<PAGE>
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 Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]CONFIDENTIAL FOR USE OF THE
[_]Preliminary Proxy Statement 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:
____________________________________________________________________________
<PAGE>
HERITAGE FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 27, 1999
The 1999 annual meeting of shareholders of Heritage Financial Corporation
will be held at Cavanaugh's at Capitol Lake, 2300 Evergreen Park Drive,
Olympia, WA, on April 27, 1999 at 11:00 a.m., Pacific Time. At the annual
meeting, you are being asked to:
1. Elect three (3) persons to serve on the Board of Directors of Heritage
until the annual meeting of shareholders in 2002.
2. Consider whatever other business that may properly be brought before
the annual meeting or any adjournment of the annual meeting.
Shareholders of record at the close of business on March 16, 1999 are
entitled to vote at the annual meeting or any adjournment of the annual
meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Wendy K. Gauksheim
Wendy K. Gauksheim
Secretary
Olympia, Washington
March 31, 1999
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.
<PAGE>
[Heritage Financial Corporation Logo]
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
shareholders on or about March 31, 1999.
ABOUT THE MEETING
When and Where are the Annual Meeting?
The annual meeting will be held at 11:00 a.m., Pacific Time, on Tuesday,
April 27, 1999 at Cavanaugh's at Capitol Lake, 2300 Evergreen Park Drive,
Olympia, WA.
What Matters will be Voted on at the Annual Meeting?
At the annual meeting, you are being asked to:
. Elect three (3) persons to serve on the Board of Directors of Heritage
until the annual meeting of shareholders in 2002; and
. Consider whatever other business that may properly come before the annual
meeting.
Who is Entitled to Vote?
Only shareholders of record at the close of business on the record date,
March 16, 1999, are entitled to receive notice of the annual meeting and to
vote at the annual meeting. On March 16, 1999, there were 10,976,540 shares of
Heritage common stock outstanding, held by approximately 1,743 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. Shareholders are not entitled to cumulate their votes in the election
of directors.
What Vote is Required to Elect the Directors?
The three nominees for election as directors who receive the greatest number
of votes 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. Votes withheld will have the same effect as a negative
vote.
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.
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 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" shareholders who wish to vote at the annual meeting
will need to obtain a proxy form from the institution that holds their shares.
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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 Wendy K.
Gauksheim, Heritage's Secretary, at 201 5th Avenue S.W., Olympia, Washington
98501, on or before the taking of the vote at the annual meeting, or by
completing a later dated proxy, or by 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.
RECENT DEVELOPMENTS
Acquisition of Washington Independent Bancshares, Inc.
On March 5, 1999, Washington Independent Bancshares, Inc. was acquired by
Heritage, and Central Valley Bank, N.A., a subsidiary of Washington
Independent, became a separate subsidiary of Heritage. In that acquisition,
Heritage issued 1,058,200 of its shares in exchange for all the shares of
Washington Independent. Heritage's chairman, president and chief executive
officer, Donald V. Rhodes, was the chairman, president and chief executive
officer of Washington Independent at the time of the acquisition and was and
remains the chairman and chief executive officer of Central Valley Bank.
Heritage director Daryl D. Jensen was a board member of Washington Independent
and Central Valley Bank at the time of the acquisition and remains a director
of Central Valley Bank. On March 25, 1999 Washington Independent director,
Melvin R. Lewis, became a director of Heritage.
Change of Fiscal Year End
On October 15, 1998, the Board of Directors of Heritage voted to change
Heritage's fiscal year end from June 30 to December 31 effective for the
interim six month period ended December 31, 1998.
STOCK OWNERSHIP
Who are the Largest Owners of Heritage Stock?
Heritage knows of no single person or group that is the beneficial owner of
more than 5% of Heritage's common stock.
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 15, 1999 by:
. Each director and director nominee;
. The chief executive officer and those executive officers who received
salaries in excess of $100,000 during the year ended December 31, 1998;
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
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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.
