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, 2003, 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.............................. $   72,200  $       --  $       --  $       --  $       --  $   72,200
 Interest bearing deposits in other institutions.      2,039          --          --          --          --       2,039
 Securities......................................        135         330      52,719     100,289          --     153,473
 Total loans, including loans
    held-for-sale, net of deferred costs.........    527,710      80,548      61,567      26,901          --     696,726
                                                   ----------  ----------  ----------  ----------  ----------  ----------
Total interest earning assets....................    602,084      80,878     114,286     127,190          --     924,438

Cash and due from banks..........................         --          --          --          --      39,978      39,978
Other assets.....................................         --          --          --          --      38,785      38,785
                                                   ----------  ----------  ----------  ----------  ----------  ----------
Total assets..................................... $  602,084  $   80,878  $  114,286  $  127,190  $   78,763  $1,003,201
                                                   ==========  ==========  ==========  ==========  ==========  ==========

INTEREST BEARING LIABILITIES:
 Demand, interest bearing........................ $  105,260  $       --  $       --  $       --  $       --  $  105,260
 Savings and money market........................    345,886          --          --          --          --     345,886
 Time deposits...................................     62,196      67,702      15,943          --          --     145,841
 Other borrowings................................     15,000       8,800      19,800          --          --      43,600
 Notes payable to subsidiary grantor trusts......      9,279          --          --      14,423          --      23,702
                                                   ----------  ----------  ----------  ----------  ----------  ----------
Total interest bearing liabilities...............    537,621      76,502      35,743      14,423          --     664,289

Demand noninterest bearing.......................     59,479          --          --          --     178,944     238,423
Accrual interest payable
  and other liabilities..........................         --          --          --          --      10,643      10,643
Shareholders' equity.............................         --          --          --          --      89,846      89,846
                                                   ----------  ----------  ----------  ----------  ----------  ----------
Total liabilities and shareholders'
  equity......................................... $  597,100  $   76,502  $   35,743  $   14,423  $  279,433  $1,003,201
                                                   ==========  ==========  ==========  ==========  ==========  ==========

Interest rate sensitivity GAP.................... $    4,984  $    4,376  $   78,543  $  112,767  $ (200,670) $       --
                                                   ==========  ==========  ==========  ==========  ==========  ==========
Cumulative interest rate
  sensitivity GAP................................ $    4,984  $    9,360  $   87,903  $  200,670  $       --  $       --
Cumulative interest rate
  sensitivity GAP ratio..........................       0.50 %      0.93 %      8.76 %     20.00 %        -- %        -- %

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, 2003, 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, 2003, it was estimated that the Company's MV would increase 30.90% in the event of a 200 basis point increase in market interest rates. The Company's MV at the same date would decrease 34.02% in the event of a 200 basis point decrease in market interest rates.

Presented below, as of December 31, 2003 and 2002, 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:

                                       2003                                           2002
                       ---------------------------------------------  ---------------------------------------------
                                              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............ $   46,986      30.90 %     19.8 %        467  $   45,780      36.18 %     17.9 %        475
     0 bp............ $       --         -- %     15.1 %         --  $       --         -- %     13.1 %         --
 - 200 bp............ $  (51,713)    (34.02)%     10.0 %       (514) $  (40,906)    (32.33)%      9.0 %       (425)

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 51 through 78, 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,
                             2003          2003        2003       2003        2002          2002        2002       2002
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Interest income......... $    12,219  $     11,556  $  11,873  $  12,448  $    13,344  $     13,051  $  13,290  $  13,071
Interest expense........       2,309         2,369      2,552      2,773        3,296         3,655      3,994      4,292
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net interest income.....       9,910         9,187      9,321      9,675       10,048         9,396      9,296      8,779
Provision for loan
  losses................         400           600        600      1,300          597           750        640        675
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net interest income
 after provision........       9,510         8,587      8,721      8,375        9,451         8,646      8,656      8,104
Noninterest income......       2,486         2,463      2,516      2,964        2,793         2,360      1,987      1,890
Noninterest expense.....       9,044         8,310      8,486      8,500        8,846         8,346      8,317      7,701
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net income before taxes.       2,952         2,740      2,751      2,839        3,398         2,660      2,326      2,293
Provision for income
  taxes.................         910           800        880        910        1,107           848        765        780
                          -----------  ------------  ---------  ---------  -----------  ------------  ---------  ---------
Net income.............. $     2,042  $      1,940  $   1,871  $   1,929  $     2,291  $      1,812  $   1,561  $   1,513
                          ===========  ============  =========  =========  ===========  ============  =========  =========
Net income per share
  basic................. $      0.18  $       0.17  $    0.17  $    0.17  $      0.21  $       0.16  $    0.14  $    0.14
Net income per share
  diluted............... $      0.17  $       0.17  $    0.16  $    0.17  $      0.20  $       0.16  $    0.14  $    0.13

None.

1. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective.
2. There was no change in our internal control over financial reporting that occurred during the fourth quarter of 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Reference is made to the Company's Proxy Statement for the May 27, 2004 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 27, 2004 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 27, 2004 Annual Meeting of Shareholders.

Information concerning certain relationships and related transactions with officers, directors, and the Company, and equity compensation plan information, is incorporated by reference from the text under the caption "Transactions with Management and Others" in the Proxy Statement for the May 27, 2004 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 "Principal Accounting Firm Fees" in the Proxy Statement for the May 27, 2004 Annual Meeting of Shareholders.

The Financial Statements of the Company and the independent auditors' report are set forth on pages 51 through 78.

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.

The exhibit list required by this Item is incorporated by reference to the Exhibit Index included in this report.

The Registrant furnished a Current Report on Form 8-K dated January 20, 2004 under Items 7 and 12, to report its year end 2003 financial results, 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.

To the Board of Directors and Shareholders of
Heritage Commerce Corp:

We have audited the accompanying consolidated balance sheets of Heritage Commerce Corp and subsidiary (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Heritage Commerce Corp and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

