SCHEDULE 14A—INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrantx
Filed by a Party other than the Registrant¨
Check the appropriate box:
¨ Preliminary Proxy Statement | ¨ | CONFIDENTIAL FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(e)(2)) |
| x | Definitive Proxy Statement |
| ¨ | Definitive Additional Materials |
| ¨ | Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 |
Heritage Financial Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| x | No fee required. |
| ¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: |
| (2) | Aggregate number of securities to which transaction applies: |
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): |
| (4) | Proposed maximum aggregate value of transaction: |
| (5) | Total fee paid: |
| ¨ | Fee paid previously with preliminary materials. |
| ¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
| (1) | Amount Previously Paid: |
| (2) | Form, Schedule or Registration Statement No.: |
| (3) | Filing Party: |
| (4) | Date filed: |
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held April 26, 2007
To Our Stockholders:
You are invited to attend the 2007 annual meeting of stockholders of Heritage Financial Corporation (Heritage) to be held at the Phoenix Inn Suites, 417 Capitol Way N., Olympia, Washington, on April 26, 2007 at 10:30 a.m., Pacific Time. At the annual meeting, you will be asked to:
| 1. | Elect three (3) persons to serve on the Board of Directors of Heritage until the annual meeting of stockholders in 2010. |
| 2. | Approve whatever other business as may properly be brought before the annual meeting or any adjournment thereof. |
Stockholders of record at the close of business on March 9, 2007 are entitled to vote at the annual meeting or any adjournment of the annual meeting.
BY ORDER OF THE BOARD OF DIRECTORS |
 |
Edward D. Cameron |
Secretary |
Olympia, Washington
March 22, 2006
We urge you to complete, sign and return the enclosed proxy card as soon as possible, whether or not you plan to attend the annual meeting in person. If you do attend the annual meeting, you then may withdraw your proxy and vote in person. The proxy may be withdrawn at any time prior to voting.
201 5th Avenue S.W.
OLYMPIA, WASHINGTON 98501
PROXY STATEMENT
Heritage is sending this proxy statement to you for the solicitation of proxies by the Board of Directors of Heritage to be voted at the annual meeting. This proxy statement and the enclosed proxy card are being mailed to stockholders on or about March 22nd, 2007.
INFORMATION ABOUT THE MEETING
When and Where is the Annual Meeting?
The annual meeting will be held at 10:30 a.m., Pacific Time, on Thursday, April 26, 2007 at the Phoenix Inn Suites, 417 Capitol Way N., Olympia, Washington.
What Matters will be Voted on at the Annual Meeting?
At the annual meeting, you will be asked to:
| • | Elect three (3) persons to serve on the Board of Directors of Heritage until the annual meeting of stockholders in 2010; |
| • | Approve whatever other business may properly come before the annual meeting or any adjournment thereof. |
Who is Entitled to Vote?
Only stockholders of record at the close of business on the record date, March 9, 2007, are entitled to receive notice of the annual meeting and to vote at the annual meeting. On March 9, 2007, there were 6,575,364 shares of Heritage common stock outstanding, held by approximately 1,300 holders of record. Each share of Heritage common stock is entitled to one vote on each matter considered at the meeting, including one vote for each director to be elected. Stockholders are not entitled to cumulate their votes in the election of directors.
What Constitutes a Quorum?
The presence at the annual meeting, in person or by proxy, of a majority of the outstanding shares eligible to vote at the annual meeting is required for a quorum to exist at the annual meeting. For this purpose, abstentions and broker non-votes are counted in determining the shares present at the annual meeting.
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What Vote is Required to Elect the Directors?
The three nominees for election as directors who receive a simple majority of votes cast will be elected directors. Votes may be cast in favor of some or all of the nominees for election to the Board of Directors or withheld as to some or all of the nominees.
How Do I Vote?
If you complete and properly sign the accompanying proxy card and return it to Heritage, it will be voted as you direct. If you give no directions on your proxy, the shares represented by your proxy, if properly signed, will be voted FOR the nominees for directors listed in this proxy statement. If any other matters are properly presented at the annual meeting for consideration, the persons named in the proxy will have discretion to vote on those matters according to their best judgment. “Street name” stockholders who wish to vote at the annual meeting will need to obtain a proxy form from the institution that holds their shares.
Can I Change My Vote After I Return My Proxy Card?
Yes. Even after you have submitted your proxy, your proxy may be withdrawn at any time before it is voted by
• | delivering written notice to Edward D. Cameron, Heritage’s Secretary, at 201 5th Avenue S.W., Olympia, Washington 98501, before 5:00 p.m. on April 25, 2007,or |
| • | completing a later dated proxy,or |
| • | attending the annual meeting and voting in person. |
Who Pays the Costs of Soliciting Proxies?
The enclosed proxy is solicited by the Board of Directors of Heritage. Heritage will bear the costs of soliciting proxies for the annual meeting. In addition to soliciting proxies by mail, Heritage’s directors, officers and employees may solicit proxies personally or by telephone or fax. No director, officer or employee of Heritage who solicits proxies will receive any compensation for their solicitation other than their regular compensation for the positions they hold. Heritage does not intend to pay any compensation to any other persons for the solicitation of proxies. However, it will reimburse brokerage houses and other custodians, nominees and fiduciaries for reasonable expenses to mail proxy materials for beneficial owners.
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STOCK OWNERSHIP
Who are the Largest Owners of Heritage Stock?
The following table sets forth information concerning the number of shares of Heritage common stock held as of March 9, 2007 by the only stockholders who are known to management to be the beneficial owners of more than five percent (5%) of Heritage’s outstanding shares:
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class | ||||
Donald V. Rhodes 201 Fifth Avenue, S.W. Olympia, WA 98501 | 411,446 | (2) | 6.20 | % |
| (1) | Of common stock. |
| (2) | Amount includes shares held in accounts under Heritage’s 401(k) ESOP. The amount shown also include amounts of Common Stock which the individual has the right to acquire within 60 days of the Record Date through the exercise of stock options granted pursuant to Heritage’s stock option plans. |
How Much Stock Do Heritage’s Directors and Executive Officers Own?
The following table shows the beneficial ownership of Heritage common stock as of March 9, 2007 by:
| • | Each director and director nominee; |
| • | The chief executive officer, chief financial officer and those persons who served as executive officers in 2006 and received salaries and bonuses totaling in excess of $100,000 during 2006; and |
| • | All directors and executive officers as a group. |
For purposes of this table and according to Rule 13d-3 under the Securities Exchange Act of 1934, a person is the beneficial owner of any shares if he or she has voting and/or investment power over those shares. The table includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, and other forms of ownership, over which shares the persons named in the table possess voting and/or investment power.
| Shares Beneficially Owned at March 9, 2007 | |||||
Name | Number | Percent of Outstanding Common Stock | |||
D. Michael Broadhead (1) | 79,291 | 1.20 | % | ||
Edward D. Cameron (2) | 32,188 | * | |||
Brian S. Charneski (3) | 31,790 | * | |||
Gary B. Christensen (4) | 34,940 | * | |||
John A. Clees (5) | 87,108 | 1.31 | % | ||
Kimberly T. Ellwanger (6) | 5,500 | * | |||
Peter N. Fluetsch (7) | 29,480 | * | |||
Daryl D. Jensen (8) | 174,683 | 2.63 | % | ||
Jeffrey S. Lyon (9) | 18,188 | * | |||
Gregory D. Patjens (10) | 51,504 | * | |||
Donald V. Rhodes (11) | 411,446 | 6.20 | % | ||
James P. Senna (12) | 85,125 | 1.28 | % | ||
Brian L. Vance (13) | 201,924 | 3.04 | % | ||
Philip S. Weigand (14) | 136,112 | 2.05 | % | ||
Directors, nominees and executive officers as a group (14 persons) (15) | 1,379,279 | 20.79 | % | ||
| * | Represents less than 1.0% of Heritage’s outstanding common stock. |
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| (1) | Includes 29,945 shares issuable upon exercise of options and 5,868 vested shares in the Heritage 401(k) ESOP. |
| (2) | Includes 16,328 shares issuable upon exercise of options and 4,520 vested shares in the Heritage 401(k) ESOP. |
| (3) | Includes 8,375 shares issuable upon exercise of options. |
| (4) | Includes 3,224 shares issuable upon exercise of options. |
| (5) | Includes 1,025 shares issuable upon exercise of options. |
| (6) | Includes 500 shares issuable upon exercise of options. |
| (7) | Includes 4,700 shares issuable upon exercise of options. |
| (8) | Includes 8,159 shares issuable upon exercise of options. |
| (9) | Includes 7,535 shares issuable upon exercise of options. |
| (10) | Includes 11,825 shares issuable upon exercise of options and 5,241 vested shares in the Heritage 401(k) ESOP. |
| (11) | Includes 32,255 shares issuable upon exercise of options and 20,951 vested shares in the Heritage 401(k) ESOP. |
| (12) | Includes 1,550 shares issuable upon exercise of options. |
| (13) | Includes 76,579 shares issuable upon exercise of options and 13,158 vested shares in the Heritage 401(k) ESOP. |
| (14) | Includes 7,535 shares issuable upon exercise of options. |
| (15) | Includes 209,535 shares issuable upon exercise of options and 49,738 vested shares in the Heritage 401(k) ESOP. |
EXECUTIVE OFFICERS
The following table provides information about the executive officers of Heritage. All officers are appointed by the Board of Directors and serve at the pleasure of the Board for an unspecified term.
