Noninterest expenses for the three and nine months ended September 30, 2001 were $8,346,000 and $24,364,000, down $341,000 and $1,259,000, or 4% and 5%, from $8,687,000 and $25,623,000 for the same periods in the prior year.

For the three months ended September 30, 2002, salaries and benefits decreased $154,000, or 3%, to $4,580,000, as compared to the same period in the prior year. Salaries and benefits decreased $429,000, or 3%, to $13,761,000 for the first nine months of 2002, as compared to the same period in the prior year. The decrease was primarily due to a decrease in employee bonuses in 2002 and reductions in salary expenses for temporary staff. For the comparative three month periods, occupancy increased by $102,000, or 14%, and for the nine month periods the increase was $248,000, or 12%, to $2,322,000 primarily as a result of increased rental costs. Occupancy costs, as a percentage of total noninterest expenses remained fairly constant over the comparative three and nine month periods. For the comparative three months periods, professional fees decreased $99,000, or 22%, to $347,000, and for the nine month periods professional fees decreased $70,000, or 7%, to $919,000. For the comparative three month periods, furniture and equipment decreased by $68,000, or 15%, to $379,000 and for the nine month periods decreased by $287,000, or 21%, to $1,062,000. The decrease in furniture and equipment in 2002 from 2001 was due to associated costs for a new branch in 2001. For the comparative three month periods, loan origination costs increased by $29,000, or 9%, to $343,000, while decreasing for the nine months period by $45,000, or 5%, to $941,000. For the comparative three months periods, client services decreased $226,000, or 49%, to $238,000, and for the nine months periods the decrease was $766,000, or 53%, to $678,000. The decrease from 2001 was primarily as a result of the decrease in services fees charged to the Company from third party vendors in 2002. For the comparative three month periods, advertising and promotion decreased by $157,000, or 46%, to $185,000 and for the nine month period decreased by $375,000, or 42%, to $515,000. The decrease from 2001 was primarily as a result of certain sponsorships no longer being continued in 2002. For the comparative three month periods, stationery and supplies decreased by $27,000, or 25%, to $82,000 and for the nine month period decreased $100,000, or 27%, to $268,000. For the comparative three month periods, telephone expense decreased by $7,000, or 8%, to $83,000 and for the nine month period decreased by $29,000, or 11%, to $241,000. For the comparative three month period, other noninterest expense increased $266,000, or 26%, to $1,295,000 and for the nine month period increased $594,000, or 19%, to $3,657,000 in support of the overall growth of the Company and expenses related to the Company's investment in a low income housing project during the first quarter of 2002.

The provision for income taxes for the three and nine months ended September 30, 2002 was $848,000 and $2,393,000, as compared to $1,088,000 and $3,594,000 for the same periods in the prior year. The following table shows the income tax rate for each period indicated.

                                                       Three Months Ended     Nine Months Ended
                                                          September 30,          September 30,
                                                      --------------------   --------------------
                                                          2002       2001        2002       2001
- ----------------------------------------------------  ---------  ---------   ---------  ---------
Income tax rate.....................................     31.88 %    37.38 %     32.88 %    37.88 %

The difference in the effective tax rate compared to the statutory tax rate is primarily the result of the Company's receipt of tax fee distributions from certain life insurance contracts, low income housing tax credits, and changes in the Company's level of investments in municipal securities.

FINANCIAL CONDITION

Total assets increased $46,990,000, or 5%, to $959,720,000 at September 30, 2002 from $912,730,000 at December 31, 2001, and increased $49,855,000, or 5%, from $909,865,000 at September 30, 2001. Total portfolio loans decreased $2,233,000, or less than 1%, to $630,684,000 at September 30, 2002 from $632,917,000 at December 31, 2001, but increased $14,911,000, or 2% from $615,773,000 at September 30, 2001. Total deposits were $841,937,000 at September 30, 2002, an increase of 4% from $807,908,000 at December 31, 2001, and an increase of 5% from $801,838,000 at September 30, 2001. The overall increase reflects the continued internal growth of the Company since December 31, 2001, primarily in cash and due from banks and federal funds sold funded by the increases in noninterest demand deposits and saving and money market deposits, offset by a decrease in time deposits.

