<PAGE>
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.
<PAGE>
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
<PAGE> - 1 -
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
ASSETS
<S> <C> <C>
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
</TABLE>
<PAGE> - 2 -
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> - 3 -
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP
Condensed Consolidated Statements of Cash Flows (Unaudited)
<S> <C> <C>
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
</TABLE>
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE> - 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.
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE> - 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
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.
<PAGE> - 9 -
Noninterest Income
The following table sets forth the various components of the Company's
noninterest income for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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%
</TABLE>
<PAGE> - 10 -
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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%
</TABLE>
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.
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(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
</TABLE>
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.
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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.
</TABLE>
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.
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
(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%
</TABLE>
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.
<PAGE> - 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<PAGE> - 16 -
Capital Resources
The following table summarizes risk-based capital, risk-weighted assets,
and risk-based capital ratios of the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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).
</TABLE>
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
<PAGE> - 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.
<PAGE> - 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.
<PAGE> - 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.
<PAGE> - 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
<PAGE>
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-
<PAGE>
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"),
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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.
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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)
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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
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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.
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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
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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
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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.
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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.
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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,
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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
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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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CALENDAR PERIOD APPLICABLE PERCENTAGE
--------------- ---------------------
<S> <C>
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%
</TABLE>
See subparagraph 1.2 of the Agreement for a definition and discussion of the
Applicable Percentage.
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
.
.
.
- -----------------------------------------------------------------------------------------------
</TABLE>
Assumptions: Initial Insurance = $1,000,000
Effective Tax Rate = 42%
One Year US Treasury Yield = 5%
-2-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
BENEFICIARY DESIGNATION FORM
PRIMARY DESIGNATION:
<TABLE>
<CAPTION>
NAME RELATIONSHIP
---- ------------
<S> <C>
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
CONTINGENT DESIGNATION:
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
</TABLE>
_____________________________ ______________, 19__
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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)
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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.
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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.
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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
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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
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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.
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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.
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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,
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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
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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
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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
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the California Commissioner of Financial Institutions and the Federal Deposit
Insurance Corporation, shall govern the validity, interpretation, construction
and effect of this Agreement.
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<PAGE>
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
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SCHEDULE A
<TABLE>
<CAPTION>
CALENDAR PERIOD APPLICABLE PERCENTAGE
--------------- ---------------------
<S> <C>
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%
</TABLE>
See subparagraph 1.2 of the Agreement for a definition and discussion of the
Applicable Percentage.
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
.
.
.
- -----------------------------------------------------------------------------------------------
</TABLE>
Assumptions: Initial Insurance = $1,000,000
Effective Tax Rate = 42%
One Year US Treasury Yield = 5%
-2-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
BENEFICIARY DESIGNATION FORM
PRIMARY DESIGNATION:
<TABLE>
<CAPTION>
NAME RELATIONSHIP
---- ------------
<S> <C>
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
CONTINGENT DESIGNATION:
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
</TABLE>
_____________________________ ______________, 19__
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
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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
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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
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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
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<PAGE>
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.
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<PAGE>
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,
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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
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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
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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
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the California Commissioner of Financial Institutions and the Federal Deposit
Insurance Corporation, shall govern the validity, interpretation, construction
and effect of this Agreement.
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<PAGE>
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
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SCHEDULE A
<TABLE>
<CAPTION>
CALENDAR PERIOD APPLICABLE PERCENTAGE
--------------- ---------------------
<S> <C>
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%
</TABLE>
See subparagraph 1.2 of the Agreement for a definition and discussion of the
Applicable Percentage.
<PAGE>
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
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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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
.
.
.
- -----------------------------------------------------------------------------------------------
</TABLE>
Assumptions: Initial Insurance = $1,000,000
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<PAGE>
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.
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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
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<PAGE>
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
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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
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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.
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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.
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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;
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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
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<PAGE>
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.