Name | Age | Position | Has Served Heritage, Heritage Bank or Central Valley Bank Since | |||
Donald V. Rhodes (1) | 71 | Chairman of Heritage; Chairman of Heritage Bank; Chairman of Central Valley Bank | 1986 | |||
Brian L. Vance (2) | 52 | President and Chief Executive Officer of Heritage; President and Chief Executive Officer of Heritage Bank; Vice Chairman and Chief Executive Officer of Central Valley Bank | 1996 | |||
Gregory D. Patjens (3) | 57 | Executive Vice President, Heritage Bank | 1999 | |||
Edward D. Cameron (4) | 66 | Executive Vice President, Chief Financial Officer and Corporate Secretary of Heritage and Executive Vice President, Chief Financial Officer and Corporate Secretary of Heritage Bank | 1999 | |||
D. Michael Broadhead (5) | 62 | President—Central Valley Bank | 1986 |
| (1) | For background information on Mr. Rhodes, see page 5 of the proxy statement. |
| (2) | For background information on Mr. Vance, see page 6 of the proxy statement. |
| (3) | Mr. Patjens joined Heritage Bank on March 16, 1999. Mr. Patjens was employed for over 25 years with Key Bank and its predecessor, Puget Sound National Bank in positions with responsibilities for a variety of administrative and bank operations functions. Prior to leaving Key Bank, Mr. Patjens was Senior Vice President for Key Services, National Client Services. |
| (4) | Mr. Cameron became the Executive Vice President and Chief Financial Officer of Heritage and Heritage Bank in October of 2006. Mr. Cameron was named Corporate Secretary of Heritage in June 2002. Prior to that he was Senior Vice President and Treasurer of Heritage. Mr. Cameron was the Senior Vice President |
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and Treasurer of Heritage Bank in August 1999. Prior to that since April 1999, Mr. Cameron was Vice President, Investment Manager at Heritage Bank. Prior to that, he had over 25 years of banking experience, most recently as Senior Vice President, Investment Manager at Security Pacific Bank. |
| (5) | Mr. Broadhead joined Central Valley Bank in 1986 and has been President of Central Valley Bank since 1990. Heritage acquired Central Valley Bank in March 1999. |
ELECTION OF DIRECTORS
Heritage’s Articles of Incorporation call for the Board of Directors to fix the exact number of directors from time to time within a range of no fewer than five nor more than 25 persons. The Board of Directors has fixed the number of directors at 11 persons.
Directors are divided into three classes with each class having three year terms that expire in successive years. Approximately one third of the members of the Board of Directors are elected by the stockholders annually. The directors whose terms will expire at the 2007 annual meeting are Brian S. Charneski, Peter N. Fluetsch, James P. Senna and Brian L. Vance. All with the exception of Mr. Senna have been nominated by the Nominating Committee of the Board of Directors for reelection at the 2007 annual meeting. Mr. Senna has indicated his decision to retire at the expiration of his term. If elected, directors Charneski, Fluetsch and Vance will hold office until the annual meeting of stockholders in the year 2010.
Each nominee has indicated that he/she is able and willing to serve on the Board of Directors. If any nominee becomes unable to serve, the shares represented by all properly completed proxies will be voted for the election of the substitute recommended by the Board of Directors. At this time, the Board of Directors knows of no reason why any nominee might be unavailable to serve.
Information about the nominees for election at the annual meeting as well as information about those directors continuing in office after the annual meeting is as follows:
The Board of Directors recommends a vote FOR the election of Messrs. Charneski, Fluetsch and Vance.
Incumbent Directors Whose Terms Expire in 2008.
Daryl D. Jensen, Director Since 1985. Mr. Jensen, 68, was the President of Sunset Life Insurance Company of America from 1973 until his retirement in 1999. Currently, Mr. Jensen is Vice President of Western Institutional Review Board, located in Olympia, WA. He serves as a director of Sunset Life Insurance Company and Kansas City Life Insurance Company. Mr. Jensen is also a director of Panorama City Corporation, a large retirement community located in Lacey, Washington. Mr. Jensen has served as a director of Central Valley Bank since 1989.
Jeffrey S. Lyon, Director since 2000. Mr. Lyon, 54, is the Chairman and Chief Executive Officer of GVA Kidder Mathews, headquartered in Seattle, Washington. Mr. Lyon serves as a director for GVA Worldwide and a director for Kidder Mathews-Segner Inc. Mr. Lyon is a member of the Real Estate Advisory Board of Washington State University, a member of the Business Advisory Board for the Milgard School of Business at the University of Washington, Tacoma and is also Chairman of the Tacoma-Pierce County Economic Development Board. Mr. Lyon has over 32 years of experience in the commercial real estate industry in the Puget Sound area.
Donald V. Rhodes, Director Since 1989. Mr. Rhodes, 71, currently serves as Chairman of Heritage; Chairman of Heritage Bank; and since 1986, Chairman of Central Valley Bank, a subsidiary of Heritage which was acquired on March 5, 1999. Mr. Rhodes joined Heritage Bank in 1989 as President and Chief Executive Officer and was elected Chairman in 1990. Mr. Rhodes serves as a director for the Federal Home Loan Bank of Seattle.
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Incumbent Directors Whose Terms Expire in 2009.
Gary B. Christensen, Director Since 2005. Mr. Christensen, 58, is the owner of R.E. Powell Distributing a fuel, lubricant and propane distributorship headquartered in Yakima, Washington. In 2004 R.E. Powell Distributing was named one of five inductees into the University of Washington sponsored “Leadership Circle” at the 6th Annual UW Minority Business of the Year Awards dinner. Mr. Christensen serves as a director for Central Valley Bank and serves on the Board of Directors for Yakima County Economic Development.
John A. Clees, Director Since 2005. Mr. Clees, 59, is Tax Services Director at the consulting and accounting firm of RSM McGladrey and McGladrey & Pullen LLP in Olympia, Washington. Mr. Clees previously served on Heritage’s Board of Directors from 1990 to 2000 and served as a non-voting consultant to Heritage’s audit committee from 2000 until June 2005. Prior to this, Mr. Clees was the President of Clees Miles CPA Group, Olympia, Washington from 1995 until the Group was sold to RSM McGladrey. Prior to that time, he was the managing partner of Gattis, Clees and Company, an accounting firm with offices in Seattle and Olympia, Washington.
Kimberly T. Ellwanger. Ms. Ellwanger, 48, was Senior Director of Corporate Affairs and Associate General Counsel at Microsoft Corporation of Redmond, Washington from 1991 until she retired in October of 1999. Prior to that Ms. Ellwanger was a Partner at Perkins Coie in Seattle, Washington where she practiced business and tax law from 1985 to 1991. She has been involved in numerous civic and professional activities including currently serving on the Board of The Community Foundation of South Puget Sound where she previously served as Board Chair. She also has served as Chair of both the Washington Council on International Trade and the Dean’s Advisory Committee of the University of Washington Law School. Ms. Ellwanger graduated with high honors from the University of Washington School of Law and graduated Phi Beta Kappa from Vassar College with an honors degree in economics.
Philip S. Weigand, Director Since 1985. Mr. Weigand, 69, is a retired Lieutenant Colonel of the U.S. Marine Corps with 20 years of active service. Since 1988, Mr. Weigand has been a real estate agent with Virgil Adams Real Estate, located in Olympia, Washington. He also serves as a member of the Board of Trustees, St. Martins University in Lacey, Washington and a director of the Boys & Girls Clubs of Thurston County, Washington.
Nominees for Election at This Annual Meeting for a Term Expiring in 2010
Brian S. Charneski, Director since 2000. Mr. Charneski, 45, is the President of L&E Bottling Company located in Olympia, Washington. Mr. Charneski is Chairman of Pepsi Northwest, Inc. of Tumwater, Washington. He is also a director of Columbia Beverage Company headquartered in Tumwater, Washington and L&E Bottling Company.
Peter N. Fluetsch, Director since 1999. Mr. Fluetsch, 69, is the Chief Executive Officer of Sunset Air, Inc. in Lacey, Washington, a heating and air conditioning contractor that he founded in 1976.
