<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                             _____________________


                                   FORM 10-Q



      [X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 1999

                                      OR

      [_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

   For the transition period from ____________________ to __________________

                        Commission file number: 0-29668


                            HIGHLAND BANCORP, INC.
            (Exact name of Registrant as specified in its charter)


               Delaware                                      95-4654552
               (State or other jurisdiction of          (I.R.S. Employer
               incorporation or organization)           Identification Number)


               601 South Glenoaks Boulevard
               Burbank, California                      91502
               (Address of principal executive office)  (Zip Code)


      Registrant's telephone number, including area code: (818) 848-4265

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____.
                                      ---

At November 5, 1999, 4,248,474 shares of the Registrant's common stock were
outstanding.
<PAGE>

                        PART 1.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

HIGHLAND BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollar amounts in thousands, except share data)

<TABLE>
<CAPTION>
                                                                        September 30,             December 31,
                                                                            1999                      1998
                                                                   --------------------      --------------------
<S>                                                                <C>                       <C>
                         ASSETS
Cash and cash equivalents                                          $             14,252                    28,776
Securities available for sale                                                    67,235                    53,374
Securities held to maturity (fair value of $9,171 in 1999
  and $11,877 in 1998)                                                            9,432                    11,926
Loans receivable, net                                                           517,437                   483,694
Real estate acquired through foreclosure, net                                       125                       630
Federal Home Loan Bank stock - at cost                                            8,095                     7,545
Accrued interest receivable                                                       4,256                     4,205
Premises and equipment, net                                                       2,062                     2,300
Deferred income taxes, net                                                        5,001                     4,409
Other assets                                                                      7,681                     7,944
                                                                   --------------------      --------------------
                                                                   $            635,576                   604,803
                                                                   ====================      ====================


        LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Deposits                                                         $            417,370                   388,047
  Federal Home Loan Bank advances                                               151,900                   150,900
  Securities sold under agreements to repurchase                                 10,000                    10,000
  Accounts payable and other liabilities                                          9,236                    10,416
  Income taxes payable                                                            1,017                     2,001
                                                                   --------------------      --------------------
         Total liabilities                                                      589,523                   561,364
                                                                   --------------------      --------------------

Shareholders' equity:
  Preferred stock - authorized 1,000,000 shares of $.01
    stated value; no shares issued                                                    -                         -
  Common stock - authorized 8,000,000 shares of $.01
    stated value, issued 4,662,987 shares in 1999 and
    2,331,174 shares in 1998                                                         47                        23
  Additional paid-in capital                                                     15,504                    16,279
  Retained earnings                                                              39,400                    32,952
  Treasury shares - 409,513 shares in 1999 and
    150,000 shares in 1998, at cost                                              (7,735)                   (5,800)
  Accumulated other comprehensive loss-unrealized
    losses on securities available-for-sale:                                     (1,163)                      (15)
                                                                   --------------------      --------------------
         Total shareholders' equity                                              46,053                    43,439
                                                                   --------------------      --------------------
                                                                   $            635,576                   604,803
                                                                   ====================      ====================
</TABLE>

                                                                               2
<PAGE>

HIGHLAND BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 Three months ended                      Nine months ended
                                                                   September 30,                           September 30,
                                                       -----------------------------------     -----------------------------------
                                                              1999                1998                1999                1998
                                                       ---------------     ---------------     ---------------     ---------------
<S>                                                    <C>                 <C>                 <C>                 <C>
Interest income:
  Loans                                                $        12,580              11,444              37,473              33,744
  Securities                                                     1,501               1,482               3,801               3,955
                                                       ---------------     ---------------     ---------------     ---------------
         Total interest income                                  14,081              12,926              41,274              37,699
                                                       ---------------     ---------------     ---------------     ---------------

Interest expense:
  Deposits                                                       4,952               4,891              14,105              14,203
  FHLB advances and other borrowings                             2,246               2,059               6,580               5,946
                                                       ---------------     ---------------     ---------------     ---------------
         Total interest expense                                  7,198               6,950              20,685              20,149
                                                       ---------------     ---------------     ---------------     ---------------

         Net interest income                                     6,883               5,976              20,589              17,550

Provision for losses on loans                                      600                 790               1,918               2,590
                                                       ---------------     ---------------     ---------------     ---------------
         Net interest income after provision for
            losses on loans                                      6,283               5,186              18,671              14,960