San Jose, California
February 20, 2004

HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS

                                                                               December 31,
                                                                          ----------------------
(Dollars in thousands)                                                       2003        2002
------------------------------------------------------------------------  ----------  ----------
                                 ASSETS
Cash and due from banks................................................. $   42,017  $   42,632
Federal funds sold......................................................     72,200      44,000
                                                                          ----------  ----------
                 Total cash and cash equivalents........................    114,217      86,632
Securities available-for-sale, at fair value............................    153,473     126,443
Loans held for sale, at lower of cost or market.........................     30,638      28,084
Loans, net of deferred costs of $863 and $117 for 2003 and 2002.........    666,088     673,907
Allowance for probable loan losses......................................    (13,451)    (13,227)
                                                                          ----------  ----------
                 Loans, net.............................................    652,637     660,680
Premises and equipment, net.............................................      4,034       5,194
Accrued interest receivable and other assets............................     20,425      24,549
Company owned life insurance ...........................................     25,273      23,898
Other investments.......................................................      2,504       3,272
                                                                          ----------  ----------
                TOTAL................................................... $1,003,201  $  958,752
                                                                          ==========  ==========
                  LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Deposits
       Demand, noninterest bearing...................................... $  238,423  $  248,616
       Demand, interest bearing.........................................    105,260      94,309
       Savings and money market.........................................    345,886     290,417
       Time deposits, under $100........................................     39,869      46,341
       Time deposits, $100 and over.....................................    105,972     162,253
                                                                          ----------  ----------
  Total deposits........................................................    835,410     841,936
  Accrued interest payable and other liabilities........................     10,643      11,599
  Other borrowings......................................................     43,600          --
  Notes payable to subsidiary grantor trusts............................     23,702      23,000
                                                                          ----------  ----------
                 Total liabilities......................................    913,355     876,535
                                                                          ----------  ----------
Commitments and contingencies
Shareholders' equity:
  Preferred stock, no par value; 10,000,000 shares authorized: none
     outstanding........................................................         --          --
  Common stock, no par value; 30,000,000 shares authorized; shares
     outstanding: 11,381,037 in 2003 and 11,214,414 in 2002.............     65,234      64,002
  Unallocated ESOP shares...............................................       (443)       (693)
  Accumulated other comprehensive income,  net of taxes.................         79       1,714
  Retained earnings.....................................................     24,976      17,194
                                                                          ----------  ----------
                 Total shareholders' equity.............................     89,846      82,217
                                                                          ----------  ----------
                 TOTAL.................................................. $1,003,201  $  958,752
                                                                          ==========  ==========

See notes to consolidated financial statements.

HERITAGE COMMERCE CORP
CONSOLIDATED INCOME STATEMENTS

                                                                           Years ended December 31,
                                                                     ----------------------------------
(Dollars in thousands, except per share data)                           2003        2002        2001
-------------------------------------------------------------------  ----------  ----------  ----------
Interest income:
  Loans, including fees............................................ $   42,934  $   46,609  $   57,153
  Securities, taxable..............................................      4,198       4,576       4,399
  Securities, non-taxable..........................................        411         500         870
  Interest bearing deposits in other financial institutions........         44          88         157
  Federal funds sold...............................................        509         983       2,426
                                                                     ----------  ----------  ----------
Total interest income..............................................     48,096      52,756      65,005
                                                                     ----------  ----------  ----------
Interest expense:
  Deposits.........................................................      7,806      13,353      22,597
  Subsidiary grantor trusts........................................      1,935       1,871       1,644
  Other............................................................        262          13         125
                                                                     ----------  ----------  ----------
Total interest expense.............................................     10,003      15,237      24,366
                                                                     ----------  ----------  ----------
Net interest income before provision for probable loan losses......     38,093      37,519      40,639
Provision for probable loan losses.................................      2,900       2,663       1,910
                                                                     ----------  ----------  ----------
Net interest income after provision for probable loan losses.......     35,193      34,856      38,729
                                                                     ----------  ----------  ----------
Noninterest income:
  Gain on sale of loans............................................      2,228       2,262       1,758
  Servicing income.................................................      1,819       1,317         721
  Service charges and other fees on deposit accounts...............      1,810       1,425         967
  Appreciation of company owned life insurance.....................      1,151       1,113       1,029
  Brokered fees......................................................    1,012       1,085         626
  Gain on sales of securities available-for-sale...................        735       1,036         732
  Gain on sale of credit card portfolio............................         --         172          --
  Other............................................................      1,674         620         464
                                                                     ----------  ----------  ----------
Total noninterest income...........................................     10,429       9,030       6,297
                                                                     ----------  ----------  ----------
Noninterest expenses:
  Salaries and employee benefits...................................     17,975      18,067      18,119
  Occupancy........................................................      3,531       3,168       2,847
  Furniture and equipment..........................................      1,588       1,503       1,453
  Professional fees................................................      1,548       1,563       1,447
  Loan origination costs.............................................    1,439       1,277       1,335
  Client services..................................................      1,018       1,100       1,889
  Advertising and promotion........................................        747         737       1,116
  Stationery & supplies............................................        324         345         489
  Telephone........................................................        311         338         358
  Loss on disposition of OREO......................................         76          --          --
  Other............................................................      5,783       5,111       4,295
                                                                     ----------  ----------  ----------
Total noninterest expenses.........................................     34,340      33,209      33,348
                                                                     ----------  ----------  ----------
Income before provision for income taxes...........................     11,282      10,677      11,678
Provision for income taxes.........................................      3,500       3,500       4,410
                                                                     ----------  ----------  ----------
Net income......................................................... $    7,782  $    7,177  $    7,268
                                                                     ==========  ==========  ==========
Earnings per share:
   Basic........................................................... $     0.69  $     0.65  $     0.66
   Diluted......................................................... $     0.67  $     0.63  $     0.65

See notes to consolidated financial statements.

HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

                                                               Accumulated
                                                                  Other
                                         Common Stock         Comprehensive                              Total         Other
                                      ----------------------     Income      Unallocated  Retained    Shareholders' Comprehensive
(Dollars in thousands)                  Shares      Amount    (Net of Taxes) ESOP Shares  Earnings       Equity        Income
                                      -----------  ---------  -------------  ----------  -----------  ------------  ------------
BALANCES, JANUARY  1, 2001........... 10,939,124  $  62,469  $         515  $       --  $     2,749  $     65,733  $
Net income...........................         --         --             --          --        7,268         7,268         7,268
Net change in unrealized
loss on securities
available-for-sale, net of
reclassification adjustment
and taxes............................         --         --            506          --           --           506           506
                                                                                                                    ------------
   Total comprehensive income........                                                                              $      7,774
                                                                                                                    ============
Unallocated ESOP shares..............         --         --             --        (901)          --          (901)
Stock options exercised..............    175,843      1,067             --          --           --         1,067
                                      -----------  ---------  -------------  ----------  -----------  ------------
BALANCES, DECEMBER 31, 2001.......... 11,114,967     63,536          1,021        (901)      10,017        73,673
Net income...........................         --         --             --          --        7,177         7,177  $      7,177
Net change in unrealized
gain on securities
available-for-sale, net of
reclassification adjustment
and taxes............................         --         --            693          --           --           693           693
                                                                                                                    ------------
   Total comprehensive income........                                                                              $      7,870
                                                                                                                    ============
Amortization of stock compensation...         --         --             --         208           --           208
Additional paid-in-capital in ESOP...         --         45             --          --           --            45
Stock options exercised..............     99,447        421             --          --           --           421
                                      -----------  ---------  -------------  ----------  -----------  ------------
BALANCES, DECEMBER 31, 2002.......... 11,214,414     64,002          1,714        (693)      17,194        82,217
Net income...........................         --         --             --          --        7,782         7,782  $      7,782
Net change in unrealized
loss on securities
available-for-sale, net of
reclassification adjustment
and taxes............................         --         --         (1,635)         --           --        (1,635)       (1,635)
                                                                                                                    ------------
   Total comprehensive income........                                                                              $      6,147
                                                                                                                    ============
Amortization of stock compensation...         --         --             --         250           --           250
Additional paid-in-capital in ESOP...         --         59             --          --           --            59
Stock options exercised..............    166,623      1,173             --          --           --         1,173
                                      -----------  ---------  -------------  ----------  -----------  ------------
BALANCES, DECEMBER 31, 2003.......... 11,381,037  $  65,234  $          79  $     (443) $    24,976  $     89,846
                                      ===========  =========  =============  ==========  ===========  ============

See notes to consolidated financial statements.

HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                           Years ended December 31,
                                                                       -------------------------------
(Dollars in thousands)                                                   2003       2002       2001
---------------------------------------------------------------------  ---------  ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $   7,782  $   7,177  $   7,268
Adjustments to reconcile net income to net cash provided by
  operating activities:
   Loss on disposals of property and equipment.......................       (35)      (100)        --
   Depreciation and amortization.....................................     1,995      1,828      1,527
   Provision for probable loan losses................................     2,900      2,663      1,910
   Gain on sales of securities available-for-sale (AFS)..............      (735)    (1,036)      (732)
   Provision for deferred income taxes...............................       919     (1,188)     2,451
   Amortization / accretion of discounts and premiums on securities..       591        230       (668)
   Gain on sale of loans.............................................    (2,228)    (2,262)    (1,758)
   Proceeds from sales of loans held for sale........................    46,985     52,200     44,371
   Originations of loans held for sale...............................   (79,927)   (66,108)   (52,411)
   Maturities of loans held for sale.................................    32,616     20,547     13,268
   Appreciation of company owned life insurance......................    (1,151)    (1,113)    (1,029)
   Effect of changes in:
      Accrued interest receivable and other assets...................     3,486     (8,005)    (4,260)
      Accrued interest payable and other liabilities.................     1,153       (782)       671
                                                                       ---------  ---------  ---------
Net cash provided by operating activities............................    14,351      4,051     10,608
                                                                       ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans.....................................     5,143    (41,581)   (22,543)
Purchases of securities available-for-sale (AFS).....................  (152,989)   (84,260)   (82,098)
Maturities/Paydowns/Calls of securities available-for-sale (AFS).....    49,834     24,575     24,484
Proceeds from sales of securities available-for-sale (AFS)...........    73,256     40,033     59,080
Maturities/Paydowns/Calls of securities held-to-maturity (HTM).......        --      1,776      4,631
Purchases of company owned life insurance............................      (225)      (750)    (4,960)
Purchase of premises and equipment...................................      (800)    (1,452)      (908)
Redemption (purchase) of other investments...........................       768       (528)       167
                                                                       ---------  ---------  ---------
Net cash used in investing activities................................   (25,013)   (62,187)   (22,147)
                                                                       ---------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits..................................    (6,526)    34,028     69,722
Proceeds from issuance of mandatorily
 redeemable cumulative trust preferred
 securities of Subsidiary Grantor Trust..............................        --      4,000      5,000
Net proceeds from issuance of common stock...........................     1,173        421      1,067
Net change in other borrowings.......................................    43,600         --    (18,000)
                                                                       ---------  ---------  ---------
Net cash provided by financing activities............................    38,247     38,449     57,789
                                                                       ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents.................    27,585    (19,687)    46,250
Cash and cash equivalents, beginning of year.........................    86,632    106,319     60,069
                                                                       ---------  ---------  ---------
Cash and cash equivalents, end of year............................... $ 114,217  $  86,632  $ 106,319
                                                                       =========  =========  =========

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest......................................................... $  10,914  $  17,327  $  24,287
    Income taxes..................................................... $   2,735  $   4,480  $   6,600
Supplemental schedule of non-cash investing and financing activity:
Transfer of investment securities from HTM to AFS.................... $      --  $  13,619  $      --
Transfer of equipment under operating lease to loans................. $   3,931  $      --  $      --

See notes to consolidated financial statements.

The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices within the banking industry.

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

The consolidated financial statements include the accounts of the Company and its subsidiary bank. All significant intercompany accounts and transactions have been eliminated.

The Company also has four other subsidiaries, Heritage Capital Trust I, and Heritage Statutory Trust I, formed in 2000, Heritage Statutory Trust II, formed in 2001, and Heritage Statutory Trust III, formed in 2002, which are Delaware statutory business trusts formed for the exclusive purpose of issuing and selling trust preferred securities. These subsidiary trusts are not consolidated in the Company's consolidated financial statements and the subordinated debt payable to subsidiary grantor trusts is recorded as debt of the Company to the related trusts.

The Company considers all highly liquid debt instruments purchased with remaining terms to maturity of three months or less from the date of acquisition to be cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Generally, Federal funds are sold and purchased for one-day periods.

The Company classifies its securities into two categories, available-for-sale and held-to-maturity, at the time of purchase and reevaluates such classifications annually. Securities available-for-sale are recorded at fair value with a corresponding recognition of the net unrealized holding gain or loss, net of income taxes, as a net amount within accumulated other comprehensive income, which is a separate component of shareholders' equity, until realized. Securities held-to-maturity are recorded at amortized cost and are based on the Company's positive intent and ability to hold the securities to maturity. As of December 31, 2003 and 2002, all the Company's securities were classified as available-for-sale securities.

A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security.

Premiums and discounts are amortized, or accreted, over the life of the related investment security as an adjustment to income using a method that approximates the interest method. Interest income is recognized when earned. Realized gains and losses for securities classified as available-for- sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

The Company holds for sale the guaranteed portion of certain Small Business Administration (SBA) loans. These loans are carried at the lower of cost or market, based on the aggregate value of the portfolio.

Gains or losses on SBA loans held for sale are recognized upon completion of the sale, and are based on the difference between the net sales proceeds and the relative fair value of the guaranteed portion of the loan sold compared to the relative fair value of the unguaranteed portion.

The servicing assets that result from the sale of SBA loans, sold with servicing rights retained, are amortized over the lives of the loans using a method approximating the interest method.

The Company accounts for the transfer and servicing of financial assets based on the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Servicing assets are measured at their fair value and are amortized in proportion to and over the period of net servicing income and are assessed for impairment on an ongoing basis. Impairment is determined by stratifying the servicing rights based on interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance. Any servicing assets in excess of the contractually specified servicing fees have been reclassified at fair value as an interest- only (I/O) strip receivable and treated like an available for sale security. The servicing asset, net of any required valuation allowance, and I/O strip receivable are included in other assets.