<TABLE>
<CAPTION>
Shares Beneficially
Owned at March 15, 1999
--------------------------------
Percent of Outstanding
Name Number Common Stock
- ---- --------- ----------------------
<S> <C> <C>
Lynn M. Brunton (1).......................... 112,291 1.0%
John A. Clees (2)............................ 87,312 1.0%
James Hastings (3)........................... 45,751 *
Daryl D. Jensen (4).......................... 154,807 1.4%
Melvin R. Lewis (5).......................... 43,928 *
H. Edward Odegard (6)........................ 102,111 1.0%
John D. Parry (7)............................ 73,192 *
Donald V. Rhodes (8)......................... 333,511 3.04%
James P. Senna (9)........................... 73,865 *
Brian L. Vance (10).......................... 65,325 *
Peter K. Wallerich........................... 1,500 *
Philip S. Weigard (11)....................... 115,140 1.0%
Directors and executive officers as a group
(12 persons) (11)........................... 1,248,026 11.40%
</TABLE>
- --------
* Represents less than 1.0% of Heritage's outstanding common stock.
(1) Includes 4,575 shares issuable upon exercise of options, which are
exercisable at $3.58 per share.
(2) Includes 4,575 shares issuable upon exercise of options, which are
exercisable at $3.58 per share.
(3) Includes 30,895 shares issuable upon exercise of options, 25,766 of
which are exercisable at $1.94 per share, and 5,149 of which are
exercisable at $3.58 per share.
(4) Includes 8,873 shares issuable upon exercise of options, 4,298 of which
are exercisable at $1.94 per share, and 4,575 of which are exercisable
at $3.58 per share, and 37,249 shares to be issued in exchange for
shares of Washington Independent Bancshares, Inc.
(5) Includes 18,428 shares to be issued in exchange for shares of Washington
Independent Bancshares, Inc.
(6) Includes 2,288 shares issuable upon exercise of options, which are
exercisable at $3.58 per share.
(7) Includes (a) 34,310 share issuable upon exercise of options, 17,146 of
which are exercisable at $2.33 per share, and 17,164 of which are
exercisable at $3.58 per share; and (b) 150 shares owned by a
corporation controlled by Mr. Parry's spouse, of which 150 shares Mr.
Parry disclaims beneficial ownership.
(8) Includes 17,164 shares issuable upon exercise of options, which are
exercisable at $3.58 per share. Includes 1,441 shares owned as a joint
tenant with his son, for which Mr. Rhodes disclaims beneficial ownership
and includes 72,535 shares to be issued in exchange for shares of
Washington Independent Bancshares, Inc.
(9) Includes 4,575 shares issuable upon exercise of options, which are
exercisable at $3.58 per share.
(10) Includes 34,327 shares issuable upon exercise of options, 17,164 of
which are exercisable at $3.11 per share, and 17,163 of which are
exercisable at $3.58 per share.
(11) Includes 4,575 shares issuable upon exercise of options, which are
exercisable at $3.58 per share.
(12) Includes 151,306 shares issuable upon exercise of options.
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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.
<TABLE>
<CAPTION>
Has Served Heritage
or Heritage Bank
Name Age Position Since
---- --- -------- -------------------
<C> <C> <S> <C>
Donald V. Rhodes (1).... 63 Chairman, President and 1989
Chief Executive Officer of
Heritage; Chairman and
Chief Executive Officer of
Heritage Bank; Chairman and
Chief Executive Officer of
Central Valley Bank*
Brian L. Vance (2)...... 44 Senior Vice President of 1996
Heritage and President and
Chief Operating Officer of
Heritage Bank
Gregory D. Patjens (3).. 49 Executive Vice President of 1999
Administration, Heritage
Bank
James Hastings (4)...... 46 Vice President and 1985
Treasurer of Heritage and
Senior Vice President and
Treasurer of Heritage Bank
John D. Parry (5)....... 52 Senior Vice President - 1994
Administration of Heritage
Bank
Wendy K. Gauksheim (6).. 38 Vice President and
Secretary of Heritage and
Senior Vice
President/Corporate
Services Officer of
Heritage Bank 1987
</TABLE>
- --------
* Effective on March 5, 1999, Central Valley Bank became a subsidiary of
Heritage upon the merger of Heritage and the holding company of Central
Valley Bank, Washington Independent Bancshares, Inc.
(1) For background information on Mr. Rhodes, see page 5 of the proxy
statement.