Brian L. Vance, Director since 2003. Mr. Vance, 52, currently serves as President and Chief Executive Officer of Heritage, President and Chief Executive Officer of Heritage Bank and Vice Chairman and Chief Executive Officer of Central Valley Bank. Mr. Vance has been employed by Heritage Bank since 1996. Prior to joining Heritage Bank, Mr. Vance was employed for over 20 years with West One Bank, a bank with offices in Idaho and Washington. Prior to leaving West One, he was Senior Vice President and Regional Manager of Banking Operations for the south Puget Sound region. On October 1, 2006, Mr. Vance was named President and Chief Executive Officer of Heritage and Vice Chairman and Chief Executive Officer of Central Valley Bank. On March 24, 2003, Mr. Vance was named President and Chief Executive Officer of Heritage Bank. On August 17, 1998, the Board of Directors of Heritage Bank approved the appointment of Mr. Vance as President and Chief Operating Officer of Heritage Bank to be effective as of October 1, 1998. Prior to that, Mr. Vance was Executive Vice President of Heritage Bank.
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INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
How Often Did the Board Meet During 2006?
During the year ended December 31, 2006, the Board of Directors of Heritage held 12 meetings. No director of Heritage attended fewer than 75% of the total meetings of the Board and committees on which a director served during this period. It is Heritage’s policy that its directors attend the annual meeting of stockholders. At the 2006 annual meeting, ten Heritage directors were in attendance.
What Committees Has the Board Established?
The Board of Directors of Heritage has an Executive Committee, an Audit and Finance Committee, a Compensation Committee and a Nominating Committee.
Audit and Finance Committee. The Audit and Finance Committee:
| • | Reviews and approves the selection of Heritage’s independent auditors; |
| • | Reviews the plan, scope and audit results of the internal auditors and the independent auditors; |
| • | Reviews the reports of bank regulatory authorities; and |
| • | Reviews the annual and other reports to the Securities and Exchange Commission and the annual report to Heritage’s stockholders. |
The Audit and Finance Committee consists of directors Jensen (chair), Charneski, Christensen, Clees, Ellwanger, Fluetsch, Lyon, Senna and Weigand. None of the members of the Audit and Finance Committee are officers or employees of Heritage or any Heritage subsidiary. Our Board has determined that all members of the Audit and Finance Committee are considered “independent” under the NASDAQ’s listing standards. There were five meetings of the Audit and Finance Committee during the year ended December 31, 2006. The Audit and Finance Committee operates under a written charter adopted by the Board of Directors. This charter is available on Heritage’s Web site at www.hf-wa.com.
Compensation Committee. The Compensation Committee reviews and recommends compensation arrangements for all officers. The members of the Compensation Committee are directors Fluetsch (chair), Christensen, Clees and Jensen. None of the members of the Committee are officers or employees of Heritage or any subsidiary of Heritage. Our Board has determined that all members of the Compensation Committee are considered “independent” under the NASDAQ’s listing standards. There were four meetings of the Compensation Committee during the year ended December 31, 2006. The Compensation Committee operates under a written charter adopted by the Board of Directors. This charter is available on Heritage’s Web site at www.hf-wa.com.
Nominating Committee. Heritage’s Board has established a Nominating Committee which reviews and recommends nominees to serve as directors and officers of Heritage. Heritage’s Nominating Committee consists of directors Jensen (chair), Clees, Fluetsch and Lyon. None of the members of the Nominating Committee are officers or employees of Heritage or any Heritage subsidiary. Our Board has determined that all members of the Nominating Committee are considered “independent” under the NASDAQ’s listing standards. The Nominating Committee provides oversight on a broad range of issues surrounding the composition and operation of the Board of Directors of Heritage. The Nominating Committee has a Charter which is available on Heritage’s website at www.hf-wa.com. There were two meeting of the Nominating Committee during the year ended December 31, 2006.
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The Nominating Committee’s Charter has established general criteria for considering director candidates. The Nominating Committee will consider the following criteria in selecting nominees:
| • | Ability to represent all Heritage stockholders; |
| • | Expected period of time available for service; |
| • | Independence; |
| • | Current knowledge and contacts in Heritage’s market area; |
| • | Ability to work effectively with the Board group; and |
| • | Ability to commit adequate time to serve as a Heritage director. |
How Can a Stockholder Nominate Someone for the Board?
According to Heritage’s Articles of Incorporation, any stockholder nominations of candidates for election to the Board of Directors at the 2007 annual meeting must be made in writing to Heritage’s chairman not fewer than 14 days nor more than 50 days prior to the date of the annual meeting. If fewer than 21 days notice of the annual meeting is given to stockholders, stockholder nominations must be mailed or delivered to Heritage’s chairman by the close of business on the seventh day after the day the notice of the annual meeting is mailed. Stockholder nominations must contain the following information if known to the nominating stockholder:
| • | The name and address of each proposed nominee; |
| • | The principal occupation of each proposed nominee; |
| • | The total number of shares of Heritage common stock that will be voted for each shareholder proposed nominee; |
| • | The name and address of the nominating stockholder; and |
| • | The number of shares of Heritage common stock owned by the nominating stockholder. |
Heritage’s Nominating Committee, in its discretion, may disregard any nominations that do not comply with the above-listed requirements. Upon the Nominating Committee’s instructions, the vote teller may disregard all votes cast for a nominee if the nomination does not comply with the above-listed requirements.
How Can Stockholders Communicate with the Board of Directors?
Heritage has implemented a stockholder communication process to facilitate communication with its Board of Directors. All stockholder communications to the Board of Directors should be forwarded to the attention of Edward D. Cameron, Secretary, Heritage Financial Corporation, 201 Fifth Avenue S.W., Olympia, Washington 98501. E-mail address: ecameron@heritagebankwa.com.
Director Independence
Heritage has adopted independence standards for Heritage’s Board of Directors that comply with NASDAQ standards. These independence standards are posted on Heritage’s Web site at www.hf-wa.com.
Based on these standards, Heritage has determined that the following directors who served during the year ended December 31, 2006 are independent:
Lynn M. Brunton
Brian S. Charneski
Gary B. Christensen
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John A. Clees
Kimberly T. Ellwanger
Peter N. Fluetsch
Daryl D. Jensen
Jeffrey S. Lyon
James P. Senna
Philip S. Weigand
AUDIT AND FINANCE COMMITTEE REPORT
Report of the Audit and Finance Committee
This report of Heritage’s Audit and Finance Committee describes the manner in which the committee reviews Heritage’s financial reporting process.
What are the Responsibilities of the Audit and Finance Committee?
The committee monitors Heritage’s internal financial controls and its financial reporting process. The committee:
| • | Reviews and discusses the audited financial statements with management. |
| • | Reviews and discusses reports filed with the Securities and Exchange Commission. |
| • | Discusses with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). |
| • | Receives written disclosures as required by Independent Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and discusses with the independent auditors the auditors’ independence. |
| • | Recommends to the Board of Directors whether the audited financial statements should be included in Heritage’s annual report on Form 10-K. |
Who are the Members of Heritage’s Audit and Finance Committee?
Heritage’s Audit and Finance Committee consists of directors Daryl D. Jensen (chair), Brian S. Charneski, Gary B. Christensen, John A. Clees, Kimberly T. Ellwanger, Peter N. Fluetsch, Jeffrey S. Lyon, James P. Senna and Philip S. Weigand. None of the members of the Audit and Finance Committee are officers or employees of Heritage or any Heritage subsidiary. Our board has determined that all members of the Audit and Finance Committee are considered “independent” under the requirements of the Securities and Exchange Commission and the NASDAQ’s listing standards, and further, our board of directors has determined that Mr. Jensen meets the definition of an audit committee financial expert, as set forth in Item 401(h)(2) of Regulation S-K.
Audit and Finance Committee Report
The Audit and Finance Committee of the Heritage Board of Directors is composed of nine independent directors and operates under a written charter adopted by the Board of Directors. The committee is responsible for the selection of Heritage’s independent auditors.
Management is responsible for Heritage’s internal controls and the financial reporting process. The independent auditors are responsible for performing an independent audit of Heritage’s consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and for issuing a report thereon. The Audit and Finance Committee’s responsibility is to monitor and oversee these processes.
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In this context, the Audit and Finance Committee has met and held discussions with management and the independent auditors. Management represented to the Audit and Finance Committee that Heritage’s consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles in the United States of America, and the Audit and Finance Committee has reviewed and discussed the consolidated financial statements with management and the independent auditors. The Audit and Finance Committee discussed with the independent auditors matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees).
Heritage’s independent auditors also provided to the Audit and Finance Committee the written disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit and Finance Committee discussed with the independent auditors that firm’s independence.
Based on the Audit and Finance Committee’s discussion with management and the independent auditors and the Audit and Finance Committee’s review of the representation of management and the report of the independent auditors to the Audit and Finance Committee, the Audit and Finance Committee recommended that the Board of Directors include the audited consolidated financial statements in Heritage’s annual report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.