Loans are stated at the principal amount outstanding net of deferred loan origination fees and costs. The majority of the Company's loans are at variable interest rates. Interest on loans is credited to income using the effective yield interest method.

Generally, if a loan is classified as non-accrual, the accrual of interest is discontinued, any accrued and unpaid interest is reversed, and the amortization of deferred loan fees and costs is discontinued. Loans are classified as non-accrual when the payment of principal or interest is 90 days past due, unless the amount is well secured and in the process of collection. Any interest or principal payments received on nonaccrual loans are applied toward reduction of principal. Nonaccrual loans generally are not returned to performing status until the obligation is brought current, has performed in accordance with the contract terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Renegotiated loans are those in which the Company has formally restructured a significant portion of the loan. The remaining portion is charged off, with a concession either in the form of below market rate financing, or debt forgiveness on the charged off portion. Loans that have been renegotiated and have not met specific performance standards for payment are classified as renegotiated loans within the classification of nonperforming assets. Upon payment performance, such loans may be transferred from nonperforming status to accrual status. At December 31, 2003 and 2002 the Company did not have any renegotiated loans outstanding.

Non-refundable loan fees and direct origination costs are deferred and recognized over the expected lives of the related loans using the effective yield interest method.

The Company maintains an allowance for probable loan losses to absorb probable losses inherent in the loan portfolio. The allowance is based on ongoing, monthly assessments of the probable estimated losses. Loans are charged against the allowance when management believes that the collectibility of the principal is doubtful. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances and the unallocated allowance.

The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on the Company's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.

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 has been incurred in excess of the amount determined by the application of the formula allowance. The allowance also incorporates the results of measuring impaired loans. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate, or the fair value of the collateral if the loan is collateral dependent.

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. The conditions evaluated in connection with the unallocated allowance may include existing general economic and business conditions affecting the key lending areas of the Company, in particular the technology industry and the real estate market, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results.

Premises and equipment are stated at cost. Depreciation and amortization are computed on a straight-line basis over the lesser of the lease terms or estimated useful lives of five to fifteen years, if appropriate. The Company evaluates the recoverability of long-lived assets on an on-going basis.

Through December 3, 2003, equipment under operating leases, where the Company was the lessor, were carried at cost less accumulated depreciation based on the terms of the agreement and included in other assets. For the year ended December 31, 2003 and 2002, depreciation expense, included in other noninterest expenses, was $985,200 and $83,400, respectively, and rental revenue, included in other noninterest income, on the leases was $1,195,000 and $103,000, respectively. Effective December 3, 2003, the agreement was amended resulting in a change in the classification from equipment under operating leases to a direct financing lease arrangement for a five year period through November 15, 2008, with the option of the borrower to repurchase the equipment at a predetermined price beginning in October 15, 2006. As a result, the Company transferred $3,931,000 from equipment under operating leases to the loan portfolio.

Other investments consist of FRB and FHLB stock.

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. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. Under this method, the computation of the net deferred tax liability or asset gives current recognition to changes in the tax laws.

Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. There were 253,805, 884,474 and 954,826 stock options in 2003, 2002, and 2001 considered to be antidilutive and excluded from the computation of diluted earnings per share. For each of the years presented, net income is the same for basic and diluted earnings per share. Reconciliation of weighted average shares used in computing basic and diluted earnings per share is as follows:

                                                               Years ended December 31,
                                                         -------------------------------------
                                                            2003         2002         2001
                                                         -----------  -----------  -----------
Weighted average common shares outstanding - used
in computing basic earnings per share..................  11,221,232   11,063,965   10,960,157
Dilutive effect of stock options outstanding,
using the treasury stock method........................     351,356      260,685      297,564
                                                         -----------  -----------  -----------
Shares used in computing diluted earnings per share....  11,572,588   11,324,650   11,257,721
                                                         ===========  ===========  ===========

The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. No compensation expense has been recognized in the financial statements for employee stock arrangements, as 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.

SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method at the grant date of all stock options. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock option awards. Those models also require subjective assumptions, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 84 months; risk-free interest rate, 0.9% for 2003, 1.2% for 2002, and 1.7% for 2001; stock volatility of 24% in 2003, 27% in 2002, and 31% in 2001; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach, and forfeitures are recognized as they occur.

Had compensation expense for the Company's stock option plan been determined under the requirements of SFAS No. 123 the Company's pro forma net income and earnings per common share would have been as follows:

                                                               Years ended December 31,
                                                           ---------------------------------
(Dollars in thousands, except per share data)                 2003        2002       2001
---------------------------------------------------------  ----------  ----------  ---------
Net income
    As reported.......................................... $    7,782  $    7,177  $   7,268
    Less: Compensation expense for amortization of fair
       value of stock awards, net of taxes...............       (681)       (678)      (622)
                                                           ----------  ----------  ---------
    Pro forma............................................ $    7,101  $    6,499  $   6,646
                                                           ==========  ==========  =========
Net income per common share - basic
    As reported.......................................... $     0.69  $     0.65  $    0.66
    Pro forma............................................ $     0.63  $     0.59  $    0.61

Net income per common share - diluted
    As reported.......................................... $     0.67  $     0.63  $    0.65
    Pro forma............................................ $     0.61  $     0.57  $    0.59

Comprehensive income includes net income and other comprehensive income, which represents the changes in its net assets during the period from non-owner sources. The Company's sources of other comprehensive income are unrealized gain and loss on securities available-for-sale and I/O strips, which are treated like available-for-sale securities, and are presented net of tax. Reclassification adjustments results from gains or losses on investment securities that were realized and included in net income of the current period that also had been included in other comprehensive incomes as unrealized holding gains and losses in the period in which they are excluded from comprehensive income of the current period. The following is a summary of the components of other comprehensive income:

                                                               Years ended December 31,
                                                         -------------------------------------
(Dollars in thousands)                                      2003         2002         2001
-------------------------------------------------------  -----------  -----------  -----------
Net income............................................. $     7,782  $     7,177  $     7,268
                                                         -----------  -----------  -----------
Other comprehensive income, net of tax:
  Net unrealized holding gains (losses) on available-
  for-sale securities during the year..................      (1,128)       1,389          961
  Less: reclassification adjustment for net realized
  gains on available-for-sale securities included
  in net income during the year........................         507          696          455
                                                         -----------  -----------  -----------
Other comprehensive income (loss) .....................      (1,635)         693          506
                                                         -----------  -----------  -----------
Comprehensive income................................... $     6,147  $     7,870  $     7,774
                                                         ===========  ===========  ===========

The Company, in conjunction with relationships with two of its borrowers, has received warrants to purchase preferred and common stock of these companies, subject to certain restrictions. The Company has determined that such warrants represent embedded derivatives. The estimated fair value of the warrants was zero and $10,000 at December 31, 2003 and 2002. The Company did not enter into freestanding derivatives contracts and was not involved in any hedging activities during 2003, 2002 and 2001.