Noninterest income:
  Gain on sale of building                                           -               1,170                   -               1,170
  Gain on the sale of loans                                          -                   -                 169                 276
  Gain (loss) on the sale of securities available
    for sale                                                         -                  (1)                  -                  12
  Other                                                            666                 453               1,633               1,426
                                                       ---------------     ---------------     ---------------     ---------------
        Total noninterest income                                   666               1,622               1,802               2,884
                                                       ---------------     ---------------     ---------------     ---------------

Noninterest expense:
  General & administrative expenses
    Compensation and benefits                                    1,270               1,442               5,322               4,196
    Occupancy and equipment                                        317                 192                 913                 721
    FDIC insurance premiums                                         58                  58                 175                 168
    Service bureau and related equipment rental                    157                 142                 498                 436
    Other                                                          380                 541               1,311               1,429
                                                       ---------------     ---------------     ---------------     ---------------
         Total general and administrative expense                2,182               2,375               8,219               6,950

  (Income) expense from operation of real estate
    acquired through foreclosure                                   (69)                123                (152)                 12
                                                       ---------------     ---------------     ---------------     ---------------
        Total noninterest expense                                2,113               2,498               8,067               6,962
                                                       ---------------     ---------------     ---------------     ---------------
        Income before income taxes                               4,836               4,310              12,406              10,882
Income taxes                                                     2,003               1,780               5,132               4,500
                                                       ---------------     ---------------     ---------------     ---------------
        Net income                                               2,833               2,530               7,274               6,382
                                                       ---------------     ---------------     ---------------     ---------------
Other comprehensive income:
  Unrealized (losses) gains on securities
    available-for-sale                                            (513)                140              (1,740)                318
  Reclassification adjustment for gains (loss)
    included in income                                               -                  10                   -                  21
  Income taxes on other comprehensive income                       175                 (50)                592                (115)
                                                       ---------------     ---------------     ---------------     ---------------
         Other comprehensive (loss) income, net
           of tax                                                 (338)                100              (1,148)                224
                                                       ---------------     ---------------     ---------------     ---------------

Comprehensive income                                   $         2,495               2,630               6,126               6,606
                                                       ===============     ===============     ===============     ===============

Basic earnings per share                               $          0.65                0.55                1.66                1.38
                                                       ===============     ===============     ===============     ===============
Diluted earnings per share                             $          0.63                0.53                1.62                1.32
                                                       ===============     ===============     ===============     ===============
</TABLE>

                                                                               3
<PAGE>

HIGHLAND BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                                              Nine months ended Sept. 30,
                                                                                     ------------------------------------------
                                                                                              1999                   1998
                                                                                     -------------------    -------------------
<S>                                                                                  <C>                    <C>
Net cash flows from operating activities:
    Net income                                                                       $             7,274                  6,382
    Adjustments to reconcile net earnings to net cash provided by operating
     activities:
        Gain on sale of loans                                                                       (169)                  (276)
        Gain on sale of securities available-for-sale                                                  -                    (12)
        Gain on sale of building                                                                       -                 (1,170)
        Amortization of premiums on securities                                                       104                    275
        Federal Home Loan Bank stock dividends                                                      (300)                  (295)
        Deferred income taxes                                                                          -                   (273)
        Gain on sale of real estate acquired through foreclosure, net                               (135)                  (209)
        Deferred direct loan origination fees and costs, net                                        (722)                  (476)
        Amortization of deferred compensation expense                                                  -                     96
        Provision for losses on loans                                                              1,918                  2,590
        Increase in accrued interest receivable                                                      (51)                  (250)
        Depreciation                                                                                 355                    457
        Decrease (increase) in other assets                                                          263                 (1,540)
        Decrease in income taxes payable                                                            (984)                (1,716)
        (Decrease) increase in accounts payable and other liabilities                             (1,180)                 2,467
                                                                                     -------------------    -------------------
            Net cash provided by operating activities                                              6,373                  6,050
                                                                                     -------------------    -------------------

Cash flows from investing activities:
        Purchases of securities available-for-sale                                               (31,147)               (43,454)
        Sales and maturities of securities available-for-sale                                     15,501                 32,228
        Principal payments on securities held-to-maturity                                          2,435                  2,452
        Purchase of FHLB stock                                                                      (250)                     -
        Net increase in loans receivable                                                         (41,133)               (47,361)
        Net costs capitalized on real estate acquired through foreclosure                           (151)                  (236)
        Proceeds from the sale of loans                                                            6,285                  9,234
        Proceeds from the sale of real estate acquired through foreclosure                           869                  1,534
        (Purchases) sales of premises and equipment, net                                            (117)                 6,284
                                                                                     -------------------    -------------------
            Net cash used in investing activities                                                (47,708)               (39,319)
                                                                                     -------------------    -------------------