Respectfully submitted: | Daryl D. Jensen, Chair of the Committee and designated audit committee financial expert Brian S. Charneski, Member Gary B. Christensen, Member John A. Clees, Member Kimberly T. Ellwanger, Member Peter N. Fluetsch, Member Jeffrey S. Lyon, Member James P. Senna, Member Philip S. Weigand, Member |
COMPENSATION COMMITTEE REPORT
Report of the Compensation Committee
This report of Heritage’s Compensation Committee describes in general terms the process the committee undertakes and the factors it considers to determine the appropriate compensation for Heritage’s officers.
What are the Responsibilities of the Compensation Committee?
The committee establishes and monitors compensation programs for executive officers of Heritage and its subsidiaries. The committee:
| • | Reviews and approves individual officer salaries, bonus plan allocations, and stock option grants and other equity-based awards; and |
| • | Establishes the compensation and evaluates the performance of the chief executive officer, while the chief executive officer evaluates the performance of the other executive officers and recommends individual compensation levels for approval by the committee. |
None of the members of the committee are officers or employees of Heritage or any Heritage subsidiary.
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Compensation Committee Report
The Compensation Committee of the Heritage Board of Directors is composed of four independent directors and operates under a written charter adopted by the Board of Directors. This charter is available on Heritage’s Web site at www.hf-wa.com.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on the Committee’s discussion with management, the Compensation Committee recommended that the Board of Directors include the Compensation Discussion and Analysis in Heritage’s annual report on Form 10-K and proxy statement on Schedule 14A for the year ended December 31, 2006 filed with the Securities and Exchange Commission.
Respectfully submitted by: | Peter N. Fluetsch, Chair of the Committee Gary B. Christensen, Member John A. Clees, Member Daryl D. Jensen, Member |
COMPENSATION DISCUSSION AND ANALYSIS
Heritage’s Philosophy of Named Executive Officer Compensation
Heritage’s philosophy is intended to reflect and support the goals and strategies that we have established. Currently, Heritage’s strategic focus is on expanding our commercial banking relationships. The key elements of this strategy are geographic and product expansion, loan portfolio diversification, development of relationship banking and maintenance of asset quality. The committee believes these goals, which are intended to create long-term stockholder value, must be supported by a compensation program that:
| • | attracts and retains highly qualified executives; |
| • | provides levels of compensation that are competitive with those offered by other financial institutions; |
| • | motivates executives to enhance long-term stockholder value by helping them to build their own ownership in Heritage; and |
| • | integrates Heritage’s long-term strategic planning and measurement processes. |
Heritage’s compensation program includes competitive salary and benefits, opportunities for employee ownership of Heritage stock through participation in an employee stock ownership plan and, for certain employees, an annual incentive cash bonus based upon attainment of company and individual performance goals and opportunities for stock ownership of Heritage stock through stock option and restricted stock programs.
To determine compensation packages for individual executives, Heritage considers various subjective and objective factors, including:
| • | individual job responsibilities and experience; |
| • | individual performance in terms of both qualitative and quantitative goals; |
| • | Heritage’s overall performance, as measured by attainment of strategic and budgeted financial goals and prior performance; and |
| • | industry surveys, prepared by an independent consulting firm, of compensation for comparable positions with similar institutions in the State of Washington, the Pacific Northwest and the United States. |
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The components of Heritage’s compensation program are the following:
Base Salary
Salary levels of executive officers are designed to be competitive within the banking industry. We utilize, among other information, compensation studies performed by third-parties. To set competitive salary ranges, the compensation committee periodically evaluates current salary levels of other financial institutions with size, lines of business, geographic dispersion and market place position similar to Heritage’s. Base salaries for Heritage’s executive officers other than the chief executive officer are based upon recommendations by the chief executive officer, taking into account the subjective and objective factors described above. The compensation committee reviews and approves or disapproves those recommendations. The base salary for the chief executive officer is recommended to the board of directors by the compensation committee.
The compensation committee meets in February or March of every year in order to approve the base salaries of the officers of Heritage and its subsidiaries effective April 1 of that year. This timing coincides with the review of the performance of the individual officer as well as the prior year performance of Heritage and its subsidiaries.
Effective January 1, 2005, Donald V. Rhodes entered into an employment agreement which provided for an annual salary of $150,000. Effective January 1, 2007, Mr. Rhodes entered into a non-binding letter of understanding which provides for annual salary of $75,000. The terms of the letter will continue for as long as the Board of Directors continues to elect him as chairman.
During 2006, Brian L. Vance executed an employment agreement with Heritage, Heritage Bank and Central Valley Bank. The agreement commenced on October 1, 2006 and will continue until September 30, 2009, after which time this agreement will automatically renew for additional terms of one year each. Subject to specified terms and conditions set forth in the agreement, the agreement may be terminated by either party by giving written notice to the other party at least one year prior to the expiration date of the original term or any renewal term. The agreement provides an annual base salary of not less than $200,000 per year. The agreement was amended in February 2007 to meet the requirements of Section 409A of the Internal Revenue Code.
During March 2007, D. Michael Broadhead executed an employment agreement with Central Valley Bank. The agreement commenced on April 1, 2007 and will continue until March 31, 2008, after which time this agreement will automatically renew for additional terms of one year each. Subject to specified terms and conditions set forth in the agreement, the agreement may be terminated by either party by giving written notice to the other party at least 90 days prior to the expiration date of the original term or any renewal term. The agreement provides an annual base salary of not less than $142,512 per year.
Annual Incentive Bonus
Executive officers have an annual incentive opportunity with cash bonus awards based on the overall performance of Heritage and on attainment of individual performance targets. The objectives of the program are to (1) clearly focus the attention of management on organizational priorities, (2) provide competitive pay opportunities contingent on bank performance, and (3) differentiate and reward the individuals who make the most significant contributions to the company’s success. The annual awards are determined by formulas established by the compensation committee following each fiscal year and are based upon an assessment of Heritage’s performance (for the year ended December 31, 2006, primarily with respect to Heritage Financial Corporation’s net income and subsidiary bank’s net income) as compared to budgeted fiscal year performance and upon an evaluation by the chief executive officer of an executive’s individual performance and contribution to Heritage’s overall performance. The compensation committee then reviews and approves the bonus recommendations and presents them to the Board of Directors for approval.
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Mr. Vance’s target bonus is 35% of base salary, or $68,670 for 2006. The bonus is comprised of the following percentages: 40%—Heritage net income performance, 40%—Heritage Bank net income performance, and 20%—individual performance. For the year ended December 31, 2006, neither Heritage nor Heritage Bank achieved the minimum necessary performance for a bonus payout in those categories. As a result, Mr. Vance received a bonus for 2006 based only on individual performance in the amount of $27,468.
Edward D. Cameron received a bonus for 2006 based solely on individual performance goals. Mr. Cameron had planned to retire prior to the end of 2006 and, therefore, his bonus in the amount of $19,000 was not based on performance of Heritage or Heritage Bank. For 2007, Mr. Cameron’s target bonus is 17.5% of base salary. The bonus for 2007 will be comprised of the following percentages: 25%—Heritage net income performance, 25%—Heritage Bank net income performance, and 50%—individual performance.
The target bonus for Greg D. Patjens was 17.5% of base salary, or $23,783 for 2006. The bonus is comprised of the following percentages: 10%—Heritage net income performance, 30%—Heritage Bank net income performance, and 60%—individual performance. For the year ended December 31, 2006, neither Heritage nor Heritage Bank achieved the minimum necessary performance for a bonus payout in those categories. As a result, Mr. Patjens received a bonus for 2006 based only on individual performance in the amount of $17,837. For 2007, Mr. Patjens target bonus will be 20% of base salary.
The target bonus for D. Michael Broadhead is 30% of the Central Valley Bank bonus pool resulting in a bonus of $30,000 for 2006. This bonus pool is calculated as 50% of the amount of net income over a profit threshold set for the bank. The maximum amount for the bonus pool is $100,000 annually.
Stock Option and Other Stock-Based Compensation
Equity-based compensation is intended to more closely align the financial interests of Heritage’s executives with long-term stockholder value, and to assist in the retention of executives who are key to the success of Heritage and its subsidiaries. Equity-based compensation generally has been in the form of incentive stock options and restricted stock awards pursuant to Heritage’s existing stock option plans. Utilizing the recommendation of the chief executive officer, the compensation committee determines which executives will receive stock options or awards and determines the number of shares subject to each option or award. Grants of stock options and awards are based on various subjective factors relating primarily to the responsibilities of individual executives, their expected future contributions to Heritage and prior option grants.
Stock options and awards are priced based on the closing price of Heritage’s stock on the date of grant. The date of grant is the date that the options or awards are approved by the board of directors, or by the shareholders at the annual shareholders meeting in April if a new option or award plan is being approved by the shareholders. Generally, options and awards are granted annually during the board of directors meeting coinciding the compensation committee meeting in February or March. One-time grants of options and awards to individuals occur occasionally.