HBC is an independent community business bank with three divisions: HBEB, HBSV, and BLA, which offer similar products to customers located in Santa Clara, Alameda, and Contra Costa counties of California. No customer accounts for more than 10 percent of revenue for HBC or the Company. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities. Accordingly, the Company and its subsidiary bank all operate as one business segment.

Certain amounts in the 2002 and 2001 financial statements have been reclassified to conform to the 2003 presentation. These reclassifications had no impact on retained earnings or net income.

Effective January 1, 2003, the Company adopted Statement of Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring and similar costs for restructuring activities initiated after December 31, 2002. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 did not have a material effect on the Company's financial position, results of operations, or cash flows.

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including indirect Guarantees of Indebtedness of Others." FIN 45 expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FIN 34, which is superceded. FIN 45 elaborates on the existing disclosure requirements for most guarantees and requires that guarantors recognize a liability for the fair value of guarantees at inception. The disclosure requirements of FIN 45 were effective for financial statement periods ending after December 15, 2002. The initial recognition and measurement provisions of FIN 45 are applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the measurement provisions of FIN 45 did not have a material effect on the Company's financial position, results of operations, or cash flows.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. The purpose of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and to determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate that entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, if they occur. New disclosure requirements are also prescribed by FIN 46. FIN 46 is effective for all VIE's created after January 31, 2003 and becomes effective for VIE's that existed before February 1, 2003 for the first period ending after December 15, 2003. As of December 31, 2003, the Company does not believe it has any VIE's for which this interpretation would require consolidation. However, under FIN 46, the Company's subsidiaries, which issued mandatorily redeemable trust preferred securities, are required to be deconsolidated. Deconsolidation of these entities resulted in total assets and total liabilities increasing by $702,000 and did not have any impact on the Company's results of operations.

The amortized cost and estimated fair value of securities as of December 31, 2003 were as follows:

                                                                  Gross        Gross      Estimated
                                                   Amortized   Unrealized   Unrealized      Fair
(Dollars in thousands)                               Cost         Gains       Losses        Value
------------------------------------------------  -----------  -----------  -----------  -----------
Securities available-for-sale:
    U.S. Treasury............................... $     6,989  $        26  $        --  $     7,015
    U.S. Government Agencies....................      36,138          105          128       36,115
    Municipals..................................      15,247          500           43       15,704
    FHLMC and FNMA Mortgage-Backed Securities...      79,996          263        1,490       78,769
    GNMA Mortgage-Backed Securities.............         799           47           --          846
    CMOs........................................      15,154           10          140       15,024
                                                  -----------  -----------  -----------  -----------
Total securities available-for-sale............. $   154,323  $       951  $     1,801  $   153,473
                                                  ===========  ===========  ===========  ===========

The amortized cost and estimated fair value of securities as of December 31, 2002 were as follows:

                                                                  Gross        Gross      Estimated
                                                   Amortized   Unrealized   Unrealized      Fair
(Dollars in thousands)                               Cost         Gains       Losses        Value
------------------------------------------------  -----------  -----------  -----------  -----------
Securities available-for-sale:
    U.S. Treasury............................... $     4,727  $        13  $        --  $     4,740
    U.S. Government Agencies....................      47,072          957           --       48,029
    Municipals..................................      11,382          752           --       12,134
    FHLMC and FNMA Mortgage-Backed Securities...      40,969          290           --       41,259
    GNMA Mortgage-Backed Securities.............       3,378          137           --        3,515
    CMOs........................................      14,023          111           --       14,134
    Corporate Bonds.............................       2,548           84           --        2,632
                                                  -----------  -----------  -----------  -----------
Total securities available-for-sale............. $   124,099  $     2,344  $        --  $   126,443
                                                  ===========  ===========  ===========  ===========

As of December 31, 2003, unrealized losses on securities were comprised of the following:

                                                Less Than 12 Months    12 Months or More
                                                ---------------------  --------------------
                                                 Market     Unrealized  Market    Unrealized
(Dollars in thousands)                            Value      Losses      Value     Losses
----------------------------------------------  ---------   ---------  ---------  ---------
    U.S. Government Agencies.................. $  15,756  $      128  $      --  $      --
    Municipals................................     6,488          43         --         --
    FHLMC and FNMA Mortgage-Backed Securities.    48,810       1,490         --         --
    CMOs......................................     7,502         140         --         --
                                                ---------   ---------  ---------  ---------
Total securities available-for-sale........... $  78,556  $    1,801  $      --  $      --
                                                =========   =========  =========  =========

At December 31, 2003, the Company held 87 securities, of which 29 had market values below amortized cost. No securities have been carried with an unrealized loss for over 12 consecutive months. The lower market values are due to either current interest rates or new preferred issue rates being greater at December 31, 2003. No security has sustained an other than temporary loss of value due to a downgrade in credit ratings. All principal amounts are expected to be paid when securities mature, or are called by the issuer. The lower market values are considered temporary and not a permanent impairment.

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, which has been included as a component of accumulated comprehensive income, 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.

The amortized cost and estimated fair values of securities as of December 31, 2003 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or pre-pay obligations with or without call or pre-payment penalties.

                                                     Available-for-sale
                                                  ------------------------
                                                                Estimated
                                                   Amortized      Fair
(Dollars in thousands)                               Cost         Value
------------------------------------------------  -----------  -----------
Due within one year............................. $       461  $       465
Due after one through five years................      52,252       52,719
Due after five through ten years................      14,371       14,251
Due after ten years.............................      87,239       86,038
                                                  -----------  -----------
Total........................................... $   154,323  $   153,473
                                                  ===========  ===========

Sales of securities available-for-sale resulted in gross realized gains of $816,000, $1,036,000, and $884,000 during the years ended December 31, 2003, 2002, and 2001, respectively.

Sales of securities available-for-sale resulted in gross realized losses of $81,000, nil, and $152,000 during the years ended December 31, 2003, 2002, and 2001, respectively.

Securities with amortized cost of $49,474,000 and $29,710,000 as of December 31, 2003 and 2002 were pledged to secure public and certain other deposits as required by law or contract.