Cash flows from financing activities:
        Net increase in deposits                                                                  29,323                 30,653
        Common stock options exercised, including tax benefit                                      1,166                    197
        Dividends paid on common stock                                                              (826)                  (873)
        Repurchase of treasury stock                                                              (3,852)                (5,800)
        Proceeds from FHLB advances                                                               24,000                 55,000
        Repayments of FHLB advances                                                              (23,000)               (51,500)
        Increase in securities sold under agreements to repurchase                                     -                 10,000
                                                                                     -------------------    -------------------
            Net cash provided by financing activities                                             26,811                 37,677
                                                                                     -------------------    -------------------

Increase (decrease) in cash and cash equivalents                                                 (14,524)                 4,408
Cash and cash equivalents at beginning of period                                                  28,776                 26,420
                                                                                     -------------------    -------------------
Cash and cash equivalents at end of period                                           $            14,252                 30,828
                                                                                     ===================    ===================
Supplemental disclosures of cash flow information:
        Interest paid                                                                $            21,859                 20,369
                                                                                     ===================    ===================
        Income taxes paid                                                                          5,360                  6,475
                                                                                     ===================    ===================
Supplemental disclosure of noncash investing and financing activities:
        Acquisition of real estate in settlement of loans                            $               401                  3,598
        Loans made in conjunction with real estate sales                                             347                    956
                                                                                     ===================    ===================
</TABLE>

                                                                               4
<PAGE>

                     HIGHLAND BANCORP, INC. & SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
                              SEPTEMBER 30, 1999

NOTE A - BASIS OF PRESENTATION

The interim consolidated financial statements included herein have been prepared
by Highland Bancorp, Inc. (the "Company" or "Highland"), without audit, pursuant
to the rules and regulations of the Securities Exchange Act of 1934, as amended.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the unaudited financial statements and notes thereto, reflect all adjustments,
including normal recurring adjustments, necessary for a fair presentation of the
financial condition and net income and comprehensive income and cash flows for
the interim periods presented. The results of operations for the three and nine
months ended September 30, 1999 are not necessarily indicative of the results of
operations that may be expected for any other interim period or the year ending
December 31, 1999. These unaudited financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the Company's audited financial statements, and these interim financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.

Highland Bancorp, Inc. is the holding corporation for Highland Federal Bank and
its wholly owned subsidiaries, H.F.S. Corporation and Hi-Fed Insurance Agency
(collectively referred to as the "Bank"). The accounting and reporting policies
of the Company and the Bank conform to the prevailing practices within the
savings and loan industry. All significant intercompany balances and
transactions have been eliminated in consolidation.

NOTE B - EARNINGS PER SHARE

The following table reconciles the weighted average shares of common stock
outstanding used in the basic EPS calculation to that used in the diluted EPS
computation, as restated to reflect the 2 for 1 stock split, effected in the
form of a 100% stock dividend, paid on May 14, 1999 to shareholders of record as
of May 3, 1999.

                                                                               5
<PAGE>

<TABLE>
<CAPTION>
                                                      Three months ended                   Nine months ended
                                                        September 30,                        September 30,
                                             ----------------------------------   ----------------------------------
                                                    1999             1998                1999             1998
                                             ----------------------------------   ----------------------------------

<S>                                          <C>                      <C>         <C>                      <C>
Basic EPS - weighted average number of
  shares used in computation                         4,350,103        4,569,722           4,379,150        4,622,064

Effect of dilutive securities - incremental
 shares from outstanding stock options                 117,023          239,562             115,391          230,758
                                             ----------------------------------   ----------------------------------
Diluted EPS - weighted average number of
 shares used in computation                          4,467,126        4,809,284           4,494,541        4,852,822

                                             ==================================   ==================================
</TABLE>


NOTE C - SUBSEQUENT EVENT

On October 18, 1999, the Board of Directors declared a 6.25 cent per share cash
dividend, payable to common stockholders of record as of October 29, 1999, to be
paid on or before November 12, 1999.

                                                                               6
<PAGE>

HIGHLAND BANCORP, INC. & SUBSIDIARIES


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS

Overview

The Company reported net income for the three and nine months ended September
30, 1999, of $2.8 million, or $0.63 diluted earnings per share, and $7.3
million, or $1.62 diluted earnings per share, respectively, compared to net
income of $2.5 million, or $0.53 diluted earnings per share, and $6.4 million,
or $1.32 diluted earnings per share, for the three and nine months ended
September 30, 1998. Net interest income for the three months ended September 30,
1999, increased 15% when compared to the 1998 third quarter, and the nine months
ended September 30, 1999 recorded a 17% increase over the comparable 1998
period.

