**Exhibit 10.26**

** **

**HERITAGE OAKS BANK**

**SALARY CONTINUATION AGREEMENT**

 

THIS AGREEMENT is adopted this 1st day of February 2002, by and betweenHERITAGE OAKS BANK, a state-chartered commercial bank located in Paso Robles,California (the “Bank”), and JOSEPH CARNEVALI (the “Executive”).

 

**INTRODUCTION**

 

To encourage the Executive to remain an employee of the Bank, the Bankis willing to provide salary continuation benefits to the Executive.  The Bank will pay the benefits from itsgeneral assets.

 

**AGREEMENT**

 

The Bank and the Executive agree as follows:

 

**Article 1**

**Definitions**

 

**Whenever used in thisAgreement, the following words and phrases shall have the meanings specified:**

 

1.1                                 *“Change of Control”* means:

 

(a)           A change in the ownership of the capital stock ofthe Company, whereby another corporation, person, or group acting in concert(hereinafter this Agreement shall collectively refer to any combination ofthese three [another corporation, person, or group acting in concert] as a“Person”) as described in Section 14(d)(2) of the Securities Exchange Act of1934, as amended (the “Exchange Act”), acquires, directly or indirectly,beneficial ownership (within the meaning of Rule 13d-3 promulgated under theExchange Act) of a number of shares of capital stock of the Company whichconstitutes fifty percent (50%) or more of the combined voting power of theCompany’s  then outstanding capitalstock then entitled to vote generally in the election of directors; or

 

(b)           The persons who weremembers of the Board of Directors of the Company  immediately prior to a tender offer, exchange offer, contestedelection or any combination of the foregoing, cease to constitute a majority ofthe Board of Directors; or

 

(c)           The adoption by theBoard of Directors of the Company of a merger, consolidation or reorganizationplan involving the Company in which the Company is not the surviving entity, ora sale of all or substantially all of the assets of the Company.  For purposes of this Agreement, a sale ofall or substantially all of the assets of the Company shall be deemed to occurif any Person acquires (or during the 12-month period ending on the date of themost recent acquisition by such Person, has acquired) gross assets of theCompany that have an aggregate fair market value equal to fifty percent (50%)or more of the fair market value of all of the respective gross assets of theCompany immediately prior to such acquisition or acquisitions; or

 

(d)           A tender offer orexchange offer is made by any Person which results in such Person beneficiallyowning (within the meaning of Rule 13d-3 promulgated under the Exchange Act)either fifty percent (50%) or more of the Company’s outstanding shares ofCommon Stock or shares of capital stock having fifty percent (50%) or more thecombined voting power of the Company’s then outstanding capital stock (otherthan an offer made by the Company), and sufficient shares are acquired underthe offer to cause such person to own fifty percent (50%) or more of the votingpower; or

 

(e)           Any othertransactions or series of related transactions occurring which havesubstantially the same effect as the transactions specified in any of thepreceding clauses of this Section 1.1.

 

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Notwithstanding the above,certain transfers are permitted within Section 318 of the Code and suchtransfers shall not be deemed a Change of Control under this Section 1.2.

 

1.2. *“Code”* means theInternal Revenue Code of 1986, as amended.

 

1.1                                 *“Company”*means Heritage Oaks Bancorp

 

1.2                                 “*Bank*” means Heritage Oaks Bank

 

1.3                                 “*Disability*” means the Executive’ssuffering a sickness, accident or injury which has been determined by thecarrier of any individual or group disability insurance policy covering theExecutive, or by the Social Security Administration, to be a disabilityrendering the Executive totally and permanently disabled.  The Executive must submit proof to the Bankof the carrier’s or Social Security Administration’s determination upon therequest of the Bank.

 

1.4                                 “*Early Termination*” means the Terminationof Employment before Normal Retirement Age for reasons other than death,Disability, Termination for Cause or following a Change of Control.

 

1.5                                 “*Early Termination Date*” means the month,day and year in which Early Termination occurs.

 

1.6                                 “*Effective Date*” means February 1, 2002.

 

1.7                                 “*Normal Retirement Age*” means theExecutive’s 65TH birthday.

 

1.8                                 “*Normal Retirement Date*” means the later ofthe Normal Retirement Age or Termination of Employment.

 

1.9                                 “*Plan Year*” means each 12-month period fromthe Effective Date.

 

1.10                           “Terminationfor Cause” See Article 5.

 

1.11                           “*Termination of Employment*” means that theExecutive ceases to be employed by the Bank for any reason, voluntary orinvoluntary, other than by reason of a leave of absence approved by the Bank.