Loans as of December 31, 2003 and 2002 were as follows:

(Dollars in thousands)                               2003         2002
------------------------------------------------  -----------  -----------
Loans held for sale............................. $    30,638  $    28,084
                                                  ===========  ===========
Loans held for investment
  Commercial.................................... $   281,561  $   263,144
  Real estate - mortgage........................     276,908      259,974
  Real estate - land and construction...........     101,082      147,822
  Direct financing leases.......................       3,931           --
  Consumer......................................       1,743        2,850
                                                  -----------  -----------
Total loans.....................................     665,225      673,790
Deferred loan costs.............................         863          117
Allowance for probable loan losses..............     (13,451)     (13,227)
                                                  -----------  -----------
Loans, net...................................... $   652,637  $   660,680
                                                  ===========  ===========

The following table represents the components of the Company's lease receivables as of December 31, 2003:

(Dollars in thousands)
------------------------------------
    Future minimum lease payments... $       4,746
    Residual interest...............          (424)
    Initial direct cost.............          (391)
    Unearned income.................            --
                                       ------------
Total............................... $       3,931
                                       ============

The following table represents the future minimum lease payments receivable by year, assuming the repurchase option is not exercised, as of December 31:

(Dollars in thousands)
------------------------------------
    2004............................ $         982
    2005............................           982
    2006............................           982
    2007............................           982
    2008............................           818
                                       ------------
Total............................... $       4,746
                                       ============

There are no contingent rental payments included in income in 2003.

Changes in the allowance for probable loan losses were as follows:

                                                        Years ended December 31,
                                                  -------------------------------------
(Dollars in thousands)                               2003         2002         2001
------------------------------------------------  -----------  -----------  -----------
Balance, beginning of year...................... $    13,227  $    11,154  $     9,651
                                                  -----------  -----------  -----------
Loans charged-off...............................      (2,906)        (936)        (709)
Recoveries......................................         230          346          302
                                                  -----------  -----------  -----------
Net loans charged-off...........................      (2,676)        (590)        (407)
Provision for probable loan losses..............       2,900        2,663        1,910
                                                  -----------  -----------  -----------
Balance, end of year............................ $    13,451  $    13,227  $    11,154
                                                  ===========  ===========  ===========

As of December 31, 2003, the Company had $3,972,000 in loans on nonaccrual status, which were considered impaired loans. The impaired loans had a related valuation allowance of $464,000 as of December 31, 2003. For the year ended December 31, 2003, the average recorded investment in loans for which impairment has been recognized was approximately $3,933,000. The Company had $608,000 in loans past due 90 days or more and still accruing interest and no restructured loans as of December 31, 2003.

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, 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.

For the year ended December 31, 2003, the Company had $167,000 in foregone interest income on nonaccrual loans and the Company recognized $3,000 in interest income for cash payments received on nonaccrual loans. For the years ended December 31, 2002 and 2001, the Company had $70,000 and zero 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. The Company did not recognize any such income for the year ended December 31, 2001.

Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) 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. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans.

HBC and its three divisions: HBEB, HBSV, and BLA make loans to executive officers, directors, and their affiliates in the ordinary course of business. These transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk or unfavorable terms for the Bank.

The following table presents the loans outstanding to related parties, with interest rates at December 31, 2003, ranging from 5% to 6%, for the years ended December 31, 2003 and 2002:

(Dollars in thousands)                               2003         2002
------------------------------------------------  -----------  -----------
Beginning balance............................... $    11,155  $     4,077
Advances on loans during the year...............       1,817        7,413
Repayment on loans during the year..............      (7,722)        (335)
                                                  -----------  -----------
Ending balance.................................. $     5,250  $    11,155
                                                  ===========  ===========

At December 31, 2003 and 2002, the Company serviced loans guaranteed by the Small Business Administration which it had sold to the secondary market of approximately $117,770,000 and $83,008,000.

At December 31, 2003 and 2002, the balance of the servicing assets was $1,876,000 and $1,538,000, respectively. There was no valuation allowance as of December 31, 2003 and 2002 as the fair market value of the assets was greater than the carrying value. At December 31, 2003 and 2002, the balance of the I/O strip receivable was $2,803,000 net of an unrealized gain of $925,000 and $2,839,000 net of an unrealized gain of $463,000. These assets represent the servicing spread generated from the sold guaranteed portions of SBA loans. Servicing income from these loans was $1,819,000 and $1,317,000 in 2003 and 2002. Amortization of the related assets for 2003 and 2002 was $1,346,000 and $837,000, respectively. In recording the initial value of the servicing assets and the fair value of the I/O strip 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, 2003, 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 loan 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.

Premises and equipment as of December 31, 2003 and 2002 were as follows:

(Dollars in thousands)                               2003         2002
------------------------------------------------  -----------  -----------
Furniture and equipment......................... $     4,145  $     5,175
Leasehold improvements..........................       4,339        4,285
                                                  -----------  -----------
                                                       8,484        9,460
Accumulated depreciation and amortization.......      (4,450)      (4,266)
                                                  -----------  -----------
Premises and equipment, net..................... $     4,034  $     5,194
                                                  ===========  ===========

(Dollars in thousands)
------------------------------------------------
Year
2004............................................ $   129,898
2005............................................      11,812
2006............................................       3,921
2007 and After..................................         210
                                                  -----------
Total time deposits............................. $   145,841
                                                  ===========

                                                               December 31,
                                                  -------------------------------------
(Dollars in thousands)                               2003         2002         2001
------------------------------------------------  -----------  -----------  -----------
FHLB short-term borrowings...................... $    15,000  $        --  $        --
Long-term borrowings............................      28,600           --           --
                                                  -----------  -----------  -----------
Total other borrowings.......................... $    43,600  $        --  $        --
                                                  ===========  ===========  ===========

(Dollars in thousands)                                 2004      2005      2006      2007      2008    There After   Total
--------------------------------------------------   --------  --------  --------  --------  --------  ----------  ---------
    FHLB short-term borrowings....................  $ 15,000  $     --  $     --  $     --  $     --  $       --  $  15,000
    Long-term borrowings..........................  $  8,800  $  7,100  $  4,300  $  4,200  $  4,200  $       --  $  28,600

(Dollars in thousands)
------------------------------------------------------------------------
    Subordinated debentures due to Heritage Capital Trust I with
    interest payable semi-anually at 10.875%, redeemable with a
    premium beginning March 8, 2010 and with no premium beginning
    March 8, 2020 and due March 8, 2030................................. $    7,217
    Subordinated debentures due to Heritage Statutory Trust I with
    interest payable semi-anually at 10.6%, redeemable with a
    premium beginning September 7, 2010 and with no premium beginning
    September 7, 2020 and due September 7, 2030.........................      7,206
    Subordinated debentures due to Heritage Statutory Trust II with
    interest payable semi-anually based on 3-month Libor plus 3.58%
    (4.75% at December 31, 2003), redeemable with a premium beginning
    July 31, 2006 and with no premium beginning July 31, 2011 and
    due July 31, 2031...................................................      5,155
    Subordinated debentures due to Heritage Statutory Trust III with
    interest payable semi-anually based on 3-month Libor plus 3.40%
    (4.57% at December 31, 2003), redeemable with a premium beginning
    September 26, 2007 and with no premium beginning September 26,
    2012 and due September 26, 2032.....................................      4,124
                                                                           ---------
Total................................................................... $   23,702
                                                                           =========