(2) 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 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. Subsequent to that, Mr. Vance was named Senior
Vice President of Heritage.
(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. Hastings has been employed by Heritage Bank since 1985 and currently
serves as Senior Vice President and Treasurer of Heritage Bank and Vice
President and Treasurer of Heritage. Mr. Hastings is a certified public
accountant with over 20 years of banking and thrift experience either in
public accounting or with financial institutions.
(5) Mr. Parry has been employed by Heritage Bank since 1994. Prior to joining
Heritage Bank, Mr. Parry was the Senior Vice President in charge of
Washington banking operations of Great American First Savings Bank, a
California based thrift institution.
(6) Ms. Gauksheim has been employed by Heritage Bank since 1987 and currently
serves as Senior Vice President/Corporate Services Officer of Heritage
Bank and Vice President and Secretary of Heritage.
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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 5 nor more than 25 persons. The Board of Directors has fixed the number
of directors at 9 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 shareholders annually. The
directors whose terms will expire at the 1999 annual meeting are Donald V.
Rhodes, Daryl D. Jensen and H. Edward Odegard, all of whom have been nominated
by the Board of Directors for reelection at the 1999 annual meeting. If
elected, these persons will hold office until the annual meeting of
shareholders in the year 2002 and until their successors are elected and
qualified.
Each nominee has indicated that he 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:
Nominees for Election at this Annual Meeting for Terms Expiring in 2002
Donald V. Rhodes, Director Since 1989. Mr. Rhodes, 63, currently serves as
Chairman, President and Chief Executive Officer of Heritage; Chairman and
Chief Executive Officer of Heritage Bank; and Chairman and Chief Executive
Officer of Central Valley Bank, a subsidiary of Heritage that 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.
Daryl D. Jensen, Director Since 1985. Mr. Jensen, 59, has been the President
and a director of Sunset Life Insurance Company of America since 1973. Mr.
Jensen also has served as a director of that company's holding company, Kansas
City Life Insurance Company, since 1978.
H. Edward Odegard, Director Since 1987. Mr. Odegard, 67, has been a private
investor since 1993. Prior to that time, he was the co-owner and manager of
the Valley Athletic Club, Tumwater, Washington.
The Board of Directors recommends a vote FOR the election of Messrs. Rhodes,
Jensen and Odegard.
Incumbent Directors Whose Terms Expire in 2001
John A. Clees, Director Since 1990. Mr. Clees, 51, has been the President of
Clees Miles CPA Group, Olympia, Washington since October 1995. Prior to that
time, he was the managing partner of Gattis, Clees and Company, an accounting
firm with offices in Seattle and Olympia, Washington
James P. Senna, Director Since 1976. Mr. Senna, 64, retired at the end of
1998 as the President and Chief Executive Officer of Shee Atika, Inc. (an
Alaska Native Corporation), Sitka, Alaska where he served in those capacities
since 1987.
Peter K. Wallerich, Director Since June, 1998. Mr. Wallerich, 68, is
presently a private investor. He was the Chairman, President and Chief
Executive Officer of North Pacific Bancorporation, the holding company of
North Pacific Bank, Tacoma, Washington, from 1970 until June 1998, when that
company was acquired by Heritage.
Incumbent Directors whose terms expire in 2000
Lynn M. Brunton, Director Since 1990. Ms. Brunton, 61, is presently a
community volunteer and serves as a member of the St. Peter Hospital Community
Board and is actively involved in several local and community organizations.
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Melvin R. Lewis, Director Since 1999. Mr. Lewis, 67, is a Broker and former
President of the firm Terril, Lewis, Wilke Insurance. Also, since 1993, Mr.
Lewis has served as a director of Central Valley Bank and, until March 5, 1999
was a director of Washington Independent Bancshares, Inc., the holding company
for Central Valley Bank. On March 5, 1999, Heritage acquired Washington
Independent Bancshares, Inc., and Central Valley Bank then became a subsidiary
of Heritage. Mr. Lewis became a director of Heritage on March 25, 1999 to
fulfill the requirements of the acquisition agreement between Heritage and
Washington Independent.
