANCE      RATE PAID        BALANCE      RATE PAID
                             --------------------------------------------------------
<S>                          <C>              <C>          <C>              <C>
NON-INTEREST BEARING DEMAND  $38,672,576          0.00%    $18,407,169          0.00%

INTEREST BEARING DEMAND       34,601,620          2.19%     30,047,646          2.27%

SAVINGS                       11,592,945          2.40%     10,766,665          2.51%

MONEY MARKET                   5,410,316          3.21%      5,819,526          3.84%

TIME DEPOSITS                 29,130,249          5.16%     18,508,651          4.99%
                            ------------                   -----------

TOTAL DEPOSITS              $119,407,706          2.56%    $83,549,657          2.71%
                            ------------                   -----------
                            ------------                   -----------

</TABLE>

Set forth below is a maturity schedule of domestic time certificates of deposits
of $100,000 and over at December 31, 1998.


<TABLE>
<CAPTION>
TIME DEPOSITS $100,000 AND OVER:
-------------------------------
(Dollars in thousands)
<S>                                                          <C>
Less than 3 months                                            $2,300
3-12 months                                                    1,616
Over 1 year                                                      757
                                                              ------
TOTAL                                                         $4,673
                                                              ------
                                                              ------

</TABLE>

Capital

The Company's total stockholders equity was $9,436,670 as of December 31, 
1998 compared to $8,127,078 as of December 31, 1997.  The increase in capital 
during 1998 was due to net income of $1,346,595, a cash dividend of $0.50 per 
share ($519,850) paid on February 27, 1998, stock options exercised in the 
amount of $289,684  and an increase in the valuation allowance for 
investments of $193,163.  The valuation allowance was a result of the 
company's adoption of SFAS No. 115 "Accounting for Certain Investment in Debt 
and Equity Securities."

Capital ratios for commercial banks in the United States are generally 
calculated using 3 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 of the bank.  
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" of 
the bank. 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) 

                                      -2-

<PAGE>

to 100% (highest risk).  The Total Risk Based Capital Ratio again uses 
"risk-weighted assets" in the denominator, but expands the numerator to 
include other capital items besides equity such as a limited amount of the 
loan loss reserve, long-term capital debt, preferred stock and other 
instruments.  Summarized below are the Bank's capital ratios at December 31, 
1998.

<TABLE>
<CAPTION>

                                          Minimum Regulatory       Heritage
                                         Capital Requirements      Oaks Bank
<S>                                      <C>                       <C>
Leverage Ratio                                 4.00%                 7.55%
Tier One Risk Based Capital Ratio              4.00%                 9.69%
Total Risk Based Capital Ratio                 8.00%                10.81%
</TABLE>

Generally speaking, the primary source of new capital will be generated from
retained earnings. However, to provide for instances when retained earnings may
not keep pace with asset growth, additional sources of capital need to be made
available. To that end, on September 11, 1998, Heritage Oaks Bancorp executed a
Promissory Note for a $2 million line of credit with Pacific Coast Bankers'
Bank. The characteristics of the note are as follows:

        -Collateralized with 339,332 shares of Heritage Oaks Bank common stock
        -Maturity  of August 15, 2004.
        -Interest only for first year of quarterly payments
        -Subsequent payments to be fully amortized to maturity based on
         outstanding balance owed.

On September 28, 1998, October 30, 1998 and December 30, 1998, the Bancorp 
drew on the line for $200,000, $200,000 and $350,000, respectively. On 
September 29, 1998, October 30, 1998 , December 30, 1998 and December 31, 
1998, Bancorp invested $150,000, $200,000, $300,000 and $50,000, 
respectively, in Heritage Oaks Bank as paid in Capital, Surplus.

In addition to this and pursuant to the Capital Plan, the Board of Directors 
are reviewing other sources of capital for the bank.

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 which serve as a 
secondary liquidity source in the amount of $3,500,000.  The Bank has also 
established two borrowing lines with brokers whereby the Bank can pledge 
investment securities as collateral for short term borrowings.

The Bank manages its liquidity by maintaining a majority of its investment 
portfolio in federal funds sold and other liquid investments.  At December 
31, 1998, the ratio of liquid assets not pledged for collateral and other 
purposes to deposits and other liabilities were 26.3% compared to 28.7% in 
1997.  At December 31, 1998 and December 31, 1997, there were no assets 
pledged as collateral on borrowings.  The ratio of gross loans to deposits, 
another key liquidity ratio, was 59.6% at year end 1998 compared to 66.6% at 
December 31, 1997.

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 which are not affected by future changes in 
prices.  Generally, the impact of inflation on a financial institution is 
reflected by fluctuations in interest rates, the ability of customers to 
repay debt and upward pressure on operating expenses.  The effect on 
inflation during the three-year period ended December 31, 1998 has not been 
significant to the Bank's financial position or  results of operations.

Year 2000 Risks and Preparedness

     Many existing computer programs use only two digits to identify a year 
in a data field. These programs were designed and developed without 
considering the impact of the upcoming change in the century. If not 
corrected, many computer applications could fail or create erroneous results 
by or at the 

                                      -3-

<PAGE>

Year 2000 or possibly earlier. The Year 2000 issue affects the Company in 
that the financial services business is highly dependent on computer 
applications in a variety of ways, including the following (i) the Company 
relies on computer systems in almost all aspects of its business, including 
the processing of deposits, loans and other services and products offered to 
customers, the failure of which in connection with the Year 2000 could cause 
systemic disruptions and failures in the products and services offered by the 
Company, (ii) other banks, clearing houses and vendors whose products and 
services the Company uses are at risk of systemic disruptions and potential 
failures in the event that such entities have not adequately addressed their 
Year 2000 issue~ prior to the Year 2000, (iii) the creditworthiness of 
borrowers of the Company might be diminished by significant disruptions of 
their business as a result of their own or others failure to address 
adequately the Year 2000 issues prior to the Year 2000, and (iv) federal 
balancing agencies have issued interagency guidance on the business-wide risk 
posed to financial institutions by the year 2000 problem pursuant to which 
the federal banking agencies may take supervisory action against financial 
institutions that fail to address appropriately Year 2000 issues prior to the 
Year 2000, including formal and informal enforcement actions, denial of 
applications to the federal banking agencies, civil money penalties and a 
reduction in the management component rating of the institution's composite 
rating.

     In order to address the Year 2000 issues facing the Company, the 
Company's Management has initiated a program to prepare the Company's 
computer systems and applications for the Year 2000 (the "Year 2000 Plan). 
The primary focus of the Year 2000 Plan is to convert to the target systems 
identified and believed to be Year 2000 compliant. The Company expects to 
incur internal staff costs as well as consulting and other expenses related 
to infrastructure and facilities enhancements necessary to prepare for 
conversion and Year 2000 system preparations, testing and conversion of 
primary system applications and hardware is expected to cost approximately 
$191,000 to be expended during fiscal years 1998 and 1999.

     As a part of the Year 2000 Plan, the Company is not only undertaking the 
infrastructure and facilities enhancement and testing necessary to ensure 
that the Company is adequately prepared for the Year 2000, but the Company is 
also communicating with its vendors upon whose services the Company relics to 
ensure Year 2000 compliance.  Pursuant to the Year 2000 Plan, the Company 
substantially completed testing of its mission-critical systems and the 
computer-related interactive vendor Systems by December 31, 1998 and expects 
to complete all testing by June 1999. In addition, as part of the credit 
review process, the Company is communicating with its major borrowers in an 
effort to ensure that such borrowers have taken appropriate steps to address 
their Year 2000 issues and will not be materially affected by any Year 2000 
problems. The Company is communicating with its deposit customers as well. 
The Company is also preparing contingency plans to protect the Company in the 
event that the Company is unable to attain Year 2000 compliance in certain 
applications according to the Year 2000 Plan.

     The Company has established a working committee comprised of Senior and 
Middle Management to plan for and monitor the Company's compliance with Year 
2000 issues. This committee has developed a comprehensive policy setting 
forth priorities and a timetable for the Bank to follow in this process.

     The Company has developed a contingency plan that identifies the mission 
critical processes and service providers. An alternative provider or process 
has been identified for each mission critical vendor. In addition, on the 
assumption that the original or alternative process fails at the point of 
processing in the Year 2000, contingency plans are being designed that will 
provide minimum levels of 

                                      -4-

<PAGE>

service or outputs until the failed system can be repaired or replaced. Most 
of these contingency plans are manual effort systems. Test results to-date 
indicate that the original system for each mission critical system should 
meet the demands of processing in the Year 2000. As a reasonable worst case, 
the manual systems designed should provide the minimum levels of service for 
the time required to repair or replace failed systems. However, in the case 
of failure, the ultimate impact on financial operations is not known, nor is 
it known what impact a regional or nationwide power failure or communications 
breakdown would have on the financial performance of the Company.

     The Company has created a budget specific to Year 2000 readiness. The 
budget is comprised of the following components: (1) Consulting assistance 
for testing, (2) Auditing, and (3) Operating system and network upgrades. 
This component is budgeted at $191,000. As of December 31, 1998, $71,104 or 
37% has been spent. Senior Management reviews the budget from time to time as 
the Year 2000 Plan is implemented. There is no assurance that additional 
amounts will not be added to the amounts already budgeted for Year 2000 
expenditures.  With respect  components number (1) and (2), it should be 
noted that Heritage Oaks Bank has the resources in-house to audit review of 
the effectiveness of the Year 2000 Plan and the  technological assistance 
necessary in preparing for and conducting the Company's testing plan.

     In addition, the Company has dedicated significant human resources to 
the Year 2000 Plan. This includes the salaries and benefits of personnel 
devoting significant time to the plan. As of December 31, 1998 the Company 
had expended over $ $16,000 in "man-hours" to the project, equivalent to 16 
work weeks. In addition, expenditures have been made in the areas of 
advertising and public relations, customer and employee awareness programs 
and more.

     In April of 1998, the Company initiated a credit risk assessment 
program, with loan officers completing a Year 2000 questionnaire for all  new 
and renewed credits in amounts over $150,000.00. These questionnaires were 
designed to provide the Company's management with information by which it 
could evaluate the borrower's awareness of and sensitivity to Year 2000 risk. 
Questionnaires are reviewed and discussed at weekly Officer Loan Committee 
meetings and are further reviewed by Credit Administration  and Senior Lender 
to ascertain Year 2000 risk associated with the credit. As a result of this  
review, $89,410  has been allocated to the Company's loan loss provision. In 
addition, legal ~ Year 2000 issues are included in significant commitment 
letters and loan documentation for certain borrowers. Finally, on loan 
participation's purchased, the Company requires assurances from the lead 
lender that it has obtained a Year 2000 questionnaire from the borrower and 
also that the lead lender is satisfactorily progressing toward Year 2000 
compliance.

     Although the Company believes that its Year 2000 Plan and other steps 
being taken are adequate to ensure that it will not be materially affected by 
the Year 2000 problem, there can be no assurance that the Year 2000 Plan and 
the Company's other Year 2000 remedial and contingency plans will fully 
protect the Company from the risks associated with the Year 2000. The 
analysis of, and preparation for, the Year 2000 and related problems 
necessarily rely on a variety of assumptions about future events and there 
can be no assurance that the Company's Management has accurately predicted 
such future events or that the remedial and contingency plans of the Company 
will adequately address such future events. In the event that the business of 
the Company, of vendors of the Company or of customers of the Company is 
disrupted as a result of the Year 2000 problem, such disruption could have a 
material adverse effect on the Company.

