**Exhibit 10.40**

 

**HACIENDA OAKS BANK**

**SALARY CONTINUATION AGREEMENT**

 

THISAGREEMENT is adopted this 1st day of November 2003, by and between HACIENDABANK, a state-chartered commercial bank located in Santa Maria, California (the“Bank”), and DAVID DUARTE (the “Executive”).

 

**INTRODUCTION**

 

Toencourage the Executive to remain an employee of the Bank, the Bank is willingto provide salary continuation benefits to the Executive.  The Bank will pay the benefits from itsgeneral assets.

 

**AGREEMENT**

 

TheBank and the Executive agree as follows:

 

Article 1

 

**Definitions**

 

Wheneverused in this Agreement, the following words and phrases shall have the meaningsspecified:

 

1.1                       *“Changeof Control”* means:

 

(a)                        A change in the ownership of the capitalstock of the Company, whereby another corporation, person, or group acting inconcert (hereinafter this Agreement shall collectively refer to any combinationof these 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 which constitutesfifty percent (50%) or more of the combined voting power of the Company’s thenoutstanding capital stock then entitled to vote generally in the election ofdirectors; or

 

(b)                       The persons who were members of the Board ofDirectors of the Company immediately prior to a tender offer, exchange offer,contested election or any combination of the foregoing, cease to constitute amajority of the Board of Directors; or

 

(c)                        The adoption by the Board of Directors of theCompany of a merger, consolidation or reorganization plan involving the Companyin which the Company is not the surviving entity, or a sale of all orsubstantially all of the assets of the Company.  For purposes of this Agreement, a sale of all or substantiallyall of the assets of the Company shall be deemed to occur if any Personacquires (or during the 12-month period ending on the date of the most recentacquisition by such Person, has acquired) gross assets of the Company that havean aggregate fair market value equal to fifty percent (50%) or more of the fairmarket value of all of the respective gross assets of the Company immediatelyprior to such acquisition or acquisitions; or

 

(d)                       A tender offer or exchange offer is made byany Person which results in such Person beneficially owning (within the meaningof Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) ormore of the Company’s outstanding shares of Common Stock or shares of capitalstock having fifty percent

 

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(50%) or more the combined voting power of the Company’s thenoutstanding capital stock (other than an offer made by the Company), andsufficient shares are acquired under the offer to cause such person to ownfifty percent (50%) or more of the voting power; or

 

(e)                        Any other transactions or series of relatedtransactions occurring which have substantially the same effect as thetransactions specified in any of the preceding clauses of this Section 1.1.

 

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

 

1.2.*“Code”*means the Internal 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’s suffering a sickness,accident or injury which has been determined by the carrier of any individualor group disability insurance policy covering the Executive, or by the SocialSecurity Administration, to be a disability rendering the Executive totally andpermanently disabled.  The Executivemust submit proof to the Bank of the carrier’s or Social SecurityAdministration’s determination upon the request of the Bank.

 

1.4                       *“EarlyTermination”* means theTermination of Employment before Normal Retirement Age for reasons other thandeath, Disability, Termination for Cause or following a Change of Control.

 

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

 

1.6                       *“**EffectiveDate**”* means November 1, 2003.

 

1.7                       *“**NormalRetirement Age**”* means theExecutive’s 65th birthday.

 

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

 

1.9                       *“**Plan**Year**”* means each 12-month period from theEffective Date.

 

1.10                 *“*Termination for Cause*”* See Article 5.

 

1.11                *“**Terminationof Employment*” means thatthe Executive 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                       *NormalRetirement Benefit*.  Upon Termination of Employment on or afterthe Normal Retirement Age****for reasons other than death, the Bank shallpay to the Executive the benefit described in this Section 2.1 in lieu of anyother benefit under this Agreement.

 

2.1.1                                  *Amountof Benefit*.  The annual benefit under this Section 2.1 is$30,000 (Thirty Thousand Dollars).  TheBank’s Board of Directors, in its sole discretion, may increase the annualbenefit under

 

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thisSection 2.1.1; however, an increase shall require the recalculation of ScheduleA.

 

2.1.2                        *Paymentof Benefit*.  The Bank shall pay the annual benefit to theExecutive in 12 equal monthly installments commencing with the month followingthe Executive’s Normal Retirement Date, paying the annual benefit to theExecutive for a period of 15 years.

 

2.2                                 *EarlyTermination 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 benefit under this Section 2.2 is theEarly Termination Lump Sum set forth on Schedule A for the Plan Year endingimmediately prior to the Early Termination Date, determined by vesting theExecutive in 10 percent of the Accrual Balance set forth on Schedule A for thefirst Plan Year and an additional 10 percent of said amount for each succeedingyear thereafter until the Executive becomes 100 percent vested in the AccrualBalance.

 

2.2.2                        *Paymentof Benefit*.  The Bank shall pay the benefit to theExecutive in a lump sum amount pursuant to Schedule A, within 90 days followingthe Early Termination date.

 

2.3                                 *DisabilityBenefit.*  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 benefit under this Section 2.3 is theDisability Annual Benefit set forth on Schedule A for the Plan Year endingimmediately prior to the date in which the Termination of Employment occurs(except during the first Plan Year, the benefit is the amount set forth forPlan Year 1), determined by vesting the Executive in 100 percent of the AccrualBalance.

 

2.3.2                        *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                                 *Changeof 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 benefit under this Section 2.4 is theChange of Control Annual Benefit set forth on Schedule A for the Plan Yearending immediately prior to the date in which Termination of Employment occurs(except during the first Plan Year, the benefit is the amount set forth forPlan Year 1), determined by vesting the Executive in the Normal RetirementBenefit described in Section 2.1.1.