Philip S. Weigand, Director Since 1985. Mr. Weigand, 61, is a retired
Lieutenant Colonial 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.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
How Often Did the Board Meet During the Interim Period?
During the year ended December 31, 1998, the Board of Directors of Heritage
held 14 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.
What Committees Has the Board Established?
The Board of Directors of Heritage has an Audit and Finance Committee and
Personnel and Compensation Committee. There is no Nominating Committee.
Audit and Finance Committee. The Audit and Finance Committee:
. Reviews and approves the services 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 shareholders.
The Audit and Finance Committee consists of directors Clees (chairman of the
committee), Weigand, Odegard and Brunton. None of the members of the Audit and
Finance Committee are officers or employees of Heritage or any Heritage
subsidiary. There were 4 meetings of the Audit and Finance Committee during
the year ended December 31, 1998.
Personnel and Compensation Committee. The Personnel and Compensation
Committee reviews and recommends compensation arrangements for senior
management. The members of the Personnel and Compensation Committee are
directors Jensen (Chairman of the committee), Clees and Brunton. None of the
members of the Committee are officers or employees of Heritage or any
subsidiary of Heritage. There were four meetings of the Personnel and
Compensation Committee during the year ended December 31, 1998.
How are Directors Compensated?
During the year ended December 31, 1998, Heritage's non-officer directors
received a monthly retainer of $500 and a monthly fee of $500 for each Board
meeting attended. Non-officer directors also received $100 for each committee
meeting attended with the Chairman of the committee receiving $150 per meeting
attended. Directors who are officers or employees of Heritage or its
subsidiaries receive no additional compensation for service as directors or
members of Board committees.
Under Heritage's 1994 Stock Option Plan, directors Brunton, Clees, Jensen,
Odegard, Senna and Weigand each were granted a non-qualified stock option in
January 1994 to purchase 10,298 shares of Heritage common stock at an exercise
price of $1.94 per share (as adjusted for the mutual holding company
conversion). Under Heritage's 1997 stock option plan, directors Brunton,
Clees, Jensen, Odegard, Senna and Weigand each were
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granted a non-qualified stock option in January 1997 to purchase 6,863 shares
of Heritage common stock at an exercise price of $3.58 per share (as adjusted
for the mutual holding company conversion). All director options vest and
become exercisable in annual one-third increments beginning one year after the
date of grant. The options are exercisable for a period of five years after
they vest.
How Can a Shareholder Nominate Someone for the Board?
According to Heritage's Articles of Incorporation, any shareholder
nominations of candidates for election to the Board of Directors at the 1999
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 shareholders,
shareholder nominations must be mailed or deliver to Heritage's chairman by
the close of business on the seventh day after the day the notice of the
annual meeting is mailed. Shareholder nominations must contain the following
information if known to the nominating shareholder:
. 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 proposed nominee;
. The name and address of the nominating shareholder; and
. The number of shares of Heritage common stock owned by the nominating
shareholder.
The chairman of the annual meeting, in his discretion, may disregard any
nominations that do not comply with the above-listed requirements. Upon the
chairman's instructions, the vote teller may disregard all votes cast for a
nominee if the nomination does not comply with the above-listed requirements.
EXECUTIVE COMPENSATION
Report of the Personnel and Compensation Committee
This report of Heritage's Personnel and Compensation Committee describes in
general terms the process the committee undertakes and the factors it
considers to determine the appropriate compensation for Heritage's executive
officers.
What Are The Responsibilities of the Personnel and Compensation Committee?
The committee establishes and monitors compensation programs for executive
officers of Heritage and its subsidiaries. The committee:
. Reviews and approves individual executive 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.
What is Heritage's Philosophy of Executive Officer Compensation?
The committee's compensation philosophy is intended to reflect and support
the goals and strategies that Heritage has established. Currently, Heritage's
growth strategy is to broaden its products and services from traditional
thrift products and services to those more closely related to commercial
banking. The key elements of this strategy are geographic and product
expansion, loan portfolio diversification, development of relationship
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<PAGE>
banking and maintenance of asset quality. The committee believes these goals,
which are intended to create long-term shareholder 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 shareholder 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, the committee
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.
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. To set competitive salary ranges, the
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 him, taking into account the subjective and objective factors described
above. The committee reviews and approves or disapproves those
recommendations.