                                      -5-
<PAGE>

ITEM 7. FINANCIAL STATEMENTS



                                       -6-

<PAGE>


                              HERITAGE OAKS BANCORP


                       -----------------------------------
                              FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996

                                      with

                          INDEPENDENT AUDITORS' REPORT
                       -----------------------------------


      

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES

                          DECEMBER 31, 1998, 1997 AND 1996





                                      CONTENTS





INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . 1


FINANCIAL STATEMENTS

  Consolidated Balance Sheets
  December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 2

  Consolidated Statements of Income
  For the Years Ended December 31, 1998, 1997 and 1996 . . . . . . . . . . . 3

  Consolidated Statements of Changes in Stockholders' Equity
  For the Years Ended December 31, 1998, 1997 and 1996 . . . . . . . . . . . 4

  Consolidated Statements of Cash Flows
  For the Years Ended December 31, 1998, 1997 and 1996 . . . . . . . . . . . 5


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 7


      

<PAGE>
                            INDEPENDENT AUDITORS' REPORT




Board of Directors and Stockholders
Heritage Oaks Bancorp and Subsidiaries
Paso Robles, California

We have audited the accompanying consolidated balance sheets of Heritage Oaks 
Bancorp and Subsidiaries as of December 31, 1998 and 1997, and the related 
consolidated statements of income and changes in stockholders' equity and 
statements of cash flows for each of the three years in the period ended 
December 31, 1998.  These consolidated financial statements are the 
responsibility of the Company's management.  Our responsibility is to express 
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the audits to 
obtain reasonable assurance about whether the consolidated financial 
statements are free of material misstatement.  An audit includes examining, 
on a test basis, evidence supporting the amounts and disclosures in the 
consolidated financial statements.  An audit also includes assessing the 
accounting principles used and significant estimates made by management, as 
well as evaluating the overall consolidated financial statement presentation. 
 We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of Heritage 
Oaks Bancorp as of December 31, 1998 and 1997, the results of their 
operations and changes in their stockholders' equity and their cash flows for 
each of the three years in the period ended December 31, 1998, in conformity 
with generally accepted accounting principles.

Rancho Cucamonga, California
February 5, 1999



                                       -1-

<PAGE>
                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS
                             DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                     ASSETS
                                                                                            1998                   1997
                                                                                       --------------          ------------
<S>                                                                                    <C>                     <C>
Cash and due from banks (there was no minimum Federal
  Reserve balance requirement at December 31, 1998)                                      $ 17,239,179           $12,491,388
Federal funds sold                                                                          7,700,000               500,000
                                                                                       --------------          ------------
                      Total Cash and Cash Equivalents                                      24,939,179            12,991,388
Interest-bearing deposits in other financial institutions                                     666,975               610,119
Investment securities (Notes #1C and #2)
      Available-for-sale                                                                   12,863,106             8,303,218
      Held-to-maturity, fair value of $16,059,007 and $11,839,161
        at December 31, 1998 and 1997, respectively                                        15,758,151            11,590,592
Loans held for sale (Notes #1E and #4)                                                      1,654,765               495,350
Loans, net of deferred fees and reserves for possible loan losses of $1,069,535
  and $930,284 at December 31, 1998
  and 1997, respectively (Notes #1D and 4)                                                 69,803,041            54,202,134
Property premises and equipment, net (Notes #1G and #7)                                     2,447,385             2,072,711
Other real estate owned (Notes #1H and #20)                                                                          62,000
Net deferred tax asset (Notes #1I and #8)                                                     563,699               566,612
Cash surrender value of life insurance                                                      1,020,576               970,318
Other assets                                                                                1,451,621             1,454,980
                                                                                       --------------          ------------
                      Total Assets                                                       $131,168,498           $93,319,422
                                                                                       --------------          ------------
                                                                                       --------------          ------------


                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
      Deposits
          Demand non-interest bearing                                                      38,672,576            18,407,169
          Savings, NOW and money market deposits                                           51,604,881            46,633,837
          Time deposits of $100,000 or more                                                 4,673,298               970,300
          Time deposits under $100,000                                                     24,456,951            17,538,351
                                                                                       --------------          ------------
                      Total Deposits                                                      119,407,706            83,549,657
      Notes payable (Note #10)                                                                750,000
      Other liabilities                                                                     1,574,122             1,642,687
                                                                                       --------------          ------------
                      Total Liabilities                                                   121,731,828            85,192,344
                                                                                       --------------          ------------
Stockholders' Equity
      Common stock, no par value; 20,000,000 authorized;
         1,069,791 and 1,036,626 shares issued and
        outstanding for 1998 and 1997, respectively                                         4,470,170             4,180,486
      Retained earnings                                                                     5,154,666             4,327,921
      Accumulated other comprehensive income                                                 (188,166)             (381,329)
                                                                                       --------------          ------------
                      Total Stockholders' Equity                                            9,436,670             8,127,078
                                                                                       --------------          ------------
                      Total Liabilities and Stockholders' Equity                         $131,168,498           $93,319,422
                                                                                       --------------          ------------
                                                                                       --------------          ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       -2-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF INCOME
                FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                1998           1997          1996
                                                             -----------    -----------   -----------
                                                             <C>            <C>           <C>
INTEREST INCOME
      Interest and fees on loans (Note #1D)                  $ 6,459,394    $ 5,505,740   $ 4,578,552
      Interest on Investment Securities (Note #1C)
          U.S. Treasury Securities                                27,396         51,472        51,666
          Obligations of U.S. Government Agencies                907,482        777,718       684,716
          Corporate Bonds, Mutual Funds, Commercial Paper        123,003         69,907        24,838
          Obligations of State and Political Subdivisions        253,148        126,916       138,345
      Interest on time deposits with other banks                  23,515         11,016         5,334
      Interest on Federal funds sold                             196,727        142,484       108,013
                                                             -----------    -----------   -----------
                      Total Interest Income                    7,990,665      6,685,253     5,591,464
                                                             -----------    -----------   -----------

INTEREST EXPENSE
      Interest on savings, NOW and money market deposits       1,142,163      1,049,847       703,580
      Interest on time deposits in denominations of
       $100,000 or more                                          204,986        112,009       110,221
      Interest on time deposits under $100,000                 1,133,271        993,941     1,138,282
      Other                                                       63,880         56,453        29,795
                                                             -----------    -----------   -----------
                      Total Interest Expense                   2,544,300      2,212,250     1,981,878
                                                             -----------    -----------   -----------
      Net interest income before provision for
        possible loan losses                                   5,446,365      4,473,003     3,609,586
                      Provision for Possible Loan Losses         164,000        164,000        90,000
                                                             -----------    -----------   -----------
                                                               5,282,365      4,309,003     3,519,586
                                                             -----------    -----------   -----------
NON-INTEREST INCOME
      Service charges on deposit accounts                        690,710        559,874       373,022
      Insurance and brokerage commission fees                     20,931         11,780        14,693
      Investment securities gain/(loss), net                      10,504        (16,719)
      Other                                                    5,638,658      4,411,247     2,501,108
                                                             -----------    -----------   -----------
                      Total Non-interest Income                6,360,803      4,966,182     2,888,823
                                                             -----------    -----------   -----------
NON-INTEREST EXPENSES
      Salaries and employee benefits                           2,892,921      2,402,600     1,873,389
      Equipment expenses                                         382,316        275,745       252,013
      Occupancy expenses                                         540,891        506,472       518,270
      Other expenses (Note #13)                                5,752,419      4,047,572     2,297,563
                                                             -----------    -----------   -----------
                      Total Non-interest Expenses              9,568,547      7,232,389     4,941,235
                                                             -----------    -----------   -----------
Income Before Provision for Income Taxes                       2,074,621      2,042,796     1,467,174
Provision for Income Taxes (Notes #1I and #8)                    728,026        781,732       553,343
                                                             -----------    -----------   -----------
Net Income                                                   $ 1,346,595    $ 1,261,064   $   913,831
                                                             -----------    -----------   -----------
                                                             -----------    -----------   -----------

Earnings Per Share (Notes #1L and #17)
       Basic                                                 $      1.24    $      1.18   $      0.88
                                                             -----------    -----------   -----------
                                                             -----------    -----------   -----------
       Diluted                                               $      1.13    $      1.11   $      0.84
                                                             -----------    -----------   -----------
                                                             -----------    -----------   -----------

</TABLE>


                                       -3-

<PAGE>

                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                                                       Accumulated
                                                            Number of                                    Other          Total
                                                             Shares        Common        Retained    Comprehensive   Stockholders'
                                                           Outstanding     Stock         Earnings        Income         Equity
                                                           -----------    ----------    ----------    -----------    ------------
<S>                                                        <C>            <C>           <C>           <C>            <C>  
BALANCE, January 1, 1996                                   665,655        $4,033,809    $2,705,175     $(513,521)    $6,225,463
  Exercise of stock options                                  9,641            55,436                                     55,436
  Cash dividends paid - $.32 per share                                                    (213,011)                    (213,011)
  Comprehensive income
  Net income                                                                               913,831                      913,831
  Unrealized security holding gains
    (net of $50,998 tax)                                                                                   71,429        71,429
  Comprehensive income                                                                                                  985,260
                                                         -------------    ----------    ----------    -----------    ------------
BALANCE, December 31, 1996                                 675,296         4,089,245     3,405,995       (442,092)    7,053,148
  Exercise of stock options                                 15,868            91,241                                     91,241
  Cash dividends paid - $.33 per share                                                    (337,787)                    (337,787)
  Three-for-two stock split                                345,462
  Cash paid to stockholders in lieu of
    fractional shares on three-for-two
    stock split                                                                             (1,351)                      (1,351)
  Comprehensive income
  Net income                                                                             1,261,064                    1,261,064
  Unrealized security holding gains (net of $37,563 tax)                                                   49,896        49,896
      less reclassification adjustments for losses
      (net of $5,852 tax)                                                                                  10,867        10,867
      Total other comprehensive income                                                                                   60,763
  Comprehensive income                                                                                                1,321,827
                                                         -------------    ----------    ----------    -----------    ------------
BALANCE, December 31, 1997                               1,036,626         4,180,486     4,327,921       (381,329)    8,127,078
  Exercise of stock options                                 33,165           289,684                                    289,684
  Cash dividends paid - $.50 per share                                                    (519,850)                    (519,850)
  Comprehensive income
  Net income                                                                             1,346,595                    1,346,595
  Unrealized security holding gains (net of $141,588)                                                     199,991       199,991
      less reclassification adjustments for losses
      (net of $3,676 tax)                                                                                 (6,828)        (6,828)
      Total other comprehensive income                                                                                  193,163
  Comprehensive income                                                                                                1,539,758
                                                         -------------    ----------    ----------    -----------    ------------
BALANCE, December 31, 1998                                1,069,791   $    4,470,170  $  5,154,666   $  (188,166)   $ 9,436,670
                                                         -------------    ----------    ----------    -----------    ------------
                                                         -------------    ----------    ----------    -----------    ------------

</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       -4-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



<TABLE>
<CAPTION>

                                                                                 1998             1997                1996
                                                                             ------------     ------------       -----------
<S>                                                                          <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                $  1,346,595     $  1,261,064       $   913,831
   Adjustments to reconcile net income to
    net cash provided by operating activities
     Net cash provided by operating activities
       Depreciation and amortization                                              427,759          351,303           262,424
       Provision for possible loan losses                                         164,000          164,000            90,000
       Provision for possible OREO losses                                           7,369
       Net (gain)/loss on sales of investment securities                          (10,504)          16,719
       Amortization of premiums/discounts on
       investment securities, net                                                (161,672)         (74,194)          (63,468)
       Increase in deferred tax asset                                            (135,000)
       Increase in other assets                                                     3,359         (145,068)         (358,556)
       Increase/(decrease) in other liabilities                                   (68,565)         257,944            (6,496)
                                                                             ------------     ------------       -----------
           Net cash provided by operating activities                            1,573,341        1,831,768           837,735
                                                                             ------------     ------------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of securities held-to-maturity                                      (3,607,551)      (3,976,013)       (2,856,218)
  Purchase of mortgage-backed securities held-to-maturity                      (6,143,140)      (2,080,158)
  Purchase of securities available-for-sale                                   (10,098,137)      (1,500,000)         (500,000)
  Purchase of mortgage-backed securities available-for-sale                      (696,825)      (3,355,847)
  Proceeds from sales of securities held-to-maturity                                             1,250,000
  Proceeds from principal reductions and maturities
   of securities held-to-maturity                                               2,379,076        2,125,000         3,890,000
  Proceeds from principal reductions and maturities
   of mortgage-backed securities held-to-maturity                               3,013,646          534,864           297,079
  Proceeds from sales of securities available-for-sale                          4,431,186        3,483,281
  Proceeds from principal reductions and maturities
   of securities available-for-sale                                                                                  500,000
  Proceeds from sales of mortgage-backed securities
   available-for-sale                                                             733,835
  Proceeds from principal reductions and maturities
   of mortgage-backed securities available-for-sale                             1,763,715          184,441
  Purchase of deposits with other banks                                           (56,856)        (510,119)
  Purchase of life insurance policies                                             (50,258)        (240,398)          (37,496)
  Proceeds from sale of other real estate owned                                    54,631
  Recoveries on loans previously written off                                       48,467           43,208            22,793
  Increase in loans, net                                                      (16,972,789)      (5,386,839)       (9,773,000)
  Purchase of property, premises and equipment, net                              (802,433)        (667,915)         (352,280)
                                                                             ------------     ------------       -----------
             Net Cash Used In Investing Activities                            (26,003,433)     (10,096,495)       (8,809,122)
                                                                             ------------     ------------       -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       -5-

