Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to matters described in this section are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. See "Item 1 - Business - Forward-looking Statements"

HCC'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, we use a 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 our financial results. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. The Company applies Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations to account for its stock option plan awards. Other estimates that we use are related to the expected useful lives of our depreciable assets. In addition GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The allowance for loan losses is an estimate of the losses that may be sustained in our 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 that 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 formula losses could differ from the loss 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 differ from 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 38.

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 I/O strips receivable, the Company uses estimates which are made based on management's expectations of future prepayment and discount rates. For the year ended December 31, 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. 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. A corresponding decrease in the value of the I/O strip receivable would also be expected.

Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount required to be paid to the Company by the optionee upon exercising the option. Because the Company's stock option plan provides for the issuance of options at a price of no less than the fair market value at the date of the grant, no compensation cost is required to be recognized for the stock option plan on the date of grant. For further information see Note 1 to the Consolidated Financial Statements in "Item 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8- K".

Average interest earning assets for 2002 were up 5% over 2001. The increase was primarily attributable to growth in loans. The average rate on interest earning assets decreased to 6.17% in 2002 from 7.99% in 2001 and 9.43% in 2000 reflective of the FRB's 50 basis points reduction in 2002 and 475 basis point reduction in 2001 in short term interest rates. Average interest bearing liabilities for 2002 were up 6% over 2001, with the increase primarily attributable to growth in interest bearing demand deposits, savings and money-market accounts and brokered deposits offset by a decrease in time deposits. The Company's average rate paid on interest bearing liabilities decreased to 2.43% in 2002 from 4.12% in 2001 and 4.75% in 2000, reflective of the declining interest rate environment in 2002 and 2001, and the timing of the Company's repricing of its interest bearing deposits. As a result, net interest margin decreased 61 basis points to 4.39% in 2002, compared to a 95 basis point decrease to 5.00% in 2001 from 5.95% in 2000.

Total noninterest income was $9,030,000 in 2002, compared to $6,297,000 in 2001, and $2,877,000 in 2000. The primary components of noninterest income in 2002 included $2,262,000 in gains on sales of SBA loans, $1,036,000 in gains on sales of securities, $1,113,000 in other investments, primarily due to the increase in the cash surrender value of Corporate Owned Life Insurance, $1,324,000 in servicing income, and $1,425,000 in service charges and other fees. Noninterest income in 2001 included $1,758,000 in gains on sales of SBA loans, $732,000 in gains on sales of securities, $967,000 in service charges and other fees, and $1,029,000 in the increase in the cash surrender value of Corporate Owned Life Insurance. Noninterest income in 2000 included $716,000 in service charges and other fees, and $778,000 in the increase in the cash surrender value of Corporate Owned Life Insurance.

Total noninterest expense was $33,209,000 in 2002, down slightly from $33,348,000 in 2001, and $34,060,000 in 2000. Salaries and employee benefits, the single largest component of operating expenses, was $18,116,000 for 2002, consistent with $18,120,000 for 2001, and $16,127,000 in 2000. Decreases in client services expenses and advertising and promotion were offset by increases in the other areas of noninterest expenses. For 2001 compared to 2000, the decrease of $3,164,000 in pretax merger-related expenses relating to the merger with Western Holdings Bancorp was offset by increases in salaries and benefits of $1,993,000, occupancy and equipment expenses of $572,000, and advertising and promotion expenses, loan origination costs, and stationery and supplies of $512,000 in support of the overall growth in the Company.

Total assets as of December 31, 2002 were $958,752,000, an increase of $46,022,000, or 5%, from $912,730,000 as of December 31, 2001. Total deposits as of December 31, 2002 were $841,936,000, an increase of $34,028,000, or 4%, from $807,908,000 as of December 31, 2001.

Total loan portfolio as of December 31, 2002 was $673,907,000, an increase of $40,990,000, or 6%, compared to $632,917,000 as of December 31, 2001. The Company's allowance for probable loan losses was $13,227,000, or 1.96%, of total loans as of December 31, 2002, compared to $11,154,000, or 1.76%, of total loans at December 31, 2001.

Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing, restructured loans and foreclosed assets. As of December 31, 2002, nonperforming assets were $4,571,000. As of December 31, 2001 and 2000 the Company had no nonperforming assets.

The Company's shareholders' equity at December 31, 2002 was $82,865,000 compared with $74,574,000 as of December 31, 2001, an 11% increase, which reflects net earnings of $7,177,000 in 2002, the proceeds from exercise of stock options and the increase in the unrealized gain on securities available- for-sale. Book value per share increased 10% to $7.39 as of December 31, 2002, compared to $6.71 as of December 31, 2001 and $6.01 as of December 31, 2000. The Company's leverage capital ratio increased to 10.8% at December 31, 2002, from 10.2% at December 31, 2001 and 9.3% at December 31, 2000, primarily due to the growth in shareholders' equity and the additional Tier I capital from the $4.0 million of trust preferred securities issued in 2002.

Return on average equity for the year ended December 31, 2002 was 9.14%, compared to 10.23% for 2001 and 9.07% for 2000. Return on average assets in 2002 was 0.77%, compared to 0.84% in 2001. Return on average assets was 0.70% in 2000.

The following table presents the average amounts outstanding for the major categories of the Company's balance sheet, the average interest rates earned or paid thereon, and the resulting net yield on average interest earning assets for the periods indicated. Average balances are based on daily averages.

                                                                           Year Ended December 31,
                                     ----------------------------------------------------------------------------------------------------
                                                   2002                              2001                              2000
                                     --------------------------------  --------------------------------  --------------------------------
                                                 Interest    Average               Interest    Average               Interest    Average
                                      Average     Income/    Yield/     Average     Income/    Yield/     Average     Income/    Yield/
(Dollars in thousands)                Balance     Expense     Rate      Balance     Expense     Rate      Balance     Expense     Rate
- -----------------------------------  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------
ASSETS:
Loans, gross(1).................... $  675,295  $  46,609       6.90% $  645,632  $  57,153       8.85%$   537,317 $   56,709      10.55%
Investment securities(2)...........    111,428      5,076       4.56%     96,340      5,269       5.47%    101,211      6,188       6.12%
Interest bearing deposits in banks...    6,758         88       1.30%      5,094        157       3.08%      1,330         66       4.97%
Federal funds sold.................     61,191        983       1.61%     66,490      2,426       3.65%     80,073      4,958       6.19%
                                     ----------  ---------             ----------  ---------             ----------  ---------
   Total interest earning assets...    854,672     52,756       6.17%    813,556     65,005       7.99%    719,931     67,921       9.43%
                                                 ---------                         ---------                         ---------
Cash and due from banks............     37,522                            28,795                            35,429
Premises and equipment, net........      5,596                             6,024                             6,803
Other assets.......................     29,993                            20,249                            17,026
                                     ----------                        ----------                        ----------
   Total assets.................... $  927,783                        $  868,624                       $   779,189
                                     ==========                        ==========                        ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Demand, interest bearing........... $   81,011  $     719       0.89% $   69,634  $   1,099       1.58%$    55,616 $    1,014       1.82%
Savings and money-market...........    275,217      4,778       1.74%    227,344      7,014       3.09%    228,336      9,496       4.16%
Time deposits, under $100..........     56,097      1,762       3.14%     78,910      4,237       5.37%     73,058      4,273       5.85%
Time deposits, $100 and over.......    129,702      3,572       2.75%    166,268      8,606       5.18%    151,275      8,701       5.75%
Brokered deposits..................     65,183      2,522       3.87%     30,843      1,641       5.32%     10,544        690       6.55%
Other borrowings...................     20,784      1,884       9.06%     18,545      1,769       9.54%      9,617        927       9.64%
                                     ----------  ---------             ----------  ---------             ----------  ---------
   Total interest bearing
     liabilities...................    627,994     15,237       2.43%    591,544     24,366       4.12%    528,446     25,101       4.75%
                                                 ---------                         ---------                         ---------
Demand deposits....................    211,195                           204,114                           183,422
Other liabilities..................     10,079                             1,910                             7,433
                                     ----------                        ----------                        ----------
   Total liabilities...............    849,268                           797,568                           719,301
Shareholders' equity...............     78,515                            71,056                            59,888
                                     ----------                        ----------                        ----------
   Total liabilities and
      shareholders' equity......... $  927,783                        $  868,624                       $   779,189
                                     ==========                        ==========                        ==========
Net interest income / margin.......             $  37,519       4.39%             $  40,639       5.00%            $   42,820       5.95%
                                                 =========                         =========                         =========

