-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KjNGDUrB1qyIyX59TlnpytZb3lzNxqWfx8bwg7zQgS3J+JACVqYOoP75Yc7kih8r ufCktZLOlYIVGDor3ZqBHw== 0001053352-99-000029.txt : 19991117 0001053352-99-000029.hdr.sgml : 19991117 ACCESSION NUMBER: 0001053352-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE COMMERCE CORP CENTRAL INDEX KEY: 0001053352 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770469558 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23877 FILM NUMBER: 99754575 BUSINESS ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089476900 MAIL ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [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 transitional period from to Commission File No. 000-23877 HERITAGE COMMERCE CORP (Exact name of registrant as specified in its charter) California 77-0469558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 Almaden Blvd., San Jose, California 95113 (Address of principal executive offices) (Zip Code) (408) 947-6900 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report.) 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. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The Registrant had 6,388,819 shares of Common Stock outstanding on November 15, 1999. HERITAGE COMMERCE CORP AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q Table of Contents Part I - Financial Information Page Item 1. Condensed Consolidated Statements of Financial Condition At September 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income For the three months and nine months ended September 30, 1999 and 1998 2 Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 1999 and 1998 3 Condensed Consolidated Notes to Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Part II - Other Information Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 - 1 -
HERITAGE COMMERCE CORP AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition ASSETS September 30, 1999 December 31, 1998 (Unaudited) Cash and due from banks $ 18,892,000 $ 18,039,000 Federal funds sold 128,130,000 28,600,000 Total cash and cash equivalents 147,022,000 46,639,000 Securities available-for-sale, at fair value 23,576,000 50,249,000 Securities held-to-maturity, at amortized cost (fair value of $13,791,000 and $27,240,000, respectively) 13,845,000 26,544,000 Loan held for sale, at fair value 17,373,000 33,079,000 Loans, net of deferred fees 245,411,000 236,307,000 Allowance for loan losses (4,569,000) (3,825,000) Loans, net 240,842,000 232,482,000 Premises and equipment, net 3,276,000 3,238,000 Accrued interest receivable and other assets 12,153,000 7,240,000 Other investments 10,487,000 5,460,000 TOTAL $ 468,574,000 $ 404,931,000 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Demand, noninterest bearing $ 120,097,000 $ 120,854,000 Demand, interest bearing 8,209,000 9,035,000 Savings and money market 169,875,000 131,518,000 Time deposits, under $100,000 42,324,000 29,793,000 Time deposits, $100,000 and over 76,145,000 58,847,000 Total deposits 416,650,000 350,047,000 Deposits held for sale --- 18,911,000 Accrued interest payable and other liabilities 8,294,000 5,276,000 Total liabilities 424,944,000 374,234,000 Commitments and contingencies Shareholders' equity: Preferred Stock, 10,000,000 shares authorized; none outstanding --- --- Common Stock, no par value; 30,000,000 shares authorized; Shares issued and outstanding: 6,388,119 at September 30, 1999 and 5,554,552 at December 31, 1998 41,006,000 29,418,000 Accumulated other comprehensive (loss) income, net of taxes (52,000) 658,000 Retained Earnings 2,676,000 621,000 Total shareholders' equity 43,630,000 30,697,000 TOTAL $ 468,574,000 $ 404,931,000 See notes to condensed consolidated financial statements
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HERITAGE COMMERCE CORP AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) Three months ended September 30, Nine months ended September 30, 1999 1998 1999 1998 Interest income: Loans, including fees $ 6,545,000 $ 5,626,000 $ 18,794,000 $ 13,381,000 Securities, taxable 407,000 1,304,000 1,481,000 3,917,000 Securities, non-taxable 144,000 191,000 463,000 479,000 Federal funds sold 780,000 348,000 1,427,000 860,000 Total interest income 7,876,000 7,469,000 22,165,000 18,637,000 Interest expense: Deposits 2,634,000 2,348,000 7,006,000 5,355,000 Other 12,000 2,000 22,000 3,000 Total interest expense 2,646,000 2,350,000 7,028,000 5,358,000 Net interest income before provision for loan losses 5,230,000 5,119,000 15,137,000 13,279,000 Provision for loan losses 356,000 550,000 1,483,000 1,060,000 Net interest income after provision for loan losses 4,874,000 4,569,000 13,654,000 12,219,000 Other income: Gain on sale of loans 271,000 50,000 401,000 83,000 Gain on sale of securities available-for-sale --- 291,000 1,004,000 358,000 Service charges and other fees 84,000 62,000 226,000 161,000 Servicing income 1,180,000 --- 1,180,000 --- Other investment income 73,000 95,000 201,000 203,000 Other income 194,000 98,000 701,000 165,000 Total other income 1,802,000 596,000 3,713,000 970,000 Other expenses: Salaries and employee benefits 2,714,000 2,078,000 7,678,000 5,448,000 Client services 362,000 511,000 1,158,000 1,430,000 Furniture and equipment 244,000 236,000 824,000 589,000 Advertising and promotion 215,000 221,000 592,000 588,000 Occupancy 300,000 224,000 793,000 566,000 Professional fees 884,000 97,000 1,129,000 410,000 Loan origination costs 145,000 109,000 401,000 304,000 Stationery & supplies 91,000 73,000 226,000 181,000 Telephone expense 56,000 38,000 159,000 119,000 Other 492,000 561,000 1,292,000 993,000 Total other expenses 5,503,000 4,148,000 14,252,000 10,628,000 Net income before income taxes 1,173,000 1,017,000 3,115,000 2,561,000 Income taxes 420,000 443,000 1,060,000 1,004,000 Net income $ 753,000 $ 574,000 $ 2,055,000 $ 1,557,000 Earnings per share: Basic $ 0.12 $ 0.10 $ 0.35 $ 0.30 Diluted $ 0.11 $ 0.09 $ 0.31 $ 0.27 See notes to condensed consolidated financial statements
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HERITAGE COMMERCE CORP Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months ended September 30, 1999 1998 Cash flows from operating activities: Net income $ 2,055,000 $ 1,557,000 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 616,000 447,000 Provision for loan losses 1,483,000 1,060,000 Gain on sale of securities available-for-sale (1,004,000) (358,000) Net amortization of premiums/ accretion of discounts (179,000) 139,000 Proceeds from sales of loans 4,317,000 358,000 Originations of loans held for sale (9,475,000) (3,203,000) Maturities of loans held for sale 4,244,000 34,000 Increase in accrued interest receivable and other assets (6,138,000) (3,264,000) Decrease in accrued interest payable and other liabilities 3,487,000 1,969,000 Net cash used by operating activities (594,000) (1,261,000) Cash flows from investing activities: Net decrease (increase) in loans 6,777,000 (90,360,000) Purchases of investment securities available-for-sale (26,334,000) (25,484,000) Maturities of investment securities available-for-sale 15,082,000 12,486,000 Sales of investment securities available-for-sale 49,512,000 7,635,000 Purchases of investment securities held-to-maturity --- (8,898,000) Maturities of investment securities held-to-maturity 1,115,000 7,617,000 Purchases of corporate owned life insurance (3,801,000) (904,000) Capital expenditures (654,000) (1,523,000) Net cash provided by (used by) investing activities 41,697,000 (99,431,000) Cash flows from financing activities: Net increase in deposits 47,692,000 120,892,000 Proceeds from issuance of stock 11,200,000 5,846,000 Proceeds from exercise of stock options 388,000 49,000 Net cash provided by financing activities 59,280,000 126,787,000 Net increase in cash and cash equivalents 100,383,000 26,095,000 Cash and cash equivalents, beginning of period 46,639,000 43,185,000 Cash and cash equivalents, end of period $ 147,022,000 $ 69,280,000 Other cash flow information: Interest paid in cash $ 7,385,000 $ 4,963,000 Income taxes paid in cash $ 1,835,000 $ 1,034,000 See notes to condensed consolidated financial statements
- 4 - HERITAGE COMMERCE CORP AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 1999 (Unaudited) 1) Basis of Presentation The unaudited condensed consolidated financial statements of Heritage Commerce Corp and its wholly owned subsidiaries, Heritage Bank of Commerce and Heritage Bank East Bay, have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included the Company's Form 10-K Annual Report for the year ended December 31, 1998. In the Company's opinion, all adjustments necessary for a fair presentation of these condensed consolidated financial statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to current year presentation. The results for the three months and nine months ended September 30, 1999 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 1999. 2) Share and Per Share Amounts Earnings per common share (basic) are calculated based on the weighted average number of shares outstanding during the period. Earnings per common and common equivalent share (diluted) are calculated based on the weighted average number of shares outstanding during the period, plus equivalent shares representing the dilutive effect of stock options using the treasuring stock method. There was no difference in net income used in the calculation of basic and diluted earning per share. All share numbers have been restated for the stock split in February, 1999. Reconciliation of weighted average shares used earnings per share are as follows:
Three months ended September 30, Nine months ended September 30, 1999 1998 1999 1998 Weighted average common shares outstanding 6,272,202 5,530,522 5,803,809 5,139,054 Diluted effect of stock options outstanding 691,311 643,896 762,083 535,896 Shares used in computing diluted earnings per share 6,963,513 6,174,418 6,565,892 5,674,950
3) Adoption of FAS 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 , "Accounting for Derivative Instruments and Hedging Activities." The Company adopted the provisions of SFAS No. 133 effective February 1, 1999. Because of the Company's minimal use of derivatives, the adoption of SFAS No. 133 did not significantly impact the Company's earnings or financial position. As allowed by SFAS No. 133 the Company transferred approximately $11.67 million of certain serurities from the held-to-maturity to available-for-sale classification. The gross realized and gross unrealized gains or losses on the securities transferred were not material to the Company. - 5 - 4) Comprehensive Income Comprehensive income includes net income and other comprehensive income. The Company's only source of other comprehensive income is derived from unrealized gains and losses on investment securities available-for-sale. Reclassification adjustments resulting from gains and losses on investment securities that were realized and included in net income of the current period that also had been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose are excluded from comprehensive income of the current period. The Company's total comprehensive income was as follows: The following is a summary of the components of accumulated other comprehensive income:
For the Three Months Ended For the Nine Months Ended September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998 Net Income $ 753,000 $ 574,000 $ 2,055,000 $ 1,557,000 Other comprehensive income, net of tax: Net unrealized holding gain on securities available-for-sale during the period 40,000 633,000 294,000 828,000 Less: reclassification adjustment for realized gains on available-for-sale securities included in net income during the period --- (37,000) (1,004,000) (104,000) Other comprehensive income (loss) 40,000 596,000 (710,000) 724,000 Comprehensive income $ 793,000 $ 1,170,000 $ 1,345,000 $ 2,281,000
5) Business Acquisition On September 21, 1999, the Company, through its wholly owned subsidiary Heritage Bank of Commerce signed a definitive agreement to acquire Business Factors, Inc. ("BFI") for $11,000,000. Pending required regulatory approval, the transaction is expected to close during the fourth quarter of 1999. BFI specializes in accounts receivable financing, inventory loans, equipment term loans, factoring, and other types of business loans. BFI is expected to operate as a subsidiary of Heritage Bank of Commerce. The operations of the Heritage Capital Group, a division of Heritage Bank of Commerce, which provides asset-based financing and factoring, are expected to be combined with those of BFI. - 6 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the quarter and nine months ended September 30, 1999 was $753,000 and $2,055,000, or $0.11 and $0.31 per diluted share, as compared to net income of $574,000 and $1,557,000, or $0.09 and $0.27 per diluted share, for the same period in 1998. The increase was attributable to the sale of the Internet credit card business as well as the growth in the level of average earning assets overall, and of loans in particular. Return on average assets annualized for the first nine months of 1999 and 1998 was 0.72% and 0.67%. Annualized return on average equity for the first nine months of 1999 was 8.06%, compared to 8.46% for the first nine months of 1998. Average interest earning assets for the quarter and nine months ended September 30, 1999 were up $45,208,000 and $63,951,000, or 14% and 23% over 1998, with much of the increase primarily attributable to growth in loans. The average rate earned on loans in the third quarter and nine months of 1999 was 9.95% and 9.84%, compared to 11.53% and 11.14% in the third quarter and nine months of 1998. The average rate on earning assets was 8.54% and 8.63% for the quarter and nine months ended September 30, 1999, compared to 9.24% and 8.91% for the quarter and nine months ended September 30, 1998. Average interest bearing liabilities increased $38,067,000 and $56,474,000, or 17% and 31% from three months and nine months ended September 30, 1998 compared to the same periods in 1999, with the increase attributable to growth in interest bearing demand deposits, saving and money market accounts, and growth in time deposits. The average rate paid on interest bearing liabilities was 4.10% and 3.94% at the three and nine months ended September 30, 1999, compared to 4.28% and 3.94% in the three and nine months ended September 30, 1998. The Company's net interest margin was 5.67% and 5.89% in the third quarter and nine months ended September 30, 1999, compared with 6.34% both in the third quarter and the nine months ended September 30, 1998. The Company's non-performing assets were $1,187,000 at September 30, 1999, compared to $1,288,000 at December 31, 1998. Shareholders' equity increased $12,933,000 to $43,630,000, or 9.31% of assets, at September 30, 1999, from $30,697,000 or 7.58% of assets, at December 31, 1998, due to the Company selling 758,138 new shares of stock at a price of $15.00 per share for the period ending September 30, 1999. The Company's Tier 1 and total risk-based capital ratios were 12.6% and 13.9% at September 30, 1999, compared to 9.2% and 10.4%, respectively, at December 31, 1998. Due to the stock offering closed in the quarter ended September 30, 1999, the Company's leverage capital ratio stood at 10.7% at September 30, 1999. This compares with a leverage ratio of 7.5% at December 31, 1998 and 8.3% at September 30, 1999. - 7 - RESULTS OF OPERATIONS Net Interest Income and Net Interest Margin The following table presents the Company's average balance sheet, net interest income and the resultant yields for the periods presented:
For the three months ended September 30,1999 For the three months ended September 30,1998 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets: Loans, gross $ 260,884 $ 6,545 9.95% $ 193,541 $ 5,626 11.53% Investments securities 43,220 551 5.06% 101,324 1,495 5.85% Federal fund sold 61,675 780 5.02% 25,706 348 5.37% Total interest earning assets 365,779 $ 7,876 8.54% 320,571 $ 7,469 9.24% Cash and due from banks 18,128 20,680 Premises and equipment, net 3,177 3,038 Other assets 20,093 7,562 Total assets $ 407,177 $ 351,851 Liabilities and shareholders'equity: Deposits Demand, interest bearing $ 8,751 $ 28 1.27% $ 7,822 $ 38 1.93% Savings and money market 129,283 1,095 3.36% 131,499 1,269 3.83% Time deposits, less than $100,000 41,261 549 5.28% 18,575 253 5.40% Time deposits, $100,000 and over 64,310 790 4.87% 55,599 721 5.14% Brokered deposits 11,913 173 5.76% 4,111 67 6.47% Other borrowings 304 11 14.32% 149 2 5.74% Total interest bearing liabilities 255,822 $ 2,646 4.10% 217,755 $ 2,350 4.28% Demand deposits 105,924 102,612 Other liabilities 5,671 3,506 Total liabilities 367,417 323,873 Shareholders' equity 39,760 27,978 Total liabilities and shareholders' equity $ 407,177 $ 351,851 Net interest income / margin $ 5,230 5.67% $ 5,119 6.34% Note: Yields and amounts earned on loans include loan fees of $531,000 and $407,000 for the three month periods ended September 30, 1999 and 1998, respectively. For the Nine Months Ended September 30,1999 For the Nine Months Ended September 30,1998 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets: Loans, gross $ 255,228 $ 18,794 9.84% $ 160,640 $ 13,381 11.14% Investments securities 48,946 1,944 5.31% 97,609 4,396 6.02% Federal funds sold 39,336 1,427 4.85% 21,310 860 5.40% Total interest earning assets 343,510 $ 22,165 8.63% 279,559 $ 18,637 8.91% Cash and due from banks 16,867 20,618 Premises and equipment, net 3,182 2,719 Other assets 16,482 6,450 Total assets $ 380,041 $ 309,346 Liabilities and shareholders' equity: Deposits: Demand, interest bearing $ 9,493 $ 102 1.44% $ 6,989 $ 100 1.91% Savings and money market 125,748 3,022 3.21% 113,541 2,915 3.43% Time deposits, less than $100,000 35,687 1,406 5.27% 11,967 460 5.14% Time deposits, $100,000 and over 59,011 2,130 4.83% 48,089 1,814 5.04% Brokered deposits 8,092 346 5.72% 1,385 66 6.40% Other borrowings 469 22 6.25% 55 3 6.17% Total interest bearing liabilities 238,500 $ 7,028 3.94% 182,026 $ 5,358 3.94% Demand deposits 101,720 99,913 Other liabilities 5,748 2,782 Total liabilities 345,968 284,721 Shareholders' equity 34,073 24,625 Total liabilities and shareholders' equity $ 380,041 $ 309,346 Net interest income / margin $ 15,137 5.89% $ 13,279 6.34% Note: Yields and amounts earned on loans include loan fees of $1,463,000 and $1,046,000 for the nine month periods ended September 30, 1999 and 1998, respectively.
- 8 - The Company's net interest income for the third quarter and nine months end of 1999 was $5,230,000 and $15,137,000, an increase of $111,000 and $1,858,000 over the third quarter and nine months end of 1998. When compared to the third quarter and nine months end of 1998, average earning assets increased by $45,208,000 and $63,951,000. The net yield on average earning assets was 5.67% and 5.89% in the third quarter and the first nine months of 1999, compared to 6.34% both in the third quarter and the first nine months of 1998 The following table sets forth an analysis of the changes in interest income and increase in the volume of interest earning liabilities balanceed by a decrease in the average rate earned and paid. The total change is shown in the column designated "Net Change" and is allocated in the columns to the left, to the portions respectively attributable to volume changes and rate changes that occurred during the period indicated. Changes due to both volume and rate have been allocated between the volume and rate categories in proportion to the relationship of the changes due solely to the changes in volume and rate, respectively.