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 annual
awards are determined by formulas established by the committee following each
fiscal year and are based upon an assessment of Heritage's performance (for
the year ended December 31, 1998, primarily with respect to the Company's
return on average assets) as compared to both budgeted and previous 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 committee then reviews and approves the bonus recommendations
and presents them to the Board of Directors for approval.
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 shareholder 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. The committee determines from time to time which executives, if
any, 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.
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How Is Heritage's Chief Executive Officer Compensated?
The base compensation for Heritage's chairman, president and chief executive
officer, Donald V. Rhodes, was determined by the committee with final approval
by the Board based on the same criteria as the compensation for the other
executive officers. In October 1997, Heritage entered into an employment
agreement with Mr. Rhodes providing for an annual base salary of $174,000,
which may be increased at the discretion of the Board of Directors or the
committee. During the year ended December 31, 1998, the base annual salary of
Mr. Rhodes was $174,000. In addition to this, he received a performance bonus
of $45,000 and granted an incentive option to acquire 20,400 shares of Heritage
common stock at an exercise price of $11.13 per share. The chief executive
officer's bonus potential is based on achievement of certain targeted results
of the Company (for fiscal year 1998 and the interim 6 months to December 31,
1998, with respect to the Company's return on average assets) and is determined
by the committee with final approval by the Board.
The committee believes that for the year ended December 31, 1998, the
compensation for Mr. Rhodes, as well as for the other executive officers, was
consistent with Heritage's overall compensation philosophy and clearly related
to the realization of Heritage's goals and strategies for the period.
Respectfully submitted by: Daryl D. Jensen, Chairman of the Committee
John A. Clees, Member
Lynn M. Brunton, Member
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Stock Performance Graph
The chart shown below depicts total return to shareholders during the period
beginning January 8, 1998, when Heritage first issued its shares publicly, and
ending December 31, 1998. Total return includes appreciation in market value
of Heritage common stock as well as actual cash and stock dividends paid to
shareholders. Indices shown below, for comparison purposes only, are the S&P
500(TM) stock index, which is a broad nationally recognized index of stock
performance by publicly traded companies, and the SNL Securities thrift index,
which is comprised of publicly-traded thrift institutions with assets of $250
million to $500 million located throughout the United States. The chart
assumes that the value of the investment in Heritage's common stock and each
of the two indices was $100 on January 8, 1998, and that all dividends were
reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG HERITAGE FINANCIAL CORP., S&P 500 AND SNL $250M-$500M THRIFT INDEX
Heritage Financial Corporation
[PERFORMANCE GRAPH APPEARS HERE]
Period Ending
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Index 1/9/98 2/28/98 4/30/98 6/30/98 8/31/98 10/31/98 12/31/98
- --------------------------------------------------------------------------------
Heritage Financial
Corporation 100.00 111.32 118.20 111.58 74.90 83.30 74.26
S&P 500 100.00 113.35 120.35 123.09 104.20 119.86 134.45
SNL $250M-$500M
Thrift Index 100.00 106.70 112.00 105.18 84.53 87.14 91.05
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Summary Compensation Table
The following table sets forth the aggregate compensation for services
rendered to Heritage or its subsidiaries in all capacities paid or accrued for
the year ended December 31, 1998 compared to the same periods ended December
31, 1997 and 1996, to Heritage's chief executive officer and each of the three
other most highly compensated executive officers whose aggregate cash and cash
equivalent forms of compensation exceeded $100,000 (on an annualized basis)
during the described interim periods.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------ ----------------------
Restricted Securities
Name and Principal Interim Stock Underlying All Other
Position Period Salary Bonus Awards($) Options (#) Compensation(1)
- ------------------ ------- -------- ------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald V. Rhodes........ 1998 $178,500 $45,000 -0- 20,400 $20,882
Chairman, President and 1997 $156,000 $19,470 -0- 51,492 $19,085
Chief Executive 1996 $132,000 $64,350 -0- $18,014
Officer
Heritage Financial
Corp.