The Company reported general and administrative expenses of $2.2 million and
$8.2 million for the three and nine months ended September 30, 1999,
respectively, compared to $2.4 million and $7.0 million for the comparable 1998
periods. General and administrative expense as a percentage of average assets
equaled 1.36% and 1.76% for the three and nine months ended September 30, 1999,
respectively, compared to 1.63% and 1.64% for the comparable 1998 periods.


Net Interest Income

Net interest income varies based upon the difference (referred to as the
"interest rate spread") between (i) the yield on the Company's loan portfolio,
mortgage backed securities, investments and other interest-earning assets and
(ii) the rate paid by the Company on its deposits, borrowings and other
interest-bearing liabilities, as well as the relative amounts or volumes of the
Company's interest-earning assets and interest-bearing liabilities.

The following table indicates the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's total interest income and expense during the periods
indicated. Information is provided for each major component of interest-earning
assets and interest-bearing liabilities with respect to: (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) changes attributable to rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to both volume and rate have
been allocated proportionately to the change due to volume and the change due to
rate.

                                                                               7
<PAGE>

<TABLE>
<CAPTION>
                                              Three months ended               Nine months ended
                                              September 30, 1999              September 30, 1999
                                           compared to three months         compared to nine months
                                           ended September 30, 1998        ended September 30, 1998
                                          Increase (Decrease) due to      Increase (Decrease) due to
                                        -------------------------------------------------------------
                                                (In thousands)                  (In thousands)
                                           Volume      Rate     Net       Volume      Rate      Net
                                        -------------------------------------------------------------
<S>                                     <C>            <C>      <C>       <C>         <C>       <C>
Interest Income:
  Loans                                 $     1,460     (324)   1,136        4,841     (1,112)  3,729
  Securities                                     70      (51)      19           (7)      (147)   (154)
Total interest income on interest-      -----------------------------     ---------------------------
  earning assets                              1,530     (375)   1,155        4,834     (1,259)  3,575
                                        -----------------------------     ---------------------------

Interest Expense:
  Deposits                                      365     (304)      61          664       (762)    (98)
  FHLB advances and
     other borrowings                           264      (77)     187        1,074       (440)    634
                                        -----------------------------     ---------------------------
Total interest expense on interest-
  bearing liabilities                           629     (381)     248        1,738     (1,202)    536
                                        -----------------------------     ---------------------------
Change in net interest income           $       901        6      907        3,096        (57)  3,039
                                        =============================     ===========================
</TABLE>

Net interest income for the three and nine months ended September 30, 1999,
exceeded the comparable 1998 periods by $0.9 million and $3.0 million,
respectively. The increases in net interest income for the 1999 periods are
primarily attributable to increased amounts of net loans receivable outstanding
in the respective 1999 periods compared with 1998. The ratio of average
interest-earning assets to average interest-bearing liabilities increased to
108% and 106% for the three and nine months ended September 30, 1999,
respectively, compared to 106% and 103% for the comparable 1998 periods.
Additionally, for both 1999 and 1998, the Company has recognized interest income
related to the amortization of a deep discount of a small pool of real estate
loans purchased in late 1996. These loans will all mature in 1999. Without the
discount amortization on this pool of loans, the yield earned by the Company
would have been reduced by approximately 10 basis points for the nine months
ended September 30, 1999. The Company's net interest margin for the quarter and
nine months ended September 30, 1999, was 4.52% and 4.64%, respectively,
compared with a net interest margin of 4.41% and 4.42% for the same periods of
1998. The increase in the net interest margin in the 1999 third quarter and nine
month periods, compared with the net interest margin for the corresponding 1998
periods, is attributable principally to an increase in the Company's ratio of
interest-earning assets to interest-bearing liabilities and continued high
levels of loan prepayment penalties and accelerated recognition of net deferred
loan origination fees.

The Company's ability to continue to increase the size of its loan portfolio,
which creates a positive volume variance in net interest income, is dependent on
both economic and Bank regulatory issues. The Bank's ability to make new
commercial real estate loans, which represented 49% of the new loan volume for
the nine months ended September 30, 1999, is restricted by a regulatory limit on
the amount of total nonresidential real estate loans which cannot exceed a
maximum of 400% of the Bank's total regulatory capital. At September 30, 1999,
the Bank had $11.6 million of additional nonresidential real estate lending
capacity available under the 400% of capital test. Certain commercial real
estate loans can be held by the Bank under regulatory "commercial loan" limits,
which gives Highland limited capacity

                                                                               8
<PAGE>

beyond the 400% of capital test. The Bank is also subject to the "Qualified
Thrift Lender" ("QTL") test, which it must meet in order to retain its ability
to operate without restrictions as a savings institution, and which places
certain restrictions on the types of loans and investments that can be held by
the Bank. Under the QTL test, the Bank must maintain a minimum of 65% of its
assets in qualified thrift investments, which consist principally of residential
and small business loans and mortgage-backed securities. At September 30, 1999,
the Bank held 66.9% of its assets in qualified thrift investments.