Incentive stock options are generally granted to officers and nonqualified stock options are granted to directors. However, per his employment agreement, Mr. Rhodes received nonqualified stock options during 2006.
Stock options generally vest ratably over three years and expire five years after they become exercisable. Restricted stock awards have a five-year cliff vesting. Heritage issues new shares to satisfy share option exercises.
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Retirement Plan
We maintain a 401(k) Employee Stock Ownership Plan (“KSOP”) as a retirement plan. The KSOP is a defined contribution plan. Heritage makes four different contributions to the plan:
| • | A contribution matching 50% of an Employee’s salary deferral contributions up a specified limit: |
| • | A fixed contribution of 2% of an Employee’s eligible salary: |
| • | A discretionary contribution based on a percentage of an Employee’s annual salary based on Heritage’s financial performance and Management’s recommendation and as approved by the Board. For 2006, the contribution was equal 2.5% of employees’ eligible salary; and |
| • | A contribution to the Employee Stock Ownership Plan (“ESOP”) portion of the plan. |
Perquisites and Other Benefits
The positions of chairman of the board, chief executive officer and president of either Heritage or its subsidiaries receive perquisites in the form of golf club memberships and vehicles. These perquisites are considered a priority for these individuals due to their community involvement and business development activities.
Executive officers also participate in Heritage’s other benefit plans on the same terms as other employees. These plans include medical, dental, and vision insurance, life insurance, long-term disability and flexible spending accounts.
Severance Benefits
Severance benefits are included in the employment agreements of Mr. Vance and Mr. Broadhead. Mr. Cameron and Mr. Patjens do not have severance benefits outside of a change in control. Mr. Rhodes does not have any severance benefits.
Mr. Vance’s employment agreement stipulates that if Mr. Vance is terminated without “cause” or he terminates the agreement for “good reason”, a severance benefit will be payable in an amount equal to his then current annual base salary or the amount of such salary which would otherwise have been paid to Mr. Vance during the then remaining term of his agreement (currently expiring September 30, 2009), whichever is greater. In such an event, or in the event of termination by reason of executive’s death or disability, all forfeiture provisions regarding restricted stock awards or vesting requirements regarding options shall lapse or be considered completed as of the effective date of termination, and the executive’s rights to exercise vested options will continue for a period of one year after date of early termination.
Mr. Broadhead’s employment agreement stipulates that if Mr. Broadhead is terminated without cause or he terminates the agreement for good reason, a severance benefit will be payable in an amount equal to the amount of such salary which would otherwise have been paid to Mr. Broadhead during the then remaining term of his agreement (currently expiring March 31, 2008).
Based upon a hypothetical termination date of December 31, 2006, the severance benefits for Mr. Vance and Mr. Broadhead would have been as follows:
Severance Benefit | |||
Mr. Vance | $ | 605,000 | |
Mr. Broadhead | $ | 178,500 | |
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The definition of “cause” within these employment agreements means willful misfeasance or gross negligence in the performance of the employee’s duties, conduct demonstrably and significantly harmful to the company, or conviction of a felony. The definition of “good reason” generally means assignment of duties inconsistent with position, reduction of the executive’s salary or elimination of any compensation or benefit plan.
Change in Control Benefits
Change of control benefits are included in the employment agreements of Mr. Vance and Mr. Broadhead, and the severance agreements of Mr. Cameron and Mr. Patjens. Mr. Rhodes does not have any change of control benefits.
Mr. Vance’s employment agreement stipulates that in the event of a “change in control”, if the executive or employer terminates executive’s employment within one year of date of change of control, or if executive is terminated without cause by employer within 180 days prior to the public announcement of the change in control, executive shall be paid a severance benefit in an amount equal to two times his then current annual base salary or the amount of such salary which would otherwise have been paid to Mr. Vance during the then remaining term of his agreement, whichever is greater, and vesting of all stock options and lapse of all restrictions with respect to restricted stock awards shall occur. The employment agreement provides that in the event Mr. Vance receives an amount under the provisions of the agreements that results in imposition of a tax on the executive under the provisions of the Code Section 4999 (relating to golden Parachute payments), the employer is obligated to reimburse the executive for that amount, exclusive of any tax imposed by reason of receipt of reimbursement under the employment agreements.
Mr. Broadhead’s employment agreement stipulates that in the event of a “change in control”, if the executive or employer terminates executive’s employment within one year of date of change of control, or if executive is terminated by employer after an announcement of a change of control which occurs within 12 months of executive’s termination, executive shall be paid a severance benefit in an amount equal to 36 months of his then current base salary. The executive’s right to receive the change in control payment terminates if before the change in control transaction closes, executive terminates his employee with good reason or the employer terminates executive’s employment for cause. The employment agreement stipulates that the change in control payment will be less than the amount that would cause it to a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code.
Mr. Cameron’s severance agreement stipulates that in the event of a change in control, if (1) termination of executive’s employment by Heritage without cause or by executive for good reason within 365 days of date of change of control, or (2) executive is terminated without cause by employer prior to 60 days prior to the public announcement of the change in control and change of control occurs within eighteen months of executive’s termination, Mr. Cameron shall be paid a severance benefit in an amount equal to one times of his then current annual base salary or equal to his salary to be paid from the date of change of control through April 30, 2008, whichever is less. In addition, vesting of all stock options and lapse of all restrictions with respect to restricted stock awards shall occur. The severance agreement stipulates that the change in control payment will be less than the amount that would cause it to a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code.
Mr. Patjens’ severance agreement stipulates that in the event of a change in control, if (1) termination of executive’s employment by Heritage without cause or by executive for good reason within 365 days of date of change of control, or (2) executive is terminated without cause by employer prior to 60 days prior to the public announcement of the change in control and change of control occurs within eighteen months of executive’s termination, Mr. Patjens shall be paid a severance benefit in an amount equal to two times of his then current annual base salary. In addition, vesting of all stock options and lapse of all restrictions with respect to restricted stock awards shall occur. The severance agreement stipulates that the change in control payment will be less than the amount that would cause it to a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code.
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Based upon a hypothetical termination date of December 31, 2006, the change in control termination benefits for the executive officers would have been as follows:
Change in Benefit | |||
Mr. Vance | $ | 605,000 | |
Mr. Broadhead | $ | 428,400 | |
Mr. Cameron | $ | 150,000 | |
Mr. Patjens | $ | 281,400 | |
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the aggregate compensation for services rendered to Heritage or its subsidiaries by named executive officers in all capacities paid or accrued for the year ended December 31, 2006.
Name and Principal Position | Year | Salary ($) | Stock Awards (1) ($) | Option Awards (1) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation (2) ($) | Total ($) | ||||||||||||||
Donald V. Rhodes Chairman, former Chief Executive Officer | 2006 | $ | 150,000 | $ | — | $ | 3,582 | -0- | $ | 26,665 | (3) | $ | 180,247 | ||||||||
Brian L. Vance President and Chief Executive Officer | 2006 | $ | 208,200 | $ | 19,261 | $ | 39,101 | $ | 27,468 | $ | 26,608 | $ | 320,638 | ||||||||
Edward D. Cameron Executive Vice President, Chief Financial Officer | 2006 | $ | 135,050 | $ | 6,122 | $ | 8,826 | $ | 19,000 | $ | 17,220 | $ | 186,218 | ||||||||
Gregory D. Patjens Executive Vice President Heritage Bank | 2006 | $ | 139,500 | $ | — | $ | 9,720 | $ | 17,837 | $ | 14,676 | $ | 181,733 | ||||||||
D. Michael Broadhead President Central Valley Bank | 2006 | $ | 141,420 | $ | 6,122 | $ | 14,554 | $ | 30,000 | $ | 223,187 | (4) | $ | 415,283 | |||||||
Paul Huntsman Former Senior Vice President and Chief Financial Officer | 2006 | $ | 29,713 | $ | 4,237 | $ | 2,556 | -0- | $ | 16,455 | (5) | $ | 52,961 | ||||||||
| (1) | For each of the stock award grants and option award grants, the value shown is what is also included in Heritage’s financial statements per FAS 123(R). See Heritage’s Annual Report for the year ended December 31, 2006 for a complete description of the FAS 123(R) valuation. The actual number of awards granted is shown in the “Grants of Plan-Based Awards” table below. |
| (2) | Amounts for Messrs. Rhodes, Vance, Cameron, Patjens, and Broadhead include company contributions to Heritage’s 401(k) ESOP of $13,977, $19,831, $14,708, $14,076 and $19,831, respectively. |
| (3) | Amount reported in All Other Compensation includes perquisites in the form of club dues and a vehicle. |
| (4) | Amount reported in All Other Compensation includes payout of $200,000 in December 2006 relating to provisions of Mr. Broadhead’s previous employment agreement. |
| (5) | Amount reported in All Other Compensation includes post-termination payments of $10,913. |
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Grants of Plan-Based Awards Table
The following table discloses each plan-based award for named executive officers for the year ended December 31, 2006.
