Dear Clients, Friends and Neighbors,

In this Q & A series, I discuss how I think the Bank has thrived/survived through 2010. I would also like to take this opportunity to share my thoughts on how I think the New Year will develop in terms of economic stability both locally and nationally, To conclude, I share some exciting steps our customers can look forward to in terms of their banking relationship with us.

Question: How has the Bank thrived/survived through 2010?

Answer: 2010 will go down as the most challenging year for banking since the great depression. The depth of this recession has been so much greater than any other over the past 70 years as it has touched everyone not only in this country but on a global scale, Most of us in banking thought rolling into 2010 we would see an improvement in the economy. After all, the recession is technically over according to the experts. In California, that couldn’t be further from the truth. The state’s unemployment is still at record level of 12.4%, well above the national average of 9.8%. Add to that the fragile state of the state’s economy and you can understand the situation we are dealing with a little more clarity. The bank was able to survive during 2010 because we have a very solid balance sheet. We are fortunate to have a very strong capital base and our deposits base consists of a high percentage of core deposits. Our deposit growth over the past two years has provided a great deal of liquidity to the bank as well. The two most important things for a bank to focus on during a recession are capital and liquidity. We have both. Where we have thrived is in the area of community involvement. This year more than any other, our staff got involved in just about every community activity you can imagine. This is an area our bank staff tells us they are most proud of as employees of Heritage Oaks Bank, they feel very proud of the fact we as a company get involved and we encourage every member of our team to also get involved.

Question: How do you see the New Year developing in terms of economic stability both locally and nationally?

Answer: Unfortunately, I do not see any major changes in the economy taking place in 2011. Interest rates are projected to remain at historically low levels, which is a direct reflection in the Fed’s        expectations for growth in the economy. Unemployment in the state of California will remain above 10% throughout 2011 and there is no way the government in this state will get the finances of the state under control in the next year or two.    A key factor to look at in judging the economy is housing. We have seen hints that the market is firming up on the lower end of the price range. Our mortgage origination team is busier than they have ever been. We have seen increased activity for both new purchases, especially lower priced houses, as well as refinances into lower rate mortgages. If there is a bright spot with this economy, it is mortgage interest rates.  Purchasers are able to purchase homes and secure new mortgages at interest rates not experienced in modern history.  This being said, I think we are in for much of the same next year. My hope is that we do begin to see pockets within the economy begin to pick up.  Manufacturing and exports are both very important to the state of California. If either of these segments of the economy show improvement, that could help ignite other segments and unemployment rates may begin to improve.    We can all be thankful we live on the Central Coast or South Coast. Santa Barbara and San Luis Obispo have two of the lowest unemployment rates in the state of California.  Santa Barbara and San Luis Obispo being coastal counties, we should see housing stabilize more quickly than inland counties as well. There is also a draw to our area for tourism and I don’t see that falling off from 2010 levels at all. Actually, tourism has been one area which has done better here than in other parts of the state.

Question: What exciting steps can our customers look forward to in terms of their banking    relationship with us?

Answer: We, at Heritage Oaks Bank, are always looking for ways to enhance our clients’ banking  experience.  This year we will be introducing a new on-line banking product which has been in      testing and development for the past 6 months. From what I have seen and experienced so far, the array of options available through our new on-line banking will make banking much quicker from the moment you log in. Look for this to roll out early in 2011.  As in 2010, Heritage Oaks Bank employees will be focused on the client experience as well as the community experience. We will be participating in hundreds of events over the course of the year and it will remain our goal to make a difference in the community we live in. If you are thinking of refinancing into a low cost mortgage, 2011 will be the year to get it done. I would suggest you begin the process sooner rather than later, but today, we are working with    mortgage interest rates at historically low levels. This also goes for those of you thinking of making a new home purchase. I can safely say, you will never be able to secure a mortgage at a lower        interest rate than today.