Three Months Ended September 30 1999 vs. 1998 Increase (Decrease) Due to Change In: Average Average Net (Dollars in thousands) Volume Rate Change Interest earning assets Loans, gross $ 1,691 $ (772) $ 919 Investments securities (741) (203) (944) Federal funds sold 455 (23) 432 Total interest earning assets $ 1,405 $ (998) $ 407 Interest bearing liabilities Demand, interest bearing $ 3 $ (13) $ (10) Money Market and Savings (19) (155) (174) Time deposits, less than $100,000 302 (6) 296 Time deposits, $100,000 and over 108 (39) 69 Brokered Deposits 113 (7) 106 Other borrowings 6 3 9 Total interest bearing liabilities $ 513 $ (217) $ 296 Net interest income $ 892 $ (781) $ 111 Nine Months Ended September 30 1999 vs. 1998 Increase (Decrease) Due to Change In: Average Average Net (Dollars in thousands) Volume Rate Change Interest earning assets Loans, gross $ 6,971 $ (1,558) $ 5,413 Investments securities (1,933) (519) (2,452) Federal funds sold 654 (87) 567 Total interest earning assets $ 5,692 $ (2,164) $ 3,528 Interest bearing liabilities Demand, interest bearing $ 27 $ (25) $ 2 Money Market and Savings 296 (189) 107 Time deposits, less than $100,000 934 12 946 Time deposits, $100,000 and over 393 (77) 316 Brokered Deposits 287 (7) 280 Other borrowings 19 0 19 Total interest bearing liabilities $ 1,956 $ (286) $ 1,670 Net interest income $ 3,736 $ (1,878) $ 1,858
Provision for Loan Losses During the third quarter of 1999, the provision for loan losses was $356,000, down $194,000 from $550,000 for the third quarter of 1998, due to the sale of Internet credit card portfolio. - 9 - Noninterest Income The following table sets forth the various components of the Company's noninterest income for the periods indicated:
Three months ended Increase September 30 1999 versus 1998 (Dollars in thousands) 1999 1998 Amount Percent Gain of sale of loans $ 271 $ 50 $ 211 442% Gain on sale of securities available-for-sale --- 291 (291) (100%) Service charges and other fees 84 62 22 35% Servicing income 1,180 --- 1,180 --- Other investment income 73 95 (22) (23%) Other income 194 98 96 98% Total $ 1,802 $ 596 $ 1,206 202% Nine months ended Increase September 30 1999 versus 1998 (Dollars in thousands) 1999 1998 Amount Percent Gain on sale of loans $ 401 $ 83 $ 318 383% Gain on sale of securities available-for-sale 1,004 358 646 180% Service charges and other fees 226 161 65 40% Servicing income 1,180 --- 1,180 --- Other investment income 201 203 (2) (1%) Other income 701 165 536 325% Total $ 3,713 $ 970 $ 2,743 283%
Noninterest income for the third quarter and the first nine months ended September 30, 1999 was $1,802,000 and $3,713,000, up $1,206,000, or 202%, and $2,743,000, or 283%, from $596,000 and $970,000 for the third quarter and the nine months ended September 30, 1998. For the nine month period, this increase was primarily the result of gains recognized on the sale of securities available-for-sale and the sale of the Company's Internet credit card portfolio. Noninterest Expense The following table sets forth the various components of the Company's noninterest expenses for the periods indicated:
For The Three Months Ended September 30, Percent Increase Increase (Dollars in thousands) 1999 1998 (Decrease)(Decrease) Salaries and benefits $ 2,714 $ 2,078 $ 636 31% Client services 362 511 (149) (29%) Furniture and equipment 244 236 8 3% Occupancy 300 224 76 34% Advertising and promotion 215 221 (6) (2%) Loan origination costs 145 109 36 33% Professional fees 884 97 787 811% Stationery & Supplies 91 73 18 25% Telephone expense 56 38 18 47% All other 492 561 (69) (12%) Total $ 5,503 $ 4,148 $ 1,355 33%
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For The Nine Months Ended September 30, Percent Increase Increase (Dollars in thousands) 1999 1998 (Decrease)(Decrease) Salaries and benefits $ 7,678 $ 5,448 $ 2,230 41% Client services 1,158 1,430 (272) (19%) Furniture and equipment 824 589 235 40% Occupancy 793 566 227 40% Advertising and promotion 592 588 4 1% Loan origination costs 401 304 97 32% Professional fees 1,129 410 719 175% Stationery & Supplies 226 181 45 25% Telephone expense 159 119 40 34% All other 1,292 993 299 30% Total $ 14,252 $ 10,628 $ 3,624 34%
Noninterest expenses for the third quarter of 1999 were $5,503,000, up $1,355,000, or 33%, from $4,148,000 for the third quarter of 1998. Noninterest expenses for the first nine months of 1999 were $14,252,000, up $3,624,000,or 34%, from $10,628,000 for the first nine months of 1998, to support the Company's loan and deposit growth and the opening of a branch office in the South Valley in city of Morgan Hill, California. Noninterest expenses consist primarily of salaries and employee benefits (49% and 50% of total noninterest expenses for the third quarter of 1999 and 1998, respectively; 54% and 51% of total noninterest expenses for the nine months ended September 30, 1999 and 1998, respectively) and client services (7% and 12% of total non-interest expenses for the third quarter of 1999 and 1998, respectively; 8% and 13% of total noninterest expenses for the first nine months of 1999 and 1998, respectively). The increase in salaries and benefits expenses was primarily attributable to an increase in the number of employees. The Company employed 135 people at September 30,1999, up 17 from 118 at September 30, 1998. Client services expenses included courier and armored car costs, imprinted check costs, and other client services costs, all of which are directly related to the amount of funds on deposit in accounts at the Company. Due to lower balances in these accounts in the third quarter of 1999, the expense was less than the previous year. The increase in furniture and equipment expenses and in occupancy expenses was primarily attributable to an increase in the number of employees and new banking locations. The increase in professional fees is primarily due to consultants the Company has used for a variety of ongoing projects. Income Taxes The provision for income taxes for the nine months ended September 30, 1999 was $1,060,000 as compared to $1,004,000 for the same period in 1998. The effecitve income tax rate for the state and federal income taxes for the nine months ended September 30, 1999 was 34.0% as compared to 39.2% for the same period in 1998. The difference in the effecitve tax rate compared to the statutory tax rate and the reduction in the effective tax rate is primarily the result of the Company holding certain life insurance contracts and the Company's investment in municipal securities. - 11 - FINANCIAL CONDITION Total assets increased 17% to $468,574,000 at September 30, 1999, compared to $399,079,000 at September 30, 1998. The growth was primarily due to increases in the Company's cash and cash equivalents and loan portfolio funded by growth in deposits offset by decreases in investment securities. Securities Portfolio The following table summarizes the composition of the Company's investment securities and the weighted average yields at September 30, 1999:
September 30, 1999 Maturity After One Year After Five Years Total Within and Within and Within After Amortized One Year Five Years Ten Years Ten Years Cost (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale: U.S. Treasury $ 10,033 4.79% $ 8,119 5.28% $ --- --- $ --- --- $ 18,152 5.01% Municipals - taxable --- --- 420 6.51% --- --- --- --- 420 6.51% Municipals - non-taxable --- --- --- --- 3,485 4.71% 1,579 4.78% 5,064 4.73% Total available-for-sale $ 10,033 4.79% $ 8,539 5.34% $ 3,485 4.71% $1,579 4.78% $ 23,636 4.98% Securities held-to-maturity: Municipals - taxable $ 1,880 6.30% $ 4,030 6.54% $ 515 6.45% $ --- --- $ 6,425 6.46% Municipals - non taxable --- --- 461 4.86% 5,841 4.50% 1,118 4.59% 7,420 4.54% Total held-to-maturity $ 1,880 6.30% $ 4,491 6.37% $ 6,356 4.66% $1,118 4.59% $ 13,845 5.43% Total securities $ 11,913 5.03% $ 13,030 5.69% $ 9,841 4.68% $2,697 4.70% $ 37,481 5.14% Note: Yield on non-taxable municipal securities are not presented in a fully tax equivalent basis.
Loans Total gross loans increased 4% to $245,411,000 at September 30, 1999, as compared to $236,307,000 at December 31, 1998. The increase in loan balances was due to the business development efforts of the Company's loan teams. The following table indicates the Company's loan portfolio for the periods indicated:
(Dollars in thousands) September 30, 1999 % of Total December 31, 1998 % of Total Commercial $ 105,543 43% $ 79,567 34% Real estate - mortgage 69,246 28% 57,216 24% Real estate - land and construction 68,662 28% 49,270 21% Consumer 2,022 1% 50,349 21% Total loans 245,473 100% 236,402 100% Deferred loan fees (62) (95) Allowance for loan losses (4,569) (3,825) Loans, net $ 240,842 $ 232,482
The change in the Company's loan portfolio is primarily due to the increase in the commercial and real estate loan portfolio offset by a decline in the consumer portfolio resulting from the sale of the Internet credit card portfolio. - 12 - The Company's loan portfolio is based in commercial (primarily to companies engaged in manufacturing, wholesale, and service businesses) and real estate lending, with the balance in consumer loans. However, while no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans. In February 1998, the Company entered into a contract with Internet Access Financial Corporation to provide a credit card over the Internet. The customers for the credit cards were not limited to Northern California, the Companys' primarily market area, as the product was available to anyone across the country. The growth in 1998 in the consumer loan portfolio was attributable to the introduction of this Internet credit card. As noted in the above table, the consumer loans category declined from $50,349,000 at December 31, 1998 to $2,022,000 at September 30, 1999 as a result of the sale of the Internet credit card portfolio. The Company has continued its relationship with Internet Access Financial Corporation as a provider of certain administrative services to them in conjunction with the issuance of credit cards. The following table sets forth the maturity distribution of the Company's loans at September 30, 1999:
Over One Year Due in One But Less Than Over (Dollars in thousands) Year or Less Five Years Five Years Total Commercial $ 98,739 $ 6,574 $ 168 $ 105,481 Real estate - mortgage 31,960 20,882 16,404 69,246 Real estate - land and construction 68,662 --- --- 68,662 Consumer 1,089 920 13 2,022 Total loans $ 200,450 $ 28,376 $ 16,585 $ 245,411 Loans with variable interest rates $ 190,360 $ 10,060 $ 307 $ 200,727 Loans with fixed interest rates 10,090 18,315 16,279 44,684 Total $ 200,450 $ 28,375 $ 16,586 $ 245,411 Note: Total shown is net of deferred loan fees of $62,000 at September 30, 1999.
The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the western edition of The Wall Street Journal. At September 30, 1999, approximately 82% of the Company's loan portfolio consisted of floating interest rate loans. Allowance for Loan Losses Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes an assessment of the following factors: past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, collateral value, loan volumes and concentrations, recent loss experience in particular segments of the portfolio, bank regulatory examination results, and current economic conditions. Management has established an evaluation process designed to determine the adequacy of the allowance for loan losses. This process attempts to assess the risk of loss inherent in the portfolio by segregating the allowance for loan losses into four components:"watch", "special mention", "substandard"and "doubtful". It is the policy of management to maintain the allowance for loan losses at a level adequate for known and future risks inherent in the loan portfolio. Based on information currently available to analyze loan loss delinquency and a history of actual charge-offs, management believes that the loan loss provision and allowance are adequate; however, no assurance of the ultimate level of credit losses can be given with any certainty. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. - 13 - The following table summarizes the Companys' loan loss experience as well as transactions in the allowance for loan losses and certain pertinent ratios for the periods indicated:
Nine months ended Year ended September 30, December 31, (Dollars in thousands) 1999 1998 1998 Balance, beginning of period / year $ 3,825 $ 2,884 $ 2,285 Charge-offs (797) (35) (173) Less recoveries 58 3 137 Net loans charged-off (739) (32) (36) Provision for loan losses 1,483 550 1,576 Balance, end of period / year $ 4,569 $ 3,402 $ 3,825 Ratios: Net charge-offs to average loans outstanding 0.31% 0.02% 0.02% Allowance for loan losses to average loans 1.89% 2.37% 2.11% Allowance for loan losses to total loans 1.86% 1.67% 1.62% Allowance for loan losses to non-performing loans 385% --- 297%
The increase in charge-offs relates primarily to the Company's consumer credit card portfolio. The following table summarizes the allocation of the allowance for loan losses (ALL) by loan type and the allocated allowance as a percent of loans outstanding in each loan category at the dates indicated:
September 30, 1999 September 30, 1998 December 31, 1998 Percent of ALL Percent of ALL Percent of ALL in each category in each category in each category (Dollars in thousands) Amount to total loans Amount to total loans Amount to total loans Commercial $ 2,196 2.08% $ 1,486 2.19% $ 1,567 1.98% Real estate - mortgage 293 0.42% 219 0.37% 224 0.39% Real estate - land and construction 1,064 1.55% 776 1.93% 815 1.65% Consumer 28 1.37% 458 1.27% 1,146 2.28% Unallocated 988 --- 463 --- 73 --- Total $ 4,569 1.86% $ 3,402 1.67% $ 3,825 1.62%
The increase in the allowance for loan losses reflects increasing on a percentage basis the reserve for the Company's commercial and real estate loan portfolio. It also reflects the increase in non-performing assets in the general loan portfolio. - 14 - Deposits Deposits totaled $416,650,000 at September 30, 1999, an increase of 19%, as compared to total deposits of $350,047,000 at December 31, 1998. The increase in deposits was primarily due to increases in saving and money market accounts and time deposit accounts. Noninterest bearing deposits were $120,097,000 at September 30, 1999, compared to $120,854,000 at December 31, 1998. Interest bearing deposits were $296,553,000 at September 30, 1999, an increase of 29% as compared to $229,193,000 at December 31, 1998 The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated:
Nine months ended Year ended September 30, 1999 December 31, 1998 Average Average Average Average (Dollars in thousands) Balance Rate Paid Balance Rate Paid Demand, non-interest bearing $ 101,720 --- $ 102,834 --- Demand, interest bearing 9,493 1.44% 7,368 1.85% Saving and money market 125,748 3.21% 122,157 3.46% Time deposits less than $100,000 35,687 5.27% 16,638 5.28% Time deposits, $100,000 and over 59,011 4.83% 48,861 5.04% Brokered deposits 8,092 5.72% 3,826 5.87% Total average deposits $ 339,751 2.76% $ 301,684 2.63%
Deposit Concentration and Deposit Volatility The following table indicates the maturity schedule of the Company's time deposits of $100,000 or more as of September 30, 1999.
(Dollars in thousands) Balance % of Total Three months or less $ 30,436 40% Over three months through twelve months 42,723 56% Over twelve months 2,986 4% Total $ 76,145 100%
The Company focuses primarily on servicing business accounts that are frequently over $100,000 in average size. Certain types of accounts that the Company makes available are typically in excess of $100,000 in average balance per account, and certain types of business clients whom the Company serves typically carry deposits in excess of $100,000 on average. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to ensure its ability to fund deposit withdrawals. Interest Rate Risk The planning of asset and liability maturities is an integral part of the management of an institution's net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or investments or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities. - 15 - The following table sets forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities at September 30, 1999, using the rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or when it is scheduled to mature within the specified time frame:
Within Due in Three Due After Three to Twelve One to Five Due After Not Rate- (Dollars in thousands) Months Months Years Five Years Sensitive Total Interest earning assets: Federal funds sold $ 128,130 $ --- $ --- $ --- $ --- $ 128,130 Securities 7,018 4,883 13,006 12,514 --- 37,421 Total loans 204,556 13,266 28,375 16,587 --- 262,784 Total interest earning assets 339,704 18,149 41,381 29,101 --- 428,335 Cash and due from banks 18,892 18,892 Other assets 21,347 21,347 Total assets $ 339,704 $ 18,149 $ 41,381 $ 29,101 $ 40,239 $ 468,574 Interest bearing liabilities: Demand, interest bearing $ 8,209 $ --- $ --- $ --- $ --- $ 8,209 Savings and money market 169,875 --- --- --- --- 169,875 Time deposits 39,705 72,229 6,535 --- --- 118,469 Total interest bearing liabilities 217,789 72,229 6,535 --- --- 296,553 Noninterest demand deposits 43,839 --- --- --- 76,258 120,097 Other liabilities 8,294 8,294 Shareholders' equity 43,630 43,630 Total liabilities and shareholders' equity $ 261,628 $ 72,229 $ 6,535 --- $128,182 $ 468,574 Interest rate sensitivity GAP $ 78,076 $ (54,080) $ 34,846 $ 29,101 $(87,943) --- Cumulative interest rate sensitivity GAP $ 78,076 $ 23,996 $ 58,842 $ 87,943 --- --- Cumulative interest rate sensitivity GAP ratio 16.66% 5.12% 12.56% 18.77%
The foregoing table demonstrates that the Company had a positive cumulative one year gap of $24 million, or 5.12% of total assets, at September 30, 1999. In theory, this would indicate that $24 million more in assets than liabilities would reprice if there was a change in interest rates over the next year. If interest rates were to increase, the positive gap would tend to result in a higher net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net margin without affecting interest rate sensitivity. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of credit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis table. These prepayments may have significant effects on the Company's net interest margin. Because of these factors, an interest sensitivity gap report may not provide a complete assessment of the Company's exposure to changes in interest rates. Liquidity and Liability Management To meet liquidity needs, the Company maintains a portion of its funds in cash deposits in other banks, in Federal funds sold, and in investment securities. At September 30, 1999, the Company's primary liquidity ratio was 38.39%, comprised of $18.5 million in investment securities available-for-sale with maturity (or probable calls) of up to five years, less $9.0 million of securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $128.1 million, and $18.9 million in cash and due from banks, as a percentage of total unsecured deposits of $407.7 million. - 16 - Capital Resources The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the Company:
September 30, December 31, (Dollars in thousands) 1999 1998 1998 Capital components: Tier 1 Capital $ 43,531 $ 29,246 $ 29,850 Tier 2 Capital 4,313 3,402 3,825 Total risk-based capital $ 47,844 $ 32,648 $ 33,675 Risk-weighted assets $ 344,751 $ 290,383 $ 323,699 Average assets $ 406,686 $ 351,727 $ 399,092 Minimum Regulatory Requirements Capital ratios: Total risk-based capital 13.9% 11.2% 10.4% 8.0% Tier 1 risk-based capital 12.6% 10.1% 9.2% 4.0% Leverage ratio (1) 10.7% 8.3% 7.5% 4.0% (1) Tier 1 capital divided by average assets (excluding goodwill).