 

**Article 2**

**Lifetime Benefits**

 

2.1           *Normal Retirement Benefit*.  Upon Termination of Employment on or afterthe Normal Retirement Age****for reasons other than death, the Bankshall pay to the Executive the benefit described in this Section 2.1 in lieu ofany other benefit under this Agreement.

 

2.1.1        *Amount ofBenefit*.  The annual benefitunder this Section 2.1 is $18,000 (Eighteen Thousand Dollars).  The Bank’s Board of Directors, in its solediscretion, may increase the annual benefit under this Section 2.1.1; however,an increase shall require the recalculation of Schedule A.

 

2.1.2        *Payment ofBenefit*.  The Bank shall paythe annual benefit to the Executive in 12 equal monthly installments commencingwith the month following the Executive’s Normal Retirement Date, paying theannual benefit to the Executive for a period of 15 years.

 

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2.2           *Early Termination Benefit*.  Upon Early Termination, the Bank shall payto the Executive the benefit described in this Section 2.2 in lieu of any otherbenefit under this Agreement.

 

2.2.1*        Amountof Benefit*.  The benefitunder this Section 2.2 is the Early Termination Lump Sum set forth on ScheduleA for the Plan Year ending immediately prior to the Early Termination Date,determined by vesting the Executive in 10 percent of the Accrual Balance setforth on Schedule A for the first Plan Year and an additional 10 percent ofsaid amount for each succeeding year thereafter until the Executive becomes 100percent vested in the Accrual Balance.

 

2.2.2*        Payment ofBenefit*.  The Bank shall paythe benefit to the Executive in a lump sum amount pursuant to Schedule A,within 90 days following the Early Termination date.

 

2.3*           Disability Benefit.*  If the Executive terminates employment dueto Disability prior to Normal Retirement Age, the Bank shall pay to theExecutive the benefit described in this Section 2.3 in lieu of any otherbenefit under this Agreement.

 

2.3.1*        Amountof Benefit.*  The benefitunder this Section 2.3 is the Disability Annual Benefit set forth on Schedule Afor the Plan Year ending immediately prior to the date in which the Terminationof Employment occurs (except during the first Plan Year, the benefit is theamount set forth for Plan Year 1), determined by vesting the Executive in  100 percent of the Accrual Balance.

 

2.3.2*        Paymentof Benefit.*  The Bank shallpay the annual benefit to the Executive in 12 equal monthly installmentscommencing with the month following the Normal Retirement Age, paying theannual benefit to the Executive for a period of 15 years.

 

2.4*           Change of Control Benefit*.  Upon a Change of Control, the Bank shall payto the Executive the benefit described in this Section 2.4 in lieu of any otherbenefit under this Agreement.

 

2.4.1*        Amountof Benefit.*  The benefitunder this Section 2.4 is the Change of Control Annual Benefit set forth onSchedule A for the Plan Year ending immediately prior to the date in whichTermination of Employment occurs (except during the first Plan Year, thebenefit is the amount set forth for Plan Year 1), determined by vesting theExecutive in the Normal Retirement Benefit described in Section 2.1.1.

 

2.4.2*        Paymentof Benefit**.******* The Bank shall pay the annual benefit to theExecutive in 12 equal monthly installments commencing with the month followingthe Normal Retirement Age, paying the annual benefit to the Executive for aperiod of 15 years.

 

2.4.3        *ExcessParachute Payment*. Notwithstanding any provision of this Agreement to the contrary, theBank shall not pay any benefit under this Agreement to the extent the benefitwould create an excise tax under the excess parachute rules of Section 280G ofthe Code.

 

**Article 3**

**Death Benefits**

 

3.1           *Death During Active Service*.  If the Executive dies while in the activeservice of the Bank, the Bank shall pay to the Executive’s beneficiary thebenefit described in this Section 3.1. This benefit shall be paid in lieu of the benefits under Article 2.

 

3.1.1        *Amount ofBenefit*.  The annual benefitunder this Section 3.1 is the Normal Retirement Benefit amount described inSection 2.1.1.

 

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3.1.2        *Payment**of Benefit*.  The Bank shall pay the annual benefit to theExecutive’s beneficiary in 12 equal monthly installments commencing with themonth following the Executive’s death, paying the annual benefit to theExecutive’s beneficiary for a period of 15 years.

 

3.2           *Death During Payment of a LifetimeBenefit*.  If the Executivedies after any Lifetime Benefit payments have commenced under this Agreementbut before receiving all such payments, the Bank shall pay the remainingbenefits to the Executive’s beneficiary at the same time and in the sameamounts they would have been paid to the Executive had the Executive survived.