Securities Portfolio

The following table sets forth the carrying value of investment securities at the dates indicated:

                                                       September 30,
                                                 ----------------------  December 31,
(Dollars in thousands)                              2002        2001        2001
- -----------------------------------------------  ----------  ----------  ----------
Securities available-for-sale (at fair value)
U.S. Treasury.................................. $    1,106  $    1,544  $    3,593
U.S. Government Agencies.......................     50,203      41,432      53,762
Mortgage-backed securities.....................     13,261      22,532      22,839
Municipals.....................................     13,186      10,947       9,273
Corporate bonds................................      2,629       2,071       2,067
CMOs...........................................     14,579         --          --
                                                 ----------  ----------  ----------
Total securities available-for-sale............ $   94,964  $   78,526  $   91,534
                                                 ==========  ==========  ==========

Securities held-to-maturity (at amortized cost)
Mortgage-backed securities..................... $      --   $    4,668  $    4,381
CMOs...........................................        --        1,636         893
Municipals.....................................        --       10,941      10,002
                                                 ----------  ----------  ----------
     Total securities held-to-maturity......... $      --   $   17,245  $   15,276
                                                 ==========  ==========  ==========

The following table summarizes the composition of the Company's investment securities and the weighted average yields at September 30, 2002:

                                                                     September 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.................. $  1,106   2.08 % $    --     --  % $    --     --  % $    --     --  % $   1,106   2.08 %
U.S. Government Agencies.......   30,746   5.04 %   19,457   3.76 %      --     --  %      --     --  %    50,203   4.55 %
Mortgage-backed securities.....      --     --  %      --     --  %    1,412   5.35 %   11,849   6.14 %    13,261   6.05 %
Municipals -  taxable..........      --     --  %    1,704   6.60 %      --     --  %      --     --  %     1,704   6.60 %
Municipals -  nontaxable.......    2,217   4.46 %    5,634   4.40 %    3,631   4.49 %      --     --  %    11,482   4.44 %
Corporates bonds...............      --     --  %    2,629   4.36 %      --     --  %      --     --  %     2,629   4.36 %
CMOs...........................      --     --  %      --     --  %    2,085   5.13 %   12,494   4.59 %    14,579   4.67 %
                                 --------          --------          --------          --------          ---------
Total available-for-sale....... $ 34,069   4.91 % $ 29,424   4.10 % $  7,128   4.85 % $ 24,343   5.34 % $  94,964   4.77 %
                                 ========          ========          ========          ========          =========

During the third quarter of 2002, the Company transferred all of its securities categorized as held-to-maturity to the available-for-sale category. The amortized cost of the transferred securities was $12,778,000 and the related unrealized holding gain was $841,000. The Company transferred these securities to increase liquid assets and to increase the ability for possible sale of these securities in the future and currently intends to classify all new purchases of securities as available-for-sale.

Loans

Total loans (exclusive of loans held for sale) decreased slightly to $630,684,000 as of September 30, 2002 from $632,917,000 as of December 31, 2001 but increased $14,911,000, or 2%, as compared to $615,773,000 as of September 30, 2001.

For the three and nine months ended September 30, 2002, $22,382,000 and $55,817,000 in loans guaranteed by the U.S. Small Business Administration (SBA) were generated and held for sale. $13,652,000 and $35,520,000 of SBA loans held for sale were sold into the secondary market. At September 30, 2002 and December 31, 2001, the Company serviced SBA loans, which it had sold to the secondary market of approximately $70,561,000 and $50,718,000, respectively. At September 30, 2002 and December 31, 2001, the carrying amount of the servicing assets was $1,378,000 and $783,000, respectively. There was no valuation allowance as of September 30, 2002 or December 31, 2001. The carrying amount of Interest-Only (I/O) strip receivable at September 30, 2002 and December 31, 2001 was $1,727,000 and $2,101,000, respectively. Servicing income from these loans was $362,000 and $935,000 for the quarter and nine months ended September 30, 2002, compared to $88,000 and $149,000 for the same periods in 2001. Amortization of the related assets was $258,000 and $536,000 for the quarter and nine months ended September 30, 2002, compared to $174,000 and $310,000 for the same periods in 2001. Heritage Bank of Commerce is a preferred lender with 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 dates indicated:

