Commerce Corp pays the cost of premiums on life insurance policies insuring all employees, including executive officers, in amounts approximately two times their annual salaries. The policies are payable to the officer's designated beneficiary(ies). In addition, Commerce Corp provides certain incidental personal benefits to executive officers. The incremental cost to Commerce Corp of providing such benefits to the executive officers named above did not, for the fiscal year ended December 31, 2001, exceed ten percent of the compensation to such officers.

In 1994 the Board of Directors adopted the Heritage Bank of Commerce 1994 Tandem Stock Option Plan ("Plan") in order to promote the long-term success of the Bank and the creation of shareholder value. In 1998 the Plan was restated and adopted by Commerce Corp as the successor corporation to Heritage Bank of Commerce. The Plan authorizes Commerce Corp to grant stock options to officers, employees and directors of Commerce Corp and its affiliates.

The following table shows options granted in 2001 to executive officers named in the Summary Compensation Table. The grant date present value dollar amount was computed in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation."

The following table delineates options exercised by executive officers named in the Summary Compensation Table and the values of unexercised options at December 31, 2001:

The Board of Directors has established an employee benefit plan under Section 401(k) of the Internal Revenue Code of 1986. The purpose of the 401(k) plan is to encourage employees to save for retirement. Eligible employees may make contributions to the plan subject to the limitations of Section 401(k) of the Internal Revenue Code of 1986. The Plan trustees administer the Plan. The Company matches the first $1,500 of each employee's contributions.

In 1997, Heritage Bank of Commerce initiated an employee stock ownership plan ("Stock Ownership Plan"). The Stock Ownership Plan was subsequently adopted by Commerce Corp as the successor corporation to Heritage Bank of Commerce. The Stock Ownership Plan allows Commerce Corp, at its option, to purchase shares of Commerce Corp Common Stock on the open market and award those shares to certain employees. To be eligible to receive an award of shares under the Stock Ownership Plan, an employee must have worked at least 1,000 hours during the year and must be employed by the Company on December 31. Awards under the Stock Ownership Plan generally vest over four years. During 2001, Commerce Corp contributed $244,000 to the Stock Ownership Plan, with contributions to Richard L. Conniff, Kenneth A. Corsello, Lawrence D. McGovern and Brad L. Smith totaling $5,100, $3,800, $4,500 and $5,100, respectively. These amounts are included in the Summary Compensation Table in the column entitled "Bonus."

Richard L. Conniff, Commerce Corp President and Chief Operating Officer, is employed under the terms of a written three-year employment contract dated August 20, 2001 which provides for the following as of December 31, 2001: base salary of $200,000 per year; bonuses paid based upon the performance of Commerce Corp awarded in the sole discretion of the Board of Directors; a car allowance; insurance; and severance compensation benefits in the event Commerce Corp terminates Mr. Conniff's employment without cause.

Kenneth A. Corsello, Commerce Corp's Executive Vice President and Chief Credit Officer, is employed under the terms of a written three-year employment contract dated March 11, 2001 which provides for the following as of December 31, 2001: base salary of $128,000 per year; bonuses paid based upon the performance of Commerce Corp awarded in the sole discretion of the Board of Directors; a car allowance; insurance; and severance compensation benefits in the event Commerce Corp terminates Mr. Corsello's employment without cause.

Lawrence D. McGovern, Commerce Corp's Executive Vice President and Chief Financial Officer, is employed under the terms of a written three-year employment contract dated July 16, 1998 which is renewable annually and provides for the following as of December 31, 2001: base salary of $150,000 per year; bonuses paid based upon the performance of Commerce Corp, awarded in the sole discretion of the Board of Directors; a car allowance; insurance; and severance compensation benefits in the event Commerce Corp terminates Mr. McGovern's employment without cause.