The following table reflects activity in the Company's loan portfolio:

<TABLE>
<CAPTION>
                                                     For the nine months ended September 30,
                                                     ---------------------------------------
                (In thousands)                              1999                 1998
                                                     ---------------------------------------
<S>                                                  <C>                         <C>

Net loans at beginning of period                     $           483,694             427,237

Loans originated:
  Real estate loans:
     One-to-four family                                                -                 600
     Multi-family                                                 52,257              55,965
     Commercial                                                   63,256              42,180
     Construction and land                                        12,313              12,597
     Commercial and consumer                                           -                 983
                                                     ---------------------------------------
            Total loans originated                               127,826             112,325

Less:
  Principal payments (including payoffs)                          83,945              64,214
  Loan sales                                                       6,116               8,958
  Transfer to real estate owned                                      401               3,598
  Other, net                                                       3,621               1,219
                                                     ---------------------------------------
Loans receivable, net                                $           517,437             461,573
                                                     =======================================
</TABLE>

Provision and Allowance for Loan Losses

For the three and nine months ended September 30, 1999, the Company's provision
for loan losses totaled $0.6 million and $1.9 million, respectively, compared to
$0.8 million and $2.6 million for the comparable periods in 1998. The Company's
decreased provisions for the 1999 third quarter and nine months compared with
the comparable 1998 periods reflect the reduced levels of loan charge-offs
during 1999 compared to 1998 and continued low levels of non-performing loans as
a percentage of the Company's total loan portfolio, as well as Management's
assessment of risks associated with trends in economic and business conditions
in the Company's market. At September 30, 1999, the Company's nonperforming
assets, consisting of nonaccrual loans and REO, totaled $2.8 million, compared
to $6.1 million at September 30, 1998 and $3.0 million at December 31, 1998. The
Company's allowance for loan losses as a percentage of gross loans receivable
was 2.15% at September 30, 1999, compared to 2.00% at September 30, 1998 and
2.01% at December 31, 1998.

                                                                               9
<PAGE>

The following table sets forth information regarding the Company's allowance for
loan losses at the dates and the periods indicated (in thousands):

<TABLE>
<CAPTION>

                                                        For the nine             For the nine               For the year
                                                        months ended             months ended                  ended
                                                     September 30, 1999       September 30, 1998         December 31, 1998
                                                     ------------------       ------------------         -----------------

<S>                                                  <C>                      <C>                        <C>
Balance at beginning of period                       $            9,909                    8,848                     8,848
Provision for loss                                                1,918                    2,590                     3,315
Chargeoffs:
   Real estate loans:
   One-to-four family                                                24                       82                        91
   Multi-family                                                     423                      964                     1,144
   Commercial                                                        30                      869                       968
   Construction and land                                              -                       47                        47
   Consumer                                                           -                        4                         4
                                                     ------------------       ------------------         -----------------
            Total                                                   477                    1,966                     2,254
Recoveries:
   Multi-family                                                      70                        -                         -
                                                     ------------------       ------------------         -----------------
Balance at end of period                             $           11,420                    9,472                     9,909
                                                     ==================       ==================         =================
</TABLE>


While management believes that the allowance for loan losses at September 30,
1999, was adequate to absorb the known and inherent risks in the loan portfolio,
no assurances can be given that future economic conditions which may adversely
affect the Company's market areas or other circumstances will not result in
increases in problem loans and future loan losses, which may not be covered
completely by the current allowance or may require provisions for loan losses in
excess of past provisions, which would have an adverse effect on the Company's
financial condition and results of operations.