Name | Grant Date | Stock Awards: Number of Shares of Stock (#) | Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($ / Sh) | |||||
Donald V. Rhodes | 4/28/06 | -0- | 1,950 | $ | 25.94 | ||||
Brian L. Vance | 4/28/06 | 2,000 | 10,500 | $ | 25.94 | ||||
Edward D. Cameron | 8/22/06 | -0- | 2,400 | $ | 27.32 | ||||
Gregory D. Patjens | 4/28/06 | -0- | 2,400 | $ | 25.94 | ||||
D. Michael Broadhead | 4/28/06 | -0- | 3,525 | $ | 25.94 | ||||
Paul Huntsman (1) | 3/27/06 | 1,000 | 2,400 | $ | 27.73 | ||||
| (1) | Mr. Huntsman terminated employment in June 2006. All stock awards and option awards granted during 2006 have been forfeited. |
Annual Incentive Bonus Plan
Both Heritage Bank and Central Valley Bank have non-equity incentive compensation plans. Within these plans, executive officers have an annual incentive opportunity with cash bonus awards based on the overall performance of Heritage and on attainment of individual performance targets. The annual awards are determined by formulas established by the compensation committee following each fiscal year and are based upon an assessment of Heritage’s performance (for the year ended December 31, 2006, primarily with respect to Heritage Financial Corporation’s net income and subsidiary bank’s net income) as compared to both budgeted fiscal year performance and upon an evaluation by the chief executive officer of an executive’s individual performance relating to set goals and contribution to Heritage’s overall performance. The compensation committee then reviews and approves the bonus recommendations and presents them to the Board of Directors for approval.
Executive Employment and Severance Agreements
Effective January 1, 2007, Donald V. Rhodes executed a non-binding letter of understanding with Heritage. The terms of the letter commenced on January 1, 2007 and will continue for as long as the Board of Directors continues to elect him as chairman. The agreement provides an annual base salary of $75,000 per year. The agreement provides for Mr. Rhodes participation in the 401(k) ESOP, stock bonus or stock option plans, memberships in clubs, and an automobile. Mr. Rhodes may also receive bonuses as determined by the board of directors at its discretion, but will not be included in the management incentive bonus.
During 2006, Brian L. Vance executed an employment agreement with Heritage, Heritage Bank and Central Valley Bank. The agreement commenced on October 1, 2006 and will continue until September 30, 2009, after which time this agreement will automatically renew for additional terms of one year each. Subject to specified terms and conditions set forth in the agreement, the agreement may be terminated by either party by giving written notice to the other party at least one year prior to the expiration date of the original term or any renewal term. The agreement provides an annual base salary of not less than $200,000 per year. During the term of the agreement, Mr. Vance will be eligible to participate in Heritage’s management incentive plan (or any successor plan) which includes specific performance targets determined on an annual basis by Heritage’s Board of Directors or Compensation Committee. In addition, the agreement provides for Mr. Vance’s participation in benefit programs generally maintained for senior executives of Heritage including health and disability insurance, participation in retirement plans, stock bonus or stock option plans, memberships in clubs, and an automobile. This agreement was amended in February 2007 to meet the requirements of Section 409A of the Internal Revenue Code.
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In the event that Mr. Vance is terminated by Heritage at any time for “cause” or by Mr. Vance without “good reason”, both as defined in the agreement, no termination benefit will be payable. If Mr. Vance is terminated without cause or he terminates the agreement for good reason, a severance benefit will be payable in an amount equal to his then current annual base salary or the amount of such salary which would otherwise have been paid to Mr. Vance during the then remaining term of his agreement, whichever is greater. In such an event, or in the event of termination by reason of executive’s death or disability, all forfeiture provisions regarding restricted stock awards or vesting requirements regarding options shall lapse or be considered completed as of the effective date of termination, and the executive’s rights to exercise vested options will continue for a period of one year after date of early termination.
In the event of a “change in control”, if the executive or employer terminates executive’s employment within one year of date of change of control, or if executive is terminated without cause by employer within 180 days prior to the public announcement of the change in control, executive shall be paid a severance benefit in an amount equal to two times his then current annual base salary or the amount of such salary which would otherwise have been paid to Mr. Vance during the then remaining term of his agreement, whichever is greater, and vesting of all stock options and lapse of all restrictions with respect to restricted stock awards shall occur. The employment agreement provides that in the event Mr. Vance receives an amount under the provisions of the agreements that results in imposition of a tax on the executive under the provisions of the Code Section 4999 (relating to golden Parachute payments), the employer is obligated to reimburse the executive for that amount, exclusive of any tax imposed by reason of receipt of reimbursement under the employment agreements.
Under the terms of the agreement, Mr. Vance agrees that, unless he is terminated without cause or for good reason, during the term of the agreement and for a period of two years after his termination he will not become a principal shareholder, director or officer of any financial institution that competes with Heritage or its successor within the state of Washington, nor will he solicit or attempt to solicit any other employee of Heritage to leave the employ of Heritage.
In March 2007, D. Michael Broadhead executed an employment agreement with Central Valley Bank. The agreement commenced on April 1, 2007 and will continue until March 31, 2008, after which time this agreement will automatically renew for additional terms of one year each. Subject to specified terms and conditions set forth in the agreement, the agreement may be terminated by either party by giving written notice to the other party at least 90 days prior to the expiration date of the original term or any renewal term. The agreement provides an annual base salary of not less than $142,512 per year. During the term of the agreement, Mr. Broadhead will be eligible to participate in Heritage’s management incentive plan (or any successor plan) which includes specific performance targets determined on an annual basis by Heritage’s by Heritage’s Board of Directors. In addition, the agreement provides for Mr. Broadhead participation in benefit programs generally maintained for executive officers of Heritage and its subsidiaries including stock options and an automobile.
In the event that Mr. Broadhead is terminated by Heritage at any time for “cause” or by Mr. Broadhead without “good reason”, both as defined in the agreement, no termination benefit will be payable. If Mr. Broadhead is terminated without cause or he terminates the agreement for good reason, a severance benefit will be payable in an amount equal to the amount of such salary which would otherwise have been paid to Mr. Broadhead during the then remaining term of his agreement.
In the event of a “change in control”, if the executive or employer terminates executive’s employment within one year of date of change of control, or if executive is terminated by employer after an announcement of a change of control which occurs within 12 months of executive’s termination, executive shall be paid a severance benefit in an amount equal to 36 months of his then current base salary. The executive’s right to receive the change in control payment terminates if, before the change in control transaction closes, executive terminates his employee with good reason or the employer terminates executive’s employment for cause. The employment agreement stipulates that the change in control payment will be less than the amount that would cause it to be a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code.
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Under the terms of the agreement, Mr. Broadhead agrees that, unless he is terminated without cause, he terminates his employment for good reason, or the employer declines to employ executive after expiration of the term or any extended term, during the term of the agreement and for a period of three years after his termination he will not become involved with a competing business or serve, directly or indirectly, a competing business in any manner except as provided in the agreement, nor will he solicit or attempt to solicit any employee or customer of Heritage or its subsidiaries located in Yakima County in Washington State to leave the employ of Heritage or its subsidiaries or remove their business from Heritage or its subsidiaries.
Under the terms of Mr. Broadhead’s prior employment agreement, Mr. Broadhead was paid an accrued benefit of $200,000 in December 2006.
In March 2007, Edward D. Cameron entered into a severance agreement with Heritage effective April 1, 2007. In the event of a “change in control”, if (1) termination of executive’s employment by Heritage without cause or by executive for good reason within 365 days of date of change of control, or (2) executive is terminated without cause by employer prior to 60 days prior to the public announcement of the change in control and change of control occurs within eighteen months of executive’s termination, Mr. Cameron shall be paid a severance benefit in an amount equal to one times his then current annual base salary or equal to his salary to be paid from the date of change of control through April 30, 2008, whichever is less. In addition, vesting of all stock options and lapse of all restrictions with respect to restricted stock awards shall occur. The severance agreement stipulates that the change in control payment will be less than the amount that would cause it to be a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code. Under the terms of the agreement, Mr. Cameron agrees that for a period of one year after receiving his severance payment he will not become involved with a competing business or serve, directly or indirectly, a competing business in any manner except as provided in the agreement, nor will he solicit or attempt to solicit any employee or customer of Heritage or its subsidiaries to leave the employ of Heritage or its subsidiaries or remove their business from Heritage or its subsidiaries.