                                     September 30,    % of       December 31,    % of
(Dollars in thousands)                   2002        Total         2001         Total
- -----------------------------------  ------------  -----------   -----------  -----------
Commercial......................... $    228,548           36 % $   208,713           33 %
Real estate - mortgage.............      261,037           41 %     246,119           39 %
Real estate - land and construction      136,631           22 %     174,077           27 %
Consumer...........................        4,320            1 %       3,833            1 %
                                     ------------  -----------   -----------  -----------
     Total loans...................      630,536          100 %     632,742          100 %
                                                   ===========                ===========
Deferred loan costs................          148                        175
Allowance for loan losses..........      (12,416)                   (11,154)
                                     ------------                -----------
Loans, net......................... $    618,268                $   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 September 30, 2002:

                                                    Over One
                                        Due in      Year But
                                       One Year     Less Than       Over
(Dollars in thousands)                 or Less     Five Years    Five Years      Total
- -----------------------------------  ------------  -----------   -----------  -----------
Commercial......................... $    214,933  $    12,582   $     1,033  $   228,548
Real estate - mortgage.............      177,584       74,458         8,995      261,037
Real estate - land and construction      136,631          --            --       136,631
Consumer...........................        3,822          498           --         4,320
                                     ------------  -----------   -----------  -----------
     Total loans................... $    532,970  $    87,538   $    10,028  $   630,536
                                     ============  ===========   ===========  ===========

Loans with variable interest rates. $    509,832  $    48,648   $     2,174  $   560,654
Loans with fixed interest rates....       23,138       38,890         7,854       69,882
                                     ------------  -----------   -----------  -----------
     Total loans................... $    532,970  $    87,538   $    10,028  $   630,536
                                     ============  ===========   ===========  ===========

The table above also 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 September 30, 2002, approximately 89% 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:

                                                    September 30,
                                              ----------------------  December 31,
(Dollars in thousands)                           2002       2001         2001
- --------------------------------------------  ----------  ----------  -----------
Nonaccrual loans............................ $    4,747  $       66  $       --
Loans 90 days past due and still accruing           --          --           --
Restructured loans..........................        --          --           --
                                              ----------  ----------  -----------
    Total nonperforming loans...............      4,747          66          --
Foreclosed assets...........................        --          --           --
                                              ----------  ----------  -----------
    Total nonperforming assets.............. $    4,747  $       66  $       --
                                              ==========  ==========  ===========
Nonperforming assets as a percentage of
  period end loans plus foreclosed assets...       0.75 %      0.01 %        --  %

As of September 30, 2002, the Company had $4,747,000 loans on nonaccrual status, compared to $66,000 in the same period of the prior year, which were considered impaired loans. The increase in the nonaccrual loans at September 30, 2002 compared to December 31, 2001 is primarily the result of the placement of one commercial real estate loan on nonaccrual status during the third quarter of 2002. The impaired loans had a related valuation allowance of $876,000 at September 30, 2002. The Company had no loans past due 90 days or more and still accruing interest, no restructured loans and no foreclosed assets as of September 30, 2002 and 2001. The Company had no loans on nonaccrual status, no loans past due 90 days or more and still accruing interest, no restructured loans, no foreclosed assets, and no impaired loans as of December 31, 2001.

The Company assigns a risk grade consistent with the system recommended by regulatory agencies to all of its loans. Grades range from "Pass" to "Loss" depending on credit quality, with "Pass" representing loans that involve an acceptable degree of risk. Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes periodic loan by loan review for certain loans to evaluate the level of impairment as well as detailed reviews of other loans (either individually or in pools) based on an assessment of the following factors: past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, collateral value, loan volumes and concentrations, size and complexity of the loans, recent loss experience in particular segments of the portfolio, bank regulatory examination results, and current economic conditions in the Company's marketplace, in particular the state of the technology industry and the real estate market.