Brian L. Vance ......... 1998 $108,000 $24,786 -0- 10,800 $14,072
President and 1997 $ 91,350 $14,994 -0- 25,746 $ 456
Chief Operating 1996 $ 46,835 -0- -0- 25,746 $ 35
Officer
Heritage Bank
John D. Parry........... 1998 $103,050 $20,930 -0- 6,900 $19,019
Executive Vice 1997 $ 94,350 $13,644 -0- 25,746 $15,940
President 1996 $ 89,650 $28,803 -0- $16,396
Heritage Bank
James Hastings.......... 1998 $ 92,850 $16,965 -0- 4,800 $10,905
Vice President and 1997 $ 88,200 $11,680 -0- 7,724 $11,279
Treasurer 1996 $ 87,000 $28,070 -0- $ 8,775
Heritage Financial
Corp.
</TABLE>
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(1) Amounts in calendar 1998 represent for Messrs. Rhodes, Vance, Parry, and
Hastings: (i) matching contributions under Heritage's 401(k) in the amount
of $4,800, $3,434, $3,528,$1,200 respectively;
(ii) contributions under Heritage's defined contribution retirement plan in
the amount of : $9,600, $6,868, $7,056, $6,198, respectively; (iii)
contributions under Heritage's ESOP of approximately $4,462, $3,192,
$3,279, $2,880, respectively; and (iv) life insurance premiums paid by
Heritage for the benefit of each executive in the amount of $2,021, $578,
$1,156, $627, respectively.
Option Grants During 1998
In October 1998, the shareholders approved the adoption of the 1998 Stock
Option Plan, providing for the award of incentive stock options to employees
and nonqualified stock options to directors of the Company at the discretion
of the Board of Directors. Under the plan, on the date of grant, the exercise
price of the option must at least equal the market value per share of the
Company's common stock. The plan provides for the granting of options for up
to 461,125 common shares. All awards made under the plan require vesting over
a three year period beginning on the date of grant. Through December 31, 1998,
92,700 options were granted under the 1998 Stock Option Plan. Under the plan,
the options must be exercised within five years of vesting. Prior to the
adoption of the 1998 Stock Option Plan, stock options and a restricted stock
award, for a total of 12,000, were granted during 1998, under a previous stock
option plan, to an employee who subsequently resigned and the stock option and
restricted stock award were forfeited.
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Option Grants in 1998. The following table summarizes options granted to
each of the executives listed in the summary compensation table for the year
ended December 31, 1998.
<TABLE>
<CAPTION>
Number of Percentage Grant
Securities of total Date
Underlying options to Exercise Present
Options employees Price Expiration Value
Name Granted (#) during year ($/ share) Date (1) ($)
- ---- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Donald V. Rhodes.......... 20,400 20% $11.13 11/2005 $98,328
Brian L. Vance............ 10,800 11% $11.13 11/2005 $52,056
John D. Parry............. 6,900 7% $11.13 11/2005 $33,258
James Hastings............ 4,800 5% $11.13 11/2005 $23,136
</TABLE>
- --------
(1) One-third of the option grants vests on the first, second and third
anniversary dates of the grants and each grant expires five years after it
becomes vested.
Option Exercises and Period End Option Values
The following table summarizes option exercises during the year ended
December 31, 1998 by each of the executives listed in the summary compensation
table and the period end value of unexercised options granted to those
periods:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at December 31, 1998 at December 31, 1998(1)
Name Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---- ----------- -------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Donald V. Rhodes........ 68,656 $700,978 0/54,728 $ 0/$211,804
Brian L. Vance.......... -- -- 25,745/36,547 $ 166,914/$162,893
John D. Parry........... 8,600 $106,812 25,728/24,064 $ 180,174/$105,902
James Hastings.......... -- -- 28,320/ 9,950 $ 216,958/$ 31,776
</TABLE>
- --------
(1) Values are calculated by subtracting the exercise price from the fair
market value of the underlying stock. For purposes of this table, fair
market value is deemed to be $9.75, the last sale price of Heritage's
common stock on the Nasdaq National Market on December 31, 1998.
Other Employee Benefits and Proposed Changes in Those Benefits
Heritage maintains a defined contribution retirement plan. The plan allows
participation of all employees, including executive officers, upon completion
of one year of service and attainment of 21 years of age. It is Heritage's
policy to fund plan costs as accrued. Employee vesting occurs over a period of
seven years, after which they become fully vested. Heritage accrued a
contribution in the amount of $203,000 to the defined contribution plan during
the year ended December 31, 1998.