(1) Yields and amounts earned on loans include loan fees of $4,544,000, $4,532,000, and $4,065,000 for the years ended December 31, 2002, 2001, and 2000. Nonaccrual loans of $4,571,000 for the year ended December 31, 2002, and zero for the years ended December 31, 2001 and 2000 are included in the average balance calculations above.

(2) Interest income is reflected on an actual basis, not a fully taxable equivalent basis and does not include a fair value adjustment.

Net interest income for the year ended December 31, 2002 decreased $3,120,000, or 8%, to $37,519,000, compared to $40,639,000 for 2001. Net interest income for the year ended December 31, 2001 decreased $2,181,000, or 5%, from $42,820,000 reported for 2000. The decreases for both years were due primarily to reductions in the short term interest rate. These reductions immediately affected the rates applicable to the majority of the Company's loans; however, the Company's ability to reprice its interest earning liabilities lagged the repricing of its interest earning assets. The decline in net interest income in 2002 was mitigated by the overall increase in the volume of earning assets which contributed a net $1,931,000. However, the rate decline decreased net interest income by $5,051,000. Average interest earning assets were up $41,116,000, or 5%, in 2002 to $854,672,000 from $813,556,000 for 2001. The yield on interest earning assets in 2002 was 6.17%, compared to 7.99% in 2001, and 9.43% in 2000.

The Company's average interest bearing liabilities were up $36,450,000, or 6%, in 2002 to $627,994,000 compared to $591,544,000 for 2001. The rate paid on interest bearing liabilities in 2002 was 2.43%, compared to 4.12% in 2001, and 4.75% in 2000.

The following tables show the changes in interest income resulting from changes in the volume of interest earning assets and interest- bearing liabilities and changes in the average rates earned and paid. The total change is shown in the column designated "Net Change" and is allocated in the columns to the left, for the portions attributable to volume changes and rate changes that occurred during the period indicated. Changes due to both volume and rate have been allocated to the change in volume.

                                                          Years Ended December 31,
                                     ------------------------------------------------------------------
                                            2002 versus 2001                  2001 versus 2000
                                     --------------------------------  --------------------------------
                                           Increase (Decrease) Due           Increase (Decrease) Due
                                                to Change In:                     to Change In:
                                     --------------------------------  --------------------------------
                                      Average     Average      Net      Average     Average      Net
(Dollars in thousands)                 Volume      Rate      Change      Volume      Rate      Change
                                     ----------  ---------  ---------  ----------  ---------  ---------
INTEREST EARNING ASSETS:
  Loans, gross..................... $    2,047  $ (12,591) $ (10,544) $    9,600  $  (9,156) $     444
  Investment securities............        687       (880)      (193)       (266)      (653)      (919)
  Interest bearing deposits in banks        22        (91)       (69)        116        (25)        91
  Federal funds sold...............        (85)    (1,358)    (1,443)       (496)    (2,036)    (2,532)
                                     ----------  ---------  ---------  ----------  ---------  ---------
Total interest earning assets...... $    2,671  $ (14,920) $ (12,249) $    8,954  $ (11,870) $  (2,916)
                                     ----------  ---------  ---------  ----------  ---------  ---------
INTEREST BEARING LIABILITIES:
  Demand, interest bearing......... $      101  $    (481) $    (380) $      221  $    (136) $      85
  Savings and money-market.........        831     (3,067)    (2,236)        (31)    (2,451)    (2,482)
  Time deposits, under $100........       (717)    (1,758)    (2,475)        314       (350)       (36)
  Time deposits, $100 and over.....     (1,007)    (4,027)    (5,034)        776       (871)       (95)
  Brokered deposits................      1,329       (448)       881       1,080       (129)       951
  Other borrowings.................        203        (88)       115         875        (33)       842
                                     ----------  ---------  ---------  ----------  ---------  ---------
Total interest bearing liabilities. $      740  $  (9,869) $  (9,129) $    3,235  $  (3,970) $    (735)
                                     ----------  ---------  ---------  ----------  ---------  ---------
Net interest income................ $    1,931  $  (5,051) $  (3,120) $    5,719  $  (7,900) $  (2,181)
                                     ==========  =========  =========  ==========  =========  =========

The provision for probable loan losses represents the current period expense associated with maintaining an appropriate allowance for credit losses. The loan loss provision and level of allowance for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company's market area. Periodic fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for probable loan losses; however, actual loan losses may vary from current estimates.

For 2002, the provision for probable loan losses was $2,663,000, compared to $1,910,000 for 2001 and $3,159,000 for 2000. The allowance for probable loan losses represented 1.96%, 1.76%, and 1.58% of total loans at December 31, 2002, 2001, and 2000, respectively. See "Allowance for Probable Loan Losses" on page 38 for additional information.

