Discussions of certain matters in this Report on Form 10-Q may constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve risks and uncertainties. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words such as "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, potential future performance, potential future credit experience, perceived opportunities in the market, and statements regarding the Company's mission and vision. The Company's actual results, performance, and achievements may differ materially from the results, performance, and achievements expressed or implied in such forward-looking statements due to a wide range of factors. The factors include, but are not limited to changes in interest rates, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the US Government, real estate valuations, competition in the financial services industry, and other risks. All of the Company's operations and most of its customers are located in California. During the past year, the availability of a sufficient supply of electrical power in California has been unreliable at times. In addition, other events, including those of September 11, 2001, have increased the uncertainty related to the national and California economic outlook and could have an effect on the future operations of the Company or its customers, including borrowers. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Heritage Commerce Corp's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In certain instances, the Company uses the discount factor and prepayment assumptions to determine the present value of assets and liabilities. A change in the discount factor or prepayment spreads could increase or decrease the values of those assets and liabilities which would result in either a beneficial or adverse impact to the Company's financial results. The Company used historical loss experience as one factor in determining the inherent loss that may be present in the Company's loan portfolio. Actual losses could differ significantly from the historical factors that we use. Other estimates that the Company used are related to the expected useful lives of the Company's depreciable assets. In addition GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact the Company's transactions could change.

The allowance for loan losses is an estimate of the losses that may be sustained in the Company's loan portfolio. The allowance is based on two basic principles of accounting. (1) Statement of Financial Accounting Standards (SFAS) No. 5 "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The Company's allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses an historical loss view as an indicator of future losses and as a result could differ from the losses incurred in the future. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, and fair market value of collateral are used to estimate those losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowances. For further information regarding our allowance for credit losses, see Allowance for Probable Loan Losses on page 20.

The amounts of gains recorded on sales of loans and the initial recording of servicing assets and interest only strips is based on the estimated fair values of the respective components. In recording the initial value of the servicing assets and the fair value of the Interest-Only (I/O) strips receivable, the Company uses estimates which are made based on management's expectations of future prepayment and discount rates. For the quarter ended June 30, 2002, management's estimate of constant prepayment rate ("CPR") was 14% and the weighted average discount rate assumption was 10%. These prepayment and discount rates were based on current market conditions and historical performance of the various pools of loan. If actual prepayments with respect to sold loans occur more quickly than projected the carrying value of the servicing assets may have to be adjusted through a charge to earnings. Variations in prevailing interest rates on borrowed funds, changes in the unemployment rate and changes in general economic conditions, among other factors, could cause changes in the prepayment experience. A corresponding decrease in the value of the I/O strip receivable would also be expected.

                                            For the Three Months Ended         For the Three Months Ended
                                                 June 30, 2002                      June 30, 2001
                                          ---------------------------------  ---------------------------------
                                                       Interest    Average                Interest    Average
                                           Average     Income/     Yield/     Average     Income/     Yield/
(Dollars in thousands)                     Balance     Expense      Rate      Balance     Expense      Rate
- ----------------------------------------  ----------  ----------  ---------  ----------  ----------  ---------
Assets:
Loans, gross............................ $  669,956  $   11,700       6.93% $  633,886  $   14,774       9.35%
Investments securities..................    113,548       1,332       4.71%     88,052       1,276       5.81%
Interest bearing deposits in banks......      6,121          21       1.37%      4,777          47       3.95%
Federal funds sold......................     56,797         237       1.67%     66,725         710       4.27%
                                          ----------  ----------             ----------  ----------
   Total interest earning assets........    846,422  $   13,290       6.30%    793,440  $   16,807       8.50%
                                                      ----------                         ----------
Cash and due from banks.................     36,934                             34,813
Premises and equipment, net.............      5,444                              6,144
Other assets............................     32,519                             22,813
                                          ----------                         ----------
   Total assets......................... $  921,319                         $  857,210
                                          ==========                         ==========
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing................ $   81,327  $      167       0.82% $   65,939  $      288       1.75%
Savings and money market................    268,751       1,290       1.93%    220,553       1,799       3.27%
Time deposits, under $100...............     58,654         476       3.25%     78,048       1,119       5.75%
Time deposits, $100 and over............    133,237         948       2.85%    161,412       2,293       5.70%
Brokered deposits.......................     69,069         666       3.87%     23,568         356       6.06%
Other borrowings........................     19,344         447       9.29%     14,000         376      10.77%
                                          ----------  ----------             ----------  ----------
   Total interest bearing liabilities...    630,382  $    3,994       2.54%    563,520  $    6,231       4.44%
                                                      ----------                         ----------
Interest bearing demand deposits........    202,174                            209,771
Other liabilities.......................     11,894                             13,337
                                          ----------                         ----------
   Total liabilities....................    844,450                            786,628
Shareholders' equity....................     76,869                             70,582
                                          ----------                         ----------
   Total liabilities and
      shareholders' equity.............. $  921,319                         $  857,210
                                          ==========                         ==========
Net interest income / margin............             $    9,296       4.41%             $   10,576       5.35%
                                                      ==========                         ==========