 

2.4.2                        *Paymentof Benefit**.******* TheBank shall pay the annual benefit to the Executive in 12 equal monthlyinstallments commencing with the month following the Normal Retirement Age,paying the annual benefit to the Executive for a period of 15 years.

 

2.4.3                        *ExcessParachute Payment*.  Notwithstanding any provision of thisAgreement to the contrary, the Bank shall not pay any benefit under thisAgreement to the extent the benefit would create an excise tax under the excessparachute rules of Section 280G of the Code.

 

**Article 3Death Benefits**

 

3.1                                 *DeathDuring 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.

 

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3.1.1                        *Amountof Benefit*.  The annual benefit under this Section 3.1 isthe Normal Retirement Benefit amount described in Section 2.1.1.

 

3.1.2                        *Paymentof 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                                 *DeathDuring Payment of a Lifetime Benefit*.  If the Executive dies afterany Lifetime Benefit payments have commenced under this Agreement but beforereceiving all such payments, the Bank shall pay the remaining benefits to theExecutive’s beneficiary at the same time and in the same amounts they wouldhave been paid to the Executive had the Executive survived.

 

3.3                                 *DeathAfter Termination of Employment But Before Payment of a Lifetime BenefitCommences.*** **If the Executive is entitled to a LifetimeBenefit under this Agreement, but dies prior to the commencement of saidbenefit 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 4Beneficiaries**

 

4.1                                 *BeneficiaryDesignations*.  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                                 *Facilityof 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 asit may deem appropriate prior to distribution of the benefit.  Such distribution shall completely dischargethe Bank from all liability with respect to such benefit.

 

**Article 5General Limitations**

 

5.1                                 *Terminationfor 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)         Commission of a felony or of a gross misdemeanor involving moralturpitude; or

 

(c)          Fraud, disloyalty, dishonesty or willfulviolation of any law or significant Bank policy committed in connection withthe Executive’s employment and resulting in an adverse effect on the Bank.

 

5.2                                 *Suicideor 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 the

 

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Bank to the Executive.

 

**Article 6**

**Claims and Review Procedure**

 

6.1                                 *ClaimsProcedure*.  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                        *Timingof 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                        *Noticeof 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 amanner calculated to be understood by the claimant.  The notification shall set forth:

 

(a)          The specific reasons for the denial;

 

(b)         A reference to the specific provisions of the Agreement on which thedenial is based;

 

(c)          A description of any additional information or material necessary forthe claimant to perfect the claim and an explanation of why it is needed;

 

(d)          An explanation of the Agreement’s review procedures and the timelimits applicable to such procedures; and

 

(e)          A statement of the claimant’s right to bring a civil action under ERISASection 502(a) following an adverse benefit determination on review.

 

6.2                                 *ReviewProcedure*.  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                        *AdditionalSubmissions – Information Access*.  The claimant shall then havethe opportunity to submit written comments, documents, records and otherinformation relating to the claim.  TheBank shall also provide the claimant, upon request and free of charge,reasonable access to, and copies of, all documents, records and otherinformation relevant (as defined in applicable ERISA regulations) to theclaimant’s claim for benefits.

 

6.2.3                        *Considerationson 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                        *Timingof 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 additional

 

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period is required.  The notice of extension must set forth thespecial circumstances and the date by which the Bank expects to render itsdecision.

 

6.2.5                        *Noticeof 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)          The specific reasons for the denial;

 

(b)         A reference to the specific provisions of the Agreement on which thedenial is based;

 

(c)          A statement that the claimant is entitled to receive, upon request andfree of charge, reasonable access to, and copies of, all documents, records andother information relevant (as defined in applicable ERISA regulations) to theclaimant’s claim for benefits; and

 

(d)         A statement of the claimant’s right to bring a civil action under ERISASection 502(a).

 

**Article 7**

**Amendments and Termination**

 

ThisAgreement may be amended or terminated only by a written agreement signed bythe Bank and the Executive.

 

**Article 8Miscellaneous**

 

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

 

8.2                                 *NoGuarantee 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 besold, transferred, assigned, pledged, attached or encumbered in any manner.

 

8.4                                 *Reorganization. *The Bank shall not merge or consolidate into or with another Bank, orreorganize, or sell substantially all of its assets to another Bank, firm, orperson unless such succeeding or continuing Bank, firm, or person agrees toassume 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 the successor orsurvivor Bank.

 

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

 

8.6                                 *ApplicableLaw*.  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                                 *UnfundedArrangement*.  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 by creditors.  Any insuranceon the

 

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Executive’s life is ageneral asset of the Bank to which the Executive and beneficiary have nopreferred or secured claim.

 

8.8                                 *EntireAgreement. *This Agreement constitutes the entireagreement 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 which are necessary to administer thisAgreement, including but not limited to:

 

(a)          Establishing and revising the method of accounting for the Agreement;

 

(b)         Maintaining a record of benefit payments;

 

(c)          Establishing rules and prescribing any forms necessary or desirable toadminister the Agreement; and

 

8.10                           *NamedFiduciary.*The Bank shall bethe 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.

 

INWITNESS WHEREOF, the Executive and the Bank have signed this Agreement.

 
| **EXECUTIVE:**   | **BANK:**               |
|------------------|-------------------------|
|             | **HACIENDA BANK**       |
|             |                    |
|             |                    | **By** |   |   |
| **David Duarte** |                    |
|             | **Title: CEO/Chairman** |
|                  |                         |  |  |  |

 

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