<PAGE>
                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>


                                                                                 1998             1997              1996
                                                                             ------------     ------------       -----------
<S>                                                                          <C>              <C>                <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Increase in deposits, net                                                   $35,858,049     $ 11,558,359      $  7,277,201
  Net increase/(decrease) in other borrowings                                                   (4,730,000)        4,730,000
  Net increase in notes payable                                                   750,000
  Proceeds from exercise of stock options                                         289,684           91,241            55,436
  Cash dividends paid or declared                                                (519,850)        (339,138)         (213,011)
                                                                             ------------     ------------       -----------
             Net Cash Provided By Financing Activities                         36,377,883        6,580,462        11,849,626
                                                                             ------------     ------------       -----------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS                           11,947,791       (1,684,265)        3,878,239

CASH AND CASH EQUIVALENTS, Beginning of year                                   12,991,388       14,675,653        10,797,414
                                                                             ------------     ------------       -----------
CASH AND CASH EQUIVALENTS, End of year                                       $ 24,939,179     $ 12,991,388      $ 14,675,653
                                                                             ------------     ------------       -----------
                                                                             ------------     ------------       -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Interest paid                                                              $  2,383,618     $  2,445,815      $  2,120,014
  Income taxes paid                                                           $   976,129       $  847,000        $  537,000

SUPPLEMENTAL DISCLOSURES OF NON-CASH FLOW INFORMATION
  Change in other comprehensive income                                        $   193,163       $   60,763       $    71,429
  Transfer of loan to other real estate owned through foreclosure                  -            $   62,000            -

</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       -6-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Heritage Oaks Bancorp (the Company) 
and Subsidiaries conform to generally accepted accounting principles and to 
general practices within the banking industry.  A summary of the Company's 
significant accounting and reporting policies consistently applied in the 
preparation of the accompanying financial statements follows:

A.   PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the Company and its wholly
     owned subsidiaries, Heritage Oaks Bank and CCMS Systems, Inc. Intercompany
     balances and transactions have been eliminated.

B.   USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period.  Actual results could differ from those
     estimates.

     Estimates that are particularly susceptible to significant change relate to
     the determination of the allowance for loan losses on loans and the
     valuation of real estate acquired in connection with foreclosures or in
     satisfaction of loans.  In connection with the determination of the
     allowances for losses on loans and foreclosed real estate, management
     obtains independent appraisals for significant properties.

     While management uses available information to recognize losses on loans
     and foreclosed real estate, future additions to the allowances may be
     necessary based on changes in local economic conditions.  In addition,
     regulatory agencies, as an integral part of their examination process,
     periodically review the Bank's allowances for losses on loans and
     foreclosed real estate.  Such agencies may require the Bank to recognize
     additions to the allowances based on their judgments about information
     available to them at the time of their examination.  Because of these
     factors, it is reasonably possible that the allowances for losses on loans
     and foreclosed real estate may change.


                                       -7-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

C.   INVESTMENT SECURITIES AND MORTGAGE-BACKED 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 and 
     mortgage-backed securities are classified in three categories and 
     accounted for as follows: debt, equity, and mortgage-backed 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 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 unrealized gains and losses, net of 
     applicable taxes, reported in a separate component of stockholders' 
     equity.  Gains or losses on sales of investment securities and 
     mortgage-backed securities are determined on the specific identification 
     method.  Premiums and discounts are amortized or accreted using the 
     interest method over the expected lives of the related securities.

D.   LOANS AND INTEREST ON LOANS

     Loans are stated at unpaid principal balances, less the allowance for 
     loan losses and net deferred loan fees and unearned discounts.  The Bank 
     recognizes loan origination fees to the extent they represent 
     reimbursement for initial direct costs, as income at the time of loan 
     boarding.  The excess of fees over costs, if any, is deferred and 
     credited to income over the term of the loan.

     In accordance with SFAS No. 114, (as amended by SFAS No. 118), 
     "Accounting by Creditors for Impairment of a Loan," those loans 
     identified as "impaired" are measured on the present value of expected 
     future cash flows, discounted at the loan's effective interest rate or 
     the fair value of the collateral if the loan is collateral dependent.  A 
     loan is impaired when it is probable the creditor will not be able to 
     collect all contractual principal and interest payments due in 
     accordance with the terms of the loan agreement.

     Loans are placed on nonaccrual when a loan is specifically determined to 
     be impaired or when principal or interest is delinquent for 90 days or 
     more. Any unpaid interest previously accrued on those loans is reversed 
     from income.  Interest income generally is not recognized on specific 
     impaired loans unless the likelihood of further loss is remote.  
     Interest payments received on such loans are applied as a reduction of 
     the loan principal balance.

     All loans on nonaccrual are measured for impairment.  The Bank applies 
     the measurement provision of SFAS No. 114 to all loans in its portfolio. 
     All loans are generally charged off at such time the loan is classified 
     a loss.



                                       -8-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

E.   LOANS HELD FOR SALE

     Loans held for sale are carried at the lower of aggregate cost or market 
     value, which is determined by the specified value in the commitments.  
     Net unrealized losses, if any, are recognized through a valuation 
     allowance by charges to income.

F.   RESERVE FOR PROBABLE LOAN LOSSES

     The reserve for probable loan losses is maintained at a level which, in
     management's judgment, is adequate to absorb credit losses inherent in the
     loan portfolio.  The amount of the reserve is based on management's
     evaluation of the collectibility of the loan portfolio, including the
     nature of the portfolio, credit concentrations, trends in historical loss
     experience, specific impaired loans, and economic conditions.  Reserves for
     impaired loans are generally determined based on collateral values or the
     present value of estimated cash flows.  The reserve is increased by a
     provision for loan losses, which is charged to expense and reduced by
     charge-offs, net of recoveries.  Changes in the reserve relating to
     impaired loans are charged or credited to the provision for loan losses.
     Because of uncertainties inherent in the estimation process, management's
     estimate of credit losses inherent in the loan portfolio and the related
     reserve may change.

G.   PROPERTY, PREMISES AND EQUIPMENT

     Property, premises and equipment are stated at cost, less accumulated
     depreciation and amortization.  Equipment under capital leases is carried
     at the present value of future minimum lease payments less accumulated
     amortization over the term of the lease.  Depreciation is computed on a
     straight-line basis over the estimated useful lives of each asset type.
     Total depreciation expense for the reporting periods ending December 31,
     1998, 1997 and 1996 were approximately $428,000, $351,000, and $262,000,
     respectively.

H.   OTHER REAL ESTATE OWNED

     Other real estate owned, which represents real estate acquired through
     foreclosure, is stated at the lower of the carrying value of the loan or
     the estimated fair market value less estimated selling costs of the related
     real estate.  Loan balances in excess of the fair market value of the real
     estate acquired at the date of acquisition are charged against the
     allowance for loan losses.  Any subsequent declines in estimated fair
     value, operation income, and gains or losses on disposition of such
     properties are expensed or charged to current operations.

I.   INCOME TAXES

     Provisions for income taxes are based on amounts reported in the statements
     of income (after exclusion of non-taxable income such as interest on state
     and municipal securities) and include deferred taxes on temporary
     differences in the recognition of income and expense for tax and financial
     statement purposes.  Deferred taxes are computed on the liability method as
     prescribed in SFAS No. 109, "Accounting for Income Taxes."


                                       -9-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

J.   CONSOLIDATED STATEMENTS OF CASH FLOWS

     The Company presents its cash flows using the indirect method and reports
     certain cash receipts and payments arising from customer loans, deposits
     and deposits placed with other financial institutions on a net basis.  For
     the purpose of the Statement of Cash Flows, cash and cash equivalents
     include cash and due from banks, cash items in transit, and Federal funds
     sold balances as of the year end.

K.   RECLASSIFICATIONS

     Certain amounts in the 1997 and 1996 financial statements have been
     reclassified to conform to the 1998 presentation.

L.   EARNINGS PER SHARE (EPS)

     Basic EPS excludes dilution and is computed by dividing income available to
     common stockholders by the weighted-average number of common shares
     outstanding for the period.  Diluted EPS 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 shared in the earnings of the entity.

M.   NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement No.
     133, "Accounting for Derivative Instruments and Hedging Activities."  This
     statement, which is effective for all fiscal quarters of fiscal years
     beginning after June 15, 1999, supercedes FASB No. 119, "Disclosure about
     Derivative Financial Instruments and Fair Value of Financial Instruments."
     FASB No. 133 establishes accounting and reporting standards for derivative
     instruments and for hedging activities.  It requires that an entity
     recognizes all derivatives as either assets or liabilities in the statement
     of financial position and measures those instruments at fair value.
     Management has not determined the potential impact of this statement will
     have on the financial statements, however believes there will be no
     material effect on the Bank's financial condition or results of operations.

                                       -10-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



NOTE #2 - INVESTMENT SECURITIES

At December 31, 1998, the investment securities portfolio was comprised of
securities classified as available-for-sale and held-to-maturity, in accordance
with SFAS No. 115, resulting in investment securities available-for-sale being
carried at fair value and investment securities held-to-maturity being carried
at cost, adjusted for amortization of premiums and accretions of discounts, and
fair market value adjustments for securities transferred from 
available-for-sale.

The amortized cost and fair values of investment securities available-for-sale
at December 31, 1998, were:

<TABLE>
<CAPTION>
                                                                  Gross             Gross
                                           Amortized            Unrealized        Unrealized
                                             Cost                 Gains             Losses            Fair Value
                                        ------------         -------------       -----------         -----------
<S>                                     <C>                  <C>                 <C>                 <C>
Obligations of U.S. Government
  agencies and corporations             $ 1,650,875          $   163,545                             $ 1,814,420
Mortgage-backed securities                3,286,605                2,903          $ 214,455            3,075,053
Commercial paper                          7,969,833                                                    7,969,833
Other securities                              3,800                                                        3,800
                                        ------------         -------------       -----------         -----------
                      Total             $12,911,113          $   166,448          $ 214,455          $12,863,106
                                        ------------         -------------       -----------         -----------
                                        ------------         -------------       -----------         -----------

</TABLE>

Available-for-sale securities in the amount of $2,089,375 were transferred to
held-to-maturity during 1994.  The unrealized loss of $330,165 net of tax of
$137,098 was reflected in a separate component of stockholders' equity and is
being amortized over the remaining life of the securities as a yield adjustment.
At December 31, 1998, the remaining unrealized loss of $274,474 net of tax of
$114,334 is included in the valuation allowance.