 

3.3           *Death After Termination of EmploymentBut Before Payment of a Lifetime Benefit Commences.*** **If the Executive is entitled to aLifetime Benefit under this Agreement, but dies prior to the commencement ofsaid benefit payments, the Bank shall pay the same benefit payments to theExecutive’s beneficiary that the Executive was entitled to prior to deathexcept that the benefit payments shall commence on the first day of the monthfollowing the date of the Executive’s death.

 

**Article 4**

**Beneficiaries**

 

4.1           *Beneficiary Designations*.  The Executive shall designate a beneficiaryby filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filinga new designation.  However,designations will only be effective if signed by the Executive and received bythe Bank during the Executive’s lifetime. The Executive’s beneficiary designation shall be deemed automaticallyrevoked if the beneficiary predeceases the Executive, or if the Executive namesa spouse as beneficiary and the marriage is subsequently dissolved.  If the Executive dies without a validbeneficiary designation, all payments shall be made to the Executive’s estate.

 

4.2           *Facility of Payment*.  If a benefit is payable to a minor, to aperson declared incompetent, or to a person incapable of handling thedisposition of his or her property, the Bank may pay such benefit to theguardian, legal representative or person having the care or custody of suchminor, incompetent person or incapable person. The Bank may require proof of incompetence, minority or guardianship as itmay deem appropriate prior to distribution of the benefit.  Such distribution shall completely dischargethe Bank from all liability with respect to such benefit.

 

**Article 5**

**General Limitations**

 

5.1           *Termination for Cause*.  Notwithstanding any provision of thisAgreement to the contrary, the Bank shall not pay any benefit under thisAgreement if the Bank terminates the Executive’s employment for:

 

(a)           Grossnegligence or gross neglect of duties;

 

(b)           Commissionof a felony or of a gross misdemeanor involving moral turpitude; or

 

(c)           Fraud,disloyalty, dishonesty or willful violation of any law or significant Bankpolicy committed in connection with the Executive’s employment and resulting inan adverse effect on the Bank.

 

5.2           *Suicide or Misstatement*.  The Bank shall not pay any benefit underthis Agreement if the Executive commits suicide within three years after thedate of this Agreement.  In addition,the Bank shall not pay any benefit under this Agreement if the Executive hasmade any material misstatement of fact on an employment application or resumeprovided to the Bank, or on any application for any benefits provided by theBank to the Executive.

 

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**Article 6**

**Claims and Review Procedure**

 

6.1           *Claims Procedure*.  Any person or entity (“claimant”) who hasnot received benefits under the Agreement that he or she believes should bepaid shall make a claim for such benefits as follows:

 

6.1.1        *Initiation — Written Claim*.  The claimant initiates a claim by submittingto the Bank a written claim for the benefits.

 

6.1.2        *Timing of Bank Response.*  The Bank shall respond to such claimantwithin 90 days after receiving the claim. If the Bank determines that special circumstances require additionaltime for processing the claim, the Bank can extend the response period by anadditional 90 days by notifying the claimant in writing, prior to the end ofthe initial 90-day period, that an additional period is required.  The notice of extension must set forth thespecial circumstances and the date by which the Bank expects to render itsdecision.

 

6.1.3        *Notice of Decision*.  If the Bank denies part or all of the claim,the Bank shall notify the claimant in writing of such denial.  The Bank shall write the notification in a mannercalculated to be understood by the claimant. The notification shall set forth:

 

(a)           Thespecific reasons for the denial;

 

(b)           Areference to the specific provisions of the Agreement on which the denial isbased;

 

(c)           Adescription of any additional information or material necessary for theclaimant to perfect the claim and an explanation of why it is needed;

 

(d)           Anexplanation of the Agreement’s review procedures and the time limits applicableto such procedures; and

 

(e)           Astatement of the claimant’s right to bring a civil action under ERISA Section502(a) following an adverse benefit determination on review.

 

6.2           *Review Procedure*.  If the Bank denies part or all of the claim,the claimant shall have the opportunity for a full and fair review by the Bankof the denial, as follows:

 

6.2.1        *Initiation — Written Request*.  To initiate the review, the claimant, within60 days after receiving the Bank’s notice of denial, must file with the Bank awritten request for review.

 

6.2.2        *Additional Submissions — Information Access*.  The claimant shall then have the opportunityto submit written comments, documents, records and other information relatingto the claim.  The Bank shall alsoprovide the claimant, upon request and free of charge, reasonable access to, andcopies of, all documents, records and other information relevant (as defined inapplicable ERISA regulations) to the claimant’s claim for benefits.