The following table sets forth the various components of the Company's noninterest income:

                                                                                   Increase (Decrease)
                                                                       --------------------------------------------
                                          Years Ended December 31,       2002 versus 2001       2001 versus 2000
                                     --------------------------------  ---------------------  ---------------------
(Dollars in thousands)                  2002       2001       2000       Amount     Percent    Amount     Percent
                                     ----------  ---------  ---------  ----------  ---------  ---------  ----------
Gain on sale of loans.............. $    2,262  $   1,758  $      --  $      504         29 %$   1,758          -- %
Service charges and other fees.....      1,425        967        716         458         47 %      251          35 %
Servicing income...................      1,324        721        236         603         84 %      485         206 %
Other investments..................      1,113      1,029        778          84          8 %      251          32 %
Gain on sale of securities
  available-for-sale...............      1,036        732         44         304         42 %      688       1,564 %
Gain on sale of credit
   card portfolio..................        172         --         --         172         -- %       --          -- %
Other income.......................      1,698      1,090      1,103         608         56 %      (13)         (1)%
                                     ----------  ---------  ---------  ----------             ---------
Total.............................. $    9,030  $   6,297  $   2,877  $    2,733         43 %$   3,420         119 %
                                     ==========  =========  =========  ==========             =========

Noninterest income for the year ended December 31, 2002 was $9,030,000, compared to $6,297,000 for 2001 and $2,877,000 for 2000. The increase in 2002 was primarily due to increased sales of SBA loans increasing the gain by $504,000, an increase in service charges and other fees of $458,000, an increase in gains on servicing income of $603,000, and an increase in gains on sales of securities of $304,000, compared to the same period in 2001. The increased sales of SBA loans were attributable to the strategic focus in 2002 on increasing SBA origination and to take advantage of the favorable market conditions for sales of the guaranteed portions. The interest rate environment in 2002 provided the opportunity for the Company to realize gains on the sale of loans and securities. The increases in service charges and fees were primarily the result of an increase in activity resulting from the growth of the Company. The increases in other investment income of $84,000 was primarily the result of increases in the cash surrender value of the Corporate Owned Life Insurance policies, which provides a funding source for the Company's Supplemental Executive Retirement Plan. In additional, noninterest income included a $172,000 gain on sale of the Company's credit card portfolio in 2002.

The increase in 2001 over 2000 was primarily due to an increase in gains on sales of SBA loans of $1,758,000, an increase in gains on sales of securities of $688,000, an increase in service charges and fees of $251,000, an increase in servicing income of $485,000, and an increase of other investment of $251,000. These increases were due to the focus on increasing SBA origination, the favorable market conditions for sales of loans and securities, the increased activity from the growth in the Company and increases in the cash surrender value of the Corporate Owned Life Insurance policies.

The following table sets forth the various components of the Company's noninterest expenses:

                                                                                   Increase (Decrease)
                                                                       --------------------------------------------
                                          Years Ended December 31,       2002 versus 2001       2001 versus 2000
                                     --------------------------------  ---------------------  ---------------------
(Dollars in thousands)                  2002       2001       2000       Amount     Percent    Amount     Percent
                                     ----------  ---------  ---------  ----------  ---------  ---------  ----------
Salaries and benefits.............. $   18,116  $  18,120  $  16,127  $       (4)         0 %$   1,993          12 %
Occupancy..........................      3,168      2,847      2,399         321         11 %      448          19 %
Professional fees..................      1,563      1,447      1,861         116          8 %     (414)        (22)%
Furniture and equipment............      1,503      1,453      1,329          50          3 %      124           9 %
Loan origination costs.............      1,277      1,335      1,011         (58)        (4)%      324          32 %
Client services....................      1,100      1,889      1,839        (789)       (42)%       50           3 %
Advertising and promotion..........        737      1,116      1,029        (379)       (34)%       87           8 %
Stationery & supplies..............        345        489        388        (144)       (29)%      101          26 %
Telephone .........................        338        358        359         (20)        (6)%       (1)          0 %
Merger-related costs...............         --         --      3,164          --         -- %   (3,164)       (100)%
Other..............................      5,062      4,294      4,554         768         18 %     (260)         (6)%
                                     ----------  ---------  ---------  ----------             ---------
Total.............................. $   33,209  $  33,348  $  34,060  $     (139)         0 %$    (712)         (2)%
                                     ==========  =========  =========  ==========             =========

The following table indicates the percentage of noninterest expenses in each category:

                                                            Years Ended December 31,
                                     ------------------------------------------------------------------
                                               2002                  2001                   2000
                                     ---------------------  ---------------------  --------------------
                                                   % of                  % of                   % of
(Dollars in thousands)                 Amount      Total     Amount      Total      Amount      Total
                                     ----------  ---------  ---------  ----------  ---------  ---------
Salaries and benefits.............. $   18,116         55% $  18,120          54% $  16,127         47%
Occupancy..........................      3,168         10%     2,847           9%     2,399          7%
Professional fees..................      1,563          5%     1,447           4%     1,861          5%
Furniture and equipment............      1,503          5%     1,453           4%     1,329          4%
Loan origination costs.............      1,277          4%     1,335           4%     1,011          3%
Client services....................      1,100          3%     1,889           6%     1,839          5%
Advertising and promotion..........        737          2%     1,116           3%     1,029          3%
Stationery & supplies..............        345          1%       489           1%       388          1%
Telephone .........................        338          1%       358           1%       359          1%
Merger-related costs...............         --         --         --          --      3,164          9%
Other..............................      5,062         14%     4,294          14%     4,554         15%
                                     ----------  ---------  ---------  ----------  ---------  ---------
Total.............................. $   33,209        100% $  33,348         100% $  34,060        100%
                                     ==========  =========  =========  ==========  =========  =========

Noninterest expenses for the year ended December 31, 2002 were $33,209,000, down slightly from $33,348,000 for the year ended December 31, 2001, which was down $712,000, or 2%, from $34,060,000 for the year ended December 31, 2000.

Salaries and employee benefits, the single largest component of noninterest expenses, were $18,116,000 for the year ended December 31, 2002, consistent with the $18,120,000 for 2001. The increase in occupancy and equipment expenses of $371,000 and increases in professional fees of $116,000 was in support of the overall growth of the Company. In 2002, client services expense decreased $789,000 due to a reduction in both the level and pricing for certain of these services during 2002. Other noninterest expenses increased $768,000 in 2002 compared to 2001. Advertising and promotion fees decreased $379,000 as certain sponsorships were discontinued in 2002. The most significant change in 2001 over 2000 was the decrease in pretax merger-related expenses due to the merger with Western Holdings Bancorp in 2000 of $3,164,000. This decrease was offset by increases in salaries and benefits of $1,993,000, primarily due to normal merit increases and increase in the number of employees in 2001. The other increases in 2001 in occupancy, equipment, advertising and promotion, loan origination costs and stationary and supplies was in support of the overall growth of the Company and the addition of new facilities.

The Company files consolidated federal and combined state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws.

The provision for income taxes was $3,500,000, $4,410,000, $3,049,000 for the years ended December 31, 2002, 2001, and 2000, respectively. The Company's effective tax rates were 32.8%, 37.8%, and 36.0% for the years ended December 31, 2002, 2001, and 2000, respectively. The effective tax rates are lower than the statutory rate of 42% primarily due to the Company purchasing additional Corporate Owned Life Insurance policies on executive officers of the Company, low income housing tax credits, and changes in the level of investments in municipal securities.