The amortized cost and fair values of investment securities held-to-maturity at
December 31, 1998, were:



<TABLE>
<CAPTION>
                                                                 Gross              Gross
                                          Amortized           Unrealized          Unrealized
                                             Cost                Gains              Losses           Fair Value
                                        ------------         -------------       -----------         -----------
<S>                                     <C>                  <C>                 <C>                 <C>
U.S. Treasury securities                $    98,777                             $       777          $    98,000
Obligations of U.S. government
  agencies and corporations               1,235,905          $    25,798                132            1,261,571
Mortgage-backed securities                8,168,695              283,004             12,759            8,438,940
Obligations of state and
  political subdivisions                  6,254,774               14,059              8,337            6,260,496
                                        ------------         -------------     ------------        -------------
                      Total             $15,758,151          $   322,861        $    22,005          $16,059,007
                                        ------------         -------------     ------------        -------------
                                        ------------         -------------     ------------        -------------
</TABLE>
                                       -11-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #2 - INVESTMENT SECURITIES, (CONTINUED)

The amortized cost and fair values of investment securities available-for-sale
at December 31, 1997, were:



<TABLE>
<CAPTION>


                                                                 Gross              Gross
                                          Amortized           Unrealized          Unrealized
                                             Cost                Gains              Losses           Fair Value
                                        ------------         -------------       -----------         -----------
<S>                                     <C>                  <C>                 <C>                 <C>
U.S. Treasury securities                $1,000,269                              $   (6,519)          $  993,750
Obligations of U.S. Government
  agencies and corporations              2,500,000          $    3,888             (11,573)           2,492,315
Mortgage-backed securities               5,167,677               3,442            (355,966)           4,815,153
Other securities                             2,000                                                        2,000
                                        ------------         -------------       -----------         -----------
                      Total             $8,669,946          $    7,330          $ (374,058)          $8,303,218
                                        ------------         -------------       -----------         -----------
                                        ------------         -------------       -----------         -----------

</TABLE>




The amortized cost and fair values of investment securities held-to-maturity at
December 31, 1997, were:

<TABLE>
<CAPTION>


                                                                 Gross              Gross
                                          Amortized           Unrealized          Unrealized
                                             Cost                Gains              Losses           Fair Value
                                        ------------         -------------       -----------         -----------
<S>                                     <C>                  <C>                 <C>                 <C>
U.S. Treasury securities                $    99,209                               $   (209)          $    99,000
Obligations of U.S. government
  agencies and corporations               3,051,500          $   236,577            (8,273)            3,279,804
Mortgage-backed securities                4,980,125               16,086            (3,182)            4,993,029
Obligations of state and
  political subdivisions                  3,459,758               10,898            (3,328)            3,467,328
                                        ------------         -------------       -----------         -----------
                      Total             $11,590,592          $   263,561          $(14,992)          $11,839,161

</TABLE>


The amortized cost and fair values of investment securities available-for-sale
and held-to-maturity at December 31, 1998, by contractual maturity are shown
below.  Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.




<TABLE>
<CAPTION>
                                                              Securities                            Securities
                                                          Available-for-Sale                     Held-to-Maturity
                                                --------------------------------          --------------------------------
                                                  Amortized                                Amortized
                                                    Cost             Fair Value               Cost              Fair Value
                                                -----------          -----------          -----------          -----------
<S>                                             <C>                  <C>                  <C>                  <C>
Due in one year or less                         $ 7,973,633          $ 7,973,633          $   279,194          $   279,191
Due after one year through five years                                                       1,343,142            1,352,728
Due after five years through ten years                                                      1,921,440            1,936,737
Due after ten years                               1,650,875            1,814,420            4,045,680            4,051,411
Mortgage-backed securities                        3,286,605            3,075,053            8,168,695            8,438,940
                                                -----------          -----------          -----------          -----------
                      Total Securities          $12,911,113          $12,863,106          $15,758,151          $16,059,007
                                                -----------          -----------          -----------          -----------
                                                -----------          -----------          -----------          -----------

</TABLE>

                                       -12-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #2 - INVESTMENT SECURITIES, (CONTINUED)

Proceeds from sales and maturities of investment securities available-for-sale
during 1998, 1997 and 1996, were $4,431,186, $3,483,281, and $500,000,
respectively.  In 1998, gross losses and gross gains on these sales were $9,970;
and $13,365, respectively.  In 1997, gross losses on these sales were $16,719;
there were no gross gains.  There were no gross gains or losses in 1996.

Proceeds from maturities and sales of investment securities held-to-maturity
during 1998, 1997 and 1996, were $2,379,076, $3,375,000, and $3,890,000,
respectively.  There were no gains or losses on those sales and maturities in
1998, 1997 and 1996.  Proceeds from sales and maturities of mortgage-backed
securities in 1998, 1997 and 1996, were $5,511,196, $719,305, and $297,079,
respectively.  Gross gains on these sales during 1998 were $7,041.  There were
no gross gains or losses on these sales during 1997 and 1996.  Unrealized losses
on investment securities and mortgage-backed securities included in
shareholders' equity net of tax at December 31, 1998, 1997 and 1996 were
$188,166, $381,329, and $442,092, respectively.  Securities having a carrying
value of approximately $2,249,000 and $5,013,000 and a fair value of
approximately $2,261,000 and $4,890,000 at December 31, 1998 and 1997,
respectively, were pledged to secure public deposits and for other purposes as
required by law.


NOTE #3 - DERIVATIVE FINANCIAL INSTRUMENTS

The Financial Accounting Standards Board Statement No. 119 defines a derivative
as a future, forward, swap, option contract or other financial instrument with
similar characteristics.  The Bank has not utilized derivatives or related types
of financial instruments except for Federal agency collateralized mortgage
obligations and, therefore, this statement does no have a material impact.


NOTE #4 - LOANS

Major classifications of loans were:

<TABLE>
<CAPTION>

                                                      1998            1997
                                                 ------------    ------------
<S>                                              <C>             <C>
Commercial, financial and agricultural           $ 38,220,932    $ 24,830,234
Real Estate - construction                          8,357,701       6,953,512
Real Estate - mortgage                             21,672,158      19,143,755
Installment loans to individuals                    2,611,325       4,296,204
All other loans (including overdrafts)                323,493         152,606
                                                 ------------    ------------
                                                   71,185,609      55,376,311
Less:  Deferred loan fees                            (313,033)       (243,893)
Less:  Reserve for possible loan losses            (1,069,535)       (930,284)
                                                 ------------    ------------
                      Total Loans                $ 69,803,041    $ 54,202,134
                                                 ------------    ------------
                                                 ------------    ------------
Loans held for sale                              $  1,654,765    $    495,350
                                                 ------------    ------------
                                                 ------------    ------------

</TABLE>

                                       -13-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




NOTE #4 - LOANS, (CONTINUED)

CONCENTRATION OF CREDIT RISK

At December 31, 1998, approximately $30,030,000 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 County.  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.

The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of December 31:

<TABLE>
<CAPTION>


                                                                1998                1997                1996
                                                           ----------          ----------          ----------
<S>                                                        <C>                 <C>                 <C>
Recorded investment in impaired loans                      $  996,476          $1,015,207          $964,009
Related allowance for loan losses                             117,199             133,930           193,109
Average recorded investment in impaired loans               1,028,128             955,187           812,252
Interest income recognized for cash payments                   20,226
Cash receipts applied to reduce principal balance               5,023

</TABLE>



The provisions of SFAS No. 114 and SFAS No. 118 permit the valuation allowance
reported above to be determined on a loan-by-loan basis or by aggregating loans
with similar risk characteristics.  Because the loans currently identified as
impaired have unique risk characteristics, the valuation allowance was
determined on a loan-by-loan basis.

Nonaccruing loans totaled $934,389 and $864,488 at December 31, 1998 and 1997,
respectively.  As of December 31, 1998 and 1997, all loans on nonaccrual were
classified as impaired.  If interest on nonaccrual loans had been recognized at
the original interest rates, interest income would have increased $103,164,
$94,762, and $97,382 in 1998, 1997 and 1996, respectively.

At December 31, 1998 and 1997, the Bank had $0 and $95,536, respectively, in
loans past due 90 days or more in interest or principal and still accruing
interest.  These loans are well secured and in the process of collection, or are
secured by 1-4 single-family residences.

At December 31, 1998, loans totaling $396,506 were classified as troubled debt
restructurings.
                                       -14-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



NOTE #5 - RESERVE FOR PROBABLE LOAN LOSSES

Transactions in the reserve for probable loan losses are summarized as follows:


<TABLE>
<CAPTION>

                                                         1998                  1997                  1996
                                                    -----------           -----------           -----------
<S>                                                 <C>                   <C>                   <C>
Balance, Beginning of year                          $   930,284           $   771,925           $   766,262
Additions charged to operating expense                  164,000               164,000                90,000
Loans charged off                                       (45,277)              (48,849)             (107,130)
Recoveries of loans previously charged off               20,528                43,208                22,793
                                                    -----------           -----------           -----------
Balance, End of year                                $ 1,069,535           $   930,284           $   771,925
                                                    -----------           -----------           -----------
                                                    -----------           -----------           -----------

</TABLE>



NOTE #6 - RELATED PARTY TRANSACTIONS

The Bank has entered into loan and deposit transactions with certain directors
and executive officers of the Company.  These loans were made and deposits were
taken in the ordinary course of the Bank's business and, in management's
opinion, were made at prevailing rates and terms.

An analysis of loans to directors and executive officers is as follows:

<TABLE>
<CAPTION>


                                                   1998                1997
                                                ---------           ---------
<S>                                             <C>                 <C>
Outstanding Balance, Beginning of year          $ 322,130           $ 285,011
Additional loans made                             548,264             115,344
Repayments                                       (148,785)            (78,225)
Loans sold                                        (22,877)
                                                ---------           ---------
Outstanding Balance, End of year                $ 698,732           $ 322,130
                                                ---------           ---------
                                                ---------           ---------

</TABLE>


NOTE #7 - PROPERTY, PREMISES AND EQUIPMENT

Property, premises and equipment consisted of the following:

<TABLE>
<CAPTION>


                                                                    1998                1997
                                                                ----------          ----------
<S>                                                             <C>                 <C>
Land                                                            $  671,070          $  400,000
Building and improvements                                        2,294,000           2,222,997
Furniture and equipment                                          2,755,760           2,431,063
Construction in Progress                                           135,663
                                                                ----------          ----------
                                                                 5,856,493           5,054,060
      Less:  Accumulated depreciation and amortization           3,409,108           2,981,349
                                                                ----------          ----------
                      Total                                     $2,447,385          $2,072,711
                                                                ----------          ----------
                                                                ----------          ----------

</TABLE>


                                       -15-

<PAGE>



                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



NOTE #8 - INCOME TAXES

The current and deferred amounts of the provision (benefit) for income taxes
were:

<TABLE>
<CAPTION>

                                                                       Year Ending December 31,
                                                         ------------------------------------------------
                                                            1998               1997                1996
                                                         ---------          ---------           ---------
<S>                                                      <C>                <C>                 <C>
Federal Income Tax
      Current                                            $ 474,820          $ 551,554           $ 396,443
      Deferred                                               2,557             (3,143)             (9,105)
                                                         ---------          ---------           ---------
                      Total Federal Taxes                  477,377            548,411             387,338
                                                         ---------          ---------           ---------

State Franchise Tax
      Current                                              250,293            236,760             166,433
      Deferred                                                 356             (3,439)               (428)
                                                         ---------          ---------           ---------
                      Total State Franchise Tax            250,649            233,321             166,005
                                                         ---------          ---------           ---------
                      Total Income Taxes                 $ 728,026          $ 781,732           $ 553,343
                                                         ---------          ---------           ---------
                                                         ---------          ---------           ---------

</TABLE>



The principal items giving rise to deferred taxes were:


<TABLE>
<CAPTION>


                                                            1998             1997              1996
                                                         ---------         ---------        ---------
<S>                                                      <C>               <C>              <C>
Use of different depreciation for tax purposes           $ 29,374          $ 15,100         $  2,300
Difference in loan loss provision for tax purposes         59,991            32,781           37,400
Differences arising from changes in accruals               51,762           (35,621)         (62,400)
Other, net                                               (138,214)          (18,802)          13,167
                                                         ---------         ---------        ---------
                      Total                              $  2,913          $ (6,542)        $ (9,533)
                                                         ---------         ---------        ---------
                                                         ---------         ---------        ---------
</TABLE>

The provision for taxes on income differed from the amounts computed using the
federal statutory tax rate of 34 percent is as follows:

<TABLE>
<CAPTION>


                                                            1998              1997             1996
                                                         ---------         ---------        ---------
<S>                                                      <C>               <C>              <C>
Tax provision at federal statutory tax rate              $705,371          $694,551         $498,839
State income taxes, net of federal income tax benefit     148,335           146,060          109,563
Other, net                                               (125,680)          (58,879)         (55,059)
                                                         ---------         ---------        ---------
                      Total Tax Provision                $728,026          $781,732         $553,343
                                                         ---------         ---------        ---------
                                                         ---------         ---------        ---------


</TABLE>


The net deferred tax asset is determined as follows:


<TABLE>
<CAPTION>

                                                            1998              1997             1996
                                                         ---------         ---------        ---------
<S>                                                      <C>               <C>              <C>
Deferred tax assets arising from cumulative
  timing differences                                     $766,699          $669,612         $676,154
Valuation allowance*                                     (203,000)         (103,000)        (103,000)
                                                         ---------         ---------        ---------
                      Net Deferred Tax Asset             $563,699          $566,612         $573,154
                                                         ---------         ---------        ---------
                                                         ---------         ---------        ---------
</TABLE>


 *The valuation allowance is estimated based upon amounts less than likely of
future realization.