 

6.2.3        *Considerations on Review*.  In considering the review, the Bank shalltake into account all materials and information the claimant submits relatingto the claim, without regard to whether such information was submitted orconsidered in the initial benefit determination.

 

6.2.4        *Timing of Bank Response*.  The Bank shall respond in writing to suchclaimant within 60 days after receiving the request for review.  If the Bank determines that specialcircumstances require additional time for processing the claim, the Bank canextend the response period by an additional 60 days by notifying the claimantin writing, prior to the end of the initial 60-day period, that an additionalperiod is required.  The notice ofextension must set

 

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forth the special circumstances and the date by which the Bank expectsto render its decision.

 

6.2.5        *Notice of Decision*.  The Bank shall notify the claimant inwriting of its decision on review.  TheBank shall write the notification in a manner calculated to be understood bythe claimant.  The notification shallset forth:

 

(a)           Thespecific reasons for the denial;

 

(b)           Areference to the specific provisions of the Agreement on which the denial isbased;

 

(c)           Astatement that the claimant is entitled to receive, upon request and free ofcharge, reasonable access to, and copies of, all documents, records and otherinformation relevant (as defined in applicable ERISA regulations) to theclaimant’s claim for benefits; and

 

(d)           Astatement of the claimant’s right to bring a civil action under ERISA Section502(a).

 

**Article 7**

**Amendments and Termination**

 

This Agreement may be amended orterminated only by a written agreement signed by the Bank and the Executive.

 

**Article 8**

**Miscellaneous**

 

8.1           *Binding Effect*.  This Agreement shall bind the Executive andthe Bank, and their beneficiaries, survivors, executors, successors,administrators and transferees.

 

8.2           *No Guarantee of Employment*.  This Agreement is not an employment policyor contract.  It does not give theExecutive the right to remain an employee of the Bank, nor does it interferewith the Bank’s right to discharge the Executive.  It also does not require the Executive to remain an employee norinterfere with the Executive’s right to terminate employment at any time.

 

8.3*           Non-Transferability*.Benefits under this Agreement cannot be sold, transferred, assigned, pledged,attached or encumbered in any manner.

 

8.4           *Reorganization. *The Bank shall not merge orconsolidate into or with another Bank, or reorganize, or sell substantially allof its assets to another Bank, firm, or person unless such succeeding orcontinuing Bank, firm, or person agrees to assume and discharge the obligationsof the Bank under this Agreement.  Uponthe occurrence of such event, the term “Bank” as used in this Agreement shall bedeemed to refer to the successor or survivor Bank.

 

8.5           *Tax Withholding*.  The Bank shall withhold any taxes that arerequired to be withheld from the benefits provided under this Agreement.

 

8.6           *Applicable Law*.  The Agreement and all rights hereunder shallbe governed by the laws of the State of California, except to the extentpreempted by the laws of the United States of America.

 

8.7           *Unfunded Arrangement*.  The Executive and beneficiary are generalunsecured creditors of the Bank for the payment of benefits under thisAgreement.  The benefits represent themere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation,alienation, sale, transfer, assignment, pledge, encumbrance, attachment, orgarnishment 

 

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bycreditors.  Any insurance on theExecutive’s life is a general asset of the Bank to which the Executive andbeneficiary have no preferred or secured claim.

 

8.8*           Entire Agreement. *This Agreement constitutes theentire agreement between the Bank and the Executive as to the subject matterhereof.  No rights are granted to theExecutive by virtue of this Agreement other than those specifically set forthherein.

 

8.9           *Administration. *The Bank shall have powers whichare necessary to administer this Agreement, including but not limited to:

 

(a)           Establishingand revising the method of accounting for the Agreement;

 

(b)           Maintaininga record of benefit payments;

 

(c)           Establishingrules and prescribing any forms necessary or desirable to administer theAgreement; and

 

8.10         *Named Fiduciary.*The Bankshall be the named fiduciary and plan administrator under this Agreement.  It may delegate to others certain aspects ofthe management and operational responsibilities including the employment ofadvisors and the delegation of ministerial duties to qualified individuals.

 

IN WITNESS WHEREOF, theExecutive and the Bank have signed this Agreement.

 
| **EXECUTIVE:**       |   | **BANK:**              |
|----------------------|--------|------------------------|
|                 |   | **HERITAGE OAKS BANK** |
|                 |   |                   |
|                 |   | **By**                 |
|                 |   |                   |
| **Joseph Carnevali** |   |                   |
|                 |   |                   |
|                 |   | **Title**              |
|                 |   |                   |

 

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