The following table sets forth information regarding nonperforming assets and
certain ratios at the dates indicated (in thousands):

                                                                              10
<PAGE>

<TABLE>
<CAPTION>
                                                                   As of               As of
                                                            September 30, 1999   December 31, 1998
                                                            ------------------   -----------------
<S>                                                        <C>                   <C>
Nonaccrual loans:
Real estate:
    One-to-four family                                     $             1,038                 526
    Multi-family                                                           367               1,379
    Commercial                                                           1,281                 423
  Consumer                                                                  37                  37
                                                           -------------------   -----------------
            Total                                                        2,723               2,365
REO                                                                        125                 630
                                                           ===================   =================
            Total nonperforming assets                     $             2,848               2,995
                                                           ===================   =================
Troubled debt restructurings                               $             2,808               3,017
                                                           ===================   =================

Allowance for loan losses as a percentage
  of gross loans receivable                                               2.15%               2.01%
Nonaccrual loans as a percentage of
  gross loans receivable                                                  0.51%               0.48%
Nonperforming assets as a percentage
  of total assets                                                         0.45%               0.50%
</TABLE>

Noninterest Income

Noninterest income for the three and nine months ended September 30, 1999, was
$0.7 million and $1.8 million, respectively, compared to $1.6 million and $2.9
million for the comparable periods of 1998. The Company realized a $1.2 million
gain on the sale of its headquarters building in the third quarter of 1998,
which accounts for virtually all the difference in the two years. The 1999 nine
months includes a $0.2 million gain on the sale of $6.1 million in loans, while
the 1998 nine month period includes $0.3 million gain on sale of $8.3 million of
loans, which was recorded in the first quarter of 1998. Recurring income for
both the three and nine month periods is comparable for both years.

Noninterest Expense

General and administrative expense for the three and nine months ended September
30, 1999, was $2.2 million and $8.2 million, respectively, compared to $2.4
million and $7.0 million for the same periods in 1998. The ratio of general and
administrative expense to average assets for the three and nine months ended
September 30, 1999, was 1.36% and 1.76%, respectively, compared to 1.63% and
1.64% for the like periods of 1998. The increase in general and administrative
expense for the first nine months of 1999 was due primarily to $1.2 million in
compensation expense related to the exercise of certain executives' stock
options with a tax-offset cash bonus. The after tax expense, approximately $0.7
million, was offset by the $0.9 million increase to additional paid in capital
from the exercise of these stock options. Excluding these stock option costs,
total general and administrative expenses were comparable between all the
periods reported, while average assets have increased in 1999 as compared to the
1998 periods.

                                                                              11
<PAGE>

Income from real estate operations totaled $0.1 million and $0.2 million for the
three and nine months ended September 30, 1999, respectively, compared with
expense of $0.1 million for the third quarter of 1998 and an insignificant net
expense for the nine month 1998 period. In 1999, small amounts of income were
recorded on sales of real estate acquired through foreclosure in excess of costs
recognized during the periods. In 1998, the Company recognized expenses in
excess of sales gains recognized.


Income Taxes

For the three months and nine months ended September 30, 1999, the Company
recorded income taxes of $2.0 million and $5.1 million, respectively, compared
to income taxes of $1.8 million and $4.5 million for the like periods in 1998.
Changes in the levels of recorded income taxes are related to changes in the
levels of the Company's earnings before income taxes.

FINANCIAL CONDITION

Comparison of Financial Condition at September 30, 1999 and December 31, 1998

Total assets at September 30, 1999, were $635.6 million, compared to $604.8
million at December 31, 1998. The Company's cash and securities decreased to
$90.9 million at September 30, 1999, from $94.1 million at December 31, 1998.
Loans receivable increased $33.7 million during the nine months ended September
30, 1999 as a result of $127.8 million of new loan originations, which offset
$83.9 million of amortization and prepayments of loans and $6.1 million in loans
sold. Total liabilities at September 30, 1999 were $589.5 million compared to
$561.4 million at December 31, 1998. This increase was due to a net increase in
deposits of $29.3 million. Shareholders' equity increased during the nine months
ended September 30, 1999, to $46.1 million, compared to $43.4 million at
December 31, 1998, reflecting principally the $7.3 million of earnings for the
period, offset by a net $1.9 million increase in common shares held in treasury,
a $1.1 million increase in unrealized loss on securities available for sale (net
of tax) and $0.8 million dividends paid to the Company's common shareholders.


Liquidity

Liquidity refers to the Company's ability to maintain cash flow adequate to fund
operations and meet obligations and other commitments on a timely basis,
including the payment of maturing deposits and the origination or purchase of
new loan receivables. Deposits, loan repayments and prepayments, cash flows
generated from operations and Federal Home Loan Bank advances are the primary
sources of Highland's funds for use in lending, investing and for other general
purposes.

For the nine months ended September 30, 1999, the growth in the loan portfolio
was funded primarily by a $30.3 million net increase in deposits and borrowings.

                                                                              12
<PAGE>

The Bank must, by regulation, maintain minimum levels of liquidity as a
percentage of deposits and short-term borrowings. Effective November 24, 1998,
the Office of Thrift Supervision (OTS) reduced this requirement from 5% to 4%.
The OTS also excluded deposits with maturities exceeding one year from the
liquidity base, while expanding the types of investments considered to be liquid
assets. The new rule includes a separate requirement that each institution must
maintain sufficient liquidity to ensure its safe and sound operation. The Bank's
average liquidity ratio for the three months ended September 30, 1999 was
16.85%.