                                            For the Six Months Ended           For the Six Months Ended
                                                 June 30, 2002                      June 30, 2001
                                          ---------------------------------  ---------------------------------
                                                       Interest    Average                Interest    Average
                                           Average     Income/     Yield/     Average     Income/     Yield/
(Dollars in thousands)                     Balance     Expense      Rate      Balance     Expense      Rate
- ----------------------------------------  ----------  ----------  ---------  ----------  ----------  ---------
Assets:
Loans, gross............................ $  671,530  $   23,309       7.00% $  630,570  $   30,575       9.78%
Investments securities..................    108,080       2,537       4.73%     97,214       2,844       5.90%
Interest bearing deposits in banks......      7,084          48       1.37%      3,808          83       4.40%
Federal funds sold......................     57,075         467       1.65%     61,128       1,450       4.78%
                                          ----------  ----------             ----------  ----------
   Total interest earning assets........    843,769  $   26,361       6.30%    792,720  $   34,952       8.89%
                                                      ----------                         ----------
Cash and due from banks.................     36,657                             38,103
Premises and equipment, net.............      5,563                              6,214
Other assets............................     32,090                             21,604
                                          ----------                         ----------
   Total assets......................... $  918,079                         $  858,641
                                          ==========                         ==========
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing................ $   81,597  $      354       0.87% $   66,221  $      633       1.93%
Savings and money market................    255,098       2,428       1.92%    222,902       4,011       3.63%
Time deposits, under $100...............     63,056       1,112       3.55%     77,745       2,288       5.93%
Time deposits, $100 and over............    138,244       2,123       3.10%    167,166       4,860       5.86%
Brokered deposits.......................     68,554       1,330       3.91%     21,497         656       6.15%
Other borrowings........................     20,323         939       9.33%     17,291         865      10.09%
                                          ----------  ----------             ----------  ----------
   Total interest bearing liabilities...    626,872  $    8,286       2.67%    572,822  $   13,313       4.69%
                                                      ----------                         ----------
Interest bearing demand deposits........    201,092                            204,162
Other liabilities.......................     13,846                             12,599
                                          ----------                         ----------
   Total liabilities....................    841,810                            789,583
Shareholders' equity....................     76,269                             69,058
                                          ----------                         ----------
   Total liabilities and
      shareholders' equity.............. $  918,079                         $  858,641
                                          ==========                         ==========
Net interest income / margin............             $   18,075       4.32%             $   21,639       5.50%
                                                      ==========                         ==========

                                              Three Months Ended June 30,
                                                  2002  vs.  2001
                                          ----------------------------------
                                          Increase (Decrease) Due to Change In:
                                           Average     Average       Net
(Dollars in thousands)                      Volume       Rate       Change
- ----------------------------------------  ----------  ----------  ----------
Interest earning assets                                                     
    Loans, gross........................ $      750  $   (3,824) $   (3,074)
    Investments securities..............        299        (243)         56
    Interest bearing deposits in banks..          5         (31)        (26)
    Federal funds sold..................        (41)       (432)       (473)
                                          ----------  ----------  ----------
 Total interest earning assets.......... $    1,013  $  (4,530)  $  (3,517)
                                          ----------  ----------  ----------

                                                                            
Interest bearing liabilities                                                
    Demand, interest bearing............ $       32  $     (153) $     (121)
    Savings and money market............        231        (740)       (509)
    Time deposits, under $100...........       (156)       (487)       (643)
    Time deposits, $100 and over........       (200)     (1,145)     (1,345)
    Brokered Deposits...................        439        (129)        310
    Other borrowings....................        123         (52)         71
                                          ----------  ----------  ----------
 Total interest bearing liabilities..... $      469  $   (2,706) $   (2,237)
                                          ----------  ----------  ----------
 Net interest income.................... $      544  $   (1,824) $   (1,280)
                                          ==========  ==========  ==========

                                               Six Months Ended June 30,
                                                      2002 vs. 2001
                                          ----------------------------------
                                          Increase (Decrease) Due to Change In:
                                           Average     Average       Net
(Dollars in thousands)                      Volume       Rate       Change
- ----------------------------------------  ----------  ----------  ----------
Interest earning assets                                                     
    Loans, gross........................ $    1,422  $   (8,688) $   (7,266)
    Investments securities..............        255        (562)       (307)
    Interest bearing deposits in banks..         22         (57)        (35)
    Federal funds sold..................        (33)       (950)       (983)
                                          ----------  ----------  ----------
 Total interest earning assets.......... $    1,666  $  (10,257) $   (8,591)
                                          ----------  ----------  ----------

                                                                            
Interest bearing liabilities                                                
    Demand, interest bearing............ $       67  $     (346) $     (279)
    Savings and money market............        306      (1,889)     (1,583)
    Time deposits, under $100...........       (258)       (918)     (1,176)
    Time deposits, $100 and over........       (444)     (2,293)     (2,737)
    Brokered Deposits...................        913        (239)        674
    Other borrowings....................        139         (65)         74
                                          ----------  ----------  ----------
 Total interest bearing liabilities..... $      723  $   (5,750) $   (5,027)
                                          ----------  ----------  ----------
 Net interest income.................... $      943  $   (4,507) $   (3,564)
                                          ==========  ==========  ==========