In March 2007, Gregory D. Patjens entered into a severance agreement with Heritage effective April 1, 2007. In the event of a “change in control”, if (1) termination of executive’s employment by Heritage without cause or by executive for good reason within 365 days of date of change of control, or (2) executive is terminated without cause by employer prior to 60 days prior to the public announcement of the change in control and change of control occurs within eighteen months of executive’s termination, Mr. Patjens shall be paid a severance benefit in an amount equal to two times his then current annual base salary. In addition, vesting of all stock options and lapse of all restrictions with respect to restricted stock awards shall occur. The severance agreement stipulates that the change in control payment will be less than the amount that would cause it to be a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code. Under the terms of the agreement, Mr. Patjens agrees that for a period of two years after receiving his severance payment he will not become involved with a competing business or serve, directly or indirectly, a competing business in any manner except as provided in the agreement, nor will he solicit or attempt to solicit any employee or customer of Heritage or its subsidiaries to leave the employ of Heritage or its subsidiaries or remove their business from Heritage or its subsidiaries.
Stock Compensation Plans
Heritage has Incentive Stock Option plans, Nonqualified Stock Option plans and Restricted Stock plans. Incentive stock options and restricted stock awards are generally granted to officers of Heritage or its subsidiaries. Nonqualified stock options are generally granted to directors of Heritage or its subsidiaries. At December 31, 2006, the number of incentive stock options, nonqualified stock options and restricted stock awards available for grants were 368,959, 73,179 and 65,697, respectively.
Stock options generally vest ratably over three years and expire five years after they become exercisable which amounts to an average term of seven years. Restricted Stock awards issued have a five-year cliff vesting. Heritage issues new shares to satisfy share option exercises.
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Heritage 401(k) ESOP
Effective October 1, 1999 Heritage combined three retirement plans, a money purchase pension plan, a 401k plan, and an employee stock ownership plan (ESOP) at Heritage Bank into one plan called the Heritage Financial Corporation 401(k) Employee Stock Ownership Plan (“KSOP”). Effective April 1, 2002 Heritage added three investment funds to the plan as well as changed the eligibility requirements to the plan. At this same time Heritage approved an amendment of the plan to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”).
The pension portion of the KSOP is a defined contribution retirement plan. The plan provides a contribution to all eligible participants upon completion of one year of service, the attainment of 21 years of age, and employment on the last day of the year. It is Heritage’s policy to fund plan costs as accrued. Employee vesting occurs over a period of six years, at which time they become fully vested.
The KSOP also maintains Heritage’s salary savings 401(k) plan for its employees. All persons employed as of July 1, 1984 automatically participate in the plan. All employees hired after that date who are at least 21 years of age and with three continuous months of service and at least 250 hours of service to the company may participate in the plan. Employees who participate may contribute a portion of their salary, which is matched by the employer at 50% up to certain specified limits. Employee vesting in employer portions is similar to the retirement plan described above for the period prior to December 31, 2001. Employee vesting in employer portions occurs over a period of six years for those contributions made after January 1, 2003.
The third portion of the KSOP is the employee stock ownership plan (ESOP). Heritage Bank established for eligible employees the ESOP and related trust effective July 1, 1994, which became active upon the former mutual holding company’s conversion to a stock-based holding company in January 1995. The plan provides a contribution to all eligible participants upon completion of one year of service, the attainment of 21 years of age, and employment on the last day of the year. The ESOP is funded by employer contributions in cash or common stock. Employee vesting occurs over a period of six years.
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Outstanding Equity Awards Table
The following table shows the outstanding option awards and unvested stock awards held by the named executive officers as of December 31, 2006.
| Option Awards | Option Price ($) | Option Date | Number of Vested (#) | Market Value Vested ($) | ||||||||||
| Number of Securities Underlying Unexercised Options (#) | Number of Securities Underlying Unexercised Options (#) | |||||||||||||
Name | Exercisable | Unexercisable | ||||||||||||
Donald V. Rhodes | 7,140 | -0- | $ | 8.04 | 11/19/07 | -0- | -0- | |||||||
| 10,500 | -0- | $ | 9.29 | 11/17/08 | ||||||||||
| 12,600 | -0- | $ | 11.67 | 2/19/10 | ||||||||||
| 682 | 1,366 | $ | 20.50 | 2/17/13 | ||||||||||
| -0- | 1,950 | $ | 25.94 | 4/28/14 | ||||||||||
Brian L. Vance | 3,780 | -0- | $ | 8.04 | 11/19/07 | 7,250 | $ | 179,873 | ||||||
| 8,400 | -0- | $ | 9.29 | 11/17/08 | ||||||||||
| 15,750 | -0- | $ | 11.67 | 2/19/10 | ||||||||||
| 22,050 | -0- | $ | 20.36 | 3/20/11 | ||||||||||
| 8,400 | 4,200 | $ | 20.11 | 3/18/12 | ||||||||||
| 5,250 | 10,500 | $ | 20.50 | 2/17/13 | ||||||||||
| -0- | 10,500 | $ | 25.94 | 4/28/14 | ||||||||||
Edward D. Cameron | 1,050 | -0- | $ | 9.29 | 11/17/08 | 2,625 | $ | 65,126 | ||||||
| 4,253 | -0- | $ | 11.67 | 2/19/10 | ||||||||||
| 4,725 | -0- | $ | 20.36 | 3/20/11 | ||||||||||
| 2,520 | 1,260 | $ | 20.11 | 3/18/12 | ||||||||||
| 1,260 | 2,520 | $ | 20.50 | 2/17/13 | ||||||||||
| -0- | 2,400 | $ | 27.32 | 8/22/14 | ||||||||||
Gregory D. Patjens | 2,415 | -0- | $ | 8.33 | 3/10/07 | -0- | -0- | |||||||
| 2,415 | -0- | $ | 8.04 | 11/19/07 | ||||||||||
| 4,830 | -0- | $ | 9.29 | 11/17/08 | ||||||||||
| 4,253 | -0- | $ | 11.67 | 2/19/10 | ||||||||||
| 4,725 | -0- | $ | 20.36 | 3/20/11 | ||||||||||
| 2,520 | 1,260 | $ | 20.11 | 3/18/12 | ||||||||||
| 1,260 | 2,520 | $ | 20.50 | 2/17/13 | ||||||||||
| -0- | 2,400 | $ | 25.94 | 4/28/14 | ||||||||||
D. Michael Broadhead | 2,415 | -0- | $ | 8.57 | 3/5/07 | 2,625 | $ | 65,126 | ||||||
| 7,245 | -0- | $ | 9.67 | 3/27/09 | ||||||||||
| 7,245 | -0- | $ | 11.67 | 2/19/10 | ||||||||||
| 7,245 | -0- | $ | 20.36 | 3/20/11 | ||||||||||
| 3,780 | 1,890 | $ | 20.11 | 3/18/12 | ||||||||||
| 1,890 | 3,780 | $ | 20.50 | 2/17/13 | ||||||||||
| -0- | 3,525 | $ | 25.94 | 4/28/14 | ||||||||||
Paul Huntsman | -0- | -0- | -0- | -0- | -0- | -0- | ||||||||
Compensation expense recognized on these options and awards appear in the “Stock Awards” and “Option Awards” columns of the Summary Compensation Table above.
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Option Exercises and Stock Vested Table
The following table discloses the number of shares acquired and the dollar amounts realized by named executive officers during the year ended December 31, 2006 on the exercise of stock options and the vesting of restricted stock.
Name | Option Awards | Stock Awards | |||||||
| Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||
Donald V. Rhodes | 19,530 | $ | 553,480 | -0- | -0- | ||||
Brian L. Vance | -0- | -0- | -0- | -0- | |||||
Edward D. Cameron | -0- | -0- | -0- | -0- | |||||
Gregory D. Patjens | 7,245 | $ | 189,336 | -0- | -0- | ||||
D. Michael Broadhead | 945 | $ | 23,067 | -0- | -0- | ||||
Paul Huntsman | -0- | -0- | -0- | -0- | |||||
DIRECTOR COMPENSATION
The following table shows the aggregate compensation for services rendered to Heritage by directors for the year ended December 31, 2006.