                                                               December 31,
                                                  -------------------------------------
(Dollars in thousands)                               2003         2002         2001
------------------------------------------------  -----------  -----------  -----------
Current:
  Federal....................................... $     1,632  $     3,696  $       534
  State.........................................         948          992        1,425
                                                  -----------  -----------  -----------
Total current...................................       2,580        4,688        1,959
                                                  -----------  -----------  -----------
Deferred:
  Federal.......................................         663         (830)       1,911
  State.........................................         257         (358)         540
                                                  -----------  -----------  -----------
Total deferred..................................         920       (1,188)       2,451
                                                  -----------  -----------  -----------
Provision for income taxes...................... $     3,500  $     3,500  $     4,410
                                                  ===========  ===========  ===========

                                                               December 31,
                                                  -------------------------------------
                                                     2003         2002         2001
                                                  -----------  -----------  -----------
Statutory federal income tax rate...............        35.0 %       35.0 %       35.0 %
State income taxes, net of federal tax benefit..         5.2          4.5          4.9
Low income housing credits......................        (2.6)          --           --
Non-taxable interest income.....................        (1.2)        (1.6)        (2.2)
Officers' life insurance........................        (3.6)        (3.5)        (3.0)
Other...........................................        (1.8)        (1.6)         3.1
                                                  -----------  -----------  -----------
Effective tax rate..............................        31.0 %       32.8 %       37.8 %
                                                  ===========  ===========  ===========

                                                       December 31,
                                                  ------------------------
(Dollars in thousands)                               2003         2002
------------------------------------------------  -----------  -----------
Deferred tax assets:
    Allowance for loan losses................... $     5,656  $     5,376
    Securities available-for-sale.................        32           --
    Accrued expenses............................       1,729        1,185
    FHLB stock..................................         602           --
    State income taxes..........................         332          347
    Net operating loss carryforward.............         225          306
    Other.......................................         678          426
                                                  -----------  -----------
Total deferred tax assets.......................       9,254        7,640
                                                  -----------  -----------
Deferred tax liabilities:
    Securities available-for-sale...............          --       (1,142)
    Leases......................................        (455)          --
    Loan fees...................................        (112)        (112)
    Other.......................................        (207)          --
                                                  -----------  -----------
Total deferred tax liabilities..................        (774)      (1,254)
                                                  -----------  -----------
Net deferred tax assets......................... $     8,480  $     6,386
                                                  ===========  ===========

                                                                                     Weighted
                                                                          Number      Average
                                                                            of       Exercise
                                                                          Shares       Price
                                                                        -----------  ---------
Options Outstanding at January 1, 2001
(1,086,985 exercisable at a weighted average exercise price of $6.54)..  1,573,833  $    7.80
Granted (weighted average fair value of $3.14).........................    181,500  $    8.22
Exercised..............................................................   (175,842) $    3.70
Cancelled..............................................................    (32,840) $   10.78
                                                                        -----------
Options Outstanding at December 31, 2001
(1,148,381 exercisable at weighted average exercise price of $7.69)....  1,546,651  $    8.25
Granted (weighted average fair value of $2.70).........................    300,500  $    8.63
Exercised..............................................................    (99,447) $    2.80
Cancelled..............................................................   (149,692) $   11.14
                                                                        -----------
Options Outstanding at December 31, 2002
(1,144,948 exercisable at weighted average exercise price of $8.18)....  1,598,012  $    8.39
Granted (weighted average fair value of $2.39).........................     94,438  $   10.95
Exercised..............................................................   (166,623) $    5.57
Cancelled..............................................................    (66,989) $    9.45
                                                                        -----------
Options Outstanding at December 31, 2003
(1,134,344 exercisable at weighted average exercise price of $8.69)....  1,458,838  $    8.82
                                                                        ===========

                                   Weighted
                                    Average    Weighted                Weighted
                                   Remaining    Average                 Average
Range of               Number     Contractual  Exercise     Number     Exercise
Exercise Prices      Outstanding  Life (Yrs.)    Price   Exercisable     Price
------------------- ------------- -----------  --------- ------------  ---------
$ 1.42 -  $4.41....      232,272        0.99  $    3.04      232,272  $    3.04
$ 4.42 -  $5.32....       45,939        3.45  $    5.23       45,939  $    5.23
$ 5.33 -  $9.70....      688,944        7.01  $    8.81      440,841  $    8.92
$ 9.71 -  $16.37...      491,683        6.06  $   11.92      415,292  $   12.00
                    -------------                        ------------
$ 1.42 -  $16.37...    1,458,838        5.62  $    8.82    1,134,344  $    8.69
                    =============                        ============

(Dollars in thousands)
Year ending December 31,
---------------------------------------------------------
   2004.................................................. $    2,289
   2005..................................................      2,146
   2006..................................................      1,867
   2007..................................................      1,579
   2008..................................................      1,136
 Thereafter..............................................      1,715
                                                           ----------
 Total................................................... $   10,732
                                                           ==========

(Dollars in thousands)                                        2003        2002
---------------------------------------------------------  ----------  ----------
Change in projected benefit obligation
  Projected benefit obligation at beginning of year...... $    3,350  $    2,399
  Service cost...........................................        457         636
  Interest cost..........................................        198         153
  Actuarial (gain)/loss..................................        (43)        162
                                                           ----------  ----------
  Projected benefit obligation at end of year............ $    3,962  $    3,350
                                                           ==========  ==========

Change in Plan assets
   Fair value of Plan assets at beginning of year........ $       --  $       --
   Fair value of Plan assets at end of year.............. $       --  $       --

Funding
   Unfunded Status....................................... $   (3,962) $   (3,350)
   Unrecognized net actuarial gain.......................       (167)       (125)
                                                           ----------  ----------
   Accrued pension cost.................................. $   (4,129) $   (3,475)
                                                           ==========  ==========

Weighted-average assumptions as of December 31
   Discount rate.........................................       7.00%       7.00%
   Rate of compensation increase.........................         N/A         N/A
   Expected return on Plan assets........................         N/A         N/A

(Dollars in thousands)                                        2003        2002
---------------------------------------------------------  ----------  ----------
Components of net periodic benefits cost
   Service cost.......................................... $      457  $      636
   Interest cost.........................................        198         153
   Amortization of (gain)/loss...........................        (23)        130
                                                           ----------  ----------
   Net periodic benefit cost............................. $      632  $      919
                                                           ==========  ==========

                                                              2003        2002
                                                           ----------  ----------
Discount rate............................................       7.00%       7.00%
Rate of compensation increase............................         N/A         N/A
Expected return on Plan assets...........................         N/A         N/A