NOTE #9 - COMMITMENTS AND CONTINGENCIES

                                       -16-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



The Company leases land, buildings, and equipment under noncancelable operating
leases expiring at various dates through 2009.  The following is a schedule of
future minimum lease payments based upon obligations at year-end.


<TABLE>
<CAPTION>


       Year Ending
      December 31,                              Amount
   -----------------                         ----------
    <S>                                      <C> 
          1999                               $  489,154
          2000                                  401,480
          2001                                  230,060
          2002                                  203,408
          2003                                  201,825
    More than 5 years                           955,546
                                             ----------
          Total                              $2,481,473
                                             ----------
                                             ----------

</TABLE>




Total expenditures charged for leases for the reporting periods ended 
December 31, 1998, 1997 and 1996, were $312,467, $309,034 and $250,736, 
respectively.

The Company is involved in various litigation.  In the opinion of management 
and the Company's legal counsel, the disposition of all such litigation 
pending will not have a material effect on the Company's financial statements.

At December 31, 1998 and 1997, the Bank was contingently liable for letters 
of credit accommodations made to its customers totaling $889,684 and 
$298,019, respectively.  At December 31, 1998 and 1997, the Bank had 
undisbursed loan commitments in the amount of $26,363,856 and $20,112,680, 
respectively.  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 confidential commitments issued by the Bank to guarantee 
the performance of a customer to a third party.  The credit risk involved in 
issuing letters of credit is essentially the same as that involved in 
extending loans to customers.  The Bank anticipates no losses as a result of 
such transactions.

NOTE #10 - NOTES PAYABLE

On September 11, 1998, the Bancorp obtained a revolving line of credit in the 
amount of $2,000,000 through Pacific Coast Bankers' Bank.  The note is 
secured by 339,332 shares of the Bank's stock.  The note matures August 15, 
2004, and bears interest at a variable rate of 1.00% over the Wall Street 
Journal prime rate.  The outstanding principal balance at December 31, 1998, 
was $750,000. The note is payable in four quarterly interest payments 
followed by 20 consecutive principal and interest payments.

The following is the required principal resolution of the note assuming full 
disbursement of loan 

                                       -17-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




proceeds of $2,000,000:

<TABLE>
<CAPTION>


       Year Ending
      December 31,                              Amount
   -----------------                         ----------
    <S>                                      <C> 
          1999                               $  100,000
          2000                                  400,000
          2001                                  400,000
          2002                                  400,000
          2003                                  400,000
          2004                                  300,000
                                             ----------
          Total                              $2,000,000
                                             ----------
                                             ----------

</TABLE>


NOTE #11 - STOCK SPLIT

On September 4, 1997, the Board of Directors approved a three-for-two stock 
split of its common stock.  The outstanding shares and related calculations 
included in these financial statements reflect retroactive adjustments for 
this stock split.

NOTE #12 - STOCK OPTION PLANS

At December 31, 1998, the Bank had two stock option plans, which are 
described below.  The Bank applies APB Opinion 25 and related interpretations 
in accounting for its plan.  Accordingly, no compensation costs have been 
recognized for its stock option plans.  Had compensation costs for these 
plans been determined on the fair value at the grant dates consistent with 
the method of SFAS No. 123, the impact would not have materially affected net 
income.

The Company adopted the Bank's 1990 stock option plan, which is a tandem 
stock option plan permitting options to be granted either as "Incentive Stock 
Options" or as non-qualified stock options under the Internal Revenue Code.  
All outstanding options were granted at prices which equal the fair market 
value on the day of grant.  Options granted vest at a rate of 25 percent per 
year for four years, and expire no later than ten years from the date of 
grant.  The plan provides for issuance of up to 138,465 shares (after giving 
retroactive effect for a three-for-two stock split in 1997) of the Company's 
unissued common stock and is subject to the specific approval of the Board of 
Directors.

NOTE #12 - STOCK OPTION PLANS, (CONTINUED)

The fair value of each option granted was estimated on the date of grant 
using the Black-Scholes option pricing model with the following assumptions 
for 1997:  risk-free rates of 5.78% and 
dividend yield of 3.22%, expected life of five years; and 
volatility of 34%.

The following tables summarize information about the 1990 stock option plan 
outstanding at December 31, 1998.  These tables are not affected by the 
subsequent stock dividend as discussed in Note #26.


                                       -18-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



<TABLE>
<CAPTION>



                                                      1998                       1997                       1996
                                              -----------------------    ------------------------   ------------------------
                                                          Weighted-                   Weighted-                 Weighted-
                                                           Average                     Average                   Average
                                                           Exercise                   Exercise                   Exercise
                                               Shares       Price         Shares        Price         Shares       Price
                                              ---------   ----------     ----------   -----------   -----------  -----------
<S>                                           <C>         <C>            <C>          <C>           <C>          <C>
Outstanding at beginning of year                99,749        $4.21       119,447        $3.92      133,908         $3.91
Granted                                                                     4,104       $10.67
Cancelled                                         (562)      $10.67
Exercised                                      (29,415)       $3.90       (23,802)       $3.83      (14,461)        $3.83
                                              ---------                  ----------                 -----------
Outstanding at end of year                      69,772        $4.29        99,749        $4.21      119,447         $3.92
                                              ---------                  ----------                 -----------
                                              ---------                  ----------                 -----------
Options available for granting at
  end of year                                          3                          3                     4,107
Weighted average fair value of options 
  granted                                                                                $3.08
</TABLE>


<TABLE>
<CAPTION>


                                        Options Outstanding                                    Options Exercisable
---------------------------------------------------------------------------------------   ----------------------------------
                                                        Weighted-           Weighted-                           Weighted-
                                                         Average             Average                             Average
         Exercise                  Number               Remaining           Exercise           Number           Exercise
           Price                Outstanding         Contractual Life          Price          Exercisable          Price
       ------------             -----------         ----------------        ---------      --------------      -------------
<S>                             <C>                 <C>                     <C>             <C>                 <C>
           $3.83                   40,168              4.09                    $3.83             40,168            $3.83
       $4.00 - 4.33                26,250              1.68                    $4.17             26,250            $4.17
          $10.67                    3,354              8.53                   $10.67                839           $10.67
                                ---------                                                    ----------
                                   69,772              3.40                    $4.29             67,257            $4.05
                                ---------                                                    ----------
                                ---------                                                    ----------

</TABLE>

The Company adopted the Bank's 1997 stock option plan, which is a tandem 
stock option plan permitting options to be granted either as "Incentive Stock 
Options" or as "Non-qualified Stock Options" under the Internal Revenue Code. 
 All outstanding options were granted at prices which equal the fair market 
value on the day of the grant.  Options granted vest at a rate of 20 percent 
per year for five years, and expire no later than ten years from the date of 
grant.  The plan provides for issuance of up to 161,049 shares (after giving 
retroactive effect for a three-for-two stock split in 1997) of the Company's 
unissued common stock and is subject to the specific approval of the Board of 
Directors.

NOTE #12 - STOCK OPTION PLANS, (CONTINUED)

The fair value of each option granted was estimated on the date of grant 
using the Black-Scholes option pricing model with the following assumptions 
for 1998 and 1997, respectively:  risk-free rates of 4.80% and 5.78%, 
dividend yields of 2.67% and 3.22%, expected life of eight years; and 
volatility of 25% and 34%. No options were granted for this plan prior to 
1997.

The following summarizes information about the 1997 stock option plan.  These 
tables are not affected by the subsequent stock dividend as discussed in Note 
#26.

                                       -19-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>

                                                                         1998                             1997
                                                              ----------------------------      --------------------------
                                                                                Weighted-                        Weighted-
                                                                                 Average                          Average
                                                                                Exercise                         Exercise
                                                                Shares            Price           Shares          Price
                                                              ------------  --------------      -----------  -------------
<S>                                                           <C>             <C>                 <C>           <C>  
Outstanding at beginning of year                                  139,146        $10.67
Granted                                                             6,500        $15.15            139,146        $10.67
Cancelled                                                         (11,400)       $10.67
Exercised                                                          (3,750)       $10.67
                                                               ----------                        ---------       --------  
Outstanding at end of year                                        130,496        $10.89            139,146        $10.67
                                                               ----------                        ---------     
                                                               ----------                        ---------
Options available for grant end of year                            26,803                           21,903
Weighted average fair value of options granted                                   $ 3.94                           $ 3.43
</TABLE>

<TABLE>
<CAPTION>


                                Options Outstanding                                              Options Exercisable
-------------------------------------------------------------------------------------   -----------------------------------
                                                     Weighted-           Weighted-                              Weighted-
                                                      Average             Average                                Average
        Exercise                 Number              Remaining            Exercise            Number            Exercise
          Price               Outstanding         Contractual Life         Price           Exercisable            Price
----------------          ------------------      ----------------       ---------       ----------------    --------------
<S>                         <C>                    <C>                     <C>              <C>                 <C>
         $10.67                  123,996                8.53               $10.67              24,799            $10.67
         $16.25                    1,500                9.29               $16.25                   -
         $16.50                    5,000                9.97               $16.50                   -
                          ------------------                                              ---------------- 
                                 130,496                8.60               $10.89              24,799             10.67
                          ------------------                                              ----------------
                          ------------------                                              ----------------

</TABLE>


                                       -20-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996

NOTE #13 - OTHER INCOME/EXPENSE

The following is a breakdown of fees and other income and expenses for the 
years ended December 31, 1998, 1997 and 1996:



<TABLE>
<CAPTION>


                                                                             1998                1997               1996
                                                                       --------------        -----------        -----------
<S>                                                                      <C>                  <C>                <C>
Fees and Other Income
      ATM transaction fees                                                 $3,380,117         $2,433,051         $1,024,017
      ATM interchange income                                                  767,192            808,901            882,058
      ATM sponsorship fees                                                    115,516            139,628             16,109
      Bankcard merchant fees                                                  757,380            697,159            363,247
      Mortgage broker fees                                                    301,988            127,411             57,399
      Other                                                                   316,465            205,097            158,278
                                                                       --------------        -----------        -----------
                                                                           $5,638,658         $4,411,247         $2,501,108
                                                                       --------------        -----------        -----------
                                                                       --------------        -----------        -----------

Other Expenses
      Data processing                                                         801,943            615,809            481,844
      Advertising and promotional                                             217,719            110,418            123,240
      Regulatory fees                                                          47,756             28,779            159,324
      Other professional fees and outside services                             58,144             66,850             54,376
      Legal fees and other litigation expenses                                187,863            152,351            118,071
      Stationery and supplies                                                 107,595            111,942             98,386
      Bankcard merchant expense                                               864,970            604,011            290,236
      Director fees                                                           158,476             96,275             88,675
      ATM costs at gaming sites                                             2,076,345          1,053,056
      ATM costs at retail sites                                               680,448            695,118            486,831
      Other                                                                   551,160            512,963            396,580
                                                                       --------------        -----------        -----------
                             Total                                         $5,752,419         $4,047,572         $2,297,563
                                                                       --------------        -----------        -----------
                                                                       --------------        -----------        -----------

</TABLE>

NOTE #14 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT

There are legal limitations on the ability of the Bank to provide funds to the
Company.  Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the State Banking Department, net income for the year and
the retained net income for the preceding two years.  Section 23A of the Federal
Reserve Act restricts the Bank from extending credit to the Company and other
affiliates amounting to more than 20 percent of its contributed capital and
retained earnings.  During 1998, the Bank paid the parent $665,355 in dividends.




                                       -21-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #15 - SALARY CONTINUATION PLAN

The Bank established a salary continuation plan agreement with the President,
Chief Financial Officer, Chief Lending Officer, and Chief Administrative
Officer, as authorized by the Board of Directors.  This agreement provides for
annual cash payments for a period not to exceed 15 years, beginning at
retirement age 60.  In the event of death prior to retirement age, annual cash
payments would be made to the beneficiaries for a determined number of years.
The present values of the Company's liability under this Agreement were $185,353
and $134,673 at December 31, 1998 and 1997, respectively, and are included in
other liabilities in the Company's Consolidated Financial Statements.  The
Company maintains life insurance policies, which are intended to fund all costs
of the plan.  The cash surrender values of these life insurance policies totaled
$1,020,576 and $970,318, at December 31, 1998 and 1997, respectively.