The liquidity of the parent company, Highland Bancorp, Inc., is dependent on
several factors, including the payment of cash dividends by its subsidiary,
Highland Federal Bank, or the ability to obtain borrowings. Without dividends
from Highland Federal Bank, Highland Bancorp, Inc. must rely solely on existing
cash and cash equivalents, which total $0.5 million at September 30, 1999, or on
the ability to obtain borrowings to pay existing current liabilities and future
operating expenses. The parent company's liquidity requirements are currently
limited to shareholder dividends when declared, and certain incidental
expenditures related to corporate obligations. The parent company currently has
no separate operations from the subsidiary Bank.

Regulatory Capital

The OTS capital regulations require certain minimum levels of regulatory capital
for savings institutions subject to OTS supervision. First, the tangible capital
requirement mandates that the Bank's stockholders' equity less intangible assets
be at least 1.50% of adjusted total assets as defined in the capital
regulations. Second, the leverage (core) capital requirement currently mandates
core capital (tangible capital plus qualifying supervisory goodwill) be at least
4.00% of adjusted total assets as defined in the capital regulations. Third, the
risk-based capital requirement presently mandates that core capital plus
supplemental capital as defined by the OTS be at least 8.00% of risk-weighted
assets as prescribed in the capital regulations. The capital regulations assign
specific risk weightings to all assets and off-balance sheet items. The Bank was
in compliance with all capital requirements in effect at September 30, 1999, and
meets all standards necessary to be considered "well-capitalized" for regulatory
capital purposes. The following table sets forth the Bank's required and actual
regulatory capital ratios at September 30, 1999 and December 31, 1998:

<TABLE>
<CAPTION>
                                                                                                 Minimum to be "Well
                                                                                                 Capitalized" under
                             Actual as of           Actual as of         Minimum for capital      Prompt Corrective
                          September 30, 1999       December 31, 1998      adequacy purposes       Action Provisions
                        -----------------------------------------------------------------------------------------------
<S>                     <C>                        <C>                   <C>                     <C>
Tangible capital                         7.29%                  7.01%                  1.50%                       N/A
Leverage Capital                         7.29%                  7.01%                  4.00%                      5.00%
Risk-based Capital                      10.41%                 10.38%                  8.00%                     10.00%
</TABLE>


Year 2000 Issues (THIS CONSTITUTES A "YEAR 2000 READINESS DISCLOSURE" UNDER THE
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT)

The Year 2000 Issue concerns the potential impact of historic computer software
code that only utilizes two digits to represent the calendar year (e.g. "99" for
1999"). Software so

                                                                              13
<PAGE>

developed, and not corrected, could produce inaccurate or unpredictable results
commencing upon January 1, 2000, when current and future dates present a lower
two digit year number than dates in the prior century. The Company, similar to
most financial services providers, is significantly subject to the potential
impact of the Year 2000 Issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware, and
other equipment both within Highland's direct control and outside of Highland's
ownership, yet with which the Company electronically or operationally
interfaces. Financial institution regulators have intensively focused upon Year
2000 exposures, issuing guidance concerning the responsibilities of senior
management and directors. Year 2000 testing and certification is being addressed
as a key safety and soundness issue in conjunction with regulatory examinations.

In order to address the Year 2000 Issue, the Company has developed and
implemented a five phase plan divided into the following major components:

 .  awareness
 .  assessment
 .  renovation
 .  validation
 .  implementation

The Company has completed all five phases of the plan for all the systems that
have been designated as critical to the operations of the Company. The Company
is currently working internally and with external vendors on the final phase for
certain systems not designated as critical to the operations of the Company.
Because the Company outsources its data processing and item processing
operations, a significant component of the Year 2000 plan is to work with
external vendors to test and certify their systems as Year 2000 compliant. Other
important segments of the Year 2000 plan are to identify those loan customers
whose possible lack of Year 2000 preparedness might expose the Bank to loss, and
to highlight any servicers of purchased loans or securities which might present
Year 2000 operating problems.

All of Highland's critical systems have been identified as Year 2000 compliant
as of September 30, 1999, and the Company completed its validation and
implementation of such systems. This testing included the Company's loan
servicing computer system and wire transfer system and deposits and general
ledger service bureau.