Brad L. Smith, Chairman of the Board and Chief Executive Officer of Commerce Corp, is employed under the terms of a written three-year employment contract dated August 20, 2001 which provides for the following as of December 31, 2001: base salary of $220,000 per year; bonuses paid based upon the performance of Commerce Corp, awarded in the sole discretion of the Board of Directors; a car allowance; insurance; and severance compensation benefits in the event Commerce Corp terminates Mr. Smith's employment without cause.

The Company has a supplemental retirement plan ("The Plan") covering key executives and directors. The Plan is a nonqualified defined benefit plan and is unsecured and unfunded and there are no Plan assets. The Company has purchased insurance on the lives of the directors and executive officers who participate in the Plan and intends to use the cash values of those policies ($22,034,000 and $15,983,000 at December 31, 2001 and 2000, respectively) to pay the retirement obligations that accrue pursuant to the plan. The Company's total accrued pension obligation was $2,596,000 and $2,125,000 as of December 31, 2001 and 2000, respectively. The formula by which benefits are determined for the executive officers and directors who participate in the Plan is based on a combination of the individual's position within the Company, their age at the time when their retirement benefits become fully vested, and the amount of their benefits available under the previous plan. The estimated annual benefits payable upon retirement at normal retirement age for Richard L. Conniff, Kenneth A. Corsello, Lawrence D. McGovern, and Brad L. Smith are $100,000, $48,000, $68,000, and $125,000, respectively. The death benefit for participants in the Plan is an endorsement to the individual's beneficiaries of 80% of the net-at-risk insurance amount (i.e., the amount of the death benefit in excess of cash value of the underlying insurance policy).

During 2001, Commerce Corp paid retainers to thirteen directors for their services during 2001, for a total of $22,000. In March 2001, the Board approved a director compensation program, effective April 1, 2001, that extended a plan previously adopted by the Board to include all non- executive officer directors. The plan allocates fees among participating directors, based on the extent and nature of each director's committee memberships, attendance, and/or that director's chairmanship of one of the various committees of the Board. The total annual cost of the program for 2001 was approximately $94,000.

An option of the director compensation program is the deferral of fees ("Deferral Plan"). Under the Deferral Plan, a participating director may defer up to 100% of their board fees into the Deferral Plan for up to ten years from the date of the first deferral. Amounts deferred earn interest at the rate of 8% per annum. The director may elect a distribution schedule of up to ten years, with interest accruing (at the same 8%) on the declining balance. A participating director is eligible to begin receiving benefits upon retirement.

Commerce Corp has purchased life insurance policies on the lives of directors who have agreed to participate in the Deferral Plan. It is expected that the earnings on these policies will offset the cost of the program. In addition, Commerce Corp will receive death benefit payments upon the death of the director. The proceeds will permit Commerce Corp to "complete" the Deferral Plan as the director originally intended if the director dies prior to the completion of the Deferral Plan. The disbursement of deferred fees is accelerated at death and commences one month after the director dies.

In the event of the director's disability prior to attainment of his benefit eligibility date, the director may request that the Board permit him to receive an immediate disability benefit equal to the annualized value of the director's deferral account.

To date, six of the directors have elected to defer their fees. For the years 1999, 2000 and 2001, Commerce Corp accrued expenses of $42,000, $67,000, and $73,000, respectively, to account for its obligation to pay deferred fees.

The Personnel and Planning Committee, acting as a compensation committee in accordance with applicable requirements, has provided the following report to the Board of Directors of Commerce Corp.

The Report of the Personnel and Planning Committee shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that Commerce Corp specifically incorporates the information contained in the report by reference, and shall not otherwise be deemed filed under such acts.

Commerce Corp's general compensation strategy for senior executive officers is to pay annual and long term compensation which is competitive with executives in similar positions at peer group companies, taking into appropriate account Commerce Corp's forward progress, its overall financial condition and its performance relative to companies in similar circumstances. In determining compensation levels, Commerce Corp obtains salary survey information regarding executive salary levels for comparable companies through many sources, including banking industry associates and independent compensation consultants. Additionally, Commerce Corp ties incentive compensation levels to financial performance goals of Commerce Corp.