The Company completed a public stock offering on August 16, 1999 resulting in an increase of $11,200,000 net of issuance cost in equity. The Company sold 758,138 new shares at a price of $15.00 per share. Year 2000 The possible inability of computers, software, and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the year 2000 problem. On January 1, 2000, such systems may be unable to accurately process certain date-based information. This discussion of the implications of the year 2000 problem for the Company contains numerous forward-looking statements based on inherently uncertain information. The cost of the project and the date on which the Company plans to complete the internal year 2000 modifications are based on management's best estimates of future events. The Company cannot guarantee these estimates and actual results could differ. Although management believes it will be able to make the necessary modifications in advance, failure to modify the systems may have a material adverse effect on the Company. The Company has developed a plan to assess its year 2000 preparedness, consisting of the following phases: - - Awareness of the year 2000 problems - - Risk assessment of internal and external systems - - Renovation of problems found in the risk assessment phase - - Validation of renovated systems - - Implementation of validated systems - 17 - Resolution of the year 2000 problem is among the Company's highest priorities, and the Company is preparing for the century change with a comprehensive enterprise-wide year 2000 program. The Company has identified all of the major systems and has employed external and internal resources to renovate and test the systems. The Company is testing purchased software and systems supported by external parties as part of the program. The Company is evaluating customers and vendors that have significant relationships with the Company to determine whether they are adequately preparing for the year 2000. In addition, the Company is developing contingency plans to reduce the impact of some potential events that may occur. The Company cannot guarantee, however, that the systems of vendors or customers with whom it does business will be completed on a timely basis, or that contingency plans will shield operations from failures that may occur. The Company identified over 90 individual year-2000 projects. The projects varied in size, importance and materiality, from large undertakings, such as remediating complicated data systems, to smaller, but still important, projects such as installing compliant computer utility systems. All of the projects identified have been completed. The Company assigned projects a priority, indicating the importance of the function to the Company's continuing operation. This prioritization facilitated reporting on projects based on their relative importance. The Company prioritized projects as "High Priority - In House", "High Priority - Not In House" and "Medium Priority". Both High Priority categories have projects classified as "Mission Critical". Mission Critical projects are defined as: - - systems vital to the continuance of a broad core business activity; - - functions, the interruption of which for longer than 3 days would threaten the Company's viability; or - - functions that provide the environment and infrastructure necessary to continue the broad core business activities. Testing of all mission critical systems was complete as of March 12, 1999 and the Company has completed a follow-up assessment of many of its clients' year 2000 preparedness. Currently, the Company's focus is on vendor follow-up and contingency plans. The Company has communicated with all vendors with whom it does significant business to determine their year 2000 compliance readiness and the extent to which the Company is vulnerable to any third-party year 2000 risks. All the vendors that present year 2000 risks have completed or are substantially complete with their testing. The Company does not significantly rely on "embedded technology" in its critical processes. Most building systems in the Company's main offices use mechanical systems rather than embedded technology and therefore do not pose any year 2000 risk. Risks The principal risks associated with the year 2000 problem can be grouped into three categories: - - the Company does not successfully ready its operations for the next century, - - disruption of the Company's operations due to operational failures of third parties, and - - business interruption among fund providers and obligors such that expected funding and repayment does not take place The only risk largely under the Company's control is preparing the Company's internal operations for the year 2000. The Company, like other financial institutions, is heavily dependent on its computer systems. The complexity of these systems and their interdependence make it impractical to convert to alternative systems without interruptions if necessary modifications are not completed on schedule. The Company believes it has made all modifications necessary to continue operations into and beyond the Year 2000. - 18 - Failure of third parties may jeopardize the Company's operations, but the seriousness of this risk depends on the nature and duration of the failures. The most serious impact on the Company's operations from vendors would result if basic services such as telecommunications, electric power, and services provided by other financial institutions and governmental agencies were disrupted. Some public disclosure about readiness preparation among basic infrastructure and other suppliers is now available. The Company is unable, however, to estimate the likelihood of significant disruptions among its basic infrastructure suppliers. In view of the unknown probability of occurrence and impact on its operations, the Company considers the loss of basic infrastructure services to be the most reasonably likely worst case year 2000 scenario. Operational failures among the Company's customers could affect their ability to continue to provide funding or meet obligations when due. The information the Company develops in the customer assessments described earlier allows the Company to identify those customers that exhibit a risk of not making adequate preparations for the century change. The Company is taking appropriate actions to manage these risks. Contingency Plans The Company has developed a business resumption contingency plans for the year 2000. Business resumption contingency plans address the actions that the Company would take if critical business functions cannot be carried out in the normal manner upon entering the next century due to system or supplier failure. Cost The total cost to the Company of year 2000 compliance issues, which includes testing, system replacement and any anticipated lost revenue, has been approximately $30,000 and is not anticipated to increase substantially through the completion of all projects. These costs and the date on which the Company plans to complete the year 2000 modifications and testing process are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes have occurred during the quarter to the Company's market risk profile or information. For further information refer to the Company's annual report on Form 10-K. - 19 - Part II - Other Information Item 1. - Legal Proceedings To the best of the Company's knowledge, there are no pending legal proceedings to which the Company is a party which may have a materially adverse effect on the Company's financial condition, results of operations, or cash flows. Item 2. - Changes in Securities and Use of Proceeds On August 16, 1999, the Company completed a public offering. The Company sold 758,138 new shares at a price of $15.00 per share. Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits included with this filing: Exhibit Number Name 10.1 Executive Indexed Compensation Benefits Agreement and The Split Dollar Agreement with John E. Rossell 10.2 Executive Indexed Compensation Benefits Agreement and The Split Dollar Agreement with Richard L. Conniff 10.3 Executive Indexed Compensation Benefits Agreement and The Split Dollar Agreement with Brad L. Smith 10.4 Form of Director Agreement 10.5 Form of Director Surrogate Agreement 27.1 Financial Data Schedule (b) Reports on Form 8-K On September 21, 1999 the Company filed Form 8-K to report the signing of a definitive agreement to acquire Business Factors, Inc. On September 25, 1999, the Company filed its quarterly earnings press release with the SEC on Form 8-K. - 20 - 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. Heritage Commerce Corp (Registrant) November 15, 1999 /s/ John E. Rossell Date John E. Rossell, III, President and CEO November 15, 1999 /s/ Lawrence D. McGovern Date Lawrence D. McGovern, Chief Financial Officer EX-10.1 2 EXECUTIVE INDEXED COMPENSATION BENEFITS AGREEMENT This Agreement is made and entered into effective as of June 19, 1997 by and between Heritage Bank of Commerce, a bank chartered under the laws of the State of California (the "Employer"), and John E. Rossell, an individual residing in the State of California (the "Executive"). R E C I T A L S WHEREAS, the Executive is an employee of the Employer, serving as its President and Chief Executive Officer since June 8, 1994, the approximate date of the Employer's organization; WHEREAS, the Employer desires to establish a compensation benefit program as a fringe benefit for executive officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Executive's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Executive with certain fringe benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer's employment; and WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive, or to the Executive's spouse or the Executive's designated beneficiaries, as the case may be; NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows: A G R E E M E N T 1. TERMS AND DEFINITIONS. 1.1. ADMINISTRATOR. The Employer shall be the "Administrator" and, solely for the purposes of ERISA as defined in subparagraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. -1- 1.2. APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall mean that percentage adjacent to a calendar period listed on Schedule "A" attached hereto, which percentage shall remain in effect until an adjustment occurs on each succeeding calendar period during the term of employment. Notwithstanding the foregoing or the percentages set forth on Schedule "A," but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (i) provided payments have not yet begun hereunder, one hundred percent (100%) upon the occurrence of an event of termination described in subparagraph 5.4 pursuant to a "Change in Control" as defined in subparagraph 1.4 below, or the Executive's death, or Disability as defined in subparagraph 1.6 below, which death or Disability occurs prior to the termination of the Executive's employment by the Employer, or termination without cause; and (ii) notwithstanding subclause (i) of this subparagraph 1.2, zero percent (0%) in the event the Executive takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive's death and of which the Employer is the designated beneficiary. Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Executive takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive's death and of which the Employer is the designated beneficiary: (1) the Executive's estate or designated beneficiary shall no longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Employer shall have the right to recover from the Executive's estate all of the amounts paid to the Executive's estate (with respect to amounts paid prior to the Executive's death or paid to the Executive's estate) or designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after the Executive's death. 1.3. BENEFICIARY. The term "beneficiary" or "designated beneficiary" shall mean the person or persons whom the Executive shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "C," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof, completed and signed by the Executive and is received by the Administrator prior to the Executive's death. 1.4. CHANGE IN CONTROL. The term "Change in Control" shall mean the occurrence of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company organized at the direction of the Employer to own 100% of the Employer's outstanding common stock): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), -2- or in response to any other form or report to the regulatory agencies or governmental authorities having jurisdiction over the Employer or any stock exchange on which the Employer's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Employer in which the Employer does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Employer having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Employer, reflected in the most recent balance sheet of the Employer; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Employer representing twenty-five percent (25%) or more of the combined voting power of the Employer's then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Employer's shareholders, of each new director is approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there shall not be a "Change of Control" for purposes of this Agreement if the event which would otherwise come within the meaning of the term "Change of Control" involves (i) a reorganization at the direction of the Employer solely to form a parent bank holding company which owns 100% of the Employer's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Employer or its parent holding company which is the party that acquires "control" or is the principal participant in the transaction constituting a "Change in Control," as described above. 1.5. THE CODE. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the "Code"). 1.6. DISABILITY/DISABLED. The term "Disability" or "Disabled" shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of duty for at least three months including, without limitation, the total irrecoverable loss of the sight in both eyes or the loss by severance of both hands at or above the wrist or of both feet at or above the ankle or of one hand at or above the wrist and one foot at or above the ankle. 1.7. EARLY RETIREMENT DATE. The term "Early Retirement Date" shall mean the Retirement, as defined below, of the Executive on a date which occurs prior to the Executive attaining sixty-two (62) years of age, but after the Executive has attained fifty-five (55) years of age. -3- 1.8. EFFECTIVE DATE. The term "Effective Date" shall mean the date first written above. 1.9. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.10. EXECUTIVE BENEFITS. The term "Executive Benefits" shall mean the benefits determined in accordance with Schedule "B", and reduced to the extent: (i) required under the other provisions of this Agreement, including, but not limited to, Paragraphs 5, 6 and 7 hereof; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). 1.11. PLAN YEAR. The term "Plan Year" shall mean the Employer's fiscal year. 1.12. RETIREMENT. The term "Retirement" or "Retires" shall refer to the date which the Executive acknowledges in writing to Employer to be the last day the Executive will provide any significant personal services, whether as an employee or independent consultant or contractor, to Employer. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period. 1.13. SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the person, if any, who shall be legally married to the Executive on the date of the Executive's death. 1.14. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination of the employment of the Executive by reason of any of the following: (a) A termination "for cause" as this term may be defined in any written employment agreement entered into by and between the Employer and the Executive; (b) The willful breach of duty by the Executive in the course of his employment; (c) The habitual neglect by the Executive of his employment responsibilities and duties; (d) The Executive's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) -4- of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; (e) The determination by a state or federal banking agency or other governmental authority having jurisdiction over the Employer that the Executive is not suitable to act in the capacity for which he is employed by the Employer; (f) The Executive's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or (g) The Executive's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Employer or taking any action which the Employer's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Employer. 20 SCOPE, PURPOSE AND EFFECT. 2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect on or be affected by, the terms and provisions of said Employment Agreement. 2.2. FRINGE BENEFIT. The benefits provided by this Agreement are granted by the Employer as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 30 PAYMENTS UPON EARLY RETIREMENT OR RETIREMENT AND AFTER RETIREMENT. 3.1. PAYMENTS UPON EARLY RETIREMENT. The Executive shall have the right to Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 -5- above. In the event the Executive elects to Retire on a date which constitutes an Early Retirement Date, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of said Early Retirement Date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 3.2. PAYMENTS UPON RETIREMENT. If the Executive shall remain in the continuous employment of the Employer until attaining sixty-two (62) years of age, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive Retires or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of said Retirement date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". At the Employer's sole and absolute discretion, the Employer may increase the Executive Benefits as and when the Employer determines the same to be appropriate. 3.3. PAYMENTS IN THE EVENT OF DEATH AFTER RETIREMENT. The Employer agrees that if the Executive Retires, but shall die before receiving all of the Executive Benefits Payments specified in Schedule "B", the Employer agrees to pay the Applicable Percentage of the Executive Benefits to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. 40 PAYMENTS IN THE EVENT DEATH OR DISABILITY OCCURS PRIOR TO RETIREMENT. 4.1. PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. If the Executive dies at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Applicable Percentage of the Executive Benefits to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. -6- 4.2. PAYMENTS IN THE EVENT OF DISABILITY PRIOR TO RETIREMENT. In the event the Executive becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive becomes Disabled, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 50 PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED PRIOR TO RETIREMENT. As indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Executive's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the employment of the Executive shall be terminated, other than by reason of death, Disability or Retirement, prior to the Executive's attaining sixty-two (62) years of age, then this Agreement shall terminate upon the date of such termination of employment; provided, however, that the Executive shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Executive's termination: 5.1. TERMINATION WITHOUT CAUSE. If the Executive's employment is terminated by the Employer without cause, and such termination is not subject to the provisions of subparagraph 5.4 below, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.2. VOLUNTARY TERMINATION BY THE EXECUTIVE. If the Executive's employment is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a -7- commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.3. TERMINATION FOR CAUSE. The Executive agrees that if the Executive's employment with the Employer is terminated "for cause," as defined in subparagraph 1.14 of this Agreement, the Executive shall forfeit any and all rights and benefits the Executive may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Employer pursuant to the terms of this Agreement. 5.4. TERMINATION BY THE EMPLOYER ON ACCOUNT OF OR AFTER A CHANGE IN CONTROL. In the event: (i) the Executive's employment with the Employer is terminated by the Employer in conjunction with, or by reason of, a "Change in Control" (as defined in subparagraph 1.4 above); or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Executive's position, responsibilities, duties, salary, benefits, or location of employment after a "Change in Control" occurs; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Executive's employment after a "Change in Control" occurs, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, as defined above, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.5. PAYMENTS IN THE EVENT OF DEATH FOLLOWING TERMINATION. If the Executive dies prior to receiving all of the Executive Benefits described in this Paragraph 5 to which the Executive is entitled, then the Employer will make such payments to the Executive's -8- designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. 60 SECTION 280G BENEFITS REDUCTION. The Executive acknowledges and agrees that the parties have entered into this Agreement based upon certain financial and tax accounting assumptions. Accordingly, with full knowledge of the potential consequences the Executive agrees that, notwithstanding anything contained herein to the contrary, in the event that any payment or benefit received or to be received by the Executive, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Employer (together with the Executive Benefits, the "Total Payments"), will not be deductible (in whole or in part) as a result of Code Section 280G or other applicable provisions of the Code, the Total Payments shall be reduced until no portion of the Total Payments is nondeductible as a result of Section 280G or such other applicable provisions of the Code. For purposes of this limitation: (a) No portion of the Total Payments, the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the date of payment of any future Executive Benefits payments, shall be taken into account; (b) No portion of the Total Payments shall be taken into account, which in the opinion of the tax counsel selected by the Employer and acceptable to the Executive, does not constitute a "parachute payment" within the meaning of Section 280G of the Code; (c) Any reduction of the Total Payments shall be applied to reduce any payment or benefit received or to be received by the Executive pursuant to the terms of this Agreement and any other plan, arrangement or agreement with the Employer in the order determined by mutual agreement of the Employer and the Executive; (d) Future payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (a) or (b) above in their entirety) constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of tax counsel referred to in clause (b) above; and (e) The value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by independent auditors selected by the Employer and acceptable to the Executive in accordance with the principles of Section 280G of the Code. -9- 70 RIGHT TO DETERMINE FUNDING METHODS. The Employer reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, the Executive's spouse or the Executive's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Executive, the Executive's spouse nor the Executive's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Executive to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Executive, the Executive's spouse and the Executive's beneficiaries of any and all rights to payment hereunder. 80 CLAIMS PROCEDURE. The Employer shall, but only to the extent necessary to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Executive, the Executive's spouse, or the Executive's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Executive, the Executive's spouse or the Executive's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. -10- 90 STATUS AS AN UNSECURED GENERAL CREDITOR. Notwithstanding anything contained herein to the contrary: (i) neither the Executive, the Executive's spouse or the Executive's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Executive, the Executive's spouse or the Executive's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Executive, the Executive's spouse and the Executive's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. Notwithstanding subparagraphs (i) through (v) above, the Employer and the Executive acknowledge and agree that upon request of the Executive at any time during the term of this Agreement, a Rabbi Trust (the "Trust") shall be established upon such terms and conditions as may be mutually agreeable between the Employer and the Executive in order to permit the Employer to make contributions and/or transfer assets to the Trust to discharge its obligations pursuant to this Agreement. The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Executive or its beneficiaries in such manner and at such times as specified in this Agreement. 100 DISCRETION OF BOARD TO ACCELERATE PAYOUT. Notwithstanding any of the other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Executive (or Executive's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors and offered to the Executive [or Executive's spouse or designated beneficiaries] on a "take it or leave it basis"). 110 MISCELLANEOUS. 11.1. OPPORTUNITY TO CONSULT WITH INDEPENDENT ADVISORS. The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Executive's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, -11- Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for the Executive, himself, and his heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Executive further acknowledges and agrees that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions. 11.2. ARBITRATION OF DISPUTES. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), located in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3. ATTORNEYS' FEES. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered -12- therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. NOTICE. Any notice required or permitted of either the Executive or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Heritage Bank of Commerce 150 Almaden Boulevard San Jose, California 95113 Attn: Chairman of the Board If to the Executive: John E. Rossell 2231 Dartmouth Street Palo Alto, CA 94306 11.5. ASSIGNMENT. Neither the Executive, the Executive's spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive, the Executive's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Employer. The Employer's consent, if any, to one or more assignments or transfers shall not obligate the Employer to consent to or be construed as the Employer's consent to any other or subsequent assignment or transfer. 11.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be binding upon and inure to the benefit of the Executive and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or -13- reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. NONWAIVER. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. PARTIAL INVALIDITY. If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. MODIFICATIONS. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative. 11.11. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. GOVERNING LAW. The laws of the State of California, other than those laws denominated choice of law rules, and, where applicable, the rules and regulations of -14- the California Commissioner of Financial Institutions and the Federal Deposit Insurance Corporation, shall govern the validity, interpretation, construction and effect of this Agreement. IN WITNESS WHEREOF, the Employer and the Executive have executed this Agreement on the date first above-written in the City of San Jose, Santa Clara County, California. THE EMPLOYER THE EXECUTIVE Heritage Bank of Commerce By: ------------------------------- ---------------------------------------- William J. Del Biaggio, Jr. John E. Rossell Chairman of the Board of Directors -15- SCHEDULE A
CALENDAR PERIOD APPLICABLE PERCENTAGE --------------- --------------------- June 8, 1994 to June 7, 1997................................... 0.00% June 8, 1997 to June 7, 1998................................... 36.00% June 8, 1998 to June 7, 1999................................... 48.00% June 8, 1999 to June 7, 2000................................... 60.00% June 8, 2000 to June 7, 2001................................... 72.00% June 8, 2001 to June 7, 2002................................... 84.00% June 8, 2002 and Thereafter.................................... 100.00%
See subparagraph 1.2 of the Agreement for a definition and discussion of the Applicable Percentage. SCHEDULE B EXECUTIVE BENEFITS 1. Executive Benefits Determination. The Executive Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a liability reserve account on the books of the Employer for the benefit of the Executive. Prior to the date on which the Executive becomes eligible to receive payments under the Agreement, such Benefit Account shall be increased (or decreased) each Plan Year (including the Plan Year in which the Executive ceases to be employed by the Employer) by an amount equal to the annual earnings or loss for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Executive becomes eligible to receive payments under the Agreement, the Index Benefit for the Executive for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the earnings, if any, established by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: Canada Life Assurance Company\US2650615 American General Life Insurance Company\CM0000644L If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall receive and use annual policy illustrations that assume the above described -1- policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Employer's marginal tax rate until the Executive's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower.