At December 31, 2002, the Company's total assets were $958,752,000, an increase of 5% from $912,730,000 at December 31, 2001. Total portfolio loans were $673,907,000, an increase of 6% from December 31, 2001, and total deposits were $841,936,000, an increase of 4% from December 31, 2001. The increases reflect the continued internal growth of the Company.

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

                                                       Years Ended December 31,
                                                  -------------------------------
(Dollars in thousands)                              2002       2001       2000
                                                  ---------  ---------  ---------
Securities available-for-sale (at fair value)
U.S. Treasury................................... $   4,740  $   3,593  $   8,524
U.S. Government Agencies........................    48,029     53,762     48,202
Municipals......................................    12,134      9,273     14,297
Mortgage-backed securities......................    44,774     22,839     18,870
CMOs..............................................  14,134         --         --
Corporate bonds...................................   2,632      2,067         --
Other debt securities...........................        --         --      1,001
                                                  ---------  ---------  ---------
   Total securities available-for-sale.......... $ 126,443  $  91,534  $  90,894
                                                  =========  =========  =========
Securities held-to-maturity (at amortized cost)
Mortgage-backed securities...................... $      --  $   4,381  $   5,783
CMOs............................................        --        893      2,215
Municipals......................................        --     10,002     11,910
                                                  ---------  ---------  ---------
     Total securities held-to-maturity.......... $      --  $  15,276  $  19,908
                                                  =========  =========  =========

The following table summarizes the amounts and distribution of the Company's investment securities and the weighted average yields as of December 31, 2002:

                                                                December 31, 2002
                             --------------------------------------------------------------------------------------------
                                                                   Maturity
                             --------------------------------------------------------------------------------------------
                                                 After One Year    After Five Years
                                                    and Within         and Within
                             Within One Year        Five Years        Ten Years       After Ten Years          Total
                             ----------------   ----------------   ----------------   ----------------   ----------------
(Dollars in thousands)        Amount   Yield     Amount   Yield     Amount   Yield     Amount   Yield     Amount   Yield
                             -------- -------   -------- -------   -------- -------   -------- -------   -------- -------
Securities available-for-sale:
 U.S. treasury............. $  1,417    1.56 % $  3,323    2.09 % $     --      -- % $     --      -- % $  4,740    1.94 %
 U.S. Government Agencies..   21,947    5.35 %   26,082    3.28 %       --      -- %       --      -- %   48,029    4.22 %
 Municipals - taxable........  1,127    6.67 %      556    6.45 %       --      -- %       --      -- %    1,683    6.59 %
 Municipals - tax exempt...    1,290    4.84 %    6,204    4.41 %    2,957    4.48 %       --      -- %   10,451    4.48 %
 Mortgage-backed securities       --      -- %       --      -- %    1,267    5.33 %   43,507    4.95 %   44,774    4.96 %
 CMOs........................     --      -- %       --      -- %    2,059    4.65 %   12,075    3.77 %   14,134    3.90 %
 Corporate bonds.............     --      -- %    2,632    4.36 %       --      -- %       --      -- %    2,632    4.36 %
                             --------           --------           --------           --------           --------
   Total available-for-sale $ 25,781    5.18 % $ 38,797    3.47 % $  6,283    4.71 % $ 55,582    4.69 % $126,443    4.42 %
                             ========           ========           ========           ========           ========

Note: Yields on tax exempt municipal securities are not presented on a fully tax equivalent basis.

During 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.

As of December 31, 2002, the only securities held by the Company where the aggregate book value of the Company's investment in securities of a single issuer exceeded 10% of the Company's shareholders' equity were direct obligations of the U.S. government or U.S. government agencies.

Securities are pledged to meet requirements imposed as a condition of deposit by some depositors, such as political subdivisions (public funds) or of other funds such as bankruptcy trustee deposits. Securities with amortized cost of $29,710,000 and $20,084,000 as of December 31, 2002 and 2001 were pledged to secure public and certain other deposits as required by law or contract.

Total loans (exclusive of loans held for sale) grew to $673,907,000 at December 31, 2002, up 6% from $632,917,000 at December 31, 2001, adding to the increase of 4% from $610,781,000 at December 31, 2000. The Company's allowance for loan losses was $13,227,000, or 1.96% of total loans, as of December 31, 2002, as compared to $11,154,000, or 1.76% of total loans, at December 31, 2001, and $9,651,000, or 1.58% of total loans, at December 31, 2000. As of December 31, 2002, the Company had $4,571,000 in nonperforming assets. As of December 31, 2001 and 2000, the Company had no nonperforming assets.

The loan portfolio is primarily composed of commercial loans to companies principally 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 located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Real estate values in portions of Santa Clara County and neighboring San Mateo County are among the highest in the country at present. 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 presents the Company's loans outstanding at year-end by loan type:

                                                                       December 31,
                               ---------------------------------------------------------------------------------------------
                                          % of               % of               % of               % of               % of
(Dollars in thousands)           2002     Total     2001     Total     2000     Total     1999     Total     1998     Total
                               --------- -------  --------- -------  --------- -------  --------- -------  --------- -------
Commercial................... $ 263,144      39% $ 208,713      33% $ 200,846      33% $ 141,101      35% $  95,587      28%
Real estate - mortgage.......   259,974      38%   246,119      39%   230,468      38%   153,518      38%   100,870      30%
Real estate - land and
 construction................   147,822      22%   174,077      27%   171,325      28%    96,868      24%    86,102      25%
Consumer.....................     2,850       1%     3,833       1%     8,172       1%    10,048       3%    55,656      17%
                               --------- -------  --------- -------  --------- -------  --------- -------  --------- -------
Total loans..................   673,790     100%   632,742     100%   610,811     100%   401,535     100%   338,215     100%
Deferred loan costs (fees)...       117                175                (30)              (295)              (284)
Allowance for loan losses....   (13,227)           (11,154)            (9,651)            (6,511)            (5,069)
                               ---------          ---------          ---------          ---------          ---------
Loans, net................... $ 660,680          $ 621,763          $ 601,130          $ 394,729          $ 332,862
                               =========          =========          =========          =========          =========

The change in the Company's loan portfolio is primarily due to the increase in the commercial and real estate mortgage loan portfolio offset by a decline in consumer loans due to the sale of the credit card portfolio in 2002 and the normal maturation on the real estate land and construction loans. The increase in the commercial and real estate mortgage loan portfolios is due to the Company's continued expansion and focus on originating these types of loans.

The Company's commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Such loans include loans with maturities ranging from thirty days to one year and "term loans," with maturities normally ranging from one to five years. Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.

The Company is an active participant in the Small Business Administration (SBA) and California guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Loan Program. The Company regularly makes SBA-guaranteed loans and considers such loans to be investment loans; however, the guaranteed portion of these loans may be sold in the secondary market depending on market conditions and, once it is determined they will be sold, are classified as held for sale and carried at the lower of cost or market. In the event of the sale of a guaranteed portion SBA loan, the Company retains the servicing rights for the sold portion. As of December 31, 2002, 2001, and 2000, $83.0 million, $50.1 million and $12.3 million, respectively, in SBA loans were serviced by the Company for others.