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:

                                         Nine Months Ended
                                            September 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 charge-offs.......................      (804)      (312)         (407)
Provision for probable loan losses....     2,066      1,334         1,910
                                        ---------  ---------   -----------
Balance, end of period / year......... $  12,416  $  10,673   $    11,154
                                        =========  =========   ===========

Ratios:                               
Net charge-offs to
   average loans outstanding..........      0.13 %     0.05 %        0.07 %
Allowance for loan losses to average
   loans..............................      1.95 %     1.68 %        1.84 %
Allowance for loan losses to total
   loans..............................      1.97 %     1.73 %        1.76 %
Allowance for loan losses to
   non-performing assets..............       262 %   16,171 %         --  %

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 September 30, 2002 were $804,000, compared to $312,000 as of September 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:

                                         September 30, 2002     September 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............................ $   5,636       2.46 % $     4,422       2.17 % $   5,489       2.63 %
Real estate - mortgage................     2,317       0.89 %       1,175       0.49 %     1,420       0.58 %
Real estate - land and construction...     2,973       2.18 %       2,843       1.73 %     3,066       1.76 %
Consumer..............................       104       2.40 %         159       2.10 %       102       2.66 %
Unallocated...........................     1,386        --  %       2,074        --  %     1,077        --  %
                                        ---------              -----------              ---------
     Total ........................... $  12,416       1.97 % $    10,673       1.73 % $  11,154       1.76 %
                                        =========              ===========              =========

The increase in the allowance for loan losses from September 30, 2001 reflects the growth in the Company's overall level of loans, primarily in the commercial and real estate - mortgage loan portfolio offset by decreases in the real estate land and construction portfolio and the impact of this change in mix on the need for additional allowances. The increase from December 31, 2001 reflects these changes in the mix of loans, primarily 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. At September 30, 2002, nonperforming loans had a related specific valuation allowance of $876,000. 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 September 30, 2002 was $11,030,000, 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 September 30, 2002, the Company's unallocated allowance was $1,386,000, 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 $970,000 - $1,733,000. 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:

                                         Nine Months Ended        Year Ended
                                        September 30, 2002     December 31, 2001
                                       --------------------   --------------------
                                                   Average                Average
                                        Average      Rate      Average      Rate
(Dollars in thousands)                  Balance      Paid      Balance      Paid
- -------------------------------------  ----------  --------   ----------  --------
Demand, noninterest bearing.......... $  204,045       --  % $  204,114       --  %
Demand, interest bearing.............     80,590      0.91 %     69,634      1.58 %
Saving and money market..............    266,408      1.84 %    227,344      3.09 %
Time deposits, under $100............     58,968      3.32 %     78,910      5.37 %
Time deposits, $100 and over.........    133,242      2.90 %    166,268      5.18 %
Brokered deposits....................     68,337      3.89 %     30,843      5.32 %
                                       ----------             ----------
     Total average deposits.......... $  811,590      1.74 % $  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 September 30, 2002.

                                                                            % of
(Dollars in thousands)                                         Balance     Total
- -----------------------------------------------------------   ----------  --------
Three months or less.......................................  $   78,166        42 %
Over three months through twelve months....................      84,498        45 %
Over twelve months.........................................      25,653        13 %
                                                              ----------  --------
       Total...............................................  $  188,317       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 annualized return on average assets and average equity and average equity to average assets for each indicated period.

                                        Three Months Ended   Nine Months Ended
                                            September 30,       September 30,
                                        ------------------  ------------------
                                          2002      2001      2002      2001
                                        --------  --------  --------  --------
Return on average assets...............    0.77 %    0.82 %    0.71 %    0.91 %
Return on average equity...............    9.05 %   10.03 %    8.45 %   11.28 %
Average equity to average assets ratio.    8.53 %    8.16 %    8.38 %    8.04 %