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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
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BENEFICIARY DESIGNATION FORM
PRIMARY DESIGNATION:
<TABLE>
<CAPTION>
NAME RELATIONSHIP
---- ------------
<S> <C>
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CONTINGENT DESIGNATION:
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</TABLE>
_____________________________ ______________, 19__
Brad L. Smith
<PAGE>
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
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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
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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
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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.
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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
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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
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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
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<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CALENDAR PERIOD APPLICABLE PERCENTAGE
--------------- ---------------------
<S> <C>
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%
</TABLE>
See subparagraph 1.2 of the Agreement for a definition and discussion of the
Applicable Percentage.
<PAGE>
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
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<PAGE>
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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
[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)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
.
.
.
- -----------------------------------------------------------------------------------------------
</TABLE>
Assumptions: Initial Insurance = $1,000,000
-2-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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: _________________________________
<PAGE>
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
<PAGE>
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
<PAGE>
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-
<PAGE>
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
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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.
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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
___________________________________ ___________________________________
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BENEFICIARY DESIGNATION FORM
PRIMARY DESIGNATION:
<TABLE>
<CAPTION>
NAME RELATIONSHIP
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<S> <C>
_____________________________ _______________________________________
_____________________________ _______________________________________
_____________________________ _______________________________________
CONTINGENT DESIGNATION:
_____________________________ _______________________________________
_____________________________ _______________________________________
_____________________________ _______________________________________
_____________________________ _____________, 19___
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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
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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
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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.
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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.
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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
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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
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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
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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:
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(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
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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
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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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CALENDAR PERIOD APPLICABLE PERCENTAGE
--------------- ---------------------
<S> <C>
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%
</TABLE>
See subparagraph 1.2 of the Agreement for a definition and discussion of the
Applicable Percentage.
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
.
.
.
- -----------------------------------------------------------------------------------------------
</TABLE>
Assumptions: Initial Insurance = $1,000,000
Effective Tax Rate = 42%
One Year US Treasury Yield = 5%
-2-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
-------------------------------
<PAGE>
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,
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
BENEFICIARY DESIGNATION FORM
PRIMARY DESIGNATION:
<TABLE>
<CAPTION>
NAME RELATIONSHIP
---- ------------
<S> <C>
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
CONTINGENT DESIGNATION:
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
- ----------------------------- ---------------------------------------
</TABLE>
_____________________________ ______________, 19__
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,892,000
<INT-BEARING-DEPOSITS> 296,553,000
<FED-FUNDS-SOLD> 128,130,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,845,000
<INVESTMENTS-CARRYING> 13,845,000
<INVESTMENTS-MARKET> 13,791,000
<LOANS> 245,411,000
<ALLOWANCE> 4,569,000
<TOTAL-ASSETS> 468,574,000
<DEPOSITS> 416,650,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,294,000
<LONG-TERM> 0
0
0
<COMMON> 41,006,000
<OTHER-SE> 2,624,000
<TOTAL-LIABILITIES-AND-EQUITY> 468,574,000
<INTEREST-LOAN> 18,794,000
<INTEREST-INVEST> 1,944,000
<INTEREST-OTHER> 1,427,000
<INTEREST-TOTAL> 22,165,000
<INTEREST-DEPOSIT> 7,006,000
<INTEREST-EXPENSE> 7,028,000
<INTEREST-INCOME-NET> 15,137,000
<LOAN-LOSSES> 1,483,000
<SECURITIES-GAINS> 1,004,000
<EXPENSE-OTHER> 14,252,000
<INCOME-PRETAX> 3,115,000
<INCOME-PRE-EXTRAORDINARY> 3,115,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,055,000
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 5.89
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,825,000
<CHARGE-OFFS> 797,000
<RECOVERIES> 58,000
<ALLOWANCE-CLOSE> 4,569,000
<ALLOWANCE-DOMESTIC> 4,569,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 988,000
</TABLE>