NOTE #16 - 401(k) PENSION PLAN

During 1994, the Bank established a savings plan for employees which allows
participants to make contributions by salary deduction equal to 15% or less of
their salary pursuant to section 401(k) of the Internal Revenue Code.  Employee
contributions are matched up to 25% of the employee's contribution.  Employees
vest immediately in their own contributions and they vest in the Bank's
contribution based on years of service.  Expenses of the savings plan were
$34,619, $24,048, and $16,651, for the years ended December 31, 1998, 1997 and
1996, respectively.


NOTE #17 - EARNINGS PER SHARE (EPS)

The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS.  Share information has been
retroactively adjusted for the subsequent stock dividend as discussed in Note
#26.

<TABLE>
<CAPTION>

                                                   1998                          1997                        1996
                                        --------------------------    -------------------------     ----------------------
                                           Net                            Net                         Net
                                          Income         Shares         Income         Shares        Income       Shares
                                        -----------     ----------    -----------     ---------     ---------    ---------
<S>                                     <C>             <C>           <C>             <C>           <C>          <C>   

Net income as reported                  $ 1,346,595                   $ 1,261,064                   $ 913,831
Shares outstanding at year-end                           1,112,583                    1,078,091                  1,053,337
Impact of weighting shares
 purchased during the year                                 (25,307)                      (9,096)                    (7,330)
                                        -----------     ----------    -----------     ---------     ---------    ---------
Used in Basic EPS                         1,346,595      1,087,276      1,261,064     1,068,995       913,831    1,046,007
Dilutive effect of outstanding
 stock options                                             104,712                       66,695                     41,189
                                        -----------     ----------    -----------     ---------     ---------    ---------
Used in Dilutive EPS                    $ 1,346,595      1,191,988    $ 1,261,064     1,135,690     $ 913,831    1,087,196
                                        -----------     ----------    -----------     ---------     ---------    ---------
                                        -----------     ----------    -----------     ---------     ---------    ---------

</TABLE>



                                       -22-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




NOTE #18 - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered 
by federal banking agencies.  Failure to meet minimum capital requirements 
can initiate certain mandatory, and possibly additional discretionary, 
actions by regulators that, if undertaken, could have a direct material 
effect on the Bank's financial statements.  Under capital adequacy guidelines 
and the regulatory framework for prompt corrective action, the Bank must meet 
specific capital guidelines that involve quantitative measures of the Bank's 
assets, liabilities and certain off-balance sheet items as calculated under 
regulatory accounting practices.  The Bank's capital amounts and 
classification are also subject to qualitative judgments by the regulators 
about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy 
require the Bank to maintain minimum amounts and ratios (set forth in the 
table below) of total and Tier 1 capital (as defined in the regulations) to 
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to 
average assets (as defined).  Management believes, as of December 31, 1998, 
that the Bank meets all capital adequacy requirements to which it is subject.

As of the most recent notification from the Federal Deposit Insurance 
Corporation categorized the Bank as well capitalized under the regulatory 
framework for prompt corrective action (there are no conditions or events 
since that notification that management believes have changed the Bank's 
category). To be categorized as well-capitalized, the Bank must maintain 
minimum capital ratios as set forth in the table below.  The following table 
also sets forth the Bank's actual regulatory capital amounts and ratios 
(dollar amounts in thousands):

<TABLE>
<CAPTION>

                                                                                           Capital Needed
                                                                             -----------------------------------------------
                                                                                                          To Be Well
                                                                                                       Capitalized Under
                                                                                For Capital            Prompt Corrective
                                                   Actual Regulatory          Adequacy Purposes         Action Provisions
                                                  --------------------       --------------------      ---------------------
                                                    Capital                   Capital                   Capital
                                                    Amount       Ratio        Amount       Ratio        Amount       Ratio
                                                  ---------     ------       --------      ------      --------     -------
<S>                                               <C>           <C>          <C>           <C>         <C>          <C>
As of December 31, 1998
Total capital to risk-weighted assets               $10,342     10.81%         $7,656        8.0%        $9,570       10.0%
Tier 1 capital to risk-weighted assets               $9,272      9.69%         $3,828        4.0%        $5,742        6.0%
Tier 1 capital to average assets                     $9,272      7.55%         $4,915        4.0%        $6,144        5.0%

As of December 31, 1997
Total capital to risk-weighted assets                $8,841     13.45%         $5,259       8.00%        $6,573      10.00%
Tier 1 capital to risk-weighted assets               $8,018     12.18%         $2,633       4.00%        $3,950       6.00%
Tier 1 capital to average assets                     $8,018      8.59%         $3,732       4.00%        $4,665       5.00%

</TABLE>



                                       -23-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



NOTE #19 - ACQUISITION OF ASSETS AND LIABILITIES

On February 21, 1997, the Bank acquired certain assets and liabilities of the 
Wells Fargo Bank branch located in Cambria, California.  The total assets 
acquired were $5,255,161, which consisted of $316,610 of leasehold 
improvements and fixed assets, $4,863,150 of cash and $15,267 of loans.  In 
addition, the Bank also assumed $5,255,161 of deposits.  The Bank paid a 
premium of $60,134 for the deposits.  On September 2, 1994, the Bank had paid 
a premium of $173,102 for a branch acquisition.  Both of these permiums are 
being amortized over a five-year period.  Amortization of the premiums for 
1998, 1997 and 1996, was $46,647, $43,641, and $34,620, respectively.  The 
remaining unamortized premiums at December 31, 1998, 1997 and 1996, were 
$62,168, $108,815, and $92,321.

NOTE #20 - OTHER REAL ESTATE OWNED

As discussed in Note #1H, Other Real Estate Owned is carried at the estimated 
fair value of the real estate.  An analysis of the transactions for December 
31, 1998 and 1997,  were as follows:


<TABLE>
<CAPTION>


                                                    1998               1997
                                                 ---------           --------
<S>                                              <C>                 <C>
Balance, Beginning of year                        $ 62,000               -
Additions                                              -             $ 62,000
Sales                                              (62,000)              -
                                                 ---------           --------
Balance, End of year                              $    -             $ 62,000
                                                 ---------           --------
                                                 ---------           --------

</TABLE>


There were no Other Real Estate Owned transactions during 1996.


NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About Fair 
Value of Financial Instruments," requires disclosure of fair value 
information about all financial instruments, whether or not recognized in the 
balance sheet. In cases where quoted market prices are not available, fair 
values are based on estimates using present value or other valuation 
techniques.  Those techniques are significantly affected by the assumptions 
used, including the discount rate and estimates of future cash flows.  In 
that regard, the derived fair value estimates cannot be substantiated by 
comparison to independent markets and, in many cases, could not be realized 
in immediate settlement of the instruments. SFAS No. 107 excludes certain 
financial instruments and all nonfinancial instruments from its disclosure 
requirements.  Accordingly, the aggregate fair value amounts presented do not 
represent the underlying value of the Bank.



                                       -24-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS, (CONTINUED)

The following table presents the carrying amounts and fair values of 
financial instruments at December 31, 1998.  SFAS No. 107, "Disclosures about 
Fair Value of Financial Instruments," defines the fair value of a financial 
instrument as the amount at which the instrument could be exchanged in a 
current transaction between willing parties, other than in a forced or 
liquidation sale.

<TABLE>
<CAPTION>
                                                                               Carrying
                                                                                Amount             Fair Value
                                                                               ------------       ------------ 
<S>                                                                            <C>                <C>
Assets
      Cash and cash equivalents                                                 $24,939,179        $24,939,179
      Investment bearing deposits                                                   666,975            666,975
      Investment and mortgage-backed securities                                  28,621,257         28,922,113
      Loans receivable                                                           72,214,308         72,278,539
      Accrued interest receivable

Liabilities
      Non-interest bearing deposits                                              38,672,576         38,672,576
      Interest bearing deposits                                                  80,735,130         80,749,292
      Notes Payable                                                                 750,000            750,000
      Accrued interest payable

                                                                               Notional           Cost to Cede
                                                                                Amount              or Assume
                                                                               ------------       ------------ 
Off-Balance Sheet Instruments
      Commitments to extend credit and standby letters of credit                $27,253,540         $ 272,535


</TABLE>


The following methods and assumptions were used by the Bank in estimating 
fair value disclosures:

-    CASH AND CASH EQUIVALENTS

     The carrying amounts reported in the balance sheet for cash and cash
     equivalents approximate those assets' fair values due to the short-term
     nature of the assets.

-    INTEREST BEARING DEPOSITS

     Fair values for time deposits are estimated using a discounted cash flow
     analysis that applies interest rates currently being offered on
     certificates to a schedule of aggregated contractual maturities on such
     time deposits.

-    INVESTMENT AND MORTGAGE-BACKED SECURITIES

     Fair values are based upon quoted market prices, where available.



                                       -25-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS, (CONTINUED)

-    LOANS

     For variable-rate loans that reprice frequently and with no significant
     change in credit risk, fair values are based on carrying amounts.  The fair
     values for other loans (for example, fixed rate commercial real estate and
     rental property mortgage loans and commercial and industrial loans) are
     estimated using discounted cash flow analysis, based on interest rates
     currently being offered for loans with similar terms to borrowers of
     similar credit quality.  Loan fair value estimates include judgments
     regarding future expected loss experience and risk characteristics.  The
     carrying amount of accrued interest receivable approximates its fair value.

-    DEPOSITS

     The fair values disclosed for demand deposits (for example, 
     interest-bearing checking accounts and passbook accounts) are, by 
     definition, equal to the amount payable on demand at the reporting date 
     (that is, their carrying amounts).  The fair values for certificates of 
     deposit are estimated using a discounted cash flow calculation that 
     applies interest rates currently being offered on certificates to a 
     schedule of aggregated contractual maturities on such time deposits.  
     The carrying amount of accrued interest payable approximates fair value.

-    LONG-TERM DEBT - NOTES PAYABLE

     The fair value disclosed for notes payable is based on carrying amounts.
     The note is a variable-rated note that reprices frequently.

-    OFF-BALANCE SHEET INSTRUMENTS

     Fair values of loan commitments and financial guarantees are based upon
     fees currently charged to enter similar agreements, taking into account the
     remaining terms of the agreement and the counterparties' credit standing.


NOTE #22 - TIME DEPOSIT LIABILITIES

At December 31, 1998, the Bank had time certificates of deposit with maturity
distributions as follows:


<TABLE>
<CAPTION>

<S>                                                       <C>
Due in one year or less                                   $26,173,587
Due after one year through three years                      2,746,854
Due after three years                                         209,808
                                                          -----------
                                                          $29,130,249
                                                          -----------
                                                          -----------
</TABLE>

                                       -26-

<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




NOTE #23 - OTHER BORROWED MONEY

Other borrowed money consisted of the following:


<TABLE>
<CAPTION>
                                                                            1998                                 1997
                                                                           Average                              Average
                                                                         Balance (1)                          Balance (1)
                                                                         -----------                          ------------
<S>                                                     <C>               <C>                   <C>             <C>
Securities sold under
  agreements to repurchase                                               $ 738,318                            $ 932,565
Federal funds purchased                                                    128,302                               40,438
                                                                       -----------                          ------------
                                                                         $ 866,620                            $ 973,003
                                                                       -----------                          ------------
                                                                       -----------                          ------------
The maximum outstanding balance
   at any month end during the year                      $2,002,500                            $3,760,000

</TABLE>

(1)  Average balances are computed using the daily balances outstanding during
     the year.




There was no balance as of December 31, 1998 and 1997.

Interest expense on federal funds purchased was $5,090, $2,572, and $2,360 
and interest expense on securities sold under agreements to repurchase was 
$46,158, $53,880, and $27,434 for the years ended December 31, 1998, 1997 and 
1996, respectively.

The Bank has a fed funds borrowing line with a correspondent bank.  The 
credit limit available on that line is $3,500,000.