Annualized return on average assets and return on average equity for the quarter ended September 30, 2002 were 0.77% and 9.05%, respectively, compared with returns of 0.82% and 10.03%, respectively, for the same period in 2001. The equity to asset ratio for the quarter ended September 30, 2002 was 8.53%, compared to 8.16% for the same period in 2001. Annualized return on average assets and return on average equity for the nine months ended September 30, 2002 were 0.71% and 8.45%, respectively, compared with returns of 0.91% and 11.28%, respectively, for the same period in 2001. The equity to asset ratio for the nine months ended September 30, 2002 was 8.38%, 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 September 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......................................... $ 102,700  $     --   $     --   $     --   $     --   $ 102,700
  Interest bearing deposits in other financial institutions..     6,401        --         --         --         --       6,401
  Securities.................................................     3,935     30,134     29,424     31,471        --      94,964
  Total loans................................................   484,718     86,940     87,625     10,872        --     670,155
                                                               ---------  ---------  ---------  ---------  ---------  ---------
    Total interest earning assets............................   597,754    117,074    117,049     42,343        --     874,220
                                                               ---------  ---------  ---------  ---------  ---------  ---------
Cash and due from banks......................................       --         --         --         --      41,861     41,861
Other assets.................................................       --         --         --         --      43,639     43,639
                                                               ---------  ---------  ---------  ---------  ---------  ---------
    Total assets............................................. $ 597,754  $ 117,074  $ 117,049  $  42,343  $  85,500  $ 959,720
                                                               =========  =========  =========  =========  =========  =========
                                                                                                                               
Interest bearing liabilities:                                                                                                  
  Demand, interest bearing................................... $  84,581  $     --   $     --   $     --   $     --   $  84,581
  Savings and money market...................................   282,400        --         --         --         --     282,400
  Time deposits..............................................    96,166    109,621     31,393        --         --     237,180
  Mandatorily Redeemable Cumulative
    Trust Preferred Securities...............................       --         --         --      23,000        --      23,000
                                                               ---------  ---------  ---------  ---------  ---------  ---------
    Total interest bearing liabilities.......................   463,147    109,621     31,393     23,000        --     627,161
                                                               ---------  ---------  ---------  ---------  ---------  ---------
Noninterest demand deposits..................................    77,372        --         --         --     160,404    237,776
Other liabilities............................................       --         --         --         --      13,992     13,992
Shareholders' equity.........................................       --         --         --         --      80,791     80,791
                                                               ---------  ---------  ---------  ---------  ---------  ---------
    Total liabilities and shareholders' equity............... $ 540,519  $ 109,621  $  31,393  $  23,000  $ 255,187  $ 959,720
                                                               =========  =========  =========  =========  =========  =========

Interest rate sensitivity GAP................................ $  57,235  $   7,453  $  85,656  $  19,343  $(169,687) $     --
                                                               =========  =========  =========  =========  =========  =========

Cumulative interest rate sensitivity GAP..................... $  57,235  $  64,688  $ 150,344  $ 169,687  $     --   $     --
Cumulative interest rate sensitivity GAP ratio...............      5.96 %     6.74 %    15.67 %    17.68 %      --  %      --  %

The foregoing table demonstrates that the Company had a positive cumulative one year gap of $64,688,000, or 6.74% of total assets, at September 30, 2002. In theory, this would indicate that $64,688,000 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, conversely if interest rates were to decline the positive gap would tend to result in a lower 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.

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

                                        September 30,
                                   ----------------------  December 31,
(Dollars in thousands)                2002        2001        2001
- ---------------------------------  ----------  ----------  ------------
Capital components:
   Tier 1 Capital................ $  100,398  $   90,377  $     91,598
   Tier 2 Capital................     10,025       9,304         9,664
                                   ----------  ----------  ------------
     Total risk-based capital.... $  110,423  $   99,681  $    101,262
                                   ==========  ==========  ============

Risk-weighted assets............. $  803,475  $  744,699  $    779,060
Average assets................... $  927,078  $  882,975  $    898,020
                                                                           Minimum
                                                                         Regulatory
                                                                         Requirements
                                                                         -----------
Capital ratios:
  Total risk-based capital.......       13.7 %      13.4 %        13.0 %        8.0 %
  Tier 1 risk-based capital......       12.5 %      12.1 %        11.8 %        4.0 %
  Leverage ratio (1).............       10.8 %      10.3 %        10.2 %        4.0 %

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

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.

(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

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

1. Exhibits included with this filing:

Exhibit Number	Exhibit 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

2. Reports on Form 8-K

The Registrant filed Current Report on Form 8-K dated October 23, 2002 under item 5 to report its third quarter ended September 30, 2002 financial results, and condensed consolidated financial information.

SIGNATURES

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