- ----------------------------------------------------------------------------------------------- EXAMPLE INDEX BENEFITS - ----------------------------------------------------------------------------------------------- [n] [A] [B] [C] [D] INDEX [Annual OPPORTUNITY COST CASH SURRENDER Policy A(0) = premium ANNUAL CUMULATIVE END OF VALUE OF LIFE Income] A(0)+C(n-1)x.05x BENEFIT BENEFIT YEAR INSURANCE POLICY A(n)-A(n-1) (1-42%) B-C D+D(n-1) - ----------------------------------------------------------------------------------------------- 0 $1,000,000 -- -- -- -- - ----------------------------------------------------------------------------------------------- 1 $1,050,000 $50,000 $29,000 $21,000 $21,000 - ----------------------------------------------------------------------------------------------- 2 $1,102,500 $52,500 $29,841 $22,659 $43,659 - ----------------------------------------------------------------------------------------------- 3 $1,157,625 $55,125 $30,706 $24,419 $68,078 - ----------------------------------------------------------------------------------------------- . . . - -----------------------------------------------------------------------------------------------
Assumptions: Initial Insurance = $1,000,000 Effective Tax Rate = 42% One Year US Treasury Yield = 5% -2- 2. Executive Benefits Payments. The Executive shall be entitled to payment of the Applicable Percentage of (i) the balance in the Benefit Account in installments upon the terms as specified in the Agreement, and (ii) the Index Benefit for each Plan Year payable in installments until the Executive's death. -3- SCHEDULE C BENEFICIARY DESIGNATION To the Administrator of the Heritage Bank of Commerce Executive Indexed Compensation Benefits Agreement: Pursuant to the Provisions of my Executive Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: PRIMARY BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship SECONDARY (CONTINGENT) BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Executive Indexed Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the -1- remaining unpaid benefit payable according to the terms of my Executive Indexed Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Executive Indexed Compensation Benefits Agreement. Dated: June _____, 1997 ---------------------------------------- John E. Rossell CONSENT OF THE EXECUTIVE'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: I, __________________, being the spouse of John E. Rossell, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Executive Indexed Compensation Benefits Agreement entered into by my spouse effective as of June 19, 1997. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Executive Indexed Compensation Benefits Agreement and in which I may have a marital property interest. Dated: June _____, 1997 ------------------------------------------ - ---------------------------------- Type/Print Name -2- SCHEDULE D DISTRIBUTION ELECTION Pursuant to the Provisions of my Executive Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: -- thirty-six (36) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: June _____, 1997 Signed: ----------------------------- John E. Rossell LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT Insurer/Policy Number: Insurance Company: Canada Life Assurance Company\US2650615 American General Life Insurance Company\CM0000644L Bank: Heritage Bank of Commerce Insured: John E. Rossell Relationship of Insured to Bank: Executive Officer Date: _____________, 19__ The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy") shall be as follows: I. DEFINITIONS Refer to the Policy provisions for the definition of all terms in this Agreement. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. The Insured's beneficiary(ies), designated in accordance with Paragraph III, shall be entitled to an amount equal to eighty percent (80%) of the net at risk insurance portion of the proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank shall be entitled to the remainder of such proceeds. 3. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value -2- of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: 1. The Insured's right to receive benefits under that certain Executive Indexed Compensation Benefits Agreement effective as of ____________, 19___ shall terminate for any reason other than the Insured's death, or 2. The Insured shall be discharged from service with the Bank for cause. The term "for cause" shall mean: a. A termination "for cause" as this term may be defined in any written employment agreement entered into by and between the Bank and the Insured; b. The willful breach of duty by the Insured in the course of his employment; c. The habitual neglect by the Insured of his employment responsibilities and duties; d. The Insured's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Bank, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Bank, which has a material adverse effect upon the Bank; e. The determination by a state or federal banking agency or other governmental authority having jurisdiction over the Bank that the Insured is not suitable to act in the capacity for which he is employed by the Bank; f. The Insured's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or g. The Insured's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Bank or taking any action which the Bank's Board of Directors determines, in its sole discretion and -3- subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Bank. Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his or her rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Bank is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Bank shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. -4- XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. -5- IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. HERITAGE BANK OF COMMERCE INSURED - --------------------------------- ---------------------------------------- John E. Rossell -6- BENEFICIARY DESIGNATION FORM PRIMARY DESIGNATION:
NAME RELATIONSHIP ---- ------------ - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- CONTINGENT DESIGNATION: - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- ---------------------------------------
_____________________________ ______________, 19__ EX-10.2 3 EXECUTIVE INDEXED COMPENSATION BENEFITS AGREEMENT This Agreement is made and entered into effective as of ______________, 1998 by and between Heritage Bank of Commerce, a bank chartered under the laws of the State of California (the "Employer"), and Richard L. Conniff, an individual residing in the State of California (the "Executive"). R E C I T A L S WHEREAS, the Executive is an employee of the Employer, serving since April 30, 1998; WHEREAS, the Employer desires to establish a compensation benefit program as a fringe benefit for executive officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Executive's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Executive with certain fringe benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer's employment; and WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive, or to the Executive's spouse or the Executive's designated beneficiaries, as the case may be; NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows: A G R E E M E N T 10 TERMS AND DEFINITIONS. 1.1. ADMINISTRATOR. The Employer shall be the "Administrator" and, solely for the purposes of ERISA as defined in subparagraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. -1- 1.2. APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall mean that percentage adjacent to a calendar period listed on Schedule "A" attached hereto, which percentage shall remain in effect until an adjustment occurs on each succeeding calendar period during the term of employment. Notwithstanding the foregoing or the percentages set forth on Schedule "A," but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (i) provided payments have not yet begun hereunder, one hundred percent (100%) upon the occurrence of an event of termination described in subparagraph 5.4 pursuant to a "Change in Control" as defined in subparagraph 1.4 below, or the Executive's death, or Disability as defined in subparagraph 1.6 below, which death or Disability occurs prior to the termination of the Executive's employment by the Employer; and (ii) notwithstanding subclause (i) of this subparagraph 1.2, zero percent (0%) in the event the Executive takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive's death and of which the Employer is the designated beneficiary. Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Executive takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive's death and of which the Employer is the designated beneficiary: (1) the Executive's estate or designated beneficiary shall no longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Employer shall have the right to recover from Executive's estate all of the amounts paid to the Executive's estate (with respect to amounts paid prior to Executive's death or paid to Executive's estate) or designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after Executive's death. 1.3. BENEFICIARY. The term "beneficiary" or "designated beneficiary" shall mean the person or persons whom the Executive shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "C," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof, completed and signed by the Executive and is received by the Administrator prior to the Executive's death. 1.4. CHANGE IN CONTROL. The term "Change in Control" shall mean the occurrence of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company organized at the direction of the Employer to own 100% of the Employer's outstanding common stock): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in response to any other form or report to the regulatory agencies or governmental authorities -2- having jurisdiction over the Employer or any stock exchange on which the Employer's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Employer in which the Employer does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Employer having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Employer, reflected in the most recent balance sheet of the Employer; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Employer representing twenty-five percent (25%) or more of the combined voting power of the Employer's then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Employer's shareholders, of each new director is approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there shall not be a "Change of Control" for purposes of this Agreement if the event which would otherwise come within the meaning of the term "Change of Control" involves (i) a reorganization at the direction of the Employer solely to form a parent bank holding company which owns 100% of the Employer's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Employer or its parent holding company which is the party that acquires "control" or is the principal participant in the transaction constituting a "Change in Control," as described above. 1.5. THE CODE. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the "Code"). 1.6. DISABILITY/DISABLED. The term "Disability" or "Disabled" shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of duty for at least three months including, without limitation, the total irrecoverable loss of the sight in both eyes or the loss by severance of both hands at or above the wrist or of both feet at or above the ankle or of one hand at or above the wrist and one foot at or above the ankle. 1.7. EARLY RETIREMENT DATE. The term "Early Retirement Date" shall mean the Retirement, as defined below, of the Executive on a date which occurs prior to the Executive attaining sixty-two (62) years of age, but after the Executive has attained fifty-five (55) years of age. 1.8. EFFECTIVE DATE. The term "Effective Date" shall mean the date first written above. -3- 1.9. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.10. EXECUTIVE BENEFITS. The term "Executive Benefits" shall mean the benefits determined in accordance with Schedule "B", and reduced to the extent: (i) required under the other provisions of this Agreement, including, but not limited to, Paragraphs 5, 6 and 7 hereof; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). 1.11. PLAN YEAR. The term "Plan Year" shall mean the Employer's fiscal year. 1.12. RETIREMENT. The term "Retirement" or "Retires" shall refer to the date which the Executive acknowledges in writing to Employer to be the last day the Executive will provide any significant personal services, whether as an employee or independent consultant or contractor, to Employer. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period. 1.13. SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the person, if any, who shall be legally married to the Executive on the date of the Executive's death. 1.14. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination of the employment of the Executive by reason of any of the following: (a) A termination "for cause" as this term may be defined in any written employment agreement entered into by and between the Employer and the Executive; (b) The willful breach of duty by the Executive in the course of his employment; (c) The habitual neglect by the Executive of his employment responsibilities and duties; (d) The Executive's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) -4- of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; (e) The determination by a state or federal banking agency or other governmental authority having jurisdiction over the Employer that the Executive is not suitable to act in the capacity for which he is employed by the Employer; (f) The Executive's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or (g) The Executive's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Employer or taking any action which the Employer's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Employer. 20 SCOPE, PURPOSE AND EFFECT. 2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect on or be affected by, the terms and provisions of said Employment Agreement. 2.2. FRINGE BENEFIT. The benefits provided by this Agreement are granted by the Employer as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 30 PAYMENTS UPON EARLY RETIREMENT OR RETIREMENT AND AFTER RETIREMENT. -5- 3.1. PAYMENTS UPON EARLY RETIREMENT. The Executive shall have the right to Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Executive elects to Retire on a date which constitutes an Early Retirement Date, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of said Early Retirement Date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 3.2. PAYMENTS UPON RETIREMENT. If the Executive shall remain in the continuous employment of the Employer until attaining sixty-two (62) years of age, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive Retires or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of said Retirement date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". At the Employer's sole and absolute discretion, the Employer may increase the Executive Benefits as and when the Employer determines the same to be appropriate. 3.3. PAYMENTS IN THE EVENT OF DEATH AFTER RETIREMENT. The Employer agrees that if the Executive Retires, but shall die before receiving all of the Executive Benefits Payments specified in Schedule "B", the Employer agrees to pay the Applicable Percentage of the Executive Benefits to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. 40 PAYMENTS IN THE EVENT DEATH OR DISABILITY OCCURS PRIOR TO RETIREMENT. 4.1. PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. If the Executive dies at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Applicable Percentage of the Executive Benefits to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. -6- 4.2. PAYMENTS IN THE EVENT OF DISABILITY PRIOR TO RETIREMENT. In the event the Executive becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive becomes Disabled, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 50 PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED PRIOR TO RETIREMENT. As indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Executive's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the employment of the Executive shall be terminated, other than by reason of death, Disability or Retirement, prior to the Executive's attaining sixty-two (62) years of age, then this Agreement shall terminate upon the date of such termination of employment; provided, however, that the Executive shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Executive's termination: 5.1. TERMINATION WITHOUT CAUSE. If the Executive's employment is terminated by the Employer without cause, and such termination is not subject to the provisions of subparagraph 5.4 below, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.2. VOLUNTARY TERMINATION BY THE EXECUTIVE. If the Executive's employment is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of -7- installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.3. TERMINATION FOR CAUSE. The Executive agrees that if the Executive's employment with the Employer is terminated "for cause," as defined in subparagraph 1.14 of this Agreement, the Executive shall forfeit any and all rights and benefits the Executive may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Employer pursuant to the terms of this Agreement. 5.4. TERMINATION BY THE EMPLOYER ON ACCOUNT OF OR AFTER A CHANGE IN CONTROL. In the event: (i) the Executive's employment with the Employer is terminated by the Employer in conjunction with, or by reason of, a "Change in Control" (as defined in subparagraph 1.4 above); or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Executive's position, responsibilities, duties, salary, benefits, or location of employment after a "Change in Control" occurs; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Executive's employment after a "Change in Control" occurs, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, as defined above, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.5. PAYMENTS IN THE EVENT OF DEATH FOLLOWING TERMINATION. If the Executive dies prior to receiving all of the Executive Benefits described in this Paragraph 5 to -8- which the Executive is entitled, then the Employer will make such payments to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. 60 SECTION 280G BENEFITS REDUCTION. The Executive acknowledges and agrees that the parties have entered into this Agreement based upon certain financial and tax accounting assumptions. Accordingly, with full knowledge of the potential consequences the Executive agrees that, notwithstanding anything contained herein to the contrary, in the event that any payment or benefit received or to be received by the Executive, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Employer (together with the Executive Benefits, the "Total Payments"), will not be deductible (in whole or in part) as a result of Code Section 280G or other applicable provisions of the Code, the Total Payments shall be reduced until no portion of the Total Payments is nondeductible as a result of Section 280G or such other applicable provisions of the Code. For purposes of this limitation: (a) No portion of the Total Payments, the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the date of payment of any future Executive Benefits payments, shall be taken into account; (b) No portion of the Total Payments shall be taken into account, which in the opinion of the tax counsel selected by the Employer and acceptable to the Executive, does not constitute a "parachute payment" within the meaning of Section 280G of the Code; (c) Any reduction of the Total Payments shall be applied to reduce any payment or benefit received or to be received by the Executive pursuant to the terms of this Agreement and any other plan, arrangement or agreement with the Employer in the order determined by mutual agreement of the Employer and the Executive; (d) Future payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (a) or (b) above in their entirety) constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of tax counsel referred to in clause (b) above; and (e) The value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by independent auditors selected by the Employer and acceptable to the Executive in accordance with the principles of Section 280G of the Code. -9- 70 RIGHT TO DETERMINE FUNDING METHODS. The Employer reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, the Executive's spouse or the Executive's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Executive, the Executive's spouse nor the Executive's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Executive to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Executive, the Executive's spouse and the Executive's beneficiaries of any and all rights to payment hereunder. 80 CLAIMS PROCEDURE. The Employer shall, but only to the extent necessary to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Executive, the Executive's spouse, or the Executive's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Executive, the Executive's spouse or the Executive's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. -10- 90 STATUS AS AN UNSECURED GENERAL CREDITOR. Notwithstanding anything contained herein to the contrary: (i) neither the Executive, the Executive's spouse or the Executive's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Executive, the Executive's spouse or the Executive's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Executive, the Executive's spouse and the Executive's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. Notwithstanding subparagraphs (i) through (v) above, the Employer and the Executive acknowledge and agree that upon request of the Executive at any time during the term of this Agreement, a Rabbi Trust (the "Trust") shall be established upon such terms and conditions as may be mutually agreeable between the Employer and the Executive in order to permit the Employer to make contributions and/or transfer assets to the Trust to discharge its obligations pursuant to this Agreement. The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Executive or its beneficiaries in such manner and at such times as specified in this Agreement. 100 DISCRETION OF BOARD TO ACCELERATE PAYOUT. Notwithstanding any of the other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Executive (or Executive's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors and offered to the Executive [or Executive's spouse or designated beneficiaries] on a "take it or leave it basis"). 110 MISCELLANEOUS. 11.1. OPPORTUNITY TO CONSULT WITH INDEPENDENT ADVISORS. The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Executive's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, -11- Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for the Executive, himself, and his heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Executive further acknowledges and agrees that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions. 11.2. ARBITRATION OF DISPUTES. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), located in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3. ATTORNEYS' FEES. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered -12- therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. NOTICE. Any notice required or permitted of either the Executive or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Heritage Bank of Commerce 150 Almaden Boulevard San Jose, California 95113 Attn: President If to the Executive: Richard L. Conniff 1128 Thountree Court San Jose, California 95120 11.5. ASSIGNMENT. Neither the Executive, the Executive's spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive, the Executive's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Employer. The Employer's consent, if any, to one or more assignments or transfers shall not obligate the Employer to consent to or be construed as the Employer's consent to any other or subsequent assignment or transfer. 11.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be binding upon and inure to the benefit of the Executive and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or -13- reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. NONWAIVER. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. PARTIAL INVALIDITY. If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. MODIFICATIONS. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative. 11.11. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. GOVERNING LAW. The laws of the State of California, other than those laws denominated choice of law rules, and, where applicable, the rules and regulations of -14- the California Commissioner of Financial Institutions and the Federal Deposit Insurance Corporation, shall govern the validity, interpretation, construction and effect of this Agreement. -15- IN WITNESS WHEREOF, the Employer and the Executive have executed this Agreement on the date first above-written in the City of San Jose, Santa Clara County, California. THE EMPLOYER THE EXECUTIVE Heritage Bank of Commerce By: -------------------------------- ---------------------------------------- John E. Rossell Richard L. Conniff President and Chief Executive Officer -16- SCHEDULE A
CALENDAR PERIOD APPLICABLE PERCENTAGE --------------- --------------------- April 30, 1998 to April 29, 2001.................... 0.00% April 30, 2001 to April 29, 2002.................... 36.00% April 30, 2002 to April 29, 2003.................... 48.00% April 30, 2003 to April 29, 2004.................... 60.00% April 30, 2004 to April 29, 2005.................... 72.00% April 30, 2005 to April 29, 2006.................... 84.00% April 30, 2006 and Thereafter....................... 100.00%
See subparagraph 1.2 of the Agreement for a definition and discussion of the Applicable Percentage. SCHEDULE B EXECUTIVE BENEFITS 1. Executive Benefits Determination. The Executive Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a liability reserve account on the books of the Employer for the benefit of the Executive. Prior to the date on which the Executive becomes eligible to receive payments under the Agreement, such Benefit Account shall be increased (or decreased) each Plan Year (including the Plan Year in which the Executive ceases to be employed by the Employer) by an amount equal to the annual earnings or loss for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Executive becomes eligible to receive payments under the Agreement, the Index Benefit for the Executive for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the earnings, if any, established by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: Canada Life Assurance Company\US2650871 Transamerica Assurance Company\50323952 If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall receive and use annual policy illustrations that assume the above described -1- policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Employer's marginal tax rate until the Executive's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower.