The Company's real estate term loans consist primarily of loans made based on the borrower's cash flow and are secured by deeds of trust on commercial and residential property to provide a secondary source of repayment. It is the Company's policy to restrict real estate term loans to no more than 80% of the lower of the property's appraised value or the purchase price of the property, depending on the type of property and its utilization. The Company offers both fixed and floating rate loans. Maturities on such loans are generally restricted to between five and ten years (on an amortization ranging from fifteen to twenty-five years with a balloon payment due at maturity); however, SBA and certain other real estate loans easily sold in the secondary market may be granted for longer maturities.

The Company's real estate land and construction loans are primarily interim loans made by the Company to finance the construction of commercial and single family residential properties. These loans are typically short term. The Company utilizes underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or permanent mortgage financing prior to making the construction loan.

The Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Additionally, the Company makes equity lines of credit and equity loans available to its clientele. Consumer loans generally provide for the monthly payment of principal and interest. Most of the Company's consumer loans are secured by the personal property being purchased, or, in the instances of equity loans or lines, real property.

With certain exceptions, the Banks are permitted to make extensions of its credit to any one borrowing entity up to 15% of the Banks' capital and reserves for unsecured loans and up to 25% of the Banks' capital and reserves for secured loans. For HBC these lending limits were $8.9 million and $14.9 million at December 31, 2002. For HBEB these lending limits were $2.0 million and $3.3 million at December 31, 2002. For HBSV these lending limits were $1.2 million and $2.0 million at December 31, 2002. For BLA these lending limits were $4.3 million and $7.2 million at December 31, 2002.

The Company does not have any concentrations in its loan portfolio by industry or group of industries, however, 61% and 66% of its net loans were secured by real property as of December 31, 2002 and 2001. This is attributed to a strong local real estate market and the Company's continued focus on these types of lending.

The following table presents the maturity distribution of the Company's loans as of December 31, 2001. 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. As of December 31, 2002, approximately 90% of the Company's loan portfolio consisted of floating interest rate loans.

                                                          Over One
                                                Due in    Year But
                                               One Year   Less Than    Over
(Dollars in thousands)                          or Less   Five Years Five Years   Total
- ---------------------------------------------  ---------  ---------  ---------  ---------
Commercial................................... $ 246,876  $  15,011  $   1,257  $ 263,144
Real estate - mortgage.......................   186,567     65,049      8,358    259,974
Real estate - land and construction..........   147,822         --         --    147,822
Consumer.....................................     2,542        308         --      2,850
                                               ---------  ---------  ---------  ---------
     Total loans.............................   583,807     80,368      9,615    673,790
                                               =========  =========  =========  =========

Loans with variable interest rates...........   559,612     45,295      2,149    607,056
Loans with fixed interest rates..............    24,195     35,073      7,466     66,734
                                               ---------  ---------  ---------  ---------
     Total loans............................. $ 583,807  $  80,368  $   9,615  $ 673,790
                                               =========  =========  =========  =========

HBC, HBEB, HBSV, and BLA are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk, in excess of the amounts recognized in the balance sheets.

Commitments to extend credit as of December 31, were as follows:

(Dollars in thousands)                                    2002        2001
                                                       ----------  ----------
Commitments to extend credit......................... $  303,510  $  275,796
Standby letters of credit............................      3,817       2,526
                                                       ----------  ----------
                                                      $  307,327  $  278,322
                                                       ==========  ==========

Commitments to extend credit are agreements to lend to a client as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. HBC evaluates each client's creditworthiness on a case-by- case basis. The amount of collateral obtained, if deemed necessary by HBC upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include cash, marketable securities, accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and/or residential properties. Fair value of these instruments is not material.

Standby letters of credit are written conditional commitments issued by HBC to guaranty the performance of a client to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Fair value of these instruments is not material.

                                                                     December 31,
                                               -----------------------------------------------------
(Dollars in thousands)                           2002       2001       2000       1999       1998
                                               ---------  ---------  ---------  ---------  ---------
Nonaccrual loans............................. $   4,571  $      --  $      --  $   1,402  $   1,354
Loans 90 days past due and still accruing....        --         --         --         --         --
Restructured loans...........................                              --         --         --
                                               ---------  ---------  ---------  ---------  ---------
   Total nonperforming loans.................     4,571         --         --      1,402      1,354
Foreclosed assets............................        --         --         --         --         --
                                               ---------  ---------  ---------  ---------  ---------
   Total nonperforming assets................ $   4,571  $      --  $      --  $   1,402  $   1,354
                                               =========  =========  =========  =========  =========
Nonperforming assets as a percentage of
    period end loans plus foreclosed assets..      0.68%        --         --       0.35%      0.40%

As of December 31, 2002, the Company had $4,571,000 in loans on nonaccrual status, which were considered impaired loans. The impaired loans had a related valuation allowance of $356,000 as of December 31, 2002. For the year ended December 31, 2002, the average recorded investment in loans for which impairment has been recognized was approximately $2,235,000. The Company had no loans past due 90 days or more and still accruing interest and no restructured loans as of December 31, 2002. As of December 31, 2001 and 2000, the Company had no loans on nonaccrual status, no significant loans past due 90 days or more and still accruing interest, no restructured loans, no foreclosed assets, and no impaired loans. The increase in the nonaccrual loans at December 31, 2002 compared to December 31, 2001 is primarily the result of the placement of one commercial real estate loan nonaccrual status during 2002. For the year ended December 31, 2002, 2001 and 2000, the Company had no foregone interest income on nonaccrual loans. For the year ended December 31, 2002, the Company recognized $134,000 in interest income for cash payments received on nonaccrual loans, compared to zero for both the years ended December 31, 2001 and 2000.

The Company assigns to all of its loans a risk grade consistent with the system recommended by regulatory agencies. 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 Department, 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 considered as special mention, substandard, and doubtful 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).

As of December 31, 2002, classified loans were $27,915,000. These loans constituted 4% of total loans and 29% of capital and reserves as of that date. At December 31, 2001, the principal balance of classified loans was $14,594,000. These loans constituted 2% of total loans and 17% of capital and reserves at that date. As of December 31, 2000, the principal balance of classified loans was $5,632,000. These loans constituted 1% of total loans and 7% of capital and reserves as of that date. During the first quarter of 2003, the Bank identified an $8.3 million commencial credit with risks identified that create doubt about full future repayment under the original terms of the agreement. Although still performing and on an accrual basis, the Company has established a specfic reserve for this loan. Other than this loan and the loans already classified at December 31, 2002, the Company has not identified any potantial problem loans which would result in these loans being included as nonperforming or classified loans at a future date.

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. Also 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. See "Provision for probable loan losses" on page 30.