                                                       Three Months Ended     Increase (decrease)
                                                             June 30,          2002 versus 2001
                                                      --------------------   --------------------
(Dollars in thousands)                                  2002       2001       Amount     Percent
- ----------------------------------------------------  ---------  ---------   ---------  ---------
Gain on sale of loans............................... $     557  $     278   $     279        100 %
Service charges and other fees on deposits accounts.       371        228         143         63 %
Servicing income....................................       310        162         148         91 %
Other investment income.............................       277        242          35         14 %
Gain on sale of securities available-for-sale.......       138        409        (271)       (66)%
Other income........................................       334        372         (38)       (10)%
                                                      ---------  ---------   ---------
Total............................................... $   1,987  $   1,691   $     296         18 %
                                                      =========  =========   =========

                                                       Six Months Ended       Increase (decrease)
                                                             June 30,          2002 versus 2001
                                                      --------------------   --------------------
(Dollars in thousands)                                  2002       2001       Amount     Percent
- ----------------------------------------------------  ---------  ---------   ---------  ---------
Gain on sale of loans............................... $     978  $     551   $     427         77 %
Service charges and other fees on deposits accounts.       687        436         251         58 %
Servicing income....................................       578        293         285         97 %
Other investment income.............................       551        510          41          8 %
Gain on sale of securities available-for-sale.......       425        551        (126)       (23)%
Other income........................................       658        588          70         12 %
                                                      ---------  ---------   ---------
Total............................................... $   3,877  $   2,929   $     948         32 %
                                                      =========  =========   =========

                                                       Three Months Ended     Increase (decrease)
                                                              June 30,         2002 versus 2001
                                                      --------------------   --------------------
(Dollars in thousands)                                  2002       2001       Amount     Percent
- ----------------------------------------------------  ---------  ---------   ---------  ---------
Salaries and employee benefits...................... $   4,648  $   4,638   $      10          0 %
Occupancy...........................................       790        681         109         16 %
Professional fees...................................       347        265          82         31 %
Furniture and equipment.............................       327        366         (39)       (11)%
Loan origination costs..............................       308        360         (52)       (14)%
Client services.....................................       282        647        (365)       (56)%
Advertising and promotion...........................       200        359        (159)       (44)%
Stationery & supplies...............................       110        125         (15)       (12)%
Telephone...........................................        83         93         (10)       (11)%
Other...............................................     1,222      1,135          87          8 %
                                                      ---------  ---------   ---------
Total............................................... $   8,317  $   8,669   $    (352)        (4)%
                                                      =========  =========   =========

                                                       Six Months Ended       Increase (decrease)
                                                            June 30,           2002 versus 2001
                                                      --------------------   --------------------
(Dollars in thousands)                                  2002       2001       Amount     Percent
- ----------------------------------------------------  ---------  ---------   ---------  ---------
Salaries and employee benefits...................... $   9,182  $   9,456   $    (274)        (3)%
Occupancy...........................................     1,508      1,361         147         11 %
Professional fees...................................       572        595         (23)        (4)%
Furniture and equipment.............................       683        716         (33)        (5)%
Loan origination costs..............................       598        659         (61)        (9)%
Client services.....................................       440        939        (499)       (53)%
Advertising and promotion...........................       330        582        (252)       (43)%
Stationery & supplies...............................       186        258         (72)       (28)%
Telephone...........................................       157        182         (25)       (14)%
Other...............................................     2,362      2,188         174          8 %
                                                      ---------  ---------   ---------
Total............................................... $  16,018  $  16,936   $    (918)        (5)%
                                                      =========  =========   =========

                                                           For The Six Months Ended June 30,
                                                      -------------------------------------------
                                                                  Percent                Percent
(Dollars in thousands)                                  2002     of Total      2001     of Total
- ----------------------------------------------------  ---------  ---------   ---------  ---------
Salaries and employee benefits...................... $   4,648         56 % $   4,638         54 %
Occupancy...........................................       790          9 %       681          8 %
Professional fees...................................       347          4 %       265          3 %
Furniture and equipment.............................       327          4 %       366          4 %
Loan origination costs..............................       308          4 %       360          4 %
Client services.....................................       282          3 %       647          7 %
Advertising and promotion...........................       200          2 %       359          4 %
Stationery & supplies...............................       110          1 %       125          1 %
Telephone...........................................        83          1 %        93          1 %
Other...............................................     1,222         15 %     1,135         13 %
                                                      ---------  ---------   ---------  ---------
Total............................................... $   8,317        100 % $   8,669        100 %
                                                      =========  =========   =========  =========

                                                            For The Six Months Ended June 30,
                                                      -------------------------------------------
                                                                  Percent                Percent
(Dollars in thousands)                                  2002     of Total      2001     of Total
- ----------------------------------------------------  ---------  ---------   ---------  ---------
Salaries and employee benefits...................... $   9,182         57 % $   9,456         56 %
Occupancy...........................................     1,508          9 %     1,361          8 %
Professional fees...................................       572          4 %       595          4 %
Furniture and equipment.............................       683          4 %       716          4 %
Loan origination costs..............................       598          4 %       659          4 %
Client services.....................................       440          3 %       939          6 %
Advertising and promotion...........................       330          2 %       582          3 %
Stationery & supplies...............................       186          1 %       258          2 %
Telephone...........................................       157          1 %       182          1 %
Other...............................................     2,362         15 %     2,188         13 %
                                                      ---------  ---------   ---------  ---------
Total............................................... $  16,018        100 % $  16,936        100 %
                                                      =========  =========   =========  =========