Heritage maintains a salary savings 401(k) plan for its employees, including
executive officers. All persons employed as of July 1, 1994 automatically
participate in the plan. All employees hired after that date who are at least
21 years of age and have one year of service may participate in the plan.
Employees who participate may contribute a portion of their salary, which is
matched 50% by Heritage, up to certain specified limits. Employee vesting in
Heritage's matching contributions is similar to the defined contribution
retirement plan vesting described above.
Heritage sponsors an Employee Stock Ownership Plan ("ESOP") which is
intended to satisfy the requirements for an employee stock ownership plan
under the Internal Revenue Code of 1986 and the Employee Retirement Income
Security Act of 1974. Full-time employees who have been credited with at least
1,000 hours of service during a 12-month period and who have attained age 21
are eligible to participate in the ESOP. The ESOP owned 259,461 shares of
Heritage common stock at December 31, 1998, of which 132,914 were allocated
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to participants' accounts and 124,169 were held in a suspense account. Shares
held in the suspense account are released to participant accounts on a pro
rata basis as Heritage's loan to the ESOP is repaid. Heritage's contribution
to the ESOP is discretionary and not fixed so benefits payable under the ESOP
cannot be estimated.
Executive Employment and Severance Agreements
Heritage and Heritage Bank entered into an employment agreement with Donald
V. Rhodes, effective on October 1, 1997. The agreement with Mr. Rhodes
provides for an annual base salary of $174,000, which may be increased at the
discretion of the Board of Directors or by an authorized board committee. In
addition to base salary, the agreement provides for Mr. Rhodes's participation
in employee benefit plans and other fringe benefits applicable to senior
executives of Heritage Bank. The term of the agreement will run until Mr.
Rhodes attains age 65 (March 14, 2001), and then will be automatically renewed
for additional terms of one year each unless notice is given one year prior to
the expiration date of any term that renewal will not be effected. In the
event the employment of Mr. Rhodes is terminated by Heritage at any time for
"cause" or by Mr. Rhodes without "good reason", both as defined in the
agreement, no termination benefit will be payable. If Mr. Rhodes is terminated
without cause or he terminates the agreement for good reason, a severance
benefit will be payable in an amount equal to two times the amount of his
then-current annual base salary, or the amount of salary which would otherwise
have been paid to him during the then remaining term of the agreement,
whichever is greater.
The agreement with Mr. Rhodes also provides for the payment of a severance
benefit to Mr. Rhodes in the event of his termination of employment in some
cases preceding, and for any reason following by up to two years, a change of
control of Heritage or Heritage Bank. Under the terms of the agreement, Mr.
Rhodes is entitled to receive his then-current base salary for three years
following such termination or until the end of the term of the agreement,
whichever is longer ($522,00 based on Mr. Rhodes's current salary and assuming
a three-year payment). In those circumstances, he also is entitled to all
benefits in his agreement, to be fully vested as to unvested options, and to
have restrictions lapse any restricted stock or other restricted securities.
Heritage Bank entered into severance agreements effective on October 1,
1998, with Messrs. John Parry, Executive Vice President-Administration, and
Brian Vance, President and Chief Operating Officer. The term of each of these
severance agreements is five years. The agreements provide for Messrs. Parry
and Vance to receive a severance benefit in an amount equal to two times the
amount of their then-current annual base salary ($252,000 for Mr. Vance and
$212,000 for Mr. Parry based on their current salaries) if their employment is
terminated in some cases preceding, and for any reason following by up to two
years, a change of control of Heritage or Heritage Bank. Heritage Bank also
entered into a severance agreement effective on October 31, 1998 with Mr.
Hastings that provides Mr. Hastings with a severance equal to his then-current
annual base salary ($96,000 based on his current salary) in the event his
employment is terminated for any reason within up to two years following a
change in control of Heritage or Heritage Bank.