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

(Dollars in thousands)                           2002       2001       2000       1999       1998
                                               ---------  ---------  ---------  ---------  ---------
Balance, beginning of period................. $  11,154  $   9,651  $   6,511  $   5,069  $   3,270
Charge-offs:
         Commercial..........................      (936)      (708)       (52)      (203)      (108)
         Real estate - mortgage..............        --         --         --         --         --
         Real estate - land and construction.        --         --         --         --         --
         Consumer............................        --         (1)        --       (629)       (71)
                                               ---------  ---------  ---------  ---------  ---------
Total charge-offs............................      (936)      (709)       (52)      (832)      (179)
Recoveries:
         Commercial..........................       346        301         33         67        137
         Real estate - mortgage..............        --         --         --         --         --
         Real estate - land and construction.        --         --         --         --         --
         Consumer............................        --          1         --          9         35
                                               ---------  ---------  ---------  ---------  ---------
Total recoveries.............................       346        302         33         76        172
                                               ---------  ---------  ---------  ---------  ---------
Net charge-offs..............................      (590)      (407)       (19)      (756)        (7)
Provision for loan losses....................     2,663      1,910      3,159      2,198      1,806
                                               ---------  ---------  ---------  ---------  ---------
Balance, end of period....................... $  13,227  $  11,154  $   9,651  $   6,511  $   5,069
                                               =========  =========  =========  =========  =========

RATIOS:
  Net charge-offs to average loans
  outstanding................................      0.09 %     0.07 %       -- %     0.20 %       -- %
  Allowance for loan losses to average loans.      2.07 %     1.84 %     1.80 %     1.71 %     1.87 %
  Allowance for loan losses to total
  loans at end of period.....................      1.96 %     1.76 %     1.58 %     1.62 %     1.50 %
  Allowance for loan losses to
  nonperforming loans........................       289 %       -- %       -- %      464 %      374 %

Charge-offs reflect the realization of losses in the portfolio that were recognized previously though provisions for loan losses. The net charge-offs in 2002 were $590,000, compared to $407,000 in 2001, $19,000 in 2000, $756,000 in 1999 and $7,000 in 1998. The increase in net charge-offs in 2002 was primarily due to the increase in commercial loan charge-offs. However, 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 allocation as a percent of loans outstanding in each loan category at the dates indicated:

                                                                          December 31,
                            ------------------------------------------------------------------------------------------------------
                                   2002                 2001                 2000                1999                 1998
                            ------------------   ------------------   ------------------   ------------------   ------------------
                                      Percent              Percent              Percent              Percent              Percent
                                       of ALL               of ALL               of ALL               of ALL               of ALL
                                      in each              in each              in each              in each              in each
                                      category             category             category             category             category
                                      to total             to total             to total             to total             to total
(Dollars in thousands)      Allowance  loans     Allowance  loans     Allowance  loans     Allowance  loans     Allowance  loans
                            --------- --------   --------- --------   --------- --------   --------- --------   --------- --------
Commercial................ $   6,349     2.41 % $   5,489     2.63 % $   4,244     2.11 % $   3,069     2.18 % $   1,961     2.05 %
Real estate - mortgage....     2,411     0.93 %     1,420     0.58 %     1,509     0.65 %     1,025     0.67 %       617     0.61 %
Real estate - land and
 construction.............     3,574     2.42 %     3,066     1.76 %     2,084     1.22 %     1,343     1.39 %     1,173     1.36 %
Consumer..................        47     1.63 %       102     2.66 %       158     1.93 %       170     1.69 %     1,245     2.24 %
Unallocated...............       846       -- %     1,077       -- %     1,656       -- %       904       -- %        73       -- %
                            ---------            ---------            ---------            ---------            ---------
Total..................... $  13,227     1.96 % $  11,154     1.76 % $   9,651     1.58 % $   6,511     1.62 % $   5,069     1.50 %
                            =========            =========            =========            =========            =========

The increase in the allowance for probable loan losses reflects the growth in the Company's overall level of loans, primarily in the commercial and real estate loan portfolio.

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. As of December 31, 2002, nonperforming loans had a related specific valuation allowance of $356,000. There were no specific allowances allocated as of December 31, 2001 as the Company did not have any impaired loans.

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 December 31, 2002 was $12,381,000, compared to $10,077,000 on December 31, 2001. The increase was attributable to several factors, most notably a growth in total 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 December 31, 2002, the Company's unallocated allowance was $846,000, compared to $1,077,000 on December 31, 2001. The decrease in the unallocated allowance was due to the Company's pro-active efforts in addressing the potential impact of changing economic conditions within the market place through an increase in the factors affecting the formula reserve allocations. In evaluating the appropriateness of the unallocated allowance, management considered the following factors:

Bank's Lending Policies and Procedures - Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. Range of potential impact $85,000 - $151,000

Economic Conditions - Changes in national and local economic and business conditions, trends, and developments, including the condition of various market segments. Range of potential impact $141,000 - $251,000

Changes in the Bank's Lending Management and Staff - Changes in the experience, ability and depth of lending management and other relevant staff. Range of potential impact $113,000 - $203,000

Changes in Trend and Volume of Past Due and Classified Loans - - 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. Range of potential impact $169,000 - - $303,000

Quality of the Bank's Loan Review System - Changes in the quality of the Bank's loan review system and the degree of oversight by the Bank's Board of Directors. Range of potential impact $28,000 - $50,000

Credit Concentrations - The existence and effect of any concentrations of credit and changes in the level of such concentrations. Range of potential impact $56,000 - $100,000

There can be no assurance that the adverse impact of any of these conditions on the Bank will not be in excess of the ranges set forth above.

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 effect 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.

Total deposits were $841,936,000 at December 31, 2002, an increase of $34,028,000, or 4%, compared to $807,908,000 at December 31, 2001. The largest increase was in savings and money market deposits, which increased $60,423,000 to $290,417,000 at December 31, 2002, as compared to $229,994,000 at December 31, 2001. Noninterest bearing deposits increased $41,979,000 to $248,616,000 at December 31, 2002 compared to $206,637,000 at December 31, 2001. Interest bearing demand deposits increased $13,780,000 to $94,309,000 at December 31, 2002, as compared to $80,529,000 at December 31, 2001. Time deposits decreased $82,154,000 to $208,594,000 at December 31, 2002, as compared to $290,748,000 at December 31, 2001.

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

                                                         Years ended December 31,
                                        -----------------------------------------------------------
                                               2002                2001                2000
                                        -----------------   ------------------   ------------------
                                                  Average             Average              Average
                                         Average   Rate      Average    Rate      Average    Rate
(Dollars in thousands)                   Balance   Paid      Balance    Paid      Balance    Paid
                                        --------- -------   --------- --------   --------- --------
Demand, noninterest bearing........... $ 211,195      -- % $ 204,114       -- % $ 183,422       -- %
Demand, interest bearing..............    81,011    0.89 %    69,634     1.58 %    55,616     1.82 %
Savings and money market..............   275,217    1.74 %   227,344     3.09 %   228,336     4.16 %
Time deposits, under $100.............    56,097    3.14 %    78,910     5.37 %    73,058     5.85 %
Time deposits, $100 and over..........   129,702    2.75 %   166,268     5.18 %   151,275     5.75 %
Time deposits - Brokered Deposits.....    65,183    3.87 %    30,843     5.32 %    10,544     6.55 %
                                        ---------           ---------            ---------
Total average deposits................ $ 818,405    1.63 % $ 777,113     2.91 % $ 702,251     3.44 %
                                        =========           =========            =========

The Company obtains deposits from a cross- section of the communities it serves. The Company's business is not seasonal in nature. The Company had brokered deposits totaling approximately $47,640,000 at December 31, 2002 and $67,995,000 at December 31, 2001. These brokered deposits generally mature within one-year period. The Company is not dependent upon funds from sources outside the United States.