                                                       Three Months Ended     Six Months Ended
                                                            June 30,               June 30,
                                                      --------------------   --------------------
                                                        2002       2001        2002       2001
                                                      ---------  ---------   ---------  ---------
Income tax rate.....................................     32.89 %    38.44 %     33.45 %    38.10 %

                                                        June 30,
                                                ----------------------  December 31,
(Dollars in thousands)                             2002        2001        2001
- ----------------------------------------------  ----------  ----------  ----------
Securities available-for-sale (at fair value)
U.S. Treasury................................. $    3,126  $    1,621  $    3,593
U.S. Government Agencies......................     63,007      31,089      53,762
Mortgage-backed securities....................     17,120      18,353      22,839
Municipals....................................      3,648      11,009       9,273
Corporate bonds...............................      2,617          --       2,067
CMOs..........................................     14,799          --          --
                                                ----------  ----------  ----------
Total securities available-for-sale........... $  104,317  $   62,072  $   91,534
                                                ==========  ==========  ==========

Securities held-to-maturity (at amortized cost)
Mortgage-backed securities.................... $    3,588  $    5,077  $    4,381
CMOs..........................................         85       2,036         893
Municipals....................................      9,491      11,886      10,002
                                                ----------  ----------  ----------
     Total securities held-to-maturity........ $   13,164  $   18,999  $   15,276
                                                ==========  ==========  ==========

                                                                     June 30, 2002
                                                                        Maturity
                                 ----------------------------------------------------------------------------------------
                                                   After One and     After Five and
                                 Within One Year   Within Five Years Within Ten Years  After Ten Years     Total
                                 ---------------   ---------------   ---------------   ---------------   ----------------
                                  Amount  Yield     Amount  Yield     Amount  Yield     Amount  Yield     Amount   Yield
(Dollars in thousands)           -------- ------   -------- ------   -------- ------   -------- ------   --------- ------
Securities available-for-sale:
U.S. Treasury.................. $  3,126   2.54 % $     --     -- % $     --     -- % $     --     -- % $   3,126   2.54 %
U.S. Government Agencies.......   17,417   4.81 %   45,590   4.15 %       --     -- %       --     -- %    63,007   4.33 %
Mortgage-backed securities.....       --     -- %       --     -- %      978   5.10 %   16,142   5.34 %    17,120   5.32 %
Municipals -  nontaxable.......    2,361   4.45 %    1,287   3.85 %       --     -- %       --     -- %     3,648   4.24 %
Corporates bonds...............       --     -- %    2,617   4.36 %       --     -- %       --     -- %     2,617   4.36 %
CMOs...........................       --     -- %       --     -- %       --     -- %   14,799   4.86 %    14,799   4.86 %
                                 --------          --------          --------          --------          ---------
Total available-for-sale....... $ 22,904   4.46 % $ 49,494   4.16 % $    978   5.10 % $ 30,941   5.11 % $ 104,317   4.51 %
                                 --------          --------          --------          --------          ---------
Securities held-to-maturity:
CMOs........................... $     --     -- % $     --     -- % $     --     -- % $     85   4.41 % $      85   4.41 %
Mortgage-backed securities.....       --     -- %       --     -- %      467   5.93 %     3121   6.24 %     3,588   6.20 %
Municipals -  taxable..........      500   6.39 %    1,589   6.60 %       --     -- %       --     -- %     2,089   6.55 %
Municipals -  nontaxable.......      125   4.85 %    3,707   4.58 %    3,570   4.48 %       --     -- %     7,402   4.54 %
                                 --------          --------          --------          --------          ---------
Total held-to-maturity......... $    625   6.08 % $  5,296   5.19 % $  4,037   4.65 % $  3,206   6.19 % $  13,164   5.31 %
                                 --------          --------          --------          --------          ---------
Total securities............... $ 23,529   4.50 % $ 54,790   4.26 % $  5,015   4.74 % $ 34,147   5.21 % $ 117,481   4.60 %
                                 ========          ========          ========          ========          =========

Loans

Total loans (exclusive of loans held for sale) decreased slightly to $629,423,000 as of June 30, 2002 from $632,917,000 as of December 31, 2001 but increased $24,291,000, or 4%, as compared to $605,132,000 as of June 30, 2001.