- ----------------------------------------------------------------------------------------------- EXAMPLE INDEX BENEFITS - ----------------------------------------------------------------------------------------------- [n] [A] [B] [C] [D] INDEX VALUE OF LIFE [Annual OPPORTUNITY COST CASH SURRENDER Policy A(0) = premium ANNUAL CUMULATIVE END OF VALUE OF LIFE Income] A(0)+C(n-1)x.05x BENEFIT BENEFIT YEAR INSURANCE POLICY A(n)-A(n-1) (1-42%) B-C D+D(n-1) - ----------------------------------------------------------------------------------------------- 0 $1,000,000 -- -- -- -- - ----------------------------------------------------------------------------------------------- 1 $1,050,000 $50,000 $29,000 $21,000 $21,000 - ----------------------------------------------------------------------------------------------- 2 $1,102,500 $52,500 $29,841 $22,659 $43,659 - ----------------------------------------------------------------------------------------------- 3 $1,157,625 $55,125 $30,706 $24,419 $68,078 - ----------------------------------------------------------------------------------------------- . . . - -----------------------------------------------------------------------------------------------
Assumptions: Initial Insurance = $1,000,000 Effective Tax Rate = 42% One Year US Treasury Yield = 5% -2- 2. Executive Benefits Payments. The Executive shall be entitled to payment of the Applicable Percentage of (i) the balance in the Benefit Account in installments upon the terms as specified in the Agreement, and (ii) the Index Benefit for each Plan Year payable in installments until the Executive's death. -3- SCHEDULE C BENEFICIARY DESIGNATION To the Administrator of the Heritage Bank of Commerce Executive Indexed Compensation Benefits Agreement: Pursuant to the Provisions of my Executive Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: PRIMARY BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship SECONDARY (CONTINGENT) BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Executive Indexed Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the -1- remaining unpaid benefit payable according to the terms of my Executive Indexed Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Executive Indexed Compensation Benefits Agreement. Dated: ____________, 1998 ---------------------------------------- Richard L. Conniff CONSENT OF THE EXECUTIVE'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: I, Sandra L. Conniff, being the spouse of Richard L. Conniff, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Executive Indexed Compensation Benefits Agreement entered into by my spouse effective as of ____________, 1998. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Executive Indexed Compensation Benefits Agreement and in which I may have a marital property interest. Dated: ____________, 1998 - --------------------------------- Sandra L. Conniff -2- SCHEDULE D DISTRIBUTION ELECTION Pursuant to the Provisions of my Executive Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: -- thirty-six (36) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: _____________, 1998 Signed: ----------------------------------- Richard L. Conniff LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT Insurer/Policy Number: Canada Life Assurance Company\US2650871 Transamerica Assurance Company\50323952 Bank: Heritage Bank of Commerce Insured: Richard L. Conniff Relationship of Insured to Bank: Executive Officer Date: _____________, 19__ The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy") shall be as follows: I. DEFINITIONS Refer to the Policy provisions for the definition of all terms in this Agreement. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. The Insured's beneficiary(ies), designated in accordance with Paragraph III, shall be entitled to an amount equal to eighty percent (80%) of the net at risk insurance portion of the proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank shall be entitled to the remainder of such proceeds. 3. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value -2- of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: 1. The Insured's right to receive benefits under that certain Executive Indexed Compensation Benefits Agreement effective as of ____________, 19___ shall terminate for any reason other than the Insured's death, or 2. The Insured shall be discharged from service with the Bank for cause. The term "for cause" shall mean: a. A termination "for cause" as this term may be defined in any written employment agreement entered into by and between the Bank and the Insured; b. The willful breach of duty by the Insured in the course of his employment; c. The habitual neglect by the Insured of his employment responsibilities and duties; d. The Insured's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Bank, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Bank, which has a material adverse effect upon the Bank; e. The determination by a state or federal banking agency or other governmental authority having jurisdiction over the Bank that the Insured is not suitable to act in the capacity for which he is employed by the Bank; f. The Insured's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or g. The Insured's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Bank or taking any action which the Bank's Board of Directors determines, in its sole discretion and -3- subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Bank. Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his or her rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Bank is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Bank shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. -4- XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. -5- IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. HERITAGE BANK OF COMMERCE INSURED - --------------------------------- -------------------------------- Richard L. Conniff -6- BENEFICIARY DESIGNATION FORM PRIMARY DESIGNATION:
NAME RELATIONSHIP ---- ------------ - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- CONTINGENT DESIGNATION: - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- ---------------------------------------
_____________________________ ______________, 19__ EX-10.3 4 EXECUTIVE INDEXED COMPENSATION BENEFITS AGREEMENT This Agreement is made and entered into effective as of January ___, 1999 by and between Heritage Bank of Commerce, a bank chartered under the laws of the State of California (the "Employer"), and Brad L. Smith, an individual residing in the State of California (the "Executive"). R E C I T A L S WHEREAS, the Executive is an employee of the Employer, serving since January 1, 1999; WHEREAS, the Employer desires to establish a compensation benefit program as a fringe benefit for executive officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Executive's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Executive with certain fringe benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer's employment; and WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive, or to the Executive's spouse or the Executive's designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows: A G R E E M E N T 10 TERMS AND DEFINITIONS. 1.1. ADMINISTRATOR. The Employer shall be the "Administrator" and, solely for the purposes of ERISA as defined in subparagraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. -1- 1.2. APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall mean that percentage adjacent to a calendar period listed on Schedule "A" attached hereto, which percentage shall remain in effect until an adjustment occurs on each succeeding calendar period during the term of employment. Notwithstanding the foregoing or the percentages set forth on Schedule "A," but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (i) provided payments have not yet begun hereunder, one hundred percent (100%) upon the occurrence of an event of termination described in subparagraph 5.4 pursuant to a "Change in Control" as defined in subparagraph 1.4 below, or the Executive's death, or Disability as defined in subparagraph 1.6 below, which death or Disability occurs prior to the termination of the Executive's employment by the Employer; and (ii) notwithstanding subclause (i) of this subparagraph 1.2, zero percent (0%) in the event the Executive takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive's death and of which the Employer is the designated beneficiary. Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Executive takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Executive's death and of which the Employer is the designated beneficiary: (1) the Executive's estate or designated beneficiary shall no longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Employer shall have the right to recover from the Executive's estate all of the amounts paid to the Executive's estate (with respect to amounts paid prior to the Executive's death or paid to the Executive's estate) or designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after the Executive's death. 1.3. BENEFICIARY. The term "beneficiary" or "designated beneficiary" shall mean the person or persons whom the Executive shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "C," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof, completed and signed by the Executive and is received by the Administrator prior to the Executive's death. 1.4. CHANGE IN CONTROL. The term "Change in Control" shall mean the occurrence of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company organized at the direction of the Employer to own 100% of the Employer's outstanding common stock): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in response to any other form or report to the regulatory agencies or governmental authorities -2- having jurisdiction over the Employer or any stock exchange on which the Employer's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Employer in which the Employer does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Employer having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Employer, reflected in the most recent balance sheet of the Employer; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Employer representing twenty-five percent (25%) or more of the combined voting power of the Employer's then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Employer's shareholders, of each new director is approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there shall not be a "Change of Control" for purposes of this Agreement if the event which would otherwise come within the meaning of the term "Change of Control" involves (i) a reorganization at the direction of the Employer solely to form a parent bank holding company which owns 100% of the Employer's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Employer or its parent holding company which is the party that acquires "control" or is the principal participant in the transaction constituting a "Change in Control," as described above. 1.5. THE CODE. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the "Code"). 1.6. DISABILITY/DISABLED. The term "Disability" or "Disabled" shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of duty for at least three months including, without limitation, the total irrecoverable loss of the sight in both eyes or the loss by severance of both hands at or above the wrist or of both feet at or above the ankle or of one hand at or above the wrist and one foot at or above the ankle. 1.7. EARLY RETIREMENT DATE. The term "Early Retirement Date" shall mean the Retirement, as defined below, of the Executive on a date which occurs prior to the Executive attaining sixty-two (62) years of age, but after the Executive has attained fifty-five (55) years of age. 1.8. EFFECTIVE DATE. The term "Effective Date" shall mean the date first written above. -3- 1.9. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.10. EXECUTIVE BENEFITS. The term "Executive Benefits" shall mean the benefits determined in accordance with Schedule "B", and reduced to the extent: (i) required under the other provisions of this Agreement, including, but not limited to, Paragraphs 5, 6 and 7 hereof; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). 1.11. PLAN YEAR. The term "Plan Year" shall mean the Employer's fiscal year. 1.12. RETIREMENT. The term "Retirement" or "Retires" shall refer to the date which the Executive acknowledges in writing to Employer to be the last day the Executive will provide any significant personal services, whether as an employee or independent consultant or contractor, to Employer. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period. 1.13. SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the person, if any, who shall be legally married to the Executive on the date of the Executive's death. 1.14. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination of the employment of the Executive by reason of any of the following: (a) A termination "for cause" as this term may be defined in any written employment agreement entered into by and between the Employer and the Executive; (b) The willful breach of duty by the Executive in the course of his employment; (c) The habitual neglect by the Executive of his employment responsibilities and duties; (d) The Executive's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) -4- of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; (e) The determination by a state or federal banking agency or other governmental authority having jurisdiction over the Employer that the Executive is not suitable to act in the capacity for which he is employed by the Employer; (f) The Executive's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or (g) The Executive's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Employer or taking any action which the Employer's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Employer. 20 SCOPE, PURPOSE AND EFFECT. 2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect on or be affected by, the terms and provisions of said Employment Agreement. 2.2. FRINGE BENEFIT. The benefits provided by this Agreement are granted by the Employer as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 30 PAYMENTS UPON EARLY RETIREMENT OR RETIREMENT AND AFTER RETIREMENT. 3.1. PAYMENTS UPON EARLY RETIREMENT. The Executive shall have the right to Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Executive elects to Retire on a date which constitutes an Early Retirement Date, the Executive shall be entitled to be paid the Applicable Percentage of the -5- Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of said Early Retirement Date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive=s death in the case of the Index Benefit defined in Schedule "B". 3.2. PAYMENTS UPON RETIREMENT. If the Executive shall remain in the continuous employment of the Employer until attaining sixty-two (62) years of age, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive Retires or upon such later date as may be mutually agreed upon by the Executive and the Employer in advance of said Retirement date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". At the Employer's sole and absolute discretion, the Employer may increase the Executive Benefits as and when the Employer determines the same to be appropriate. 3.3. PAYMENTS IN THE EVENT OF DEATH AFTER RETIREMENT. The Employer agrees that if the Executive Retires, but shall die before receiving all of the Executive Benefits Payments specified in Schedule "B", the Employer agrees to pay the Applicable Percentage of the Executive Benefits to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. 40 PAYMENTS IN THE EVENT DEATH OR DISABILITY OCCURS PRIOR TO RETIREMENT. 4.1. PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. If the Executive dies at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Applicable Percentage of the Executive Benefits to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. 4.2. PAYMENTS IN THE EVENT OF DISABILITY PRIOR TO RETIREMENT. In the event the Executive becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Executive shall be entitled to be paid the Applicable Percentage of the -6- Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive becomes Disabled, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive=s death in the case of the Index Benefit defined in Schedule "B". 50 PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED PRIOR TO RETIREMENT. As indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Executive's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the employment of the Executive shall be terminated, other than by reason of death, Disability or Retirement, prior to the Executive's attaining sixty-two (62) years of age, then this Agreement shall terminate upon the date of such termination of employment; provided, however, that the Executive shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Executive's termination: 5.1. TERMINATION WITHOUT CAUSE. If the Executive's employment is terminated by the Employer without cause, and such termination is not subject to the provisions of subparagraph 5.4 below, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.2. VOLUNTARY TERMINATION BY THE EXECUTIVE. If the Executive's employment is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in -7- the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.3. TERMINATION FOR CAUSE. The Executive agrees that if the Executive's employment with the Employer is terminated "for cause," as defined in subparagraph 1.14 of this Agreement, the Executive shall forfeit any and all rights and benefits the Executive may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Employer pursuant to the terms of this Agreement. 5.4. TERMINATION BY THE EMPLOYER ON ACCOUNT OF OR AFTER A CHANGE IN CONTROL. In the event: (i) the Executive's employment with the Employer is terminated by the Employer in conjunction with, or by reason of, a "Change in Control" (as defined in subparagraph 1.4 above); or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Executive's position, responsibilities, duties, salary, benefits, or location of employment after a "Change in Control" occurs; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Executive's employment after a "Change in Control" occurs, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefits, as defined above, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Executive and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Executive does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Executive attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Executive's death in the case of the Index Benefit defined in Schedule "B". 5.5. PAYMENTS IN THE EVENT OF DEATH FOLLOWING TERMINATION. If the Executive dies prior to receiving all of the Executive Benefits described in this Paragraph 5 to which the Executive is entitled, then the Employer will make such payments to the Executive's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Executive under the terms of this Agreement shall be paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse, the remaining -8- amounts due to the Executive under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Executive's estate. 60 SECTION 280G BENEFITS REDUCTION. The Executive acknowledges and agrees that the parties have entered into this Agreement based upon certain financial and tax accounting assumptions. Accordingly, with full knowledge of the potential consequences the Executive agrees that, notwithstanding anything contained herein to the contrary, in the event that any payment or benefit received or to be received by the Executive, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Employer (together with the Executive Benefits, the "Total Payments"), will not be deductible (in whole or in part) as a result of Code Section 280G or other applicable provisions of the Code, the Total Payments shall be reduced until no portion of the Total Payments is nondeductible as a result of Section 280G or such other applicable provisions of the Code. For purposes of this limitation: (a) No portion of the Total Payments, the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the date of payment of any future Executive Benefits payments, shall be taken into account; (b) No portion of the Total Payments shall be taken into account, which in the opinion of the tax counsel selected by the Employer and acceptable to the Executive, does not constitute a "parachute payment" within the meaning of Section 280G of the Code; (c) Any reduction of the Total Payments shall be applied to reduce any payment or benefit received or to be received by the Executive pursuant to the terms of this Agreement and any other plan, arrangement or agreement with the Employer in the order determined by mutual agreement of the Employer and the Executive; (d) Future payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (a) or (b) above in their entirety) constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of tax counsel referred to in clause (b) above; and (e) The value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by independent auditors selected by the Employer and acceptable to the Executive in accordance with the principles of Section 280G of the Code. 70 RIGHT TO DETERMINE FUNDING METHODS. The Employer reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, the -9- Executive's spouse or the Executive's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Executive, the Executive's spouse nor the Executive's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Executive to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Executive, the Executive's spouse and the Executive's beneficiaries of any and all rights to payment hereunder. 80 CLAIMS PROCEDURE. The Employer shall, but only to the extent necessary to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Executive, the Executive's spouse, or the Executive's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Executive, the Executive's spouse or the Executive's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. -10- 90 STATUS AS AN UNSECURED GENERAL CREDITOR. Notwithstanding anything contained herein to the contrary: (i) neither the Executive, the Executive's spouse or the Executive's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Executive, the Executive's spouse or the Executive's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Executive, the Executive's spouse and the Executive's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. Notwithstanding subparagraphs (i) through (v) above, the Employer and the Executive acknowledge and agree that upon request of the Executive at any time during the term of this Agreement, a Rabbi Trust (the "Trust") shall be established upon such terms and conditions as may be mutually agreeable between the Employer and the Executive in order to permit the Employer to make contributions and/or transfer assets to the Trust to discharge its obligations pursuant to this Agreement. The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Executive or its beneficiaries in such manner and at such times as specified in this Agreement. 100 DISCRETION OF BOARD TO ACCELERATE PAYOUT. Notwithstanding any of the other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Executive (or Executive's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors and offered to the Executive [or Executive's spouse or designated beneficiaries] on a "take it or leave it basis"). 110 MISCELLANEOUS. 11.1. OPPORTUNITY TO CONSULT WITH INDEPENDENT ADVISORS. The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Executive's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, -11- Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for the Executive, himself, and his heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Executive further acknowledges and agrees that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions. 11.2. ARBITRATION OF DISPUTES. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), located in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3. ATTORNEYS' FEES. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the -12- case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. NOTICE. Any notice required or permitted of either the Executive or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Heritage Bank of Commerce 150 Almaden Boulevard San Jose, California 95113 Attn: President If to the Executive: Brad L. Smith 1707 Vista Del Sur Gilroy, California 95020 11.5. ASSIGNMENT. Neither the Executive, the Executive's spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive, the Executive's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Employer. The Employer's consent, if any, to one or more assignments or transfers shall not obligate the Employer to consent to or be construed as the Employer's consent to any other or subsequent assignment or transfer. 11.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be binding upon and inure to the benefit of the Executive and the Employer and, as applicable, their -13- respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. NONWAIVER. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. PARTIAL INVALIDITY. If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. MODIFICATIONS. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative. 11.11. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. GOVERNING LAW. The laws of the State of California, other than those laws denominated choice of law rules, and, where applicable, the rules and regulations of -14- the California Commissioner of Financial Institutions and the Federal Deposit Insurance Corporation, shall govern the validity, interpretation, construction and effect of this Agreement. -15- IN WITNESS WHEREOF, the Employer and the Executive have executed this Agreement on the date first above-written in the City of San Jose, Santa Clara County, California. THE EMPLOYER THE EXECUTIVE Heritage Bank of Commerce By: ------------------------------- ---------------------------------------- John E. Rossell Brad L. Smith President and Chief Executive Officer -16- SCHEDULE A
CALENDAR PERIOD APPLICABLE PERCENTAGE --------------- --------------------- January 1, 1999 to December 31, 2001............. 0.00% January 1, 2002 to December 31, 2002............. 36.00% January 1, 2003 to December 31, 2003............. 48.00% January 1, 2004 to December 31, 2004............. 60.00% January 1, 2005 to December 31, 2005............. 72.00% January 1, 2006 to December 31, 2006............. 84.00% January 1, 2007 and Thereafter................... 100.00%
See subparagraph 1.2 of the Agreement for a definition and discussion of the Applicable Percentage. SCHEDULE B EXECUTIVE BENEFITS 1. Executive Benefits Determination. The Executive Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a liability reserve account on the books of the Employer for the benefit of the Executive. Prior to the date on which the Executive becomes eligible to receive payments under the Agreement, such Benefit Account shall be increased (or decreased) each Plan Year (including the Plan Year in which the Executive ceases to be employed by the Employer) by an amount equal to the annual earnings or loss for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Executive becomes eligible to receive payments under the Agreement, the Index Benefit for the Executive for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the earnings, if any, established by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: Canada Life Assurance Company\US2669025 Security Life of Denver\001078311 Southland Life Insurance\0600081375 If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall -1- receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Employer's marginal tax rate until the Executive's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower.