The following table indicates the maturity schedule of the Company's time deposits of $100,000 or more as of December 31, 2002:

                                                   % of
(Dollars in thousands)                   Balance   Total
                                        --------- -------
Three months or less.................. $  72,553      45 %
Over three months through six months..    49,105      30 %
Over six months through twelve months.    18,786      12 %
Over twelve months....................    21,809      13 %
                                        --------- -------
          Total....................... $ 162,253     100 %
                                        ========= =======

The Company focuses primarily on servicing business deposit 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.

To meet liquidity needs, the Company maintains a portion of its funds in cash deposits in other banks, in Federal funds sold, and in investment securities. As of December 31, 2002, the Company's primary liquidity ratio was 16.47%, comprised of $64.6 million in investment securities available-for-sale of maturities (or probable calls) of up to five years, less $15.0 million of securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $44.0 million, and $42.6 million in cash and due from banks, as a percentage of total unsecured deposits of $827.0 million. As of December 31, 2001, the Company's primary liquidity ratio was 20.27%, comprised of $65.2 million in investment securities available-for-sale of maturities (or probable calls) of up to five years, less $9.8 million of securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $71.6 million, and $34.7 million in cash and due from banks, as a percentage of total unsecured deposits of $789.1 million. As of December 31, 2000, the Company's primary liquidity ratio was 15.04%, comprised of $61.2 million in investment securities available-for-sale of maturities (or probable calls) of up to five years, less $12.0 million securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $19.3 million, and $40.8 million in cash and due from banks, as a percentage of total unsecured deposits of $726.2 million.

The following table summarizes the Company's borrowings under its federal funds purchased, security repurchase arrangements and lines of credit for the periods indicated:

                                                 2002          2001          2000
(Dollars in thousands)                       ------------  ------------  ------------
Average balance during the year............ $        770  $      2,436  $      2,020
Average interest rate during the year......         1.77%         5.80%         5.17%
Maximum month-end balance during the year.. $         --  $         --  $     18,000
Average rate at December 31................           --            --          5.13%

The Company has Federal funds purchase lines and lines of credit of totaling $56,000,000. As of December 31, 2002, the Company had no borrowings from the FHLB.

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

                                           December 31,
                                ----------------------------------
(Dollars in thousands)             2002        2001        2000
                                ----------  ----------  ----------
Capital components:
   Tier 1 Capital............. $  102,614  $   91,598  $   78,982
   Tier 2 Capital.............     10,563       9,664       9,427
                                ----------  ----------  ----------
   Total risk-based capital... $  113,177  $  101,262  $   88,409
                                ==========  ==========  ==========

Risk-weighted assets.......... $  842,399  $  779,060  $  753,947
Quarterly average assets...... $  950,091  $  898,020  $  850,072


                                                                      MINIMUM
                                                                    REGULATORY
                                                                    REQUIREMENTS
                                                                    -----------
Capital ratios:
Total risk-based capital......       13.4%       13.0%       11.7%         8.0%
Tier 1 risk-based capital.....       12.2%       11.8%       10.5%         4.0%
Leverage ratio(1).............       10.8%       10.2%        9.3%         4.0%

(1) Tier 1 capital divided by average assets (excluding goodwill).

At December 31, 2002, 2001 and 2000, the Company's capital met all minimum regulatory requirements. As of December 31, 2002, 2001 and 2000, management believes that HBC, HBEB, HBSV, and BLA were considered "well capitalized" under the regulatory framework for prompt corrective action.

To enhance regulatory capital and to provide liquidity the Company issued the following mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trusts: In the first quarter of 2000, the Company issued $7,000,000 aggregate principal amount of 10.875% subordinated debentures due on March 8, 2030 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2000, the Company issued $7,000,000 aggregate principal amount of 10.60% subordinated debentures due on September 7, 2030 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2001, the Company issued $5,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on July 31, 2031 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2002, the Company issued $4,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on September 26, 2032 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. Under applicable regulatory guidelines, the Trust Preferred securities currently qualify as Tier I capital.

Market risk is the risk of loss to future earnings, to fair values, or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits, borrowings, its trading activities for its own account, and its role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company's earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.

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 table below sets forth the interest rate sensitivity of the Company's interest earning assets and interest bearing liabilities as of December 31, 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        Due in       Due
                                           Within      Three     After One
                                           Three     to Twelve    to Five    Due After   Not Rate-
(Dollars in  thousands)                    Months      Months      Years     Five Years  Sensitive     Total
                                         ----------  ----------  ----------  ----------  ----------  ----------
INTEREST EARNING ASSETS:
 Federal funds sold.................... $   44,000  $       --  $       --  $       --  $       --  $   44,000
 Interest bearing deposits in banks......    7,022          --          --          --          --       7,022
 Securities............................      2,817      22,964      38,797      61,865          --     126,443
 Total loans, including loans
    held-for-sale, net of deferred cost    528,044      83,964      80,368       9,615          --     701,991
                                         ----------  ----------  ----------  ----------  ----------  ----------
Total interest earning assets..........    581,883     106,928     119,165      71,480          --     879,456

Cash and due from banks................         --          --          --          --      35,610      35,610
Other assets...........................         --          --          --          --      43,686      43,686
                                         ----------  ----------  ----------  ----------  ----------  ----------
Total assets........................... $  581,883  $  106,928  $  119,165  $   71,480  $   79,296  $  958,752
                                         ==========  ==========  ==========  ==========  ==========  ==========

INTEREST BEARING LIABILITIES:
 Demand, interest bearing.............. $   94,309  $       --  $       --  $       --  $       --  $   94,309
 Savings and money market..............    290,417          --          --          --          --     290,417
 Time deposits.........................     90,844      89,902      27,848          --          --     208,594
 Mandatorily redeemable cumulative
   trust preferred securities..........         --          --          --      23,000          --      23,000
                                         ----------  ----------  ----------  ----------  ----------  ----------
Total interest bearing liabilities.....    475,570      89,902      27,848      23,000          --     616,320

Demand noninterest bearing.............     85,817          --          --          --     162,799     248,616
Accrual interest payable
  and other liabilities................         --          --          --          --      10,951      10,951
Shareholders' equity...................         --          --          --          --      82,865      82,865
                                         ----------  ----------  ----------  ----------  ----------  ----------
Total liabilities and shareholders'
  equity............................... $  561,387  $   89,902  $   27,848  $   23,000  $  256,615  $  958,752
                                         ==========  ==========  ==========  ==========  ==========  ==========

Interest rate sensitivity GAP.......... $   20,496  $   17,026  $   91,317  $   48,480  $ (177,319) $       --
                                         ==========  ==========  ==========  ==========  ==========  ==========
Cumulative interest rate
  sensitivity GAP...................... $   20,496  $   37,522  $  128,839  $  177,319  $       --  $       --
Cumulative interest rate
  sensitivity GAP ratio................       2.14 %      3.91 %     13.44 %     18.49 %        -- %        -- %

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. For additional information on the Company's simulation model and the methodology used to estimate the potential effects of changing interest rates, see Item 7A - "Quantitative and qualitative disclosures about market risk" below.