For the three and six months ended June 30, 2002, $14,690,000 and $33,435,000 in loans guaranteed by the U.S. Small Business Administration (SBA) were generated and held for sale. $10,665,000 and $21,868,000 of SBA loans held for sale were sold into the secondary market. At June 30, 2002 and December 31, 2001, the Company serviced SBA loans, which it had sold to the secondary market of approximately $61,703,000 and $50,718,000, respectively. At June 30, 2002 and December 31, 2001, the carrying amount of the servicing assets was $921,000 and $783,000, respectively. There was no valuation allowance as of June 30, 2002 or December 31, 2001. The carring amount of Interest-Only (I/O) strip receivable at June 30, 2002 and December 31, 2001 was $2,572,000 and $2,142,000, respectively. Servicing income from these loans was $310,000 and $573,000 for the quarter and six months ended June 30, 2002, compared to $44,000 and $61,000 for the same periods in 2001. Amortization of the related assets was $322,000 and $565,000 for the quarter and six months ended June 30, 2002, compared to $71,000 and $136,000 for the same periods in 2001. Heritage Bank of Commerce is a preferred lender under the U.S. Small Business Administration, which allows the Company to grant certain U.S. Small Business Administration loans without the prior approval of the SBA.

The following table summarizes the composition of the Company's loan portfolio at the rates indicated:

                                       June 30,       % of       December 31,    % of
(Dollars in thousands)                   2002         Total         2001         Total
- -----------------------------------  ------------  -----------   -----------  -----------
Commercial......................... $    213,908           34 % $   208,713           33 %
Real estate - mortgage.............      250,658           40 %     246,119           39 %
Real estate - land and construction      160,368           25 %     174,077           27 %
Consumer...........................        4,237            1 %       3,833            1 %
                                     ------------  -----------   -----------  -----------
     Total loans...................      629,171          100 %     632,742          100 %
                                                   ===========                ===========
Deferred loan costs................          252                        175
Allowance for loan losses..........      (11,856)                   (11,154)
                                     ------------                -----------
Loans, net......................... $    617,567                $   621,763
                                     ============                ===========

The Company's loan portfolio is based on commercial (primarily to companies engaged in manufacturing, wholesale, and service businesses) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are dependent on the technology and real estate industries and their supporting companies located within the Company's market area. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy, which could reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans.

The following table sets forth the maturity distribution of the Company's loans at June 30, 2002:

                                                    Over One
                                        Due in      Year But
                                       One Year     Less Than       Over
(Dollars in thousands)                 or Less     Five Years    Five Years      Total
- -----------------------------------  ------------  -----------   -----------  -----------
Commercial......................... $    201,147  $    11,477   $     1,284  $   213,908
Real estate - mortgage.............      160,894       81,518         8,246      250,658
Real estate - land and construction      160,368           --            --      160,368
Consumer...........................        3,681          556            --        4,237
                                     ------------  -----------   -----------  -----------
     Total loans................... $    526,090  $    93,551   $     9,530  $   629,171
                                     ============  ===========   ===========  ===========

Loans with variable interest rates. $    505,292  $    53,954   $     5,444  $   564,690
Loans with fixed interest rates....       20,798       39,597         4,086       64,481
                                     ------------  -----------   -----------  -----------
     Total loans................... $    526,090  $    93,551   $     9,530  $   629,171
                                     ============  ===========   ===========  ===========

The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the western edition of The Wall Street Journal. At June 30, 2002, approximately 90% of the Company's loan portfolio consisted of floating interest rate loans.

Nonperforming assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing, troubled debt restructurings and other real estate owned. Management generally places loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is generally reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where the Banks have granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. Other real estate owned ("OREO") consists of real property acquired through foreclosure on the related underlying defaulted loans. The following table shows nonperforming assets at the dates indicated:

                                                     June 30,
                                              ----------------------  December 31,
(Dollars in thousands)                           2002        2001        2001
- --------------------------------------------  ----------  ----------  -----------
Nonaccrual loans............................ $    1,951  $       66  $        --
Loans 90 days past due and still accruing           415          --           --
Restructured loans..........................         --          --           --
                                              ----------  ----------  -----------
    Total nonperforming loans...............      2,366          66           --
Foreclosed assets...........................         --          --           --
                                              ----------  ----------  -----------
    Total nonperforming assets.............. $    2,366  $       66  $        --
                                              ==========  ==========  ===========
Nonperforming assets as a percentage of
  period end loans plus foreclosed assets...       0.38 %      0.01 %         -- %

This process attempts to assess the risk of loss inherent in the portfolio by segregating loans into four components for purposes of determining an appropriate level of the allowance: "watch," "special mention," "substandard" and "doubtful." Additionally, the Company maintains a program for regularly scheduled reviews of certain new and renewed loans by an outside loan review consultant. Any loans identified during an external review process that expose the Company to increased risk are appropriately downgraded and an increase in the allowance for loan losses is established for such loans. Further, the Company is examined periodically by the FDIC, FRB, and the California Department of Financial Institutions at which time a further review of loan quality is conducted.

Loans that demonstrate a weakness, for which there is a possibility of loss if the weakness is not corrected, are categorized as "classified." Classified loans include all loans graded substandard, doubtful and loss and may result from problems specific to a borrower's business or from economic downturns that affect the borrower's ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate).

Allowance for Loan Losses

It is the policy of management to maintain the allowance for probable loan losses at a level adequate for risks inherent in the loan portfolio. Based on information currently available to analyze loan loss delinquency and a history of actual charge-offs, management believes that the loan loss allowance is adequate. However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in the Company's market area were to weaken. Additionally, any weakness of a prolonged nature in the technology industry would have a negative impact on the local market. The effect of such events although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect the Company's future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely.