The compensation policy of Commerce Corp is designed to attract and retain highly qualified personnel and to provide meaningful incentives for measurable performance. The components of executive compensation include base salary, an incentive bonus plan, non-plan bonuses, stock options and a supplemental executive retirement plan.

Commerce Corp's senior executive compensation is determined by the Personnel and Planning Committee of the Board of Directors and by the Board itself. Brad L. Smith, Commerce Corp's Chairman and Chief Executive Officer, and Richard L. Conniff, Commerce Corp's President and Chief Operating Officer, are currently members of both the Board of Directors and the Personnel and Planning Committee, but do not participate in matters related to executive compensation. The Committee meets a minimum of four times per year. Salaries and other compensation are reviewed annually. Any significant increases or other changes to compensation or benefits are approved by the Board of Directors. Incentive bonus awards are determined by the Committee in January or February and recommended to the full Board for immediate action. Compensation for a newly hired executive may be established by the Committee at a special meeting.

In its discretion, Commerce Corp pays annual incentive bonuses to its senior executives after receiving a recommendation to do so by the Personnel and Planning Committee of the Board. The decision to pay, and the amount of payment, is based upon an assessment of the institution's performance in the context of the plan and with reference to the executive's base wages, as well as to peer group patterns.

During 2001 Richard L. Conniff, the Company's President and Chief Operating Officer, and Brad L. Smith, the Company's Chairman and Chief Executive Officer, served on the Board's Personnel and Planning Committee. The Personnel and Planning Committee is responsible for recommending changes in executive officer salaries and other forms of compensation to the Company's Board of Directors. Mr. Conniff and Mr. Smith did not participate as voting members of the Personnel and Planning Committee or the Board of Directors with respect to matters related to their own compensation.

The following graph compares the stock performance of Heritage Bank of Commerce from December 31, 1996 to January 31, 1998 and of Commerce Corp from February 1, 1998 to December 31, 2001, to the performance of several specific industry indices. The performance of the S&P 500 and S&P Regional Bank indicies were used as comparisons to the Company's stock performance. Management believes that a performance comparison to the Nasdaq Stock Index and the Nasdaq Bank Stocks provide meaningful information and has therefore included those comparisons in the following graph.

The Company is not involved in any litigation other than routine litigation in the ordinary course of the Company's business.

THE BOARD OF DIRECTORS INTENDS TO VOTE ALL PROXIES HELD BY IT IN FAVOR OF ELECTION OF EACH OF THE NOMINEES. YOU ARE URGED TO VOTE FOR PROPOSAL 1: TO ELECT THE FIVE NOMINEES SET FORTH HEREIN TO SERVE UNTIL THE ANNUAL MEETING OF 2005 OF THE SHAREHOLDERS AND UNTIL THEIR RESPECTIVE SUCCESSORS SHALL BE ELECTED AND QUALIFIED: PHILLIP R. BOYCE, RICHARD L. CONNIFF, KIRK M. ROSSMANN, BRAD L. SMITH AND CHARLES J. TOENISKOETTER. IF NO INSTRUCTION IS GIVEN, THE BOARD OF DIRECTORS INTENDS TO VOTE FOR EACH NOMINEE LISTED.

At the 2002 Annual Meeting of Shareholders, the following resolution will be subject to ratification by a simple majority vote of the shares represented at the meeting:

If ratification is not achieved, the selection of an independent certified public accountant will be reconsidered and made by the Board of Directors. Even if the selection is ratified, the Board of Directors reserves the right and, in its discretion, may direct the appointment of any other independent certified public accounting firm at any time if the Board decides that such a change would be in the best interests of the Corporation and its shareholders.

The services provided Deloitte & Touche LLP include the examination and reporting of the financial status of Commerce Corp. These services have been furnished at customary rates and terms. There are no existing direct or indirect agreements or understandings that fix a limit on current or future fees for these audit services.

A representative of Deloitte & Touche LLP is expected to attend the 2002 Annual Meeting of Shareholders. The representative will have the opportunity to make a statement, if desired, and is expected to be available to respond to shareholder inquiries.

