**Exhibit 10.38**

 

**PROMISSORY NOTE**

** **
| **Principal** |             | **Loan Date** |           | **Maturity** |           | **Loan No.** |        | **Call / Coll** |      | **Account** |   | **Officer** |    | **Initials** |                |
|---------------|------------------|---------------|----------------|--------------|----------------|--------------|-------------|-----------------|-----------|-------------|--------|-------------|---------|--------------|---------------------|
| **$**         | **3,500,000.00** |          | **10-01-2003** | ** **   | **10-01-2013** | ** **   | **7002125** | ** **      | **Stock** | ** **  |   | ** **  | ******* |         | **/s/ [ILLEGIBLE]** | ** ** |
|               |                  |               |                |              |                |              |             |                 |           |             |        |             |         |              |                     |  |

** **

References in the shaded area are forLender’s use only and do not limit the applicability of this document to anyparticular loan or item. Any item above containing “***” has been omitted dueto text length limitations.

** **
| **Borrower:** | **Heritage Oaks Bancorp  545 12th Street  Paso Robles, CA  93446** |   | **Lender:** | **PACIFIC COAST BANKERS’ BANK  340 PINE STREET, SUITE 401  SAN FRANCISCO, CA  94104** |
|---------------|-------------------------------------------------------------------------|--------|-------------|-------------------------------------------------------------------------------------------------|

 
| **Principal Amount:     $3,500,000.00** | **Initial Rate:  4.000%** | **Date of Note:  October 1, 2003** |
|--------------------------------------------------------|-------------------------------------|-----------------------------------------|

 

**PROMISE TO PAY.  Heritage Oaks Bancorp (“Borrower”) promises to pay to PACIFICCOAST BANKERS’ BANK (“Lender”), or order, in lawful money of the United Statesof America, the principal amount of Three Million Five Hundred Thousand &00/100 Dollars ($3,500,000.00) or so much as may be outstanding, together withinterest on the unpaid outstanding principal balance of each advance.  Interest shall be calculated from the dateof each advance until repayment of each advance.**

** **

**PAYMENT. Borrower will pay this loan in accordance with the following paymentschedule:**

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**Two years Revolving Line of Credit – 8quarterly consecutive interest payments, beginning January 1, 2004, withinterest calculated on the unpaid principal balances at interest rate based onthe Prime Rate as published in the Western Edition of the Wall Street Journal(currently 4.000%), resulting in an initial interest rate of 4.000%.  The Line of Credit will mature October 1,2005 and then amortized over 8–years term loan.**

** **

**Eight years Term Loan – 31 quarterlyconsecutive principal and interest payments in the initial amount of$128,635.23 each, beginning January 1, 2006, with interest calculated on theunpaid balances at an interest rate based on the Prime Rate as published in theWestern Edition of the Wall Street Journal (currently 4.000%), resulting in aninitial interest rate of 4.000%; and one principal and interest payment of$128,635.27 on October 1, 2013, with interest calculated on the unpaidprincipal balances at an initial rate based on the Prime Rate as published inthe Western Edition of the Wall Street Journal (currently 4.000%), resulting inan initial interest rate of 4.000%. This estimated final payment is based on the assumption that allpayments will be made exactly as scheduled and that the Index does not change;the actual final payment will be for all principal and accrued interest not yetpaid, together with any other unpaid amounts under this Note**

** **

**Unless otherwise agreed or required byapplicable law, payments will be applied first to any unpaid collection costsand any late charges, then to any unpaid interest, and any remaining amount toprincipal.  The annual interest rate forthis Note is computed on a 365/360 basis; that is, by applying the ratio of theannual interest rate over a year of 360 days, multiplied by the outstandingprincipal balance, multiplied by the actual number of days the principalbalance is outstanding.  Borrower willpay Lender at Lender’s address shown above or at such other place as Lender maydesignate in writing.**

 

**VARIABLE INTEREST RATE.**  The interest rate on this Note is subject tochange from time to time based on changes in an independent index which is thePrime Rate as published in the Western Edition of the Wall Street Journal (the“Index”).  The Index is not necessarilythe lowest rate charged by Lender on its loans.  If the Index becomes unavailable during the term of this loan,Lender may designate a substitute index after notice to Borrower. Lender willtell Borrower the current index rate upon Borrower’s request. The interest ratechange will not occur more often than each Day. Borrower understands thatLender may make loans based on other rates as well.  **The Index currently is4.000%.  The interest rate to be appliedto the unpaid principal balance of this Note will be at a rate equal to theIndex, resulting in an initial rate of 4.000%.**  NOTICE: Under no circumstances will the interest rate on this Note be more thanthe maximum rate allowed by applicable law.