The following table summarizes the Company's loan loss experience as well as provisions, charge-offs and recoveries to the allowance for loan losses and certain pertinent ratios for the periods indicated:

                                         Six Months Ended
                                               June 30,     For the Year Ended
                                        --------------------   December 31,
(Dollars in thousands)                    2002       2001         2001
- --------------------------------------  ---------  ---------   -----------
Balance, beginning of period / year... $  11,154  $   9,651   $     9,651
Net recoveries (charge-offs)..........      (613)      (359)         (407)
Provision for probable loan losses....     1,315      1,055         1,910
                                        ---------  ---------   -----------
Balance, end of period / year......... $  11,856  $  10,347   $    11,154
                                        =========  =========   ===========

Ratios:                               
Net recoveries (charge-offs) to
   average loans outstanding..........      0.10 %     0.06 %        0.07 %
Allowance for loan losses to average
   loans..............................      1.86 %     1.74 %        1.84 %
Allowance for loan losses to total
   loans..............................      1.88 %     1.71 %        1.76 %
Allowance for loan losses to
   non-performing assets..............       501 %   15,677 %          -- %

Charge-offs reflect the realization of losses in the portfolio that were recognized previously though provisions for probable loan losses. The net charge-offs as of June 30, 2002 were $613,000, compared to $359,000 as of June 30, 2001. The increase in net charge-offs in 2002 was primarily due to the increase in certain commercial loan charge-offs. Historical net charge-offs are not necessarily indicative of the amount of net charge-offs that the Company will realize in the future.

The following table summarizes the allocation of the allowance for loan losses (ALL) by loan type and the allocated allowance as a percent of loans outstanding in each loan category at the dates indicated:

                                            June 30, 2002          June 30, 2001         December 31, 2001
                                        --------------------   ----------------------   --------------------
                                                    Percent                  Percent                Percent
                                                   of ALL by                of ALL by              of ALL by
                                                   category                 category               category
                                                   to total                 to total               to total
                                                   loans by                 loans by               loans by
(Dollars in thousands)                   Amount    category      Amount     category     Amount    category
- --------------------------------------  ---------  ---------   -----------  ---------   ---------  ---------
Commercial............................ $   5,834       2.72 % $     3,925       1.94 % $   5,489       2.63 %
Real estate - mortgage................     2,254       0.90 %       1,538       0.66 %     1,420       0.58 %
Real estate - land and construction...     2,997       1.87 %       2,657       1.61 %     3,066       1.76 %
Consumer..............................       101       2.39 %         161       2.77 %       102       2.66 %
Unallocated...........................       670         -- %       2,066         -- %     1,077         -- %
                                        ---------              -----------              ---------
     Total ........................... $  11,856       1.88 % $    10,347       1.71 % $  11,154       1.76 %
                                        =========              ===========              =========

The increase in the allowance for loan losses from June 30, 2001 reflects the growth in the Company's overall level of loans, primarily in the commercial and real estate loan portfolio and the increase from December 31, 2001 reflects the increase in commercial loans which typically have the greatest inherent loss exposure.

Loans are charged against the allowance when management believes that the collectibility of the principal is doubtful. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, the formula allowance and the unallocated allowance.

Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss may be incurred in excess of the amount determined by the application of the formula allowance. There were no specific allowances allocated at June 30, 2002 and December 31, 2001 as none of the nonperforming loans at June 30, 2002 required specific allowances based on the underlying collateral values and there were no nonperforming loans at December 31, 2001.

The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on management's experience and may be adjusted for significant factors that, in management's judgment, may affect the collectibility of the portfolio as of the evaluation date. Due to the Company's limited historical loss experience, management utilizes their prior industry experience to determine the loss factor for each category of loan. The formula allowance on June 30, 2002 was $11,186,000, compared to $10,077,000 on December 31, 2001. The increase was attributable to several factors, most notably the change in the mix of loans and an increase in certain factors used to estimate the reserve allocations.

The unallocated allowance is based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. As of June 30, 2002, the Company's unallocated allowance was $670,000, compared to $1,077,000 on December 31, 2001. In evaluating the appropriateness of the unallocated allowance, management considered the changes in the trend of the volume and severity of past due and classified loans; and trends in the volume of nonaccrual loans, troubled debt restructurings and other loan modifications, changes in national and local economic and business conditions, trends, and developments, including the condition of various market segments, changes in underwriting standards and collection, charge-off, and recovery practices, and changes in the volume and mix of the loan portfolio and in credit concentrations particularly in commercial and real estate land and construction lending. The range of potential impact for these factors is estimated to be from $470,000 - $840,000. There can be no assurance that the adverse impact of any of these conditions on the Bank will not be in excess of the range set forth above.

In addition, the current business, economic, and real estate markets along with the seasoning of the portfolio and the nature and duration of the current business cycle will affect the amount of unallocated reserve.