                                                                         2003                    2002
                                                                ----------------------  --------------------
                                                                            Estimated              Estimated
                                                                 Carrying      Fair     Carrying     Fair
(Dollars in thousands)                                           Amounts      Value      Amounts     Value
--------------------------------------------------------------  ----------  ----------  ---------  ---------
Assets
  Cash and cash equivalents................................... $  114,217  $  114,217  $  86,632  $  86,632
  Securities..................................................    153,473     153,473    126,443    126,443
  Loans, including loans held for sale, net...................    683,275     682,120    688,764    690,231
  Other investments, including company owned life insurance...     27,777      27,777     27,170     27,170


Liabilities
  Time deposits............................................... $  145,841  $  146,403  $ 208,594  $ 211,198
  Other deposits..............................................    689,569     689,569    633,342    633,342
  Other borrowings............................................     43,600      44,843         --         --
  Notes payable subsidiary grantor trusts.....................     23,702      21,859     23,000     24,716

(Dollars in thousands)                                             2003        2002
--------------------------------------------------------------  ----------  ----------
Commitments to extend credit.................................. $  269,504  $  303,510
Standby letters of credit.....................................      4,449       3,817
                                                                ----------  ----------
                                                               $  273,953  $  307,327
                                                                ==========  ==========

                                      Actual                For Capital Adequacy Purposes
                                --------------------  ------------------------------------------
(Dollars in thousands)           Amount      Ratio     Amount                 Ratio
------------------------------  ---------  ---------  ---------  -------------------------------
 As of December 31, 2003
 Total Capital................ $ 121,294       14.6% $  66,462   (greater than or equal to) 8.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $ 110,891       13.4% $  33,102   (greater than or equal to) 4.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $ 110,891       11.2% $  39,604   (greater than or equal to) 4.0%
  (to average assets)

 As of December 31, 2002
 Total Capital................ $ 112,529       13.4% $  67,181   (greater than or equal to) 8.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $ 101,966       12.1% $  33,708   (greater than or equal to) 4.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $ 101,966       10.7% $  38,118   (greater than or equal to) 4.0%
  (to average assets)

                                                                                                     To Be Well-Capitalized Under Prompt
                                      Actual                For Capital Adequacy Purposes                Corrective Action Provisions
                                --------------------  ------------------------------------------  ------------------------------------------
(Dollars in thousands)           Amount      Ratio     Amount                 Ratio                Amount                 Ratio
------------------------------  ---------  ---------  ---------  -------------------------------  ---------  -------------------------------
 As of December 31, 2003
 Total Capital................ $ 113,899       13.7% $  66,510   (greater than or equal to) 8.0% $  83,138   (greater than or equal to) 10.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $ 103,496       12.5% $  33,119   (greater than or equal to) 4.0% $  49,678   (greater than or equal to)  6.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $ 103,496       10.4% $  39,806   (greater than or equal to) 4.0% $  49,758   (greater than or equal to)  5.0%
  (to average assets)

 As of December 31, 2002
 Total Capital................ $ 104,735       12.3% $  67,960   (greater than or equal to) 8.0% $  84,950   (greater than or equal to) 10.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $  94,085       11.1% $  33,980   (greater than or equal to) 4.0% $  50,970   (greater than or equal to)  6.0%
  (to risk-weighted assets)
 Tier 1 Capital............... $  94,085        9.8% $  38,533   (greater than or equal to) 4.0% $  48,166   (greater than or equal to)  5.0%
  (to average assets)

                                                                   December 31,  December 31,
(Dollars in thousands)                                                 2003          2002
-----------------------------------------------------------------  ------------  ------------
Cash and cash equivalents........................................ $      8,880  $      9,133
Investment in and advancements to subsidiary.....................      104,465        96,655
Other assets.....................................................        1,300         2,517
                                                                   ------------  ------------
        Total.................................................... $    114,645  $    108,305
                                                                   ============  ============

Liabilities...................................................... $      1,097  $      2,386
Amounts due to subsidiaries......................................       23,702        23,702
Shareholders' equity.............................................       89,846        82,217
                                                                   ------------  ------------
        Total.................................................... $    114,645  $    108,305
                                                                   ============  ============

                                                                               For the Years Ended,
                                                                   ----------------------------------------
                                                                   December 31,  December 31,  December 31,
(Dollars in thousands)                                                 2003          2002          2001
-----------------------------------------------------------------  ------------  ------------  ------------
Interest income.................................................. $        122  $         95  $        141
Management and service fees......................................           --        10,747         8,573
Interest expense.................................................       (1,965)       (1,920)       (1,640)
Other expenses...................................................          (71)      (11,176)      (11,283)
                                                                   ------------  ------------  ------------
Loss before equity in net income of subsidiary banks.............       (1,914)       (2,254)       (4,209)
Equity in undistributed net income of subsidiary.................        9,096         8,692         9,897
Income tax benefit ..............................................          600           739         1,580
                                                                   ------------  ------------  ------------
Net income.......................................................        7,782         7,177         7,268
Other comprehensive income (loss)................................       (1,635)          693           506
                                                                   ------------  ------------  ------------
Comprehensive income............................................. $      6,147  $      7,870  $      7,774
                                                                   ============  ============  ============

                                                                               For the Years Ended,
                                                                   ----------------------------------------
                                                                   December 31,  December 31,  December 31,
(Dollars in thousands)                                                 2003          2002          2001
-----------------------------------------------------------------  ------------  ------------  ------------
Cash flows from operating activities:
Net Income....................................................... $      7,782  $      7,177  $      7,268
Adjustments to reconcile net income to net cash provided by
  (used in) operations:
   Provision for deferred income taxes...........................         (600)         (739)       (1,580)
   Equity in undistributed income of subsidiary..................       (9,096)       (8,692)       (9,897)
   Net change in other assets....................................          135          (416)           84
   Net change in other liabilities...............................          796         2,328         1,710
                                                                   ------------  ------------  ------------
Net cash used in by operating activities                                  (983)         (342)       (2,415)

Cash flows from investing activities:
   Cash distributed to Bank  subsidiaries........................           --            --        (2,750)
Net cash used in investing activities                              ------------  ------------  ------------
                                                                            --            --        (2,750)

Cash flows from financing activities:
   Proceeds from issuance of common stock........................        1,173           421         1,067
   Proceeds from issuance of long-term debt......................           --         4,000         5,000
   Other, net....................................................         (443)         (693)         (901)
                                                                   ------------  ------------  ------------
Net cash provided by financing activities........................          730         3,728         5,166
                                                                   ------------  ------------  ------------
Net increase (decrease) in cash and cash equivalents.............         (253)        3,386             1
Cash and cash equivalents, beginning of year.....................        9,133         5,747         5,746
                                                                   ------------  ------------  ------------
Cash and cash equivalents, end of year........................... $      8,880  $      9,133  $      5,747
                                                                   ============  ============  ============