In accordance with its written charter adopted by Heritage Commerce Corp's Board of Directors (Board), the Heritage Commerce Corp Audit Committee (Committee) assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, and financial reporting practices of the Company. During fiscal 2001 the Committee met four times, and the Committee chair, as representative of the Committee, discussed the interim financial information contained in each quarterly earnings announcement with the CFO, controller and independent auditors prior to public release.

In discharging its oversight responsibility as to the audit process, the Audit Committee obtained from the independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors' independence consistent with Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees," discussed with the auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditors' independence. The Committee also discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Company's internal controls and the internal audit function's organization, responsibilities, budget and staffing. The Committee reviewed with both the independent and the internal auditors their audit plans, audit scope, and identification of audit risks.

The Committee discussed and reviewed with the independent auditors all communications required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees" and, with and without management present, discussed and reviewed the results of the independent auditors' examination of the financial statements. The Committee also discussed the results of the internal audit examinations.

The Committee reviewed the audited financial statements of the Company as of and for fiscal year ended December 31, 2001 with management and the independent auditors. Management has the responsibility for the preparation of the Company's financial statements and the independent auditors have the responsibility for the examination of those statements.

Based on the above-mentioned review and discussion with management and the independent auditors, the Committee recommended to the Board that the Company's audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2001, for filing with the Securities and Exchange Commission. The Committee also recommended the reappointment, subject to shareholder approval, of the independent auditors and the Board concurred in such recommendation.

Howard J. Weiland, Vice Chairman

Jack L. Peckham

March 28, 2002

Principal Accounting Firm Fees

Audit fees: The aggregate fees for professional services rendered by the company's principal accounting firm, Deloitte & Touche LLP and their affiliates (collectively, "Deloitte & Touche"), in connection with their audit of our consolidated financial statements and reviews of the consolidated financial statements included in our Quarterly Reports on Form 10-Q for the 2001 fiscal year was approximately $186,000.

Financial and Information Systems Design and Implementation Fees: There were no professional services rendered by Deloitte & Touche LLP in the 2001 fiscal year relating to financial information systems design and implementation.

The aggregate fees for all other services rendered by Deloitte & Touche in the 2001 fiscal year was approximately $131,000 and can be subcategorized as follows:

The Board of Directors has considered whether Deloitte & Touche's provision of the services described above as "Financial Information Systems Design and Implementation Fees" and "All Other Fees" is compatible with maintaining the independence of Deloitte & Touche.

THE BOARD OF DIRECTORS INTENDS TO VOTE ALL PROXIES HELD BY IT IN FAVOR OF APPROVING THE RATIFICATION OF DELOITTE & TOUCHE LLP AS COMMERCE CORP'S AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2002 (UNLESS THE SHAREHOLDERS DIRECT OTHERWISE). YOU ARE URGED TO VOTE FOR PROPOSAL 2: TO RATIFY THE BOARD'S SELECTION OF DELOITTE & TOUCHE LLP TO SERVE AS COMMERCE CORP'S AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2002.

If any matters not referred to in this Proxy Statement come before the meeting, including matters incident to the conduct of the meeting, the proxy holders will vote the shares represented by proxies in accordance with their best judgment. Management is not aware of any other business to come before the meeting and, as of the date of the preparation of this Proxy Statement, no shareholder has submitted to management any proposal to be acted upon at the meeting.

Under certain circumstances, shareholders are entitled to present proposals at shareholders' meetings, provided that the proposal is presented in a timely manner and in a form that complies with applicable regulations. Any shareholder proposals intended to be presented for consideration at the 2003 Annual Meeting of Shareholders, and to be included in Commerce Corp's Proxy Statement for that meeting, must be received by Commerce Corp no later than December 17, 2002 in a form that complies with applicable regulations. Shareholder proposals may not be included in the Proxy Statement for the 2003 Annual Meeting or presented at the shareholder meeting unless certain conditions are met. Shareholder proposals are subject to regulation under Federal securities laws.