Name | Fee Earned or Paid In Cash ($) | Option Awards (3) (4) ($) | Total ($) | ||||||
Lynn Brunton (1) | $ | 7,300 | $ | 3,059 | $ | 10,359 | |||
Brian Charneski | $ | 20,300 | $ | 4,392 | $ | 24,692 | |||
Gary B. Christensen | $ | 22,150 | $ | 4,072 | $ | 26,222 | |||
John A. Clees | $ | 21,250 | $ | 2,791 | $ | 24,041 | |||
Kimberly T. Ellwanger (2) | $ | 14,900 | $ | 1,333 | $ | 16,233 | |||
Peter Fluetsch | $ | 21,200 | $ | 4,392 | $ | 25,592 | |||
Daryl D. Jensen | $ | 27,100 | $ | 5,709 | $ | 32,809 | |||
Jeffrey Lyon | $ | 21,500 | $ | 4,392 | $ | 25,892 | |||
James P. Senna | $ | 20,500 | $ | 4,392 | $ | 24,892 | |||
Philip S. Weigand | $ | 21,050 | $ | 4,392 | $ | 25,442 | |||
| (1) | Ms. Brunton retired from the Board of Directors at the end of her term at the 2006 annual meeting. |
| (2) | Ms. Ellwanger was newly elected to the board of directors at the 2006 annual meeting. |
| (3) | The following is the aggregate number of stock option awards held by each director at December 31, 2006: Mr. Charneski—9,900 shares; Mr. Christensen—6,047 shares; Mr. Clees—3,075 shares; Ms. Ellwanger—1,500 shares; Mr. Fluetsch—6,225 shares; Mr. Jensen—10,142 shares; Mr. Lyon—9,060 shares; Mr. Senna —10,320 shares; and Mr. Weigand—10,320 shares. |
| (4) | For each of the stock option award grants, the value shown is what is also included in Heritage’s financial statements per FAS 123(R). See Heritage’s Annual Report for the year ended December 31, 2006 for a complete description of the FAS 123(R) valuation. |
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How are Directors Compensated?
Directors receive a monthly retainer fee, a monthly fee for each meeting attended, and a fee for each committee meeting attended. During the year ended December 31, 2006, Heritage’s non-officer directors received a monthly retainer of $1,000 and a monthly fee of $625 for each Board meeting attended. Non-officer directors also received $150 for each committee meeting attended, other than the Audit and Finance Committee and Compensation Committee, with the Chair of the committee receiving $200 per meeting attended. Non-officer directors of the Audit and Finance Committee received $500 for each meeting attended with the Chair of the committee receiving $1,000 per meeting. Non-officer directors of the Compensation Committee received $300 for each meeting attended with the Chair of the committee receiving $350 per meeting. Directors who are officers or employees of Heritage or its subsidiaries receive no additional compensation for service as directors or members of Board committees.
Directors typically receive annual grants of non-qualified stock options. Stock options granted vest ratably over a three-year period and expire five years from the vesting date. In 2006, the Directors were each granted Non-Qualified Stock Options to purchase 1,500 shares at a strike price of $25.94. In addition, Directors Jensen and Christensen each received Non-Qualified Stock Options to purchase 450 shares at a strike price of $25.94 for their service as Directors of Central Valley Bank.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors, executive officers and greater than 10% stockholders to file reports of their ownership and any changes in ownership of Heritage securities with the Securities and Exchange Commission. These directors, executive officers and greater than 10% stockholders are required by regulation to provide Heritage with a copy of any Section 16(a) reports they file. Heritage believes that all 16(a) filing requirements applicable to its Directors, Executive Officers and greater than 10% stockholders were complied with during the year ended December 31, 2006, except that new Director Kimberly T. Ellwanger filed a Form 5 on February 9, 2007 because she inadvertently neglected to file Form 4s after her acquisition of Heritage stock on June 5, 2006, June 6, 2006, November 6, 2006, and December 26, 2006. Additionally, John A. Clees filed a Form 5 on February 14, 2007 because he inadvertently neglected to report his charitable gift of stock on May 12, 2006 and Gregory Patjens filed a Form 4/A on March 1, 2007 because he inadvertently neglected to report stock sold privately on August 4, 2004.
Based on Heritage’s review of copies of these reports received by it and written representations made to Heritage by these persons, Heritage believes that all Section 16(a) filing requirements applicable to its directors, executive officers and greater than 10% stockholders were complied with during the year ended December 31, 2006.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
During the year ended December 31, 2006, several directors and executive officers of Heritage and Heritage Bank and their associates, were customers of Heritage Bank or Central Valley Bank, and it is anticipated that these persons will continue to be customers of Heritage Bank or Central Valley Bank in the future. All transactions between Heritage Bank and Central Valley Bank and its executive officers and directors, and their associates, were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and, in the opinion of management, did not involve more than the normal risk of repayment or present other unfavorable features.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG LLP performed the audit of the consolidated financial statements of Heritage and its subsidiaries for the period ended December 31, 2006. The Audit and Finance Committee has retained KPMG LLP as independent auditors of Heritage and its subsidiaries for the year ending December 31, 2007, subject to the terms of an engagement letter with that firm. Stockholders are not required to take action on this retention. Representatives of KPMG LLP will be present at the annual meeting. They will have the opportunity to present a statement if they desire and will be available to respond to appropriate questions.
Fees for services provided by KPMG during 2006 and 2005 were as follows:
| 2006 | 2005 | |||||
Audit fees (1) | $ | 327,900 | $ | 280,290 | ||
Other Fees: | ||||||
Audit related services (2) | $ | 27,567 | $ | — | ||
Tax services | 44,800 | 44,800 | ||||
All other services | — | — | ||||
Total | $ | 72,367 | $ | 44,800 | ||
| (1) | Fees include amounts related to the financial statement audit, audit of internal control over financial reporting, review of SEC filings and quarterly reviews |
| (2) | Fees relate to the 2005 benefit plan audit |
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STOCKHOLDER PROPOSALS FOR THE 2008 ANNUAL MEETING
Stockholders interested in presenting a proposal for consideration at the annual meeting of stockholders in 2008 may do so by following the procedures prescribed in Rule 14a-8 under the Securities Exchange Act of 1934. To be eligible for inclusion, stockholder proposals must be received by Heritage no later than November 22, 2007.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before the annual meeting. If other matters are properly brought before the annual meeting, the persons appointed in the proxy intend to vote the shares represented by the proxy according to their best judgment.
We urge you to sign and return the enclosed proxy as soon as possible, whether or not you plan to attend the annual meeting in person. If you do attend the annual meeting, you then may withdraw your proxy and vote in person. The proxy may be withdrawn at any time prior to voting.
MISCELLANEOUS
Heritage’s annual report for the year ended December 31, 2006 has been mailed along with this proxy statement to all stockholders of record as of March 9, 2007. Any stockholder who has not received a copy of this annual report may obtain a copy by writing to Heritage. The annual report is not to be treated as part of the proxy solicitation material or having been incorporated by reference in this proxy statement.
A copy of Heritage’s Form 10-K that was filed with the Securities and Exchange Commission on March 5, 2007 will be provided to you without charge if you are a stockholder of Heritage as of March 9, 2007. Please make your written request to Edward D. Cameron, Secretary, Heritage Financial Corporation, 201 5th Avenue S.W., Olympia, Washington 98501.
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HERITAGE FINANCIAL CORPORATION PROXY FOR ANNUAL MEETING OF STOCKHOLDERS April 26, 2007 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF HERITAGE FINANCIAL CORPORATION PLEASE SIGN AND RETURN IMMEDIATELY
The undersigned stockholder of HERITAGE FINANCIAL CORPORATION (“Heritage”) hereby nominates, constitutes and appoints Donald V. Rhodes and Daryl D. Jensen, and each of them, jointly and severally, as true and lawful agents and proxies, with full power of substitution, for me and in my name, place and stead, to act and vote all the common stock of Heritage standing in my name and on its books on March 9, 2007 at the Annual Meeting of Stockholders to be held at the Phoenix Inn, Olympia, Washington, on April 26, 2007 at 10:30 a.m., and at any adjournment thereof, with all the powers the undersigned would possess if personally present, as follows:
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR” THE PROPOSALS SET FORTH WITHIN.
Management knows of no other matters that may properly be, or which are likely to be, brought before the Annual Meeting. However, if any other matters are properly presented at the Annual Meeting, this Proxy will be voted according to the discretion of the named proxies.
The undersigned hereby acknowledges receipt of the Notice of the Annual Meeting of Stockholders for the April 26, 2007 Annual Meeting, and the accompanying documents forwarded therewith, and ratifies all lawful action taken by the above-named agents and proxies.
(Continued and to be signed on the other side) | ||
Ú DETACH PROXY CARD HEREÚ
1. ELECTION OF DIRECTORS:
|
| |||||||||||||
| ¨ | FOR all the nominees listed below. | ¨ | WITHHOLD AUTHORITY TO VOTE for all nominees listed below (in the manner described below). | |||||||||||
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a line through the nominee’s name listed below.
Election of three (3) directors to serve on the Board of Directors until 2010. | ||||||||||||||
Brian S. Charneski Peter N. Fluetsch Brian L. Vance | ||||||||||||||
2. In their discretion, upon such other business as may properly come before the Annual Meeting or any adjournment thereof. | ||||||||||||||
| Date: | ____________________________ | |||||||||||||
__________________________________ | ||||||||||||||
| Signature | ||||||||||||||
__________________________________ | ||||||||||||||
| Signature, if held jointly | ||||||||||||||
NOTE: Signature(s) should agree with name(s) on Heritage stock certificate(s). Executives, administrators, trustees and other fiduciaries, and persons signing on behalf of corporations, partnerships or other entities should so indicate when signing. All joint owners must sign. | ||||||||||||||