- ----------------------------------------------------------------------------------------------- EXAMPLE INDEX BENEFITS - ----------------------------------------------------------------------------------------------- [n] [A] [B] [C] [D] INDEX [Annual OPPORTUNITY COST CASH SURRENDER Policy A0 = premium ANNUAL CUMULATIVE END OF VALUE OF LIFE Income] A0+Cn-1x.05x BENEFIT BENEFIT YEAR INSURANCE POLICY An-An-1 (1-42%) B-C D+Dn-1 - ----------------------------------------------------------------------------------------------- 0 $1,000,000 -- -- -- -- - ----------------------------------------------------------------------------------------------- 1 $1,050,000 $50,000 $29,000 $21,000 $21,000 - ----------------------------------------------------------------------------------------------- 2 $1,102,500 $52,500 $29,841 $22,659 $43,659 - ----------------------------------------------------------------------------------------------- 3 $1,157,625 $55,125 $30,706 $24,419 $68,078 - ----------------------------------------------------------------------------------------------- . . . - -----------------------------------------------------------------------------------------------
Assumptions: Initial Insurance = $1,000,000 -2- Effective Tax Rate = 42% One Year US Treasury Yield = 5% 2. Executive Benefits Payments. The Executive shall be entitled to payment of the Applicable Percentage of (i) the balance in the Benefit Account in installments upon the terms as specified in the Agreement, and (ii) the Index Benefit for each Plan Year payable in installments until the Executive's death. -3- SCHEDULE C BENEFICIARY DESIGNATION To the Administrator of the Heritage Bank of Commerce Executive Indexed Compensation Benefits Agreement: Pursuant to the Provisions of my Executive Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: PRIMARY BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship SECONDARY (CONTINGENT) BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Executive Indexed Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the -1- remaining unpaid benefit payable according to the terms of my Executive Indexed Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Executive Indexed Compensation Benefits Agreement. Dated: ____________, 1999 --------------------------------------- Brad L. Smith CONSENT OF THE EXECUTIVE'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: I, Kathleen M. Smith, being the spouse of Brad L. Smith, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Executive Indexed Compensation Benefits Agreement entered into by my spouse effective as of ____________, 1999. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Executive Indexed Compensation Benefits Agreement and in which I may have a marital property interest. Dated: ____________, 1999 - ------------------------------ Kathleen M. Smith -2- SCHEDULE D DISTRIBUTION ELECTION Pursuant to the Provisions of my Executive Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: -- thirty-six (36) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: _____________, 1999 Signed: -------------------------------- Brad L. Smith LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT Insurer/Policy Number: Insurance Company: Canada Life Assurance Company\US2669025 Insurance Company: Security Life of Denver\001078311 Insurance Company: Southland Life Insurance\0600081375 Bank: Heritage Bank of Commerce Insured: Brad L. Smith Relationship of Insured to Bank: Executive Officer Date: _____________, 1999 The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy") shall be as follows: I. DEFINITIONS Refer to the Policy provisions for the definition of all terms in this Agreement. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. The Insured's beneficiary(ies), designated in accordance with Paragraph III, shall be entitled to an amount equal to eighty percent (80%) of the net at risk insurance portion of the proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank shall be entitled to the remainder of such proceeds. 3. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. -2- IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: 1. The Insured's right to receive benefits under that certain Executive Indexed Compensation Benefits Agreement effective as of ____________, 1999 shall terminate for any reason other than the Insured's death, or 2. The Insured shall be discharged from service with the Bank for cause. The term "for cause" shall mean: a. A termination "for cause" as this term may be defined in any written employment agreement entered into by and between the Bank and the Insured; b. The willful breach of duty by the Insured in the course of his employment; c. The habitual neglect by the Insured of his employment responsibilities and duties; d. The Insured's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Bank, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Bank, which has a material adverse effect upon the Bank; e. The determination by a state or federal banking agency or other governmental authority having jurisdiction over the Bank that the Insured is not suitable to act in the capacity for which he is employed by the Bank; -3- f. The Insured's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or g. The Insured's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Bank or taking any action which the Bank's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Bank. Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his or her rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR -4- The Bank is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Bank shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the Named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. -5- IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. HERITAGE BANK OF COMMERCE INSURED - --------------------------------- ---------------------------------------- John E. Rossell Brad L. Smith President and Chief Executive Officer -6- BENEFICIARY DESIGNATION FORM PRIMARY DESIGNATION:
NAME RELATIONSHIP ---- ------------ - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- CONTINGENT DESIGNATION: - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- ---------------------------------------
_____________________________ ______________, 19__ Brad L. Smith EX-10.4 5 DIRECTOR INDEXED COMPENSATION BENEFITS AGREEMENT This Agreement is made and entered into effective as of June 19, 1997 by and between Heritage Bank of Commerce, a bank chartered under the laws of the State of California (the "Bank"), and ______________, an individual residing in the State of California (the "Director"). R E C I T A L S WHEREAS, the Director is a member of the Board of Directors of the Bank and has served in such capacity since June 8, 1994, the approximate date of the Bank's organization; WHEREAS, the Bank desires to establish a compensation benefit for directors who are not also officers or employees of the Bank in order to attract and retain individuals with extensive and valuable experience as directors; and WHEREAS, the Director and the Bank wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Director, or to the Director's spouse or designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Director in the future, as well as the mutual promises and covenants contained herein, the Director and the Bank agree as follows: A G R E E M E N T 1. TERMS AND DEFINITIONS. 1.1. ADMINISTRATOR. The Bank shall be the "Administrator" and, solely for the purposes of ERISA as defined in subparagraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. 1.2. APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall mean that percentage adjacent to a calendar period listed on Schedule "A" attached hereto, which percentage shall remain in effect until an adjustment occurs on each succeeding calendar period during the term of service as a member of the Board of Directors of the Bank. Notwithstanding the foregoing or the percentages set forth on Schedule "A," but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (i) provided payments have not yet begun hereunder, one hundred percent (100%) upon termination of service described in -1- subparagraph 5.4 pursuant to a "Change in Control" as defined in subparagraph 1.4 below, or the Director's death, or Disability as defined in subparagraph 1.6 below, which death or Disability occurs prior to termination of service; and (ii) notwithstanding subclause (i) of this subparagraph 1.2, zero percent (0%) in the event the Director takes any intentional action which prevents the Bank from collecting the proceeds of any life insurance policy which the Bank may happen to own at the time of the Director's death and of which the Bank is the designated beneficiary. Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Director takes any intentional action which prevents the Bank from collecting the proceeds of any life insurance policy which the Bank may happen to own at the time of the Director's death and of which the Bank is the designated beneficiary: (1) the Director's estate or designated beneficiary shall no longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Bank shall have the right to recover from the Director's estate all of the amounts paid to the Director's estate (with respect to amounts paid prior to the Director's death or paid to the Director's estate) or designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after the Director's death. 1.3. BENEFICIARY. The term "beneficiary" or "designated beneficiary" shall mean the person or persons whom the Director shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "C," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof, completed and signed by the Director and is received by the Administrator prior to the Director's death. 1.4. CHANGE IN CONTROL. The term "Change in Control" shall mean the occurrence of any of the following events with respect to the Bank (with the term "Bank" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company organized at the direction of the Bank to own 100% of the Bank's outstanding common stock): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in response to any other form or report to the regulatory agencies or governmental authorities having jurisdiction over the Bank or any stock exchange on which the Bank's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Bank in which the Bank does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Bank having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Bank, reflected in the most recent balance sheet of the Bank; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Bank representing twenty-five percent (25%) or more of the combined voting power of the Bank's then -2- outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Bank cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Bank's shareholders, of each new director is approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there shall not be a "Change of Control" for purposes of this Agreement if the event which would otherwise come within the meaning of the term "Change of Control" involves (i) a reorganization at the direction of the Bank solely to form a parent bank holding company which owns 100% of the Bank's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Bank or its parent holding company which is the party that acquires "control" or is the principal participant in the transaction constituting a "Change in Control," as described above. 1.5. THE CODE. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the "Code"). 1.6. DISABILITY/DISABLED. The term "Disability" or "Disabled" shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of duty for at least three months including, without limitation, the total irrecoverable loss of the sight in both eyes or the loss by severance of both hands at or above the wrist or of both feet at or above the ankle or of one hand at or above the wrist and one foot at or above the ankle. 1.7. EARLY RETIREMENT DATE. The term "Early Retirement Date" shall mean the Retirement, as defined below, of the Director on a date which occurs prior to the Director attaining sixty-two (62) years of age, but after the Director has attained fifty-five (55) years of age. 1.8. EFFECTIVE DATE. The term "Effective Date" shall mean the date first written above. 1.9. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.10. DIRECTOR BENEFITS. The term "Director Benefits" shall mean the benefits determined in accordance with Schedule "B", and reduced to the extent: (i) required under the other provisions of this Agreement, including, but not limited to, Paragraphs 5, 6 and 7 hereof; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Bank; or (iii) required in order for the Bank to properly comply with any -3- and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). 1.11. PLAN YEAR. The term "Plan Year" shall mean the Bank's fiscal year. 1.12. RETIREMENT. The term "Retirement" or "Retires" shall refer to the date which the Director acknowledges in writing to the Bank to be the last day of service as a member of the Board of Directors of the Bank. 1.13. SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the person, if any, who shall be legally married to the Director on the date of the Director's death. 1.14. REMOVAL FOR CAUSE. The term "removal for cause" shall mean termination of a Director's service as a member of the Board of Directors of the Bank by reason of any of the following: (a) The willful breach or habitual neglect by the Director of his responsibilities and duties; (b) The Director's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Bank, or (ii) the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Bank, which has a material adverse effect upon the Bank; (c) The determination by a state or federal court, banking agency or other governmental authority having jurisdiction over the Bank, that the Director (i) is of unsound mind, or (ii) has committed a gross abuse of authority or discretion with reference to the Bank, or (iii) otherwise is not suitable to continue to serve as a member of the Board of Directors of the Bank; (d) The Director's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or (e) The Director's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Bank or taking any action which the Bank's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Bank. 2. SCOPE, PURPOSE AND EFFECT. -4- 2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to provide the Director with an additional incentive to continue to serve as a member of the Board of Directors of the Bank, this Agreement shall not be deemed to constitute a contract of employment between the Director and the Bank nor shall any provision of this Agreement restrict the right of the Bank to remove or cause the removal of the Director including, without limitation, by (i) refusal to nominate the Director for election for any successive term of office as a member of the Board of Directors of the Bank, or (ii) complying with an order or other directive from a court of competent jurisdiction or any regulatory authority having jurisdiction over the Bank which requires the Bank to take action to remove the Director. 2.2. FRINGE BENEFIT. The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Director and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Director has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 3. PAYMENTS UPON EARLY RETIREMENT OR RETIREMENT AND AFTER RETIREMENT. 3.1. PAYMENTS UPON EARLY RETIREMENT. The Director shall have the right to Retire from the Board of Directors on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Director elects to Retire on a date which constitutes an Early Retirement Date, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs or upon such later date as may be mutually agreed upon by the Director and the Bank in advance of said Early Retirement Date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Director's death in the case of the Index Benefit defined in Schedule "B". 3.2. PAYMENTS UPON RETIREMENT. If the Director shall continue to serve as a member of the Board of Directors until attaining sixty-two (62) years of age, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director Retires or upon such later date as may be mutually agreed upon by the Director and the Employer in advance of said Retirement date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Director's death in the case of the Index Benefit defined in Schedule "B". At the Bank's sole and absolute discretion, the Bank may increase the Director Benefits as and when the Bank determines the same to be appropriate. 3.3. PAYMENTS IN THE EVENT OF DEATH AFTER RETIREMENT. The Bank agrees that if the Director Retires, but shall die before receiving all of the Director Benefits Payments -5- specified in Schedule "B", the Bank agrees to pay the Applicable Percentage of the Director Benefits to the Director's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Director under the terms of this Agreement shall be paid to the Director's Surviving Spouse. If the Director leaves no Surviving Spouse, the remaining amounts due to the Director under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Director's estate. 4. PAYMENTS IN THE EVENT DEATH OR DISABILITY OCCURS PRIOR TO RETIREMENT. 4.1. PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. If the Director dies at any time after the Effective Date of this Agreement, but prior to Retirement, the Bank agrees to pay the Applicable Percentage of the Director Benefits to the Director's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Director under the terms of this Agreement shall be paid to the Director's Surviving Spouse. If the Director leaves no Surviving Spouse, the remaining amounts due to the Director under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Director's estate. 4.2. PAYMENTS IN THE EVENT OF DISABILITY PRIOR TO RETIREMENT. In the event the Director becomes Disabled at any time after the Effective Date of this Agreement, but prior to Retirement, the Director shall be entitled to the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director becomes Disabled, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Director's death in the case of the Index Benefit defined in Schedule "B". 5. PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED PRIOR TO RETIREMENT. As indicated in subparagraph 2.1 above, the Bank reserves the right to remove or cause the removal of the Director under certain circumstances, at any time prior to the Director's Retirement. In the event that the service of the Director shall be terminated, other than by reason of death, Disability or Retirement, prior to the Director's attaining sixty-two (62) years of age, then this Agreement shall terminate upon the date of such termination; provided, however, that the Director shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Director's termination: 5.1. TERMINATION WITHOUT CAUSE. If the Director's service as a member of the Board of Directors of the Bank is terminated for reasons other than as specified in paragraph 5.3 below, and such termination is not subject to the provisions of subparagraph 5.4 below, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the -6- month following the month in which the Director attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Director and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Director does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Director attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Director's death in the case of the Index Benefit defined in Schedule "B". 5.2. VOLUNTARY TERMINATION BY THE DIRECTOR. If the Director's service as a member of the Board of Directors of the Bank is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraphs 5.3 or 5.4 below, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Director and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Director does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Director attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Director's death in the case of the Index Benefit defined in Schedule "B". 5.3. TERMINATION BY REMOVAL FOR CAUSE. The Director agrees that if the Director's service as a member of the Board of Directors of the Bank is terminated by "removal for cause," as defined in subparagraph 1.14 of this Agreement, the Director shall forfeit any and all rights and benefits the Director may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Director by the Bank pursuant to the terms of this Agreement. 5.4. TERMINATION BY THE BANK ON ACCOUNT OF OR AFTER A CHANGE IN CONTROL. In the event that the Director's service as a member of the Board of Directors of the Bank is terminated in conjunction with, or by reason of, a "Change in Control", the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Director and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Director does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Director attains sixty-two (62) years of age. The installments shall be payable (i) for the period -7- designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the Director's death in the case of the Index Benefit defined in Schedule "B". 6. SECTION 280G BENEFITS REDUCTION. The Director acknowledges and agrees that the parties have entered into this Agreement based upon certain financial and tax accounting assumptions. Accordingly, with full knowledge of the potential consequences the Director agrees that, notwithstanding anything contained herein to the contrary, in the event that any payment or benefit received or to be received by the Director, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Bank (together with the Director Benefits, the "Total Payments"), will not be deductible (in whole or in part) as a result of Code Section 280G or other applicable provisions of the Code, the Total Payments shall be reduced until no portion of the Total Payments is nondeductible as a result of Section 280G or such other applicable provisions of the Code. For purposes of this limitation: (a) No portion of the Total Payments, the receipt or enjoyment of which the Director shall have effectively waived in writing prior to the date of payment of any future Director Benefits payments, shall be taken into account; (b) No portion of the Total Payments shall be taken into account, which in the opinion of the tax counsel selected by the Bank and acceptable to the Director, does not constitute a "parachute payment" within the meaning of Section 280G of the Code; (c) Any reduction of the Total Payments shall be applied to reduce any payment or benefit received or to be received by the Director pursuant to the terms of this Agreement and any other plan, arrangement or agreement with the Bank in the order determined by mutual agreement of the Bank and the Director; (d) Future payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (a) or (b) above in their entirety) constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of tax counsel referred to in clause (b) above; and (e) The value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by independent auditors selected by the Bank and acceptable to the Director in accordance with the principles of Section 280G of the Code. 7. RIGHT TO DETERMINE FUNDING METHODS. The Bank reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Director, the Director's spouse or the Director's beneficiaries under the terms of this Agreement. In the event -8- that the Bank elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Bank shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Bank further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Director, the Director's spouse nor the Director's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Bank pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Bank's obligations pursuant to this Agreement. In connection with the foregoing, the Director agrees to execute such documents and undergo such medical examinations or tests which the Bank may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Bank's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Director to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Director, the Director's spouse and the Director's beneficiaries of any and all rights to payment hereunder. 8. CLAIMS PROCEDURE. The Bank shall, but only to the extent necessary to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Bank shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Director, the Director's spouse, or the Director's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Director, the Director's spouse or the Director's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Bank shall provide the Director, the Director's spouse or the Director's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. 9. STATUS AS AN UNSECURED GENERAL CREDITOR. Notwithstanding anything contained herein to the contrary: (i) neither the Director, the Director's spouse or the Director's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Bank as a result of this Agreement; (ii) none of the Bank's assets shall be held in or under any trust for the benefit of the Director, the Director's spouse or the Director's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Bank under this Agreement; (iii) all of the Bank's assets shall be and remain the general unpledged and unrestricted assets of the Bank; (iv) the Bank's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Bank to pay money in the future; and (v) the Director, the Director's spouse and the Director's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. -9- Notwithstanding subparagraphs (i) through (v) above, the Bank and the Director acknowledge and agree that upon request of the Director at any time during the term of this Agreement, a Rabbi Trust (the "Trust") shall be established upon such terms and conditions as may be mutually agreeable between the Bank and the Director and that it is the intention of the Bank to make contributions and/or transfer assets to the Trust in order to discharge its obligations pursuant to this Agreement. The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Bank to be used exclusively for discharge of the Bank's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Bank's general creditors until paid to the Director or its beneficiaries in such manner and at such times as specified in this Agreement. 