A copy of Commerce Corp's annual report on Form 10-K (excluding exhibits) is being sent to shareholders along with this Proxy Statement. To obtain an additional copy without charge, please contact Rebecca Levey at (408) 947-6900.

1. Purpose
2. Mission Statement
3. Audit Committee Charter
4. Internal Audit
5. Certification of On and Off Balance Sheet Items
6. Duties of the Independent Internal Audit Firms
7. Internal Audit Outsourcing Arrangements
8. External Audit

The Board of Directors of Heritage Commerce Corp (HCC) under its fiduciary duties has established an Audit Committee. The Committee assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, internal control and financial reporting practices of the company. It may also have such other duties that may, from time to time, be assigned to it by the Board.

The primary purpose of this policy is to provide the Audit Committee of HCC and its subsidiary banks, the authority to perform its fiduciary responsibilities of safeguarding the assets of the institution, ensure adherence to Board Policies and ensure quality and reliability of information reporting. The Audit Committee may engage independent third party services to audit, investigate and perform operational reviews of activities and financial statements of the company and its subsidiaries.

The mission of the Audit Committee is to provide the most effective risk-focused internal control system, a highly effective audit program, and to provide sufficient resources in a cost effective manner, and to adequately and independently test the reliability of administrative and financial reporting of HCC and its Subsidiary banks.

The Boards of Heritage Commerce Corp and its subsidiary banks have adopted this Audit Committee Charter. The Committee shall annually review and reassess this charter and recommend any proposed changes to the Board for approval.

• The Committee shall consist entirely of outside directors who are independent of management.
• The Committee shall not be less than three and more than six members.

• Each committee member shall meet the independence and financial literacy requirements for serving on audit committees, and at least one member shall have accounting or related financial management expertise, all as set forth in the applicable rules of the state and federal banking laws and NASDAQ/American Stock Exchange.
• Non-voting advisory members shall consist of the Chairperson of subsidiary bank Audit Committees, Chief Executive Officers, Chief Financial Officer and the Audit Liaison Officer. Bank officers, independent public accountants, operations and loan review representatives and regulatory examiners will attend as deemed necessary by the Chairperson.
• The Board of Directors shall appoint the Chairperson, Vice Chairperson and each member of the Committee.
• All Committee members shall serve a term of one year unless re-appointed by the Board of Directors. In the event of a vacancy, an outside director will be appointed to fill the vacancy.
• Fifty percent of the voting members at any given meeting shall constitute and qualify as a quorum. A quorum of voting members must exist to conduct the meeting.
• The Audit Committee shall meet quarterly or as called by the Chairperson.
• The Committee shall report to the full Board at its regularly scheduled meetings and provide the Board with written minutes of its meetings.

Audit Committee responsibilities will include, but are not limited to, the following:

• The Committee shall maintain free and open communication with the independent auditors, the internal auditors and company management.
• In discharging its oversight role, the Committee is empowered to investigate any matter relating to the Company's accounting, auditing, internal control or financial reporting practices brought to its attention, with full access to all Company books, records, facilities and personnel.

• The Committee may engage highly competent, certified public accounting firms to audit the consolidated financial statement of the holding company and its subsidiary banks and to provide other attestation services requiring independence.
• The Committee will ensure that qualified personnel with diversified banking and internal audit expertise and experience perform the internal audit and loan review functions.
• Review and approve the scope and coverage of any audit engagement, regulatory examinations, and loans and operations review.
• Review audit plans, risk assessment, management letter, responses and follow-up to audit and examination findings.
• Review audited financial statements and discusses them with management and independent auditors (Statement of Auditing Standards No 61.) Review periodic reports from the Compliance and Bank Secrecy Act Officers.
• Issue annually, a report to be included in the Company's proxy statement as required by the rules of the Securities and Exchange Commission.
• Ensure that management replies in writing to the recommendations contained in each audit report within 30 days or such other reasonable time necessary to provide adequate response.
• Review the Audit Follow-up Log of all audit reports issued. The Log should be updated at least quarterly and summarize management responses and corrective action plans.
• The Committee shall direct a follow up audit, where necessary, to adequately address significant areas of concern. The follow up shall be performed within six months of the audit.
• The Committee may meet in a closed session with auditors without the presence of senior management.
• The Committee shall review and formally accept annually, the audited consolidated financial statements of HCC and its subsidiary banks prepared by certified public accountants in accordance with generally accepted accounting principles.
• Discuss with management and/or the Company's general counsel, any legal matters (including the status of pending litigation) that may have a material impact on the Company's financial statements, and any material reports or inquiries from regulatory or governmental agencies.

