1053352--3/17/2010--HERITAGE_COMMERCE

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Risks Relating to Recent Economic Conditions and Governmental Response Efforts Difficult economic and market conditions have adversely affected our industry. Recent legislative and regulatory initiatives may not be successful. The FDIC has increased insurance premiums to rebuild and maintain the federal deposit insurance fund. U.S. and international financial markets and economic conditions could adversely affect our liquidity, results of operations and financial condition. Risks Related to Our Market and Business We are subject to a written agreement with the Federal Reserve and the California Department of Financial Institutions, and in the future may become subject to additional supervisory actions and/or enhanced regulation that could have a material adverse effect on our business, operating flexibility, financial condition and the value of our common stock. Our allowance for loan losses may not be adequate to cover actual loan losses, which could adversely affect our earnings. Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition. We may be required to make additional provisions for loan losses and charge off additional loans in the future, which could adversely affect our results of operations. Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. If we lost a significant portion of our low-cost deposits, it would negatively impact our liquidity and profitability. We borrow from the Federal Home Loan Bank and the Federal Reserve, and there can be no assurance these programs will continue in their current manner. Our results of operations may be adversely affected by other-than-temporary impairment charges relating to our securities portfolio. We may need to raise additional capital in the future and such capital may not be available when needed or at all. Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance. Our profitability is dependent upon the economic conditions of the markets in which we operate. Our loan portfolio has a large concentration of real estate loans in California, which involve risks specific to real estate values. Our construction and land development loans are based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans. We must effectively manage our growth strategy. We have a significant deferred tax asset and cannot assure that it will be fully realized. If the goodwill we have recorded in connection with acquisitions becomes impaired, our earnings and capital could be adversely affected. We face strong competition from financial service companies and other companies that offer banking services. We are subject to extensive government regulation that could limit or restrict our activities, which in turn may adversely impact our ability to increase our assets and earnings. Technology is continually changing and we must effectively implement new technologies. System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities. We are exposed to the risk of environmental liabilities with respect to properties to which we take title. Managing operational risk is important to attracting and maintaining customers, investors and employees. Potential acquisitions may disrupt our business and adversely affect our results of operations. We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects. The terms of our Series A Preferred Stock limit our ability to pay dividends on and repurchase our common stock. Our outstanding Series A Preferred Stock impacts net income allocable to our common shareholders and earnings per common share, and the warrant issued to the U.S. Treasury may be dilutive to holders of our common stock. Because of our participation in the U.S. Treasury Capital Purchase Program, we are subject to various restrictions, including restrictions on compensation paid to our executives. Until we are able to repurchase the Series A Preferred Stock we are required to operate under the restrictions imposed by the U.S. Treasury under the Capital Purchase Program, and such restrictions may have unforeseen and unintended adverse effects on our business. Federal and state law may limit the ability of another party to acquire us, which could cause our stock price to decline. Risks Related to Our Common Stock An investment in our common stock is not an insured deposit. We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock. The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive. We are a holding company and depend on our subsidiaries for dividends, distributions and other payments. Our common stock is equity and therefore is subordinate to our and HBC's indebtedness and our Series A Preferred Stock, and our ability to declare dividends on our common stock may be limited. An entity holding as little as a 5% interest in our outstanding common stock could, under certain circumstances, be subject to regulation as a "bank holding company."

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1053352--3/17/2010--HERITAGE_COMMERCE_CORP