NOTE #24 - OPERATING SEGMENTS

In June 1997, the Financial Accounting Standards Board (FASB) issued 
Statement No. 131, "Disclosures about Segments of an Enterprise and Related 
Information," which the Bank has adopted in the current year.  The Company 
has two primary reportable segments.  The segments reported herein apply to 
the Bank and the Bank's EFT Department.  The segments are identified as such 
based upon the percentage of operating net income, management responsibility, 
and the types of products and services offered.

The segments consist of the Bank and four separately classified components 
within the EFT Department referred to as networks.  The Bank offers 
traditional banking products such as checking, savings, and certificates of 
deposit, as well as mortgage, commercial, and consumer loans.  The EFT 
Department has installed 64 automatic teller machines located in retail 
outlets and gaming facilities, and approximately 300 point of sale machines 
located in retail outlets.  Income is based upon total customer usage of the 
machines and the applicable transaction charge.  Income is allocated to the 
Bank via contractual agreement. The Bank measures segment profit as operating 
net income which is defined as income before provision for income taxes.

                                       -27-


<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




NOTE #24 - OPERATING SEGMENTS, (CONTINUED)

Presented below is comparative financial information relating to the Bank's 
operating segments:

<TABLE>
<CAPTION>

                                                                       EFT
                                                                    Department                Bank          Consolidated
                                                                   ------------           ------------      ------------
<S>                                                                <C>                    <C>               <C>
FISCAL YEAR ENDED DECEMBER 31, 1998
      Revenues                                                       $5,085,276           $ 9,266,192       $14,351,468
      Depreciation and amortization                                       2,247               425,841           428,088
      Operating income                                                1,069,050             1,005,571         2,074,621
      Total assets                                                    7,999,357           123,034,141       131,033,498

                                                                       EFT
                                                                    Department               Bank           Consolidated
                                                                   ------------           ------------      ------------
FISCAL YEAR ENDED DECEMBER 31, 1997
      Revenues                                                      $4,094,762            $ 7,556,673       $11,651,435
      Depreciation and amortization                                                           351,303           351,303
      Operating income                                               1,367,429                675,367         2,042,796
      Total assets                                                   7,408,302             85,911,120        93,319,422

                                                                       EFT
                                                                    Department               Bank          Consolidated
                                                                   ------------          ------------      ------------
FISCAL YEAR ENDED DECEMBER 31, 1996
      Revenues                                                      $2,287,260           $ 6,193,027        $8,480,287
      Depreciation and amortization                                                          262,424           262,424
      Operating income                                                 964,045               503,129         1,467,174
      Total assets                                                  10,121,109            75,001,208        85,122,317

</TABLE>



NOTE #25 - CASH DIVIDENDS

On January 29, 1998, the Board of Directors declared a cash dividend of $.50 per
share to stockholders' of record on February 9, 1998.  The dividend paid was
$519,718.

On January 23, 1997, the Board of Directors declared a cash dividend of $.33 per
share (after retroactive adjustment for 1997 stock split) to stockholders' of
record on February 7, 1997.  The dividend paid was $337,787.


                                       -28-


<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



NOTE #26 - SUBSEQUENT EVENTS

On January 28, 1999, the Board of Directors declared a 4% stock dividend payable
on February 26, 1999 to stockholders of record on February 15, 1999.  Per share
amounts in the accompanying financial statements have been restated for the
stock dividend.  Per share amounts for December 31, 1998, 1997 and 1996, prior
to the restatement of the stock dividend were as follows:


<TABLE>
<CAPTION>

                                  1998                  1997              1996
                                ------                ------            ------
<S>                             <C>                   <C>               <C>
Basic                           $ 1.29                $ 1.23            $ 0.91
Diluted                         $ 1.17                $ 1.15            $ 0.87

</TABLE>



                                       -29-


<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996




NOTE #27 - CONDENSED FINANCIAL INFORMATION OF HERITAGE OAKS BANCORP (PARENT
COMPANY)


<TABLE>
<CAPTION>


                                             BALANCE SHEETS
                                                                    1998           1997
                                                               ------------     -----------
<S>                                                            <C>              <C>
ASSETS
      Cash                                                      $   108,161     $  300,296
      Prepaid                                                       286,723         89,024
      Construction in progress                                      406,733
      Investment in subsidiary                                    9,398,102      7,746,408
                                                               ------------     -----------

                      Total Assets                              $10,199,719     $8,135,728
                                                               ------------     -----------
                                                               ------------     -----------

</TABLE>

                                       -30-


<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996



<TABLE>
<CAPTION>

<S>                                                              <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
      Notes payable                                                 750,000
      Other Liabilities                                              13,049          8,650
                                                                 -----------     ---------
                      Total Liabilities                             763,049          8,650
                                                                 -----------     ---------
      Stockholders' Equity
      Common stock                                                4,470,170      4,180,486
      Retained earnings                                           4,966,500      3,946,592
                                                                 -----------     ---------
                      Total Stockholders' Equity                  9,436,670      8,127,078
                                                                 -----------     ---------
                      Total Liabilities and
                         Stockholders' Equity                   $10,199,719     $8,135,728
                                                                 -----------     ---------
                                                                 -----------     ---------
</TABLE>


                                             STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                     1998           1997           1996
                                                                 ----------     ----------       --------
<S>                                                              <C>            <C>              <C>
INCOME
      Equity in undisbursed income of subsidiary                 $1,423,886     $1,317,202       $950,057
                                                                 ----------     ----------       --------
                      Total Income                                1,423,886      1,317,202        950,057
                                                                 ----------     ----------       --------
EXPENSE
      Salary expense                                                 35,284         32,283         31,987
      Equipment expense                                                 182
      Other professional fees and outside services                   44,930         22,785         13,781
      Interest expense                                               12,632
      Other                                                          39,724         37,887         16,141
                                                                 ----------     ----------       --------
                      Total Expense                                 132,570         92,955         62,091
                                                                 ----------     ----------       --------
                      Total Operating Income                      1,291,316      1,224,247        887,966

Tax benefit of parent                                               (55,279)       (36,817)       (25,865)
                                                                 ----------     ----------       --------
                      Net Income                                 $1,346,595     $1,261,064       $913,831
                                                                 ----------     ----------       --------
                                                                 ----------     ----------       --------

</TABLE>


                                       -31-


<PAGE>


                       HERITAGE OAKS BANCORP AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1998, 1997 AND 1996


NOTE #27 - CONDENSED FINANCIAL INFORMATION OF HERITAGE OAKS BANCORP (PARENT 
 COMPANY), (CONTINUED)




                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                            1998                1997                1996
                                                                         ----------         -----------           ---------
<S>                                                                      <C>                <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net income                                                         $1,346,595          $1,261,064           $ 913,831
      Adjustments to Reconcile Net Income
       to Net Cash Provided By Operating Activities
          Increase in other assets                                         (197,699)            (31,217)            (28,434)
          Increase/(decrease) in other liabilities                            4,399             (24,825)            (11,062)
          Undistributed income of subsidiary                             (1,423,886)         (1,317,202)           (950,057)
                                                                         ----------         -----------           ---------
                      Net Cash Used In
                        Operating Activities                               (270,591)           (112,180)            (75,722)
                                                                         ----------         -----------           ---------


CASH FLOWS FROM INVESTING ACTIVITIES
      Purchase of property and premises                                    (406,733)
                                                                         ----------         -----------           ---------
CASH FLOWS FROM FINANCING ACTIVITIES
      Cash dividends declared                                              (519,850)           (339,138)           (213,011)
      Cash dividends received                                               665,355             345,985             499,016
      Additional contributed capital                                       (700,000)
      Increase in loans payable                                             750,000
      Proceeds from the exercise of options                                 289,684              91,241              55,436
                                                                         ----------         -----------           ---------
                      Net Cash Provided By
                         Financing Activities                               485,189              98,088             341,441
                                                                         ----------         -----------           ---------

NET INCREASE/(DECREASE) IN CASH                                            (192,135)            (14,092)            265,719

CASH, Beginning of year                                                     300,296             314,388              48,669
                                                                         ----------         -----------           ---------
CASH, End of year                                                         $ 108,161           $ 300,296           $ 314,388
                                                                         ----------         -----------           ---------
                                                                         ----------         -----------           ---------

</TABLE>

                                       -32-


<PAGE>


                          SELECTED QUARTERLY FINANCIAL DATA
                                    (UNAUDITED)


The selected quarterly data for 1998 and 1997 is based on the unaudited
financial statements of the Company as presented by Management.

<TABLE>
<CAPTION>

                                                                   Quarter Ended
(Dollars in thousands, except             --------------------------------------------------------------------
    per share data)                        March 31          June 30          September 30         December 31
                                          -----------      ------------       ------------         -----------
<S>                                       <C>               <C>                <C>                 <C>
1998
Net interest income                            1,220             1,255             1,417             1,554
Provision for possible loan losses                21                25                58                60
Non-interest income                            1,582             1,644             1,695             1,440
Non-interest expenses                          2,261             2,361             2,477             2,470
                                          -----------      ------------       ------------         -----------
Income before provision for
  income taxes                                   520               513               577               464
Provision for income taxes                       191               180               202               155
                                          -----------      ------------       ------------         -----------
Net Income                                  $    329          $    333          $    375          $    309
                                          -----------      ------------       ------------         -----------
                                          -----------      ------------       ------------         -----------

Earnings Per Share:
    Basic                                       0.32              0.32              0.32              0.28
    Diluted                                     0.30              0.30              0.30              0.23
Dividends declared per share
Total assets                                  97,445           106,110           119,155           131,138
Total deposits                                86,932            96,321           108,364           119,408
Loans, net                                    60,505            63,538            68,343            69,803
Stockholders' equity                           7,987             8,337             8,784             9,437

1997
Net interest income                            1,027             1,097             1,114             1,235
Provision for possible loan losses                60                26                43                35
Non-interest income                              836               911             1,619             1,600
Non-interest expenses                          1,393             1,506             2,117             2,216
                                          -----------      ------------       ------------         -----------
Income before provision for
  income taxes                                   410               476               573               584
Provision for income taxes                       156               180               222               224
                                          -----------      ------------       ------------         -----------
Net Income                                  $    254          $    296          $    351          $    360
                                          -----------      ------------       ------------         -----------
                                          -----------      ------------       ------------         -----------

Earnings Per Share:
    Basic (1)                                   0.25              0.29              0.34              0.35
    Diluted (1)                                 0.23              0.27              0.32              0.33
Dividends declared per share                                                                          0.33
Total assets                                  84,897            87,787            93,825            93,319
Total deposits                                76,439            79,079            84,184            83,550
Loans, net                                    51,193            52,802            55,088            54,697
Stockholders' equity                           6,980             7,408             7,717             8,127

</TABLE>

(1) Adjusted retroactively for the three-for-two stock split which occurred on
    November 5, 1997.

                                       -33-

<PAGE>
                            MARKET FOR COMMON EQUITY AND
                            RELATED STOCKHOLDER MATTERS


MARKET INFORMATION

There is a limited over-the-counter market for the Company's Common Stock.  
The Company's Common Stock is not listed on any exchange or market.  However, 
Maguire Investments, Inc., Hoeffer & Arnett, Inc., and Sutro & Co., make a 
market in the Company's Common Stock.

The information in the following table indicates the high and low bid prices 
of the Company's Common Stock for each quarterly period during the last two 
years based upon information provided by Maguire Investments, Inc. and 
Hoeffer & Arnett.  These prices do not include retain mark-ups, mark-downs, 
or commissions.

<TABLE>
<CAPTION>


                                                     Bid Prices
     Quarter Ended                          ---------------------------
         1998                                  Low              High
     -------------                          ---------------------------
<S>                                          <C>               <C>
     March 31                                $13.50            $16.00
     June 30                                  15.75             16.75
     September 30                             16.00             17.75
     December 31                              16.00             17.00


                                                     Bid Prices
     Quarter Ended                          ---------------------------
         1997                                  Low              High
     -------------                          ---------------------------
     March 31                                  $8.00            $10.00
     June 30                                   10.00             11.33
     September 30                              10.33             11.33
     December 31                               11.50             12.67

</TABLE>



AVAILABILITY OF 10-KSB

A COPY OF THE BANCORP'S ANNUAL REPORT ON FORM 10-KSB IS AVAILABLE TO 
SHAREHOLDERS FREE OF CHARGE BY SENDING A WRITTEN REQUEST TO THE PRESIDENT OF 
HERITAGE OAKS BANCORP, 545 12TH STREET, PASO ROBLES, CALIFORNIA 93446.