For purposes of the agreements, "change in control" generally includes the
acquisition by any person of 25% or more of the outstanding securities of
Heritage; replacement of incumbent directors or election of newly elected
directors constituting a majority of the Board of Heritage where the
replacement or election has not been supported by the Board; dissolution, or
sale of 50% or more in value of the assets, of either Heritage or Heritage
Bank or any of their respective subsidiaries; or the merger of Heritage into
any corporation, 25% or more of the outstanding common stock of which is owned
by person other than owners of the common stock of Heritage prior to such
merger.
The employment agreement with Mr. Rhodes and the severance agreements with
Messrs. Parry and Vance provide that in the event any of those executives
receive 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.
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The agreements also restrict the right of Messrs. Rhodes, Parry and Vance to
compete against Heritage or Heritage Bank in the State of Washington for a
period of two years in the case of Mr. Rhodes and one year in the case of
Messrs. Parry and Vance following termination of employment, except in the
case of Mr. Rhodes if employment is terminated without cause or good reason.
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% shareholders 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% shareholders are required by regulation to provide Heritage
with a copy of any Section 16(a) reports they file. 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% shareholders were complied with during the year ended December 31, 1998
except for the following: the initial Form 3 reports for each of Heritage's
executive officers and directors, with the exception of Mr. Wallerich, were
filed 7 days late and a Form 4 reporting a single transaction by Mr. Vance was
filed 14 days late.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
During the year ended December 31, 1998, several directors and executive
officers of Heritage and Heritage Bank and their associates, were customers of
Heritage 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 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 subsidiary for the period ended December 31,
1998. The Audit and Finance Committee has recommended that KPMG LLP be
retained as independent auditors of Heritage and its subsidiaries for the year
ending December 31, 1999, subject to management approval of the terms of an
engagement letter with that firm. Shareholders 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 to
and will be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Shareholder interested in presenting a proposal for consideration at the
annual meeting of shareholders in 2000 may do so by following the procedures
prescribed in Rule 14a-8 under the Securities Exchange Act of 1934. To be
eligible for inclusion, shareholder proposals must be received by Heritage no
later than December 1, 1999.
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 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.
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MISCELLANEOUS
Heritage's annual report for the interim period ended December 31, 1998 has
been mailed along with this proxy statement to all shareholders of record as
of March 16, 1999. Any shareholder who has not received a copy of this annual
report may obtain a copy by writing to Heritage. The annual report is not 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 as filed with the Securities and Exchange
Commission will be provided to you without charge if you are a shareholder of
Heritage as of March 16, 1999. Please make your written request to Wendy
Gauksheim, Secretary, Heritage Financial Corporation, 201 5th Avenue S.W.,
Olympia, Washington 98501.
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HERITAGE FINANCIAL CORPORATION
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
April 27, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF
HERITAGE FINANCIAL CORPORATION
PLEASE SIGN AND RETURN IMMEDIATELY
----------------------------------
The undersigned shareholder of HERITAGE FINANCIAL CORPORATION ("Heritage")
hereby nominates, constitutes and appoints Donald V. Rhodes the true and lawful
attorney and proxy, 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 16, 1999 at the Annual Meeting of
Shareholders to be held at Cavanaugh's at Capitol Lake, Olympia, Washington, on
April 27, 1999, at 11:00 a.m., and at any adjournment thereof, with all the
powers the undersigned would possess if personally present, as follows:
1. ELECTION OF DIRECTORS: Election of three (3) persons to serve on the Board
of Directors until 2002.
[_] FOR all 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.
Daryl D. Jensen H. Edward Odegard Donald V.Rhodes
(Continued and to be signed on the other side)
<PAGE>
2. In their discretion, upon such other business as may properly come before
the Annual Meeting or any adjournment thereof.
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
ABOVE.
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 in
accordance with the recommendations of management.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Shareholders for the April 27, 1999 Annual Meeting, and the accompanying
documents forwarded therewith, and ratifies all lawful action taken by the
above-named attorneys and proxy.
Date: ______________________, 1999
----------------------------------
Signature
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Signature
NOTE: Signature(s) should agree
with name(s) on Heritage stock
certificate(s). Executors,
administrators, trustees and
other fiduciaries, and persons
signing on behalf of corporations
or partnerships should so
indicate when signing. All joint
owners must sign.