The internal audit policy statement provides guidelines and sound practices for the Audit Department to follow in order to effectively manage the internal audit function. The Audit Liaison Officer will oversee the internal audit function and report directly to the Board's Audit Committee.

• Assist Board's Audit Committee and Senior Management in effective discharge of their responsibilities by providing them with independent analysis, appraisal and recommendations regarding the activities of the Holding Company and its subsidiary banks.
• Coordinate upcoming audits and regulatory examinations with outside auditors and regulatory agencies.
• Ensure implementation of risk-focused internal control system and effective certification program to promote operational efficiency and adherence to internal policies.
• Conduct operations audit, loan review and special investigations when appropriate, to detect the presence, absence and/or extent of fraud, embezzlement, or willful manipulation of funds and records.
• Maintain the independent nature of the audit function by ensuring that neither the auditor nor his staff initiates or approves accounting transactions of any nature, or administers or supervises any bank operational function.
• Assess the competency, independence, and objectivity of the outside service provider as it relates to assignments to be performed.
• Strictly guard the confidentiality of audit reports, audit files and findings, audit schedules, HCC records, Subsidiary Bank's/Client relationships, and HCC data in general.

V. Certification of On and Off Balance Sheet Items

Certification is a process of reconciling, verifying and confirming accounting records and administrative processes to ensure protection of assets, dual control, segregation of duties and other internal control systems are in place.

The Audit Committee of Heritage Commerce Corp and its subsidiary banks establishes this policy as a necessary tool of an effective internal control structure.

• All general ledger accounts or group of similar accounts are to be periodically certified in accordance with established certification procedures.
• Non general ledger accounts including certain administrative procedures are to be certified according to established procedures.
• Certification of general ledger accounts shall be evidenced by reconciliation to the general ledger with appropriate supporting documentation and certified correct by a reviewer.
• Certification of On and Off Balance Sheet items are to performed on any day of the month; however, the date shall vary within 5 working days of the previous month to maintain an element of surprise.
• All stale items (90 days and over) are to be properly researched and referred to the Controller for charge-off, unless the said items are in process of collection.
• Each Department Manager is responsible for completing the certification of his/her area or bank.
• Audit Liaison Officer is to oversee the company-wide certification process.
• Respective Department Managers are to forward one copy of the certification schedule to the Audit Liaison Officer each month.

VI. Duties of the Independent Internal Audit Firms

• Design and implement a risk assessment program to effectively assess risk exposures of the areas audited.
• Perform a risk-focused audit of the institutions' operations and activities.
• Verify and determine compliance with adopted policies, plans, procedures, and applicable banking laws and regulation, including generally accepted accounting principles.
• Review internal control systems in place to safeguard assets and other intangibles and verify existence and value of assets and liabilities.
• Review operational efficiency of the HCC and its banks, to ensure that the resources are employed efficiently and in a cost-effective manner. Identify and analyze operating weaknesses and recommend corrective action measures.
• Review loans, credit administration and analysis of loan and lease losses reserve.
• Communicate the results of the internal audits, both positive and negative, in writing including management response to the appropriate levels of management and the Audit Committee.
• Participate on a consultative basis in the planning stages of new policies, procedures, and control systems for new product offerings and for new laws and regulation.