Because all Highland's critical computer systems are written and maintained by
outside vendors, the direct costs incurred by the Company for Year 2000 issues
have been less than if the Company had to utilize its own personnel to modify or
rewrite computer software. The Company spent approximately $78,000 in the first
nine months of 1999 and $75,000 in the year ended December 31, 1998, primarily
indirect labor to oversee planning and testing for Year 2000. The Company
expects to spend a total of $100,000 in 1999 to complete its Year 2000 program.
These costs will be funded from the operations of the Bank. The Company has
determined that it has little or no exposure to contingencies related to the
Year 2000 Issue for products it has sold.

The risks to the Company posed by Year 2000 issues are considerable. Most of the
Company's business involves calculations of interest, which are recognized over
periods of time. The inability of a critical system to identify the time that
has elapsed for an interest calculation would result in a sharp decrease in the
Company's ability to make these calculations on a timely basis. The Company also
processes significant volumes of customer

                                                                              14
<PAGE>

deposit, withdrawal and payment transactions using computer systems. The failure
of a critical system, which would include deposit servicing or loan servicing,
would require considerable additional personnel costs to make interest
calculations, to process customer transactions, and to convert to a Year 2000
compliant system. Furthermore, some services, such as ATM cards and certain
transaction type deposit accounts, might have to be curtailed until new systems
were purchased and installed. There would be considerable potential for lost
customers and revenue.

Year 2000 risks not directly related to the Company's computer software and
systems include the risk of large withdrawals by deposit customers as a response
to perceived Year 2000 problems and the risk of adverse business impacts on the
Bank's loan customers. The Company has made an assessment of the potential
impact of Year 2000 issues on its customers, and does not believe this poses a
significant risk to the Company. Despite Highland's activities with regard to
the Year 2000 issue, there can be no assurance that partial or total systems
interruptions, or the costs necessary to maintain system availability, will not
have a material adverse impact on Highland's business, financial condition or
results of operations.


ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISK

The principal objectives of Highland's interest rate risk management function
are to evaluate the interest rate risk included in certain balance sheet
accounts and in the balance sheet as a whole, determine the level of risk
appropriate given Highland's business focus, operating environment, capital and
liquidity requirements and performance objectives, and manage such risk
consistent with Board of Director approved guidelines. Through such management,
the Company seeks to reduce the vulnerability of its operations to changes in
interest rates.

During 1998 and the first nine months of 1999, the Company utilized the
following strategies to manage interest rate risk: (a) originating primarily
adjustable-rate new loans for the portfolio, or attempting to match new fixed
rate loans against longer term FHLB advances, (b) attempting to reduce the
overall interest rate sensitivity of liabilities by emphasizing core and longer-
term deposits, in addition to lengthening the maturity of the Company's FHLB
advances and other borrowings and (c) purchasing an interest rate "swap"
contract with the notational principal amount of $20 million in the second
quarter of 1999.

The Company's interest rate sensitivity "gap" and its net portfolio value have
not materially changed since December 31, 1998. For more detailed information
regarding the definition and measurement of these items, refer to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.

At September 30, 1999, the Company was a party to interest rate swap agreements
with notational principal amounts of $20 million. These swaps involve the
receipt of floating interest rates based on 6 month LIBOR, and payments of fixed
interest rates on the underlying principal amounts. These swaps mature in the
third quarter of 2004. Swap interest income and expense is recorded using the
accrual method and is included (net) in the Company's cost of deposits. The net
cost incurred through September 30, 1999 was approximately $52,000. Highland did
not hold any derivative financial instruments during 1998.

                                                                              15
<PAGE>

This discussion and analysis contains certain statements which constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995, relating to, among other things, future cash dividends, and future
earnings levels, which are subject to risks and uncertainties that could cause
actual results, performance, or achievements to differ materially. These risks
and uncertainties include economic conditions, interest rates, changes in
government regulation and monetary policy, competition in the geographic and
business areas in which Highland conducts its operations, fluctuations in
interest rates, credit quality and government regulation. For additional
information concerning these factors, see "Item 1. Business-Factors That May
Affect Future Results." in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.


                          PART II. OTHER INFORMATION

ITEMS 1-5.

Item 1.  Not applicable

Item 2.  Not applicable

Item 3.  Not applicable

Item 4.  Not applicable

Item 5.  Not applicable


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
    Exhibit 27 - Financial Data Schedule

(b) Reports on Form 8-K
      None.

                                  SIGNATURES

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

                                HIGHLAND BANCORP, INC.
                                ----------------------
                                  (Registrant)


DATED:  November 10, 1999       by:  /s/ STEPHEN D. COOPER
                                     ---------------------
                                     Vice President and Controller
                                     Principal Accounting Officer

                                                                              16