10. DISCRETION OF BOARD TO ACCELERATE PAYOUT. Notwithstanding any of the other provisions of this Agreement, the Board of Directors of the Bank may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Director (or Director's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Bank's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Bank's Board of Directors and offered to the Director [or Director's spouse or designated beneficiaries] on a "take it or leave it basis"). 11. MISCELLANEOUS. 11.1. OPPORTUNITY TO CONSULT WITH INDEPENDENT ADVISORS. The Director acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Director's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Director acknowledges and agrees shall be the sole responsibility of the Director notwithstanding any other term or provision of this Agreement. The Director further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Director and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successors and assigns to claim or assert liability on the part of the Bank related to the matters described above in this subparagraph 11.1. The Director further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions. -10- 11.2. ARBITRATION OF DISPUTES. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Bank in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), located in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3. ATTORNEYS' FEES. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. NOTICE. Any notice required or permitted of either the Director or the Bank under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is -11- transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Bank: Heritage Bank of Commerce 150 Almaden Boulevard San Jose, California 95113 Attn: Chairman of the Board If to the Director: _____________________________ _____________________________ _____________________________ 11.5. ASSIGNMENT. Neither the Director, the Director's spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Director, the Director's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Bank. The Bank's consent, if any, to one or more assignments or transfers shall not obligate the Bank to consent to or be construed as the Bank's consent to any other or subsequent assignment or transfer. 11.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be binding upon and inure to the benefit of the Director and the Bank and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Bank shall not merge or consolidate into or with another corporation, or -12- reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. NONWAIVER. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. PARTIAL INVALIDITY. If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. MODIFICATIONS. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative. 11.11. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. GOVERNING LAW. The laws of the State of California, other than those laws denominated choice of law rules, and, where applicable, the rules and regulations of the California Commissioner of Financial Institutions and the Federal Deposit Insurance Corporation, shall govern the validity, interpretation, construction and effect of this Agreement. -13- IN WITNESS WHEREOF, the Bank and the Director have executed this Agreement on the date first above-written in the City of San Jose, Santa Clara County, California. BANK DIRECTOR Heritage Bank of Commerce By:________________________________ ___________________________________ William J. Del Biaggio, Jr. Chairman of the Board of Directors -14- SCHEDULE A
CALENDAR PERIOD APPLICABLE PERCENTAGE --------------- --------------------- June 8, 1994 to June 7, 1997..................... 0.00% June 8, 1997 to June 7, 1998..................... 36.00% June 8, 1998 to June 7, 1999..................... 48.00% June 8, 1999 to June 7, 2000..................... 60.00% June 8, 2000 to June 7, 2001..................... 72.00% June 8, 2001 to June 7, 2002..................... 84.00% June 8, 2002 and Thereafter...................... 100.00%
See subparagraph 1.2 of the Agreement for a definition and discussion of the Applicable Percentage. SCHEDULE B DIRECTOR BENEFITS 1. Director Benefits Determination. The Director Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a liability reserve account on the books of the Bank for the benefit of the Director. Prior to the date on which the Director becomes eligible to receive payments under the Agreement, such Benefit Account shall be increased or decreased each Plan Year (including the Plan Year in which the Director ceases to serve as a member of the Board of Directors of the Bank) by an amount equal to the annual earnings or loss for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Director becomes eligible to receive payments under the Agreement, the Index Benefit for the Director for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the earnings, if any, established by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: American General Life Insurance Company/CM0000765L Canada Life Assurance Company/US2650641 If such contracts of life insurance are actually purchased by the Bank, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are -1- not purchased or are subsequently surrendered or lapsed, then the Bank shall receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefit (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Bank's marginal tax rate until the Director's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Bank is higher or lower. - -------------------------------------------------------------------------------- EXAMPLE INDEX BENEFITS - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------- [n] [A] [B] [C] [D] END OF CASH SURRENDER INDEX OPPORTUNITY COST ANNUAL CUMULATIVE YEAR VALUE OF LIFE [Annual A(0) = premium BENEFIT BENEFIT INSURANCE POLICY Policy A(0)+C(n-1)x.05x B-C D+D(n-1) Income] (1-42%) A(n)-A(n-1) - ----------------------------------------------------------------------------------------------- 0 $1, 000,000 -- -- -- -- - ----------------------------------------------------------------------------------------------- 1 $1,050,000 $50,000 $29,000 $21,000 $21,000 - ----------------------------------------------------------------------------------------------- 2 $1,102,500 $52,500 $29,841 $22,659 $43,659 - ----------------------------------------------------------------------------------------------- 3 $1,157,625 $55,125 $30,706 $24,419 $68,078 - ----------------------------------------------------------------------------------------------- . . . - -----------------------------------------------------------------------------------------------
Assumptions: Initial Insurance = $1,000,000 -2- Effective Tax Rate = 42% One Year US Treasury Yield = 5% 2. Director Benefits Payments. The Director shall be entitled to payment of the Applicable Percentage of (i) the balance in the Benefit Account in installments upon the terms as specified in the Agreement, and (ii) the Index Benefit for each Plan Year payable in installments until the Director's death. -3- SCHEDULE C BENEFICIARY DESIGNATION To the Administrator of the Heritage Bank of Commerce Director Indexed Compensation Benefits Agreement: Pursuant to the Provisions of my Director Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: PRIMARY BENEFICIARY: _______________________ _________________________ ___________________________ Name Address Relationship SECONDARY (CONTINGENT) BENEFICIARY: _______________________ _________________________ ___________________________ Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Director Indexed Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the -1- remaining unpaid benefit payable according to the terms of my Director Indexed Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Director Indexed Compensation Benefits Agreement. Dated: June _____, 1997 ___________________________________ CONSENT OF THE DIRECTOR'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: I, __________________, being the spouse of ______________, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Director Indexed Compensation Benefits Agreement entered into by my spouse effective as of June 19, 1997. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Director Indexed Compensation Benefits Agreement and in which I may have a marital property interest. Dated: June _____, 1997. __________________________________________ __________________________________________ Type/Print Name -2- SCHEDULE D DISTRIBUTION ELECTION Pursuant to the Provisions of my Director Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: ____ thirty-six (36) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ____ sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ____ one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ____ one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: June _____, 1997 Signed: _________________________________ LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT Insurer/Policy Number: Bank: Heritage Bank of Commerce Insured: Relationship of Insured to Bank: Director Date: _____________, 19__ The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy") shall be as follows: I. DEFINITIONS Refer to the Policy provisions for the definition of all terms in this Agreement. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. The Insured's beneficiary(ies), designated in accordance with Paragraph III, shall be entitled to an amount equal to eighty percent (80%) of the net at risk insurance portion of the proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank shall be entitled to the remainder of such proceeds. 3. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: 1. The Insured's right to receive benefits under that certain Director Indexed Compensation Benefits Agreement effective as of ____________, 19___ shall terminate for any reason other than the Insured's death, or 2. The Insured shall be discharged from service with the Bank for cause. The term "for cause" shall mean: a. The willful breach or habitual neglect by the Insured of his responsibilities and duties; b. The Insured's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Bank, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Bank, which has a material adverse effect upon the Bank; c. The determination by a state or federal court, banking agency or other governmental authority having jurisdiction over the Bank that the Insured (i) is of unsound mind, or (ii) has committed a gross abuse of authority or discretion with reference to the Bank, or (iii) otherwise is not suitable to continue to serve as a member of the Board of Directors of the Bank; d. The Insured's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or e. The Insured's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Bank or taking any action which the Bank's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Bank. -3- Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his or her rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Bank is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Bank shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY -4- The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. -5- IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. HERITAGE BANK OF COMMERCE INSURED ___________________________________ ___________________________________ -6- BENEFICIARY DESIGNATION FORM PRIMARY DESIGNATION:
NAME RELATIONSHIP ---- ------------ _____________________________ _______________________________________ _____________________________ _______________________________________ _____________________________ _______________________________________ CONTINGENT DESIGNATION: _____________________________ _______________________________________ _____________________________ _______________________________________ _____________________________ _______________________________________ _____________________________ _____________, 19___
EX-10.5 6 DIRECTOR INDEXED COMPENSATION BENEFITS AGREEMENT This Agreement is made and entered into effective as of June 19, 1997 by and between Heritage Bank of Commerce, a bank chartered under the laws of the State of California (the "Bank"), and ___________________________,an individual residing in the State of California (the "Director"). R E C I T A L S WHEREAS, the Director is a member of the Board of Directors of the Bank and has served in such capacity since June 8, 1994, the approximate date of the Bank's organization; WHEREAS, the Bank desires to establish a compensation benefit for directors who are not also officers or employees of the Bank in order to attract and retain individuals with extensive and valuable experience as directors; and WHEREAS, the Director and the Bank wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Director, or to the Director's spouse or designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Director in the future, as well as the mutual promises and covenants contained herein, the Director and the Bank agree as follows: A G R E E M E N T 1. TERMS AND DEFINITIONS. 1.1. ADMINISTRATOR. The Bank shall be the "Administrator" and, solely for the purposes of ERISA as defined in subparagraph 1.10 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. 1.2. APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall mean that percentage adjacent to a calendar period listed on Schedule "A" attached hereto, which percentage shall remain in effect until an adjustment occurs on each succeeding calendar period during the term of service as a member of the Board of Directors of the Bank. Notwithstanding the foregoing or the percentages set forth on Schedule "A," but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (i) provided payments have not yet begun hereunder, one hundred percent (100%) upon termination of service described in subparagraph 5.4 pursuant to a "Change in Control" as defined in subparagraph 1.4 below, or the -1- Director's death, or Disability as defined in subparagraph 1.6 below, which death or Disability occurs prior to termination of service; and (ii) notwithstanding subclause (i) of this subparagraph 1.2, zero percent (0%) in the event the Director takes any intentional action which prevents the Bank from collecting the proceeds of any life insurance policy which the Bank may happen to own at the time of the Surrogate's death and of which the Bank is the designated beneficiary. Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Director takes any intentional action which prevents the Bank from collecting the proceeds of any life insurance policy which the Bank may happen to own at the time of the Surrogate's death and of which the Bank is the designated beneficiary: (1) the Director's estate or designated beneficiary shall no longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Bank shall have the right to recover from the Director's estate all of the amounts paid to the Director's estate (with respect to amounts paid prior to the Surrogate's death or paid to the Director's estate) or designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after the Surrogate's death. 1.3. BENEFICIARY. The term "beneficiary" or "designated beneficiary" shall mean the person or persons whom the Director shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "C," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof, completed and signed by the Director and is received by the Administrator prior to the Director's death. 1.4. CHANGE IN CONTROL. The term "Change in Control" shall mean the occurrence of any of the following events with respect to the Bank (with the term "Bank" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company organized at the direction of the Bank to own 100% of the Bank's outstanding common stock): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in response to any other form or report to the regulatory agencies or governmental authorities having jurisdiction over the Bank or any stock exchange on which the Bank's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Bank in which the Bank does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Bank having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Bank, reflected in the most recent balance sheet of the Bank; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Bank representing twenty-five percent (25%) or more of the combined voting power of the Bank's then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the -2- beginning of such period constitute the Board of Directors of the Bank cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Bank's shareholders, of each new director is approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there shall not be a "Change of Control" for purposes of this Agreement if the event which would otherwise come within the meaning of the term "Change of Control" involves (i) a reorganization at the direction of the Bank solely to form a parent bank holding company which owns 100% of the Bank's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Bank or its parent holding company which is the party that acquires "control" or is the principal participant in the transaction constituting a "Change in Control," as described above. 1.5. THE CODE. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the "Code"). 1.6. DISABILITY/DISABLED. The term "Disability" or "Disabled" shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of duty for at least three months including, without limitation, the total irrecoverable loss of the sight in both eyes or the loss by severance of both hands at or above the wrist or of both feet at or above the ankle or of one hand at or above the wrist and one foot at or above the ankle. 1.7. DIRECTOR BENEFITS. The term "Director Benefits" shall mean the benefits determined in accordance with Schedule "B", and reduced to the extent: (i) required under the other provisions of this Agreement, including, but not limited to, Paragraphs 5, 6 and 7 hereof; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Bank; or (iii) required in order for the Bank to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). 1.8. EARLY RETIREMENT DATE. The term "Early Retirement Date" shall mean the Retirement, as defined below, of the Director on a date which occurs prior to the Director attaining sixty-two (62) years of age, but after the Director has attained fifty-five (55) years of age. 1.9. EFFECTIVE DATE. The term "Effective Date" shall mean the date first written above. 1.10. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. -3- 1.11. PLAN YEAR. The term "Plan Year" shall mean the Bank's fiscal year. 1.12. REMOVAL FOR CAUSE. The term "removal for cause" shall mean termination of a Director's service as a member of the Board of Directors of the Bank by reason of any of the following: (a) The willful breach or habitual neglect by the Director of his responsibilities and duties; (b) The Director's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Bank, or (ii) the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Bank, which has a material adverse effect upon the Bank; (c) The determination by a state or federal court, banking agency or other governmental authority having jurisdiction over the Bank, that the Director (i) is of unsound mind, or (ii) has committed a gross abuse of authority or discretion with reference to the Bank, or (iii) otherwise is not suitable to continue to serve as a member of the Board of Directors of the Bank; (d) The Director's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or (e) The Director's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Bank or taking any action which the Bank's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Bank. 1.13. RETIREMENT. The term "Retirement" or "Retires" shall refer to the date which the Director acknowledges in writing to the Bank to be the last day of service as a member of the Board of Directors of the Bank. 1.14. SURROGATE. The term "Surrogate" shall mean the individual selected as a substitute insured for purposes related to any insurance policy applicable to this Agreement. 1.15. SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the person, if any, who shall be legally married to the Director on the date of the Director's death. -4- 20 SCOPE, PURPOSE AND EFFECT. 2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to provide the Director with an additional incentive to continue to serve as a member of the Board of Directors of the Bank, this Agreement shall not be deemed to constitute a contract of employment between the Director and the Bank nor shall any provision of this Agreement restrict the right of the Bank to remove or cause the removal of the Director including, without limitation, by (i) refusal to nominate the Director for election for any successive term of office as a member of the Board of Directors of the Bank, or (ii) complying with an order or other directive from a court of competent jurisdiction or any regulatory authority having jurisdiction over the Bank which requires the Bank to take action to remove the Director. 2.2. FRINGE BENEFIT. The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Director and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Director has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 30 PAYMENTS UPON EARLY RETIREMENT OR RETIREMENT AND AFTER RETIREMENT. 3.1. PAYMENTS UPON EARLY RETIREMENT. The Director shall have the right to Retire from the Board of Directors on a date which constitutes an Early Retirement Date as defined in subparagraph 1.8 above. In the event the Director elects to Retire on a date which constitutes an Early Retirement Date, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs or upon such later date as may be mutually agreed upon by the Director and the Bank in advance of said Early Retirement Date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until death in the case of the Index Benefit defined in Schedule "B". 3.2. PAYMENTS UPON RETIREMENT. If the Director shall continue to serve as a member of the Board of Directors until attaining sixty-two (62) years of age, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the -5- month in which the Director Retires or upon such later date as may be mutually agreed upon by the Director and the Employer in advance of said Retirement date, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until death in the case of the Index Benefit defined in Schedule "B". At the Bank's sole and absolute discretion, the Bank may increase the Director Benefits as and when the Bank determines the same to be appropriate. 3.3. PAYMENTS IN THE EVENT OF DEATH AFTER RETIREMENT. (a) The Bank agrees that if the Director Retires, but shall die before receiving all of the Director Benefits Payments to which he may be entitled specified in Schedule "B", and provided that the Surrogate is alive at the date of the Director's death, the Bank will pay to the Director's designated beneficiary the balance, if any, of the Benefit Account and up to fifteen (15) Index Benefit installment payments in the amounts which would otherwise be paid to the Director if still alive, minus the number of Index Benefit installment payments made to the Director after Retirement and prior to his death. Upon the death of the Surrogate, such installment payments shall cease whether or not any unpaid portion of the fifteen (15) installment payments shall remain unpaid. (b) If a valid Beneficiary Designation is not in effect, then all payments described above in subparagraph 3.3 (a) shall be paid to the Director's Surviving Spouse. If the Director leaves no Surviving Spouse, the remaining amounts due to the Director under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Director's estate. 40 PAYMENTS IN THE EVENT DEATH OR DISABILITY OCCURS PRIOR TO RETIREMENT. 4.1. PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. (a) The Bank agrees that if the Director shall die before Retirement and provided that the Surrogate is alive at the date of the Director's death, the Bank will pay to the Director's designated beneficiary the balance, if any, of the Benefit Account and up to fifteen (15) Index Benefit installment payments in the amounts which would otherwise be paid to the Director if alive following Retirement. Upon the death of the Surrogate, such installment payments shall cease whether or not any unpaid portion of such fifteen (15) installment payments shall remain unpaid. (b) If a valid Beneficiary Designation is not in effect, then all payments described above in subparagraph 4.1 (a) shall be paid to the Director's Surviving Spouse. If the Director leaves no Surviving Spouse, the remaining amounts due to the Director -6- under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Director's estate. 4.2. PAYMENTS IN THE EVENT OF DISABILITY PRIOR TO RETIREMENT. In the event the Director becomes Disabled at any time after the Effective Date of this Agreement, but prior to Retirement, the Director shall be entitled to the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director becomes Disabled, payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until the earlier of the death of the Surrogate or the Director in the case of the Index Benefit defined in Schedule "B". 