 

**PREPAYMENT.**  Borrower agrees that all loan fees and otherprepaid finance charges are earned fully as of the date of the loan and willnot be subject to refund upon early payment (whether voluntary or as a resultof default), except as otherwise required by law.  Except for the foregoing, Borrower may pay without penalty all ora portion of the amount owed earlier than it is due.  Early payments will not, unless agreed to by Lender in writing,relieve Borrower of Borrower’s obligation to continue to make payments ofaccrued unpaid interest.  Rather, earlypayments will reduce the principal balance due.  Borrower agrees not to send Lender payments marked “paid infull”, “without recourse”, or similar language.  If Borrower sends such a payment, Lender may accept it withoutlosing any of Lender’s rights under this Note, and Borrower will remainobligated to pay any further amount owed to Lender.  All written communications concerning disputed amounts, includingany check or other payment instrument that indicates that the paymentconstitutes “payment in full” of the amount owed or that is tendered with otherconditions or limitations or as full satisfaction of a disputed amount must bemailed or delivered to:  PACIFIC COASTBANKERS’ BANK, 340 PINE STREET, SUITE 401, SAN FRANCISCO, CA  94104.

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**LATE CHARGE.**  If a payment is 10 days or more late,Borrower will be charged **5.000% of the regularlyscheduled payment.**

 

**INTEREST AFTER DEFAULT.**  Upon Borrower’s failure to pay all amountsdeclared due pursuant to this section, including failure to pay upon finalmaturity, Lender, at its option, may, if permitted under applicable law,increase the variable interest rate on this Note to 5.000 percentage pointsover the Index.

 

**DEFAULT.** Each of thefollowing shall constitute an event of default (“Event of Default”) under thisNote:

 

**Payment Default.**  Borrower fails to make any payment when dueunder this Note.

 

**Other Defaults.**  Borrower fails to comply with or to performany other term, obligation, covenant or condition contained in this Note or inany of the related documents or to comply with or to perform any term,obligation, covenant or condition contained in any other agreement betweenLender and Borrower.

 

**False Statements.**  Any warranty, representation or statementmade or furnished to Lender by Borrower or on Borrower’s behalf under this Noteor the related documents is false or misleading in any material respect, eithernow or at the time made or furnished or becomes false or misleading at any timethereafter.

 

**Insolvency.**  The dissolution or termination of Borrower’sexistence as a going business, the insolvency of Borrower, the appointment of areceiver for any part of Borrower’s property, any assignment for the benefit ofcreditors, any type of creditor workout, or the commencement of any proceedingunder any bankruptcy of insolvency laws by or against Borrower.

 

**Creditor or Forfeiture Proceedings.**  Commencement of foreclosure or forfeitureproceedings, whether by judicial proceeding, self–help, repossession or anyother method, by any creditor of Borrower or by any governmental agency againstany collateral securing the loan.  Thisincludes a garnishment of any of Borrower’s accounts, including depositaccounts, with Lender.  However, thisEvent of Default shall not apply if there is a good faith dispute by Borroweras to the validity or reasonableness of the claim which is the basis of thecreditor or forfeiture proceeding and if Borrower gives Lender written noticeof the creditor or forfeiture proceeding and deposits with Lender monies or asurety bond for the creditor or forfeiture proceeding, in an amount determinedby Lender, in its sole discretion, as being an adequate reserve or bond for thedispute.