In an effort to improve its analysis of risk factors associated with its loan portfolio, the Company continues to monitor and to make appropriate changes to its internal loan policies. These efforts better enable the Company to assess risk factors prior to granting new loans and to assess the sufficiency of the allowance for loan losses.

Management believes that it has adequately provided an allowance for estimated probable losses in the credit portfolio. Significant deterioration in Northern California real property values or economic downturns could impact future operating results, liquidity or capital resources and require additional provisions to the allowance or cause losses in excess of the allowance.

The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated:

                                         Six Months Ended         Year Ended
                                          June 30, 2002        December 31, 2001
                                       --------------------   --------------------
                                                   Average                Average
                                        Average      Rate      Average      Rate
(Dollars in thousands)                  Balance      Paid      Balance      Paid
- -------------------------------------  ----------  --------   ----------  --------
Demand, noninterest bearing.......... $  201,092        -- % $  204,114        -- %
Demand, interest bearing.............     81,597      0.87 %     69,634      1.58 %
Saving and money market..............    255,098      1.92 %    227,344      3.09 %
Time deposits, under $100............     63,056      3.55 %     78,910      5.37 %
Time deposits, $100 and over.........    138,244      3.10 %    166,268      5.18 %
Brokered deposits....................     68,554      3.91 %     30,843      5.32 %
                                       ----------             ----------
     Total average deposits.......... $  807,641      1.83 % $  777,113      2.91 %
                                       ==========             ==========

Deposit Concentration and Deposit Volatility

The following table indicates the maturity schedule of the Company's time deposits of $100,000 or more as of June 30, 2002.

                                                                            % of
(Dollars in thousands)                                         Balance     Total
- -----------------------------------------------------------   ----------  --------
Three months or less.......................................  $   75,586        39 %
Over three months through twelve months....................      85,446        45 %
Over twelve months.........................................      30,338        16 %
                                                              ----------  --------
       Total...............................................  $  191,370       100 %
                                                              ==========  ========

The Company focuses primarily on servicing business accounts that are frequently over $100,000 in average size. Certain types of accounts that the Company makes available are typically in excess of $100,000 in average balance per account, and certain types of business clients whom the Company serves typically carry deposits in excess of $100,000 on average. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to ensure its ability to fund deposit withdrawals.

The following table indicates the ratios on the return on average equity and average assets for each indicated period.

                                         Three Months Ended   Six Months Ended
                                               June 30,          June 30,
                                            2002      2001      2002      2001
                                        ----------  -------- ----------  --------
Return on average assets................   0.68 %     0.88 %   0.68 %     0.95 %
Return on average equity................   8.15 %    10.74 %   8.13 %    11.89 %
Average equity to average assets ratio..   8.34 %     8.23 %   8.31 %     8.04 %

Annualized return on average assets and return on average equity for the quarter ended June 30, 2002 were 0.68% and 8.15%, respectively, compared with returns of 0.88% and 10.74%, respectively, for the same period in 2001. The equity to asset ratio for the quarter ended June 30, 2002 was 8.34%, compared to 8.23% for the same period in 2001. Annualized return on average assets and return on average equity for the six months ended June 30, 2002 were 0.68% and 8.13%, respectively, compared with returns of 0.95% and 11.89%, respectively, for the same period in 2001. The equity to asset ratio for the six months ended June 30, 2002 was 8.31%, compared to 8.04% for the same period in 2001.

Interest Rate Risk

The planning of asset and liability maturities is an integral part of the management of an institution's net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or investments or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities

The following table sets forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities at June 30, 2002, using the rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or when it is scheduled to mature within the specified time frame:

                                                            Due in    Due After
                                                 Within    Three to    One to    Due After     Not
                                                  Three     Twelve      Five       Five       Rate-
(Dollars in thousands)                           Months     Months      Years      Years    Sensitive    Total
- ----------------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
Interest earning assets:                                                                                        
  Federal funds sold.......................... $  55,500  $      --  $      --  $      --  $      --  $  55,500
  Interest bearing deposits in banks..........     6,025         --         --         --         --      6,025
  Securities..................................     3,264     20,266     54,789     39,162         --    117,481
  Total loans.................................   492,489     70,652     93,551      9,530         --    666,222
                                                ---------  ---------  ---------  ---------  ---------  ---------
    Total interest earning assets.............   557,278     90,918    148,340     48,692         --    845,228
                                                ---------  ---------  ---------  ---------  ---------  ---------
Cash and due from banks.......................        --         --         --         --     40,062     40,062
Other assets..................................        --         --         --         --     42,402     42,402
                                                ---------  ---------  ---------  ---------  ---------  ---------
    Total assets.............................. $ 557,278  $  90,918  $ 148,340  $  48,692  $  82,464  $ 927,692
                                                =========  =========  =========  =========  =========  =========
                                                                                                                