All outsourcing arrangements shall be evidenced by a written contract, i.e., engagement letter. Minimum requirements of engagement letter are as follows:

• The engagement shall set the scope and frequency of work to be performed by the vendor.
• It shall set manner and frequency of reporting to Audit Committee about the status of the engagement.
• Establish the requisite protocol for changing the terms of the service engagement, i.e. expansion of coverage if material issues are found.
• Specify that the internal audit reports are the property of the institution, that the institution will be provided with any copies of the related work papers it deems necessary, and that the Audit Liaison Officer will have reasonable and timely access to the work papers prepared by the vendor.
• Specify the locations of the internal audit reports and the related work papers.
• The regulatory examiners will be granted access to the internal audit reports and related work papers prepared by the vendor if needed, through the Audit Liaison Officer.
• Prescribe the method for determining who bears the cost of consequential damages arising from errors, omissions and negligence.
• That the vendors shall not perform management functions, make management decisions, or act or appear to act, in a capacity equivalent to that of an employee of HCC and its subsidiaries. Nothing in this section prohibits value- added audit.

The audit period shall generally be from January 1^st to December 31, the Company's fiscal year end. The audit plan and schedule shall be rotating, although an element of surprise should be maintained. The schedule will be driven by risk assessment results, internal and external audit findings and conclusions, as well as regulatory examinations.

1. High Risk/or Less than Satisfactory Rating: 6 months Maximum
2. Moderate Risk/ Satisfactory: 12 months Maximum
3. Low Risk Areas/ Satisfactory: 12 months Maximum
4. Board Policies, irrespective of the risk rating: 12 months

The scope of an internal audit will be sufficient to test compliance with adopted policy and procedures; appraise the soundness and adequacy of accounting, operating, and other administrative controls, and to detect irregularities from proof detail or reconcilement.

The Internal audit firm will have access to any area or records as deemed necessary.

The Bank/Department/Function shall be rated after a thorough analysis and review of its functions and activities in accordance with Board policies, adherence to internal accounting and administrative control procedures, as well as applicable laws and regulation. The ratings are defined as follows:

1. Strong: The Bank/Department/Function is in substantial compliance with applicable policies and procedures.
2. Satisfactory: The Banks/Department/Function is in compliance with policies and procedures. Any weaknesses are minor and can be handled in a routine manner.
3. Needs Improvement: The Banks/Department/Function, although generally in compliance with policies and procedures, has certain deficiencies that should be improved. Typically, more than one significant weakness is noted.
4. Unsatisfactory: The Banks/Department/Function is in substantial noncompliance with policies and procedures. Violations of laws and regulations are noted. The problem may range from severe to critical and as such, will expose the bank to financial losses if left uncorrected.

The Internal audit firm shall prepare, review and provide written audit reports to be submitted to the Audit Committee. The internal audit firm shall routinely discuss preliminary findings with the appropriate levels of management to ascertain correctness of facts, and to give management the opportunity to clarify. An exit review will be held with senior management and the Audit Liaison Officer. The written report, including the management response, will be provided to the Audit Committee within a reasonable time frame not to exceed 45 days from date of the completion of audit.

A strong internal auditing function establishes the proper control environment and promotes accuracy and efficiency in the company. An external auditing program complements this function by providing an objective outside view of the HCC and its subsidiary banks' operations. Heritage Commerce Corp and its banks are committed to maintaining a sound external-auditing program. The Audit Committee of the Board of Directors will engage the external auditors annually. An engagement letter will be accepted and it must be sufficient in scope to render an opinion on the consolidated financial statement of the Heritage Commerce Corp and its subsidiaries.

In view of our continued expansion, the holding company and its banks may be subject to Section 36 of the Federal Deposit Insurance Act, as implemented by 12 CFR, Part 363. This law requires each depository institution with $500 million or more in total assets at the beginning of its fiscal year to file with the appropriate federal banking agency the following documents:

(a) An audited financial statement

(b) A management report and,

A copy of the audited consolidated financial statements of the holding company will be submitted to the appropriate regulatory agency on behalf of the affiliated banks to satisfy this requirement.