ANNUAL DISCLOSURE STATEMENT

In addition to this Annual Report to Shareholders, the Bank makes available, 
pursuant to FDIC regulations, an Annual Disclosure Statement.  A copy of the 
Annual Disclosure Statement may be obtained by contacting the President of 
Heritage Oaks Bancorp, 545 12th Street, Paso Robles, California 93446, or by 
telephoning (805) 239-5200.

                                       -34-

<PAGE>

ITEM 8.   CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.

PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT

THE INFORMATION REQUIRED BY ITEM 9 OF FORM 10-KSB IS INCORPORATED BY 
REFERENCE FROM THE INFORMATION CONTAINED IN THE COMPANY'S PROXY STATEMENT FOR 
THE 1999 ANNUAL MEETING OF SHAREHOLDERS WHICH WILL BE FILED PURSUANT TO 
REGULATION 14A.

ITEM 10.  EXECUTIVE COMPENSATION

THE INFORMATION REQUIRED BY ITEM 10 OF FORM 10-KSB IS INCORPORATED BY 
REFERENCE FROM THE INFORMATION CONTAINED IN THE COMPANY'S PROXY STATEMENT FOR 
THE 1999 ANNUAL MEETING OF SHAREHOLDERS WHICH WILL BE FILED PURSUANT TO 
REGULATION 14A.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

THE INFORMATION REQUIRED BY ITEM 11 OF FORM 10-KSB IS INCORPORATED BY 
REFERENCE FROM THE INFORMATION CONTAINED IN THE COMPANY'S PROXY STATEMENT FOR 
THE 1999 ANNUAL MEETING OF SHAREHOLDERS WHICH WILL BE FILED PURSUANT TO 
REGULATION 14A.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

THE INFORMATION REQUIRED BY ITEM 12 OF FORM 10-K IS INCORPORATED BY REFERENCE
FROM THE INFORMATION CONTAINED IN THE COMPANY'S PROXY STATEMENT FOR THE 1999
ANNUAL MEETING OF SHAREHOLDERS WHICH WILL BE FILED PURSUANT TO REGULATION 14A.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS:

(2.1)          PLAN OF REORGANIZATION AND MERGER AGREEMENT DATED AS OF MARCH 22,
1994, INCORPORATED BY REFERENCE FROM EXHIBIT 2 TO REGISTRATION STATEMENT ON FORM
S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.

(3.1a)         ARTICLES OF INCORPORATION INCORPORATED BY REFERENCE FROM EXHIBIT
3.1A TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504 FILED WITH THE SEC ON
APRIL, 1994.

(3.1b)         AMENDMENT TO THE ARTICLES OF INCORPORATION FILED WITH THE
SECRETARY OF STATE ON OCTOBER 16, 1997.

(3.2)          BYLAWS INCORPORATED BY REFERENCE FROM EXHIBIT 3.2 TO REGISTRATION
STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.

(4.1)          SPECIMEN FORM OF HERITAGE OAKS BANCORP STOCK CERTIFICATE
INCORPORATED BY REFERENCE FROM EXHIBIT 


                                                                            28


<PAGE>


4.1 TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504 FILED WITH THE SEC ON 
APRIL 8, 1994.

(10.1)         AGREEMENT TO PURCHASE ASSETS AND ASSUME LIABILITIES BETWEEN 
HERITAGE OAKS BANK AND LA CUMBRE SAVINGS BANK, DATED MARCH 28, 1994, 
INCORPORATED BY REFERENCE FROM EXHIBIT 10.1 TO REGISTRATION STATEMENT ON FORM 
S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.

*(10.2)        1990 STOCK OPTION PLAN INCORPORATED BY REFERENCE FROM EXHIBIT
10.2 TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON
APRIL 8, 1994.

*(10.3)        FORM OF STOCK OPTION AGREEMENT INCORPORATED BY REFERENCE FROM
EXHIBIT 4.2 TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH THE
SEC ON APRIL 8, 1994.


*(10.4)        LAWRENCE P. WARD EMPLOYMENT LETTER AGREEMENT, DATED NOVEMBER 17,
1992, INCORPORATED BY REFERENCE FROM EXHIBIT 10.3 TO REGISTRATION STATEMENT ON
FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.

(10.5)         SERVICE AGREEMENT, DATED NOVEMBER 10, 1992, BETWEEN HERITAGE 
OAKS BANK AND MESCOM ENTERPRISES, INC. DBA NATIVE AMERICAN NETWORK SYSTEM, 
INCORPORATED BY REFERENCE FROM EXHIBIT 10.4 TO REGISTRATION STATEMENT ON FORM 
S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.

(10.6)         LETTER AGREEMENT, DATED OCTOBER 23, 1992, BETWEEN HERITAGE OAKS
BANK AND PETER GHEORGHIU, INCORPORATED BY REFERENCE FROM EXHIBIT 10.5 TO
REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8,
1994.

(10.7)         ITEM PROCESSING AND BACK OFFICES SERVICING AGREEMENT, DATED
AUGUST 11, 1993, BETWEEN HERITAGE OAKS BANK AND SYSTEMATICS FINANCIAL SERVICES,
INC., INCORPORATED BY REFERENCE FROM EXHIBIT 10.6 TO REGISTRATION STATEMENT ON
FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1995.

(10.8)         DATA PROCESSING AGREEMENT, DATED OCTOBER 1, 1992, BETWEEN
HERITAGE OAKS BANK AND CITY NATIONAL INFORMATION SYSTEMS, INCORPORATED BY
REFERENCE FROM EXHIBIT 10.7 TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504,
FILED WITH THE SEC ON APRIL 8, 1994.

*(10.9)        401(k) PENSION AND PROFIT SHARING PLAN FILED WITH THE SEC IN THE
COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

*(10. 10) HERITAGE OAKS BANCORP 1995 BONUS PLAN, FILED WITH THE SEC IN THE 
COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

*(10.11)       SALARY CONTINUATION PLAN OF HERITAGE OAKS BANK, FILED WITH THE
SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

*(10. 12)      SALARY CONTINUATION AGREEMENT WITH LAWRENCE P. WARD, FILED WITH
THE SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

*(10. 13)      SALARY CONTINUATION AGREEMENT WITH GWEN R. PELFREY, FILED WITH
THE SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

*(10. 14)      SALARY CONTINUATION AGREEMENT WITH ROBERT E. BLOCH, FILED WITH
THE SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

                                                                            29


<PAGE>

(10.15)        WOODLAND SHOPPING CENTER LEASE, FILED WITH THE SEC IN THE
COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

(10.16)        LAGUNA VILLAGE SUBLEASE, FILED WITH THE SEC IN THE COMPANY'S 10K
REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.

*(10.17)  LAWRENCE P. WARD EMPLOYMENT LETTER AGREEMENT, DATED FEBRUARY 27, 1996,
FILED WITH THE SEC IN THE COMPANY'S 10KSB REPORT FOR THE YEAR ENDED DECEMBER 31,
1995.

(10.18)        1135 SANTA ROSA STREET LEASE, FILED WITH THE SEC IN THE COMPANY'S
10KSB REPORT FOR THE YEAR ENDED DECEMBER 31, 1995.

(10.19)        PURCHASE AND ASSUMPTION BETWEEN WELLS FARGO BANK, N.A. AND
HERITAGE OAKS BANK, DATED AS OF OCTOBER 15, 1996, FILED WITH THE SEC IN THE
COMPANY'S 8-K REPORT, DATED DECEMBER 2, 1996.

(10.20)        LEASE AGREEMENT FOR CAMBRIA BRANCH OFFICE DATED FEBRUARY 21, 1997
               FILED WITH THE SEC IN THE COMPANY'S 10KSB REPORTED FOR THE YEAR
               ENDED DECEMBER 31, 1996.

(10.21)        1997 STOCK OPTION PLAN INCORPORATED BY REFERENCE FROM EXHIBIT 4A
               TO REGISTRATION STATEMENT ON FORM S-8 NO.333-31105 FILED WITH THE
               SEC ON JULY 11, 1997.

(10.22)        FORM OF STOCK OPTION AGREEMENT INCORPORATED BY REFERENCE FROM
               EXHIBIT 4B TO REGISTRATION STATEMENT ON FORM S-8 NO. 333-31105
               FILED WITH THE SEC ON JULY 11, 1997.

(10.23)   MADONNA ROAD LEASE FILED WITH THE SEC IN THE COMPANY'S 10KSB FOR THE
YEAR ENDED DECEMBER 31, 1997.

(10.24)   SANTA MARIA LEASE COMMENCING NOVEMBER 1, 1998.

(10.25)   SERVICE AGREEMENT WITH ONLINE RESOURCES AND COMMUNICATION CORP. DATED
DECEMBER 18, 1998 ( INTERNET BANKING PRODUCT FOR CUSTOMERS).

(10.26)   MASTER DATA PROCESSING AGREEMENT WITH MID WEST PAYMENT SYSTEMS, INC.
COMMENCING OCTOBER 1, 1998.

(21)      SUBSIDIARIES OF HERITAGE OAKS BANCORP. HERITAGE OAKS BANK IS THE ONLY
          SUBSIDIARY OF HERITAGE OAKS BANCORP.

(23)      CONSENT OF INDEPENDENT ACCOUNTANTS

(27)      FINANCIAL SCHEDULE

*DENOTES MANAGEMENT CONTRACTS, COMPENSATORY PLANS OR ARRANGEMENTS.


REPORTS ON FORM 8-K:

DURING THE FOURTH QUARTER OF 1998, THE COMPANY DID NOT FILE ANY REPORTS ON FORM
8-K.


                                                                            30


<PAGE>


SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.

HERITAGE OAKS BANCORP


BY:  /S/ LAWRENCE P. WARD
LAWRENCE P. WARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER


DATED:    MARCH 25, 1999



BY:  /S/MARGARET A. TORRES
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

DATED:    MARCH 25, 1999

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.

DATED: MARCH 18, 1999


<TABLE>
<CAPTION>

<S>                           <C>                           <C>
/S/ B.R. BRYANT               CHAIRMAN OF THE               MARCH 18, 1999
B.R. BRYANT                   BOARD OF
DIRECTORS


/S/ DONALD H. CAMPBELL        VICE CHAIRMAN                 MARCH 18, 1999
DONALD H. CAMPBELL            OF THE BOARD
OF DIRECTORS


/S/ KENNETH DEWAR             DIRECTOR                      MARCH 18, 1999
KENNETH DEWAR


/S/ DOLORES T. LACEY          DIRECTOR                      MARCH 18, 1999
DOLORES T. LACEY



/S/ MERLE F. MILLER           DIRECTOR                     MARCH 18, 1999
MERLE F. MILLER


                                                                            31


<PAGE>



/S/ JOHN PALLA                DIRECTOR                     MARCH 18, 1999
JOHN  PALLA


/S/ OLE K. VIBORG             DIRECTOR                     MARCH 18, 1999
OLE K. VIBORG


/S/ LAWRENCE P. WARD          DIRECTOR                     MARCH 18, 1999
LAWRENCE P. WARD


/S/ DAVID WEYRICH             DIRECTOR                     MARCH 18,1999
DAVID WEYRICH

</TABLE>

EXHIBIT INDEX

<TABLE>
<CAPTION>



EXHIBIT
SEQUENTIAL
NUMBER              DESCRIPTION                                                       PAGE NUMBER
<S>       <C>                                                                         <C>
(10.24)   SANTA MARIA LEASE COMMENCING NOVEMBER 1, 1998.

(10.25)   SERVICE AGREEMENT WITH ONLINE RESOURCES AND COMMUNICATION CORP. DATED
          DECEMBER 18, 1998 ( INTERNET BANKING PRODUCT FOR CUSTOMERS).

(10.26)   MASTER DATA PROCESSING AGREEMENT WITH MID WEST PAYMENT SYSTEMS, INC.
          COMMENCING OCTOBER 1, 1998.


23        CONSENT OF INDEPENDENT ACCOUNTANTS

27        FINANCIAL DATA SCHEDULE

</TABLE>


                                                                            32