Interest bearing liabilities:                                                                                   
  Demand, interest bearing.................... $  91,761  $      --  $      --  $      --  $      --  $  91,761
  Savings and money market....................   266,032         --         --         --         --    266,032
  Time deposits...............................    96,711    111,416     36,077         --         --    244,204
  Mandatorily Redeemable Cumulative
    Trust Preferred Securities................        --         --         --     19,000         --     19,000
                                                ---------  ---------  ---------  ---------  ---------  ---------
    Total interest bearing liabilities........   454,504    111,416     36,077     19,000         --    620,997
                                                ---------  ---------  ---------  ---------  ---------  ---------
Noninterest demand deposits...................    63,925         --         --         --    152,542    216,467
Other liabilities.............................        --         --         --         --     12,130     12,130
Shareholders' equity..........................        --         --         --         --     78,098     78,098
                                                ---------  ---------  ---------  ---------  ---------  ---------
    Total liabilities and shareholders' equity $ 518,429  $ 111,416  $  36,077  $  19,000  $ 242,770  $ 927,692
                                                =========  =========  =========  =========  =========  =========

Interest rate sensitivity GAP................. $  38,849  $ (20,498) $ 112,263  $  29,692  $(160,306) $      --
                                                =========  =========  =========  =========  =========  =========

Cumulative interest rate sensitivity GAP...... $  38,849  $  18,351  $ 130,614  $ 160,306  $      --  $      --
Cumulative interest rate sensitivity GAP ratio      4.19 %     1.98 %    14.08 %    17.28 %       -- %       -- %

The foregoing table demonstrates that the Company had a positive cumulative one year gap of $18,351,000, or 1.98% of total assets, at June 30, 2002. In theory, this would indicate that $18,351,000 more in assets than liabilities would reprice if there was a change in interest rates over the next year. If interest rates were to increase, the positive gap would tend to result in a higher net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net margin without affecting interest rate sensitivity. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of certain short-term funding sources.

Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity gap report may not provide a complete assessment of the exposure to changes in interest rates. To supplement traditional GAP analysis, the Company performs simulation modeling to estimate the potential effects of changing interest rate environments. The process allows the Company to explore the complex relationships within the GAP over time and various interest rate environments.

Liquidity risk represents the potential for loss as a result of limitations on the Company's ability to adjust for future cash flows, to meet the needs of depositors and borrowers, and to fund operations on a timely and cost-effective basis. The liquidity policy approved by the board requires annual review of the Company's liquidity by the asset/liability committee, which is composed of senior executives, and the finance and investment committee of the board of directors.

The Company's internal asset/liability committee and the finance and investment committee of the board each meet monthly to monitor the Company's investments, liquidity needs and to oversee its asset/liability management. The Company evaluates the rates offered on its deposit products on a weekly basis.

Capital Resources

The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the Company:

At June 30, 2002 and 2001, and December 31, 2001, the Company's capital met all minimum regulatory requirements. As of June 30, 2002, management believes that HBC, HBEB, HBSV, and BLA were considered "Well Capitalized" under the Prompt Corrective Action Provisions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have occurred during the quarter to the Company's market risk profile or information. For further information refer to the Company's Form 10-K.

Part II - Other Information

Item 4. - Submissions of Matters to a Vote of Security Holders

The Company held its 2002 Annual Meeting of Shareholders on May 23, 2002. There were 11,132,462 issued and outstanding shares of Company Common Stock on April 9, 2002, the Record Date for the 2002 Annual Meeting. Each of the shares voting at the meeting was entitled to one vote.

At the 2002 Annual Meeting, the following actions were taken:

Election of Directors

The Company's board is divided into three classes. At the 2002 Annual Meeting, five directors of the Company were elected. The following chart indicates the number of shares cast for each elected director:

Name of Director			Votes For			Votes Withheld

Phillip R. Boyce			8,959,103			298,491

Richard L. Conniff			8,813,602			443,992

Kirk M. Rossmann			8,983,809			273,785

Brad L. Smith			8,813,272			444,322

Charles J. Toeniskoetter		8,983,809			273,785

In addition to the above five individuals, the following previously elected directors' terms continued after the meeting:

Name of Director			Title

Frank Bisceglia			Director

Jim Blair				Director

Bill Del Biaggo, Jr.			Director/Business Development Officer

Anneke Dury			Director

Roy Lave				Director

Lon Normandin			Director

Jack Peckham			Director

Humphrey Polanen			Director

Howard Weiland			Director

Ratification of Deloitte & Touche, LLP as the Company's auditors

The number of shares cast for and against the ratification of the Board of Directors' selection of Deloitte & Touche, LLP to serve as the Company's auditors for the fiscal year ending December 31, 2002 was as follows:

		FOR			   9,239,142

		AGAINST		                  5,372

		ABSTENTIONS		      13,080

Item 6. - Exhibits and Reports on Form 8-K

a. Exhibits included with this filing:

Exhibits Number						Name

99.1		Certification of Registrant's Chief Executive Officer Pursuant to 18
		U.S.C. Section 1350

99.2		Certification of Registrant's Chief Financial Officer Pursuant to 18
		U.S.C. Section 1350

b. Reports on Form 8-K

The Registrant filed Current Report on Form 8-K dated July 16, 2002 under item 5 to report the merger of three of its wholly owned commercial bank subsidiaries into the Company's original wholly owned bank susidiary.

The Registrant filed Current Report on Form 8-K dated July 24, 2002 under item 5 to report its second quarter ended June 30, 2002 financial results, and condensed summarized statements of financial position and results of operations.