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.

As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which have a short term to maturity. Since all of the Company's interest-bearing assets and liabilities are located at HBC, all of the Company's interest rate risk exposure lies at that level, as well. As a result, all interest rate risk management procedures are performed at HBC's level. Based upon the nature of the Company's operations, the Company is not subject to foreign exchange or commodity price risk. The Company has no market risk sensitive instruments held for trading purposes. As of December 31, 2002, the Company does not use interest rate derivatives to hedge its interest rate risk.

The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee (ALCO). Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent, and that the goal is to identify and accept the risks. Management uses two methodologies to manage interest rate risk: 1) a standard GAP analysis; and 2) an interest rate shock simulation model.

The detail from the Company's GAP analysis is shown in Item 7, above, and is not discussed here. The Company applies a market value (MV) methodology to gauge its interest rate risk exposure as derived from its simulation model. Generally, MV is the discounted present value of the difference between incoming cash flows on interest earning assets and other investments and outgoing cash flows on interest bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the MV which would result from a theoretical 200 basis point (1 basis point equals 0.01%) change in market interest rates. Both a 200 basis point increase and a 200 basis point decrease in market rates are considered.

At December 31, 2002, it was estimated that the Company's MV would increase 13.19% in the event of a 200 basis point increase in market interest rates. The Company's MV at the same date would decrease 14.02% in the event of a 200 basis point decrease in market interest rates.

Presented below, as of December 31, 2002 and 2001, is an analysis of the Company's interest rate risk as measured by changes in MV for instantaneous and sustained parallel shifts of 200 basis points in market interest rates:

                                       2002                                                2001
                       ---------------------------------------------  ---------------------------------------------
                                              Market Value as a % of                         Market Value as a % of
                        $ Change   % Change   Present Value of Assets  $ Change   % Change   Present Value of Assets
(Dollars in thousands) in Market  in Market   ----------------------  in Market  in Market   ----------------------
Change in rates          Value      Value     MV Ratio   Change (bp)    Value      Value     MV Ratio   Change (bp)
- ---------------------  ---------- ----------  ---------  -----------  ---------- ----------  ---------  -----------
 + 200 bp............ $   16,686      13.19 %     14.9 %        173  $   12,254       9.63 %     15.3 %        134
     0 bp............ $       --         -- %     13.1 %         --  $       --         -- %     14.0 %         --
 - 200 bp............ $  (17,734)    (14.02)%     11.3 %       (184) $  (14,344)    (11.27)%     12.4 %       (157)

Management believes that the MV methodology overcomes three shortcomings of the typical maturity gap methodology. First, it does not use arbitrary repricing intervals and accounts for all expected future cash flows. Second, because the MV method projects cash flows of each financial instrument under different interest rate environments, it can incorporate the effect of embedded options on an institutions' interest rate risk exposure. Third, it allows interest rates on different instruments to change by varying amounts in response to a change in market interest rates, resulting in more accurate estimates of cash flows.

However, as with any method of gauging interest rate risk, there are certain shortcomings inherent to the MV methodology. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react the same to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change in general market rates. Additionally, the MV methodology does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients' ability to service their debt. All of these factors are considered in monitoring the Company's exposure to interest rate risk.

Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust our 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 financial statements and independent auditors' report are set forth on pages 55 through 86, which follows Item 15 - "Exhibits, Financial Statement Schedules, and Reports on Form 8-K."

The following table discloses the Company's selected quarterly financial data.

                                                                For the Quarter Ended
                          ------------------------------------------------------------------------------------------------
                          December 31, September 30, June 30,   March 31,  December 31, September 30, June 30,   March 31,
                             2002          2002        2002       2002        2001          2001        2001       2001
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Interest income......... $    13,344  $     13,051  $  13,290  $  13,071  $    14,198  $     15,855  $  16,807  $  18,145
Interest expense........       3,296         3,655      3,994      4,292        5,250         5,803      6,231      7,082
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net interest income.....      10,048         9,396      9,296      8,779        8,948        10,052     10,576     11,063
Provision for loan
  losses................         597           750        640        675          576           279        528        527
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net interest income
 after provision........       9,451         8,646      8,656      8,104        8,372         9,773     10,048     10,536
Noninterest income......       2,793         2,360      1,987      1,890        1,543         1,825      1,691      1,238
Noninterest expense.....       8,846         8,346      8,317      7,701        7,725         8,687      8,669      8,267
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net income before taxes.       3,398         2,660      2,326      2,293        2,190         2,911      3,070      3,507
Provision for income
  taxes.................       1,107           848        765        780          816         1,088      1,180      1,326
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net income.............. $     2,291  $      1,812  $   1,561  $   1,513  $     1,374  $      1,823  $   1,890  $   2,181
                          ===========  ============  =========  =========  ===========  ============  =========  =========
Net income per share
  basic................. $      0.20  $       0.16  $    0.14  $    0.14  $      0.12  $       0.17  $    0.17  $    0.20
Net income per share
  diluted............... $      0.20  $       0.16  $    0.14  $    0.13  $      0.12  $       0.16  $    0.17  $    0.19

None.

PART III

Reference is made to the Company's Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders for incorporation of information concerning directors and persons nominated to become directors of the Company. Information concerning executive officers of the Company also included in the Company's Proxy Statement.

Information concerning executive compensation is incorporated by reference from the text under the caption "Executive Compensation" in the Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders.

Information concerning ownership of the equity stock of the Company by certain beneficial owners and management is incorporated by reference from the text under the caption "Proposal One - Election of Directors" in the Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders.

Information concerning certain relationships and related transactions with officers, directors, and the Company is incorporated by reference from the text under the caption "Transactions with Management and Others" in the Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders.

The Financial Statements of the Company and the independent auditors' report are set forth on pages 55 through 86.

All schedules to the Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in the Financial Statements or accompanying notes.

* Management contract or compensatory plan or arrangement.

The Registrant filed Current Reports on Form 8-K dated January 23, 2003 under Item 5, to report its year end 2002 financial results, and containing condensed summarized statements of financial position and results of operations.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.

I, Lawrence D. McGovern, Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Heritage Commerce Corp;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 28, 2003

/s/ Lawrence D. McGovern
Lawrence D. McGovern

Chief Financial Officer