 

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**Loan No: 7001967**

 

**Events Affecting Guarantor.**  Any of the preceding events occurs withrespect to any guarantor, endorser, surety, or accommodation party of any ofthe indebtedness or any guarantor, endorser, surety, or accommodation partydies or becomes incompetent, or revokes or disputes the validity of, orliability under, any guaranty of the indebtedness evidenced by this Note.  In the event of a death, Lender, at itsoption, may, but shall not be required to, permit the guarantor’s estate toassume unconditionally the obligations arising under the guaranty in a mannersatisfactory to Lender, and, in doing so, cure any Event of Default.

 

**Change in Ownership.**  Any change in ownership of twenty–fivepercent (25%) or more of the common stock of Borrower.

 

**Adverse Change.**  A material adverse change occurs inBorrower’s financial condition, or Lender believes the prospect of payment orperformance of this Note is impaired.

 

**Cure Provisions.**  If any default, other than a default inpayment or failure to satisfy Lender’s requirement in the Insufficient MarketValue of Securities section is curable and if Borrower has not been given anotice of breach of the same provision of this Note within the preceding twelve(12) months, it may be cured (and no event of default will have occurred) ifBorrower, after receiving written notice from Lender demanding cure of suchdefault:  (1) cures the default withinfifteen (15) days; or (2) if the cure requires more than fifteen (15) days,immediately initiates steps which Lender deems in Lender’s sole discretion tobe sufficient to cure the default and thereafter continues and completes allreasonable and necessary steps sufficient to produce compliance as soon asreasonable practical.

 

**LENDER’S RIGHTS.**  Upon default, Lender may declare the entireunpaid principal balance on this Note and all accrued unpaid interestimmediately due, and then Borrower will pay that amount.

 

**ATTORNEYS’ FEES; EXPENSES. **Lender may hire orpay someone else to help collect this Note if Borrower does not pay.  Borrower will pay Lender that amount.  This includes, subject to any limits underapplicable law, Lender’s attorneys’ fees and Lender’s legal expenses, whetheror not there is a lawsuit, including attorneys’ fees, expenses for bankruptcyproceedings (including efforts to modify or vacate any automatic stay orinjunction), and appeals.  Borrower alsowill pay any court costs, in addition to all other sums provided by law.

 

**GOVERNING LAW.  This Note will be governed by, construed and enforced inaccordance with federal law and the laws of the State of California.  This Note has been accepted by Lender in theState of California.**

 

**CHOICE OF VENUE. **If there is a lawsuit, Borrower agreesupon Lender’s request to submit to the jurisdiction of the courts of SANFRANCISCO****County, State ofCalifornia.

 

**RIGHT OF SETOFF. **To the extent permitted by applicablelaw, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whetherchecking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else andall accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trustaccounts for which setoff would be prohibited by law.  Borrower authorizes Lender, to the extent permitted by applicablelaw, to charge or setoff all sums owing on the indebtedness against any and allsuch accounts.

 

**COLLATERAL. **Borrower acknowledges this Note is secured by339,332 Shares of Heritage Oaks Bank Stock.

 

**LINE OF CREDIT. **This Note evidences a revolving line ofcredit.  Advances under this Note, aswell as directions for payment from Borrower’s accounts, may be requestedorally or in writing by Borrower or by an authorized person.  Lender may, but need not, require that alloral requests be confirmed in writing. Borrower agrees to be liable for allsums either: (A) advanced in accordance with the instructions of an authorizedperson or (B) credited to any of Borrower’s accounts with Lender.  The unpaid principal balance owing on thisNote at any time may be evidenced by endorsements on this Note or by Lender’sinternal records, including daily computer print–outs.  Lender will have no obligation to advance fundsunder this Note if: (A) Borrower or any guarantor is in default under the termsof this Note or any agreement that Borrower or any guarantor has with Lender,including any agreement made in connection with the signing of this Note; (B)Borrower or any guarantor ceases doing business or is insolvent; (C) anyguarantor seeks, claims or otherwise attempts to limit, modify or revoke suchguarantor’s guarantee of this Note or any other loan with Lender; or (D)Borrower has applied funds provided pursuant to this Note for purposes otherthan those authorized by Lender.

 

**OTHERCONDITIONS.**1.               Approvalis contingent upon PCBB participating out $1,500,000 of the facility to otherbanks.