50 PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED PRIOR TO RETIREMENT. As indicated in subparagraph 2.1 above, the Bank reserves the right to remove or cause the removal of the Director under certain circumstances, at any time prior to the Director's Retirement. In the event that the service of the Director shall be terminated, other than by reason of death, Disability or Retirement, prior to the Director's attaining sixty-two (62) years of age, then this Agreement shall terminate upon the date of such termination; provided, however, that the Director shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Director's termination: 5.1. TERMINATION WITHOUT CAUSE. If the Director's service as a member of the Board of Directors of the Bank is terminated for reasons other than as specified in paragraph 5.3 below, and such termination is not subject to the provisions of subparagraph 5.4 below, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Director and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Director does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Director attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until death in the case of the Index Benefit defined in Schedule "B". 5.2. VOLUNTARY TERMINATION BY THE DIRECTOR. If the Director's service as a member of the Board of Directors of the Bank is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraphs 5.3 or 5.4 below, the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director attains fifty-five (55) years of age or any month thereafter, as -7- requested in writing by the Director and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Director does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Director attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until death in the case of the Index Benefit defined in Schedule "B". 5.3. TERMINATION BY REMOVAL FOR CAUSE. The Director agrees that if his service as a member of the Board of Directors of the Bank is terminated by "removal for cause," as defined in subparagraph 1.12 of this Agreement, the Director shall forfeit any and all rights and benefits the Director may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Director by the Bank pursuant to the terms of this Agreement. 5.4. TERMINATION BY THE BANK ON ACCOUNT OF OR AFTER A CHANGE IN CONTROL. In the event that the Director's service as a member of the Board of Directors of the Bank is terminated in conjunction with, or by reason of, a "Change in Control", the Director shall be entitled to be paid the Applicable Percentage of the Director Benefits, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Director attains fifty-five (55) years of age or any month thereafter, as requested in writing by the Director and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Director does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Director attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "D" in the case of the balance in the Benefit Account and (ii) until death in the case of the Index Benefit defined in Schedule "B". 60 SECTION 280G BENEFITS REDUCTION. The Director acknowledges and agrees that the parties have entered into this Agreement based upon certain financial and tax accounting assumptions. Accordingly, with full knowledge of the potential consequences the Director agrees that, notwithstanding anything contained herein to the contrary, in the event that any payment or benefit received or to be received by the Director, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Bank (together with the Director Benefits, the "Total Payments"), will not be deductible (in whole or in part) as a result of Code Section 280G or other applicable provisions of the Code, the Total Payments shall be reduced until no portion of the Total Payments is nondeductible as a result of Section 280G or such other applicable provisions of the Code. For purposes of this limitation: -8- (a) No portion of the Total Payments, the receipt or enjoyment of which the Director shall have effectively waived in writing prior to the date of payment of any future Director Benefits payments, shall be taken into account; (b) No portion of the Total Payments shall be taken into account, which in the opinion of the tax counsel selected by the Bank and acceptable to the Director, does not constitute a "parachute payment" within the meaning of Section 280G of the Code; (c) Any reduction of the Total Payments shall be applied to reduce any payment or benefit received or to be received by the Director pursuant to the terms of this Agreement and any other plan, arrangement or agreement with the Bank in the order determined by mutual agreement of the Bank and the Director; (d) Future payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (a) or (b) above in their entirety) constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of tax counsel referred to in clause (b) above; and (e) The value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by independent auditors selected by the Bank and acceptable to the Director in accordance with the principles of Section 280G of the Code. 70 RIGHT TO DETERMINE FUNDING METHODS. The Bank reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Director, the Director's spouse or the Director's beneficiaries under the terms of this Agreement. In the event that the Bank elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Bank shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Bank further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Director, the Director's spouse nor the Director's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Bank pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Bank's obligations pursuant to this Agreement. In connection with the foregoing, the Director agrees to execute such documents and undergo such medical examinations or tests which the Bank may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Bank's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Director to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement -9- and the immediate forfeiture by the Director, the Director's spouse and the Director's beneficiaries of any and all rights to payment hereunder. 80 CLAIMS PROCEDURE. The Bank shall, but only to the extent necessary to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Bank shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Director, the Director's spouse, or the Director's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Director, the Director's spouse or the Director's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Bank shall provide the Director, the Director's spouse or the Director's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. 90 STATUS AS AN UNSECURED GENERAL CREDITOR. Notwithstanding anything contained herein to the contrary: (i) neither the Director, the Director's spouse or the Director's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Bank as a result of this Agreement; (ii) none of the Bank's assets shall be held in or under any trust for the benefit of the Director, the Director's spouse or the Director's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Bank under this Agreement; (iii) all of the Bank's assets shall be and remain the general unpledged and unrestricted assets of the Bank; (iv) the Bank's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Bank to pay money in the future; and (v) the Director, the Director's spouse and the Director's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. Notwithstanding subparagraphs (i) through (v) above, the Bank and the Director acknowledge and agree that upon request of the Director at any time during the term of this Agreement, a Rabbi Trust (the "Trust") shall be established upon such terms and conditions as may be mutually agreeable between the Bank and the Director and that it is the intention of the Bank to make contributions and/or transfer assets to the Trust in order to discharge its obligations pursuant to this Agreement. The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Bank to be used exclusively for discharge of the Bank's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Bank's general creditors until paid to the Director or its beneficiaries in such manner and at such times as specified in this Agreement. 100 DISCRETION OF BOARD TO ACCELERATE PAYOUT. Notwithstanding any of the other provisions of this Agreement, the Board of Directors of the Bank may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the -10- terms of this Agreement, provided that Director (or Director's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Bank's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Bank's Board of Directors and offered to the Director [or Director's spouse or designated beneficiaries] on a "take it or leave it basis"). 110 MISCELLANEOUS. 11.1. OPPORTUNITY TO CONSULT WITH INDEPENDENT ADVISORS. The Director acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Director's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Director acknowledges and agrees shall be the sole responsibility of the Director notwithstanding any other term or provision of this Agreement. The Director further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Director and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successors and assigns to claim or assert liability on the part of the Bank related to the matters described above in this subparagraph 11.1. The Director further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions. 11.2. ARBITRATION OF DISPUTES. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Bank in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), located in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of -11- procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3. ATTORNEYS' FEES. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. NOTICE. Any notice required or permitted of either the Director or the Bank under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Bank: Heritage Bank of Commerce 150 Almaden Boulevard San Jose, California 95113 Attn: Chairman of the Board If to the Director: ________________________________ ________________________________ ________________________________ 11.5. ASSIGNMENT. Neither the Director, the Director's spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, -12- nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Director, the Director's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Bank. The Bank=s consent, if any, to one or more assignments or transfers shall not obligate the Bank to consent to or be construed as the Bank=s consent to any other or subsequent assignment or transfer. 11.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be binding upon and inure to the benefit of the Director and the Bank and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Bank shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. NONWAIVER. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. PARTIAL INVALIDITY. If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. MODIFICATIONS. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative. -13- 11.11. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. GOVERNING LAW. The laws of the State of California, other than those laws denominated choice of law rules, and, where applicable, the rules and regulations of the California Commissioner of Financial Institutions and the Federal Deposit Insurance Corporation, shall govern the validity, interpretation, construction and effect of this Agreement. IN WITNESS WHEREOF, the Bank and the Director have executed this Agreement on the date first above-written in the City of San Jose, Santa Clara County, California. BANK DIRECTOR Heritage Bank of Commerce By: ------------------------------- ---------------------------------------- William J. Del Biaggio, Jr. Chairman of the Board of Directors -14- SCHEDULE A
CALENDAR PERIOD APPLICABLE PERCENTAGE --------------- --------------------- June 8, 1994 to June 7, 1997.......................... 0.00% June 8, 1997 to June 7, 1998.......................... 36.00% June 8, 1998 to June 7, 1999.......................... 48.00% June 8, 1999 to June 7, 2000.......................... 60.00% June 8, 2000 to June 7, 2001.......................... 72.00% June 8, 2001 to June 7, 2002.......................... 84.00% June 8, 2002 and Thereafter........................... 100.00%
See subparagraph 1.2 of the Agreement for a definition and discussion of the Applicable Percentage. SCHEDULE B DIRECTOR BENEFITS 1. Director Benefits Determination. The Director Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a liability reserve account on the books of the Bank for the benefit of the Director. Prior to the date on which the Director becomes eligible to receive payments under the Agreement, such Benefit Account shall be increased or decreased each Plan Year (including the Plan Year in which the Director ceases to serve as a member of the Board of Directors of the Bank) by an amount equal to the annual earnings or loss for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Director becomes eligible to receive payments under the Agreement, the Index Benefit for the Director for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the earnings, if any, established by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: If such contracts of life insurance are actually purchased by the Bank, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are -1- not purchased or are subsequently surrendered or lapsed, then the Bank shall receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefit (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Bank's marginal tax rate until the Director's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Bank is higher or lower.
- ----------------------------------------------------------------------------------------------- EXAMPLE INDEX BENEFITS - ----------------------------------------------------------------------------------------------- [n] [A] [B] [C] [D] INDEX VALUE OF LIFE [Annual OPPORTUNITY COST CASH SURRENDER Policy A(0) = premium ANNUAL CUMULATIVE END OF VALUE OF LIFE Income] A(0)+C(n-1)x.05x BENEFIT BENEFIT YEAR INSURANCE POLICY A(n)-A(n-1) (1-42%) B-C D+D(n-1) - ----------------------------------------------------------------------------------------------- 0 $1, 000,000 -- -- -- -- - ----------------------------------------------------------------------------------------------- 1 $1,050,000 $50,000 $29,000 $21,000 $21,000 - ----------------------------------------------------------------------------------------------- 2 $1,102,500 $52,500 $29,841 $22,659 $43,659 - ----------------------------------------------------------------------------------------------- 3 $1,157,625 $55,125 $30,706 $24,419 $68,078 - ----------------------------------------------------------------------------------------------- . . . - -----------------------------------------------------------------------------------------------
Assumptions: Initial Insurance = $1,000,000 Effective Tax Rate = 42% One Year US Treasury Yield = 5% -2- 2. Director Benefits Payments. The Director shall be entitled to payment of the Applicable Percentage of (i) the balance in the Benefit Account in installments upon the terms as specified in the Agreement, and (ii) the Index Benefit for each Plan Year payable in installments until the Director's death or as applicable, the Surrogate's death, as specified in the Agreement. -3- SCHEDULE C BENEFICIARY DESIGNATION To the Administrator of the Heritage Bank of Commerce Director Indexed Compensation Benefits Agreement: Pursuant to the Provisions of my Director Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: PRIMARY BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship SECONDARY (CONTINGENT) BENEFICIARY: - ---------------------- -------------------- ----------------------------- Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Director Indexed Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the -4- remaining unpaid benefit payable according to the terms of my Director Indexed Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Director Indexed Compensation Benefits Agreement. Dated: June _____, 1997 ---------------------------------------- CONSENT OF THE DIRECTOR'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: I, __________________, being the spouse of ________________________, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Director Indexed Compensation Benefits Agreement entered into by my spouse effective as of June 19, 1997. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Director Indexed Compensation Benefits Agreement and in which I may have a marital property interest. Dated: June _____, 1997. ---------------------------------- - ------------------------------------- Type/Print Name -5- SCHEDULE D DISTRIBUTION ELECTION Pursuant to the Provisions of my Director Indexed Compensation Benefits Agreement with Heritage Bank of Commerce, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: -- thirty-six (36) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. -- one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: June _____, 1997 Signed: ------------------------------- LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT Insurer(s)/Policy Number(s): Bank: Heritage Bank of Commerce Participant: Insured: _____________, as the insured surrogate for Participant Relationship of Participant to Bank: Director Date: _____________, 19__ The respective rights and duties of the Bank and the Participant in the above policy(ies) (the "Policy") shall be as follows: I. DEFINITIONS Refer to the Policy provisions for the definition of all terms in this Agreement. Notwithstanding the foregoing, whenever the term "Insured" is used in the Policies, unless the Policy provisions otherwise require, it shall mean _____________________________ for purposes of any beneficial interest or right to proceeds from any insurance policy to which this Agreement refers. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Participant all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Participant (or beneficiary[ies] or assignee[s], with the consent of the Participant) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS The Participant (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his or her share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Participant will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Participant the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. a. Subject to paragraph VI.1.b below, upon the death of the Insured, the Participant's beneficiary(ies), designated in accordance with Paragraph III, shall be entitled to an amount equal to eighty percent (80%) of the net at risk insurance portion of the proceeds of the Policy. The net at risk insurance portion of a Policy is the total proceeds less the cash value of the Policy. Notwithstanding the foregoing, in the event the Participant [or his or her beneficiary(ies)] becomes entitled to receive the foregoing death benefit prior to the Participant becoming entitled to receive 100% of the benefits, if any, specified in that certain Director Indexed Compensation Benefits Agreement between the Bank and the Participant, effective __________, 19__ (the "Benefits Agreement"), then the Participant [or his or her beneficiary(ies)] shall be entitled to receive the same percentage of the foregoing death benefit as the percentage applicable to the Participant's benefits, if any, under such Agreement immediately prior to the Participant's death or, if earlier, the date on which the Participant [or his or her beneficiary(ies)] commences receiving such death benefit. b. Notwithstanding paragraph VI.1.a above, if the Insured predeceases the Participant after the Participant Retires, becomes Disabled, or otherwise terminates employment (as defined or described in the Benefits Agreement), then the Participant shall be entitled to the amount determined in accordance with paragraph VI.1.a, reduced by (i) the portion of the projected death benefit payable to the Participant's beneficiary(ies) upon the Participant's death, and (ii) the amount of any Index Benefit payments (or payments made in lieu of such Index Benefit payments) made to the Participant or the Participant's beneficiary(ies) pursuant to the terms of the Benefits Agreement and which are determined with reference to the Policy (or any replacement surrogate Policy). Such benefit shall be payable in lump sum or in such -2- periodic installments as may be mutually agreed upon by the Bank and the Participant. Upon the death of the Participant, the remaining unpaid balance of the death benefit to which the Participant is entitled shall be paid to the Participant's beneficiary(ies) in lump sum. In no event shall the Participant and/or the Participant's beneficiary(ies) receive an aggregate benefit under this Agreement exceeding the amount to which the Participant is entitled under paragraph VI.1.a above. 2. The Bank shall be entitled to the remainder of such proceeds. 3. The Bank and the Participant (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Participant, respectively, bears to the total proceeds, excluding any such interest. 4. In the event that either a Policy is terminated or the proceeds of the Policies are insufficient to provide the benefit specified herein, other than as a result of (i) a termination of this Agreement pursuant to paragraph X or (ii) any intentional act of the Participant which results in the termination of one or more of the Policies, then the Bank shall pay to the Participant's beneficiary(ies) an amount which, when combined with the proceeds of the Policies actually received, will provide a total death benefit equal to the amount to which the Participant [or his beneficiary(ies)] is entitled under this Agreement. VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity -3- benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Participant upon the happening of any one of the following: 1. The Participant's right to receive benefits pursuant to the terms and conditions of that certain Director Indexed Compensation Benefits Agreement effective as of ___________, 19__, shall terminate for any reason other than the Participant's death; or 2. The Participant shall be discharged from service with the Bank for cause. The term "for cause" shall mean: a. The willful breach or habitual neglect by the Participant of his responsibilities and duties; b. The Participant's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Bank, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation or any other regulatory agency or governmental authority having jurisdiction over the Bank, which has a material adverse effect upon the Bank; c. The determination by a state or federal court, banking agency or other governmental authority having jurisdiction over the Bank that the Participant (i) is of unsound mind, or (ii) has committed a gross abuse of authority or discretion with reference to the Bank, or (iii) otherwise is not suitable to continue to serve as a member of the Board of Directors of the Bank; d. The Participant's conviction of any felony or a crime involving moral turpitude or a fraudulent or dishonest act; or e. The Participant's disclosure without authority of any secret or confidential information not otherwise publicly available concerning the Bank or taking any action which the Bank's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or inducement of any customer to breach any contract with the Bank. -4- Upon such termination, the Participant (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Participant (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Participant (or beneficiary[ies] or assignee[s]) agrees that all of his or her rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. PARTICIPANT'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Participant may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Participant and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Bank is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Bank shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY The funding policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. -5- XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. -6- IN WITNESS WHEREOF, the Participant and a duly authorized Bank officer have signed this Agreement as of the date first written above. HERITAGE BANK OF COMMERCE PARTICIPANT - ------------------------------- ---------------------------------------- -7- BENEFICIARY DESIGNATION FORM PRIMARY DESIGNATION:
NAME RELATIONSHIP ---- ------------ - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- CONTINGENT DESIGNATION: - ----------------------------- --------------------------------------- - ----------------------------- --------------------------------------- - ----------------------------- ---------------------------------------
_____________________________ ______________, 19__ EX-27.1 7
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HERITAGE COMMERCE CORP UNAUDITED FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 SEP-30-1999 18,892,000 296,553,000 128,130,000 0 13,845,000 13,845,000 13,791,000 245,411,000 4,569,000 468,574,000 416,650,000 0 8,294,000 0 0 0 41,006,000 2,624,000 468,574,000 18,794,000 1,944,000 1,427,000 22,165,000 7,006,000 7,028,000 15,137,000 1,483,000 1,004,000 14,252,000 3,115,000 3,115,000 0 0 2,055,000 0.35 0.31 5.89 0 0 0 0 3,825,000 797,000 58,000 4,569,000 4,569,000 0 988,000
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