2.       Loan to collateral valuenot to exceed 50% during the term of the credit facility.  Collateral value based on the Tier 1 Capitalof Heritage Oaks Bank.

3.       PCBB to hold 51% of thestock of Heritage Oaks Bank.

4.       PCBB to be provided witha copy of minutes from the Board of Directors of Heritage Oaks Bank statingthat dividends will be declared in an amount necessary to service this debt.

5.       PCBB to be provided witha copy of the minutes from the Board of Directors of Heritage Oaks Bancorpauthorizing the debt of $3.5MM with PCBB.

6.       HeritageOaks Bancorp will inform PCBB of any declaration of cash dividends.

7.       Cash flow of HeritageOaks Bank must be sufficient to service the proposed debt at a Debt ServiceRatio not less than 1.50X as calculated by PCBB.

8.       Heritage Oaks Bancorpwill not incur any additional debt over $2MM exclusive of inter–company debtand existing debt (existing debt includes lines of credit, trust preferred,etc.) without the prior written consent of PCBB which will not be unreasonablywithheld.

9.       Heritage Oaks Bancorp toprovide PCBB with immediate notification of any Regulatory Action relative toHeritage Oaks Bank or any financial institution acquired by Heritage OaksBancorp within compliance of regulatory requirements.

10.     Heritage Oaks Bank must be“well” capitalized on an on–going basis as defined by Regulators.

11.     Heritage Oaks Bancorp toprovide PCBB with their Annual Report within 90 days of fiscal year end andquarterly call reports within 30 days of each quarter.

12.     Heritage Oaks Bank toprovide PCBB with Call Reports, including all schedules (including past dueloans, OREO and non–accrual) within 30 days of each quarter end.

13.     Pacific Coast Bankers’Bank reserves the right to conduct a review of the subsidiary bank(s) loanportfolio.

 

**SUCCESSOR INTERESTS. **The terms of thisNote shall be binding upon Borrower, and upon Borrower’s heirs, personalrepresentatives, successors and assigns, and shall inure to the benefit ofLender and its successors and assigns.

 

**NOTIFY US OF INACCURATE INFORMATION WE REPORTTO CONSUMER REPORTING AGENCIES.**Please notify us if wereport any inaccurate information about your account(s) to a consumer reportingagency. Your written notice describing the specific inaccuracy(ies) should besent to us at the following address: PACIFIC COAST BANKERS’ BANK 340 PINESTREET, SUITE 401 SAN FRANCISCO, CA 94104

 

**GENERAL PROVISIONS. **Lender may delay or forgo enforcing anyof its rights or remedies under this Note without losing them. Borrower and anyother person who signs, guarantees or endorses this Note, to the extent allowedby law, waive any applicable statute of limitations, presentment, demand forpayment, and notice of dishonor.  Uponany change in the terms of this Note, and unless otherwise expressly stated inwriting, no party who signs this Note, whether as maker, guarantor,accommodation maker or endorser, shall be released from liability.  All such parties agree that Lender may renewor extend (repeatedly and for any length of time) this loan or release anyparty or guarantor or collateral; or impair, fail to realize upon or perfectLender’s security interest in the collateral; and take any other action deemednecessary by Lender without the consent of or notice to anyone. All suchparties also agree that Lender may modify this loan without the consent of ornotice to anyone other than the party with whom the modification is made.  The obligations under this Note are jointand several.

 

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**PRIOR TO SIGNING THIS NOTE, BORROWER READ ANDUNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTERESTRATE PROVISIONS.  BORROWER AGREES TO THETERMS OF THE NOTE.**

 

**BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETEDCOPY OF THIS PROMISSORY NOTE.**

 

**BORROWER:**

 

 

**HERITAGE OAKS BANCORP**

 

 
| **By:** | **/s/   Lawrence Ward      10-3-03** |   | **By:** | **/s/   Margaret Torres**                                          |   |
|---------|-------------------------------------------------------------------------|--------|---------|-------------------------------------------------------------------------|--------|
|    | **Lawrence Ward, President**/**CEO of Heritage Oaks Bancorp**           |   |    | **Margaret Torres, Executive Vice President  of Heritage Oaks Bancorp** |   |

 

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