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Section 1: DEF 14A (2020 PROXY STATEMENT)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No.    )
 
 
Filed by the Registrant  ý                             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))
 
 
ý
 
Definitive Proxy Statement
 
 
¨
 
Definitive Additional Materials
 
 
¨
 
Soliciting Material under Rule 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):
ý
 
No fee required.
¨
 
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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:

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March 19, 2020


Dear Shareholder:
On behalf of the Board of Directors and management of Heritage Financial Corporation, we cordially invite you to attend the annual meeting of shareholders. The meeting will be held at 10:00 a.m., Pacific time, on Monday, May 4, 2020 at the DoubleTree by Hilton, 415 Capitol Way N., Olympia, Washington. The matters expected to be acted upon at the meeting are described in the attached Proxy Statement. In addition, we will report on our results of operations during the past year and address your questions and comments.
We encourage you to attend the meeting in person. Whether or not you plan to attend, please take the time to read the Proxy Statement and vote via the Internet or telephone or by completing and mailing a proxy card as promptly as possible. This will save us the additional expense of soliciting proxies and will ensure that your shares are represented at the annual meeting.
Your Board of Directors and management are committed to the continued success of Heritage Financial Corporation and the enhancement of your investment. We appreciate your confidence and support and look forward to seeing you at the meeting.
 
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Brian L. Vance
 
Jeffrey J. Deuel
Executive Chairman
 
President and Chief Executive Officer




NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Date:    Monday, May 4, 2020
Time:    10:00 a.m, Pacific time
Place:    DoubleTree by Hilton
415 Capitol Way N.
Olympia, Washington 98501
Matters to be Voted On:


1.
The election of eleven directors to each serve for a one-year term.
2.
An advisory (non-binding) resolution to approve the compensation paid to our named executive officers, as disclosed in the Proxy Statement.
3.
The ratification of the Audit and Finance Committee’s appointment of Crowe LLP as our independent registered public accounting firm for the year ending December 31, 2020.
We will also transact other business that may properly come before the meeting, or any adjournment or postponement thereof.
Shareholders of record at the close of business on March 5, 2020 are entitled to receive notice of and to vote at the annual meeting.

Please vote your shares at your earliest convenience. This will ensure the presence of a quorum at the meeting. For instructions on voting, please refer to the instructions on the Notice of Internet Availability of Proxy Materials you received in the mail. You can request to receive proxy materials by mail or e-mail. Promptly voting your shares via the Internet, by telephone, or by signing, dating, and returning the proxy card, which is solicited by the Board of Directors, will save us the expense and extra work for additional solicitation. The proxy will not be used if you attend and vote at the annual meeting in person. Your vote is very important.
By Order of the Board of Directors,
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Kaylene M. Lahn
Senior Vice President and Corporate Secretary
Olympia, Washington
March 19, 2020





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PROXY SUMMARY
This summary highlights information contained elsewhere in the Proxy Statement. This summary provides an overview and is not intended to contain all the information that you should consider before voting. We encourage you to read the entire Proxy Statement for more detailed information on each topic prior to casting your vote.
2020 Annual Meeting of Shareholders

 
DATE:
 
 
TIME:
 
 
PLACE:
Monday, May 4, 2020
 
10:00 a.m., Pacific Time
 
DoubleTree by Hilton
415 Capitol Way N.
Olympia, Washington
Voting Matters and Board Recommendations

 
 
 
Proposal
Board
Recommendation
Page
1
The election of eleven directors to each serve for a one-year term.
FOR each nominee
2
An advisory (non-binding) resolution to approve the compensation paid to our named executive officers, as disclosed in this Proxy Statement.
FOR
3
The ratification of the Audit and Finance Committee’s appointment of Crowe LLP as our independent registered public accounting firm for the year ending December 31, 2020.
FOR
Director Nominees

 
 
 
 
 
 
 
 
 
Committee Membership 
 
 
 
 
 
 
 
 
 
Name
Age
Director
since
Independent
Audit
and
Finance
Compensation
Governance
and
Nominating
Risk
Trust
Brian S. Charneski
58
2000
 
 
John A. Clees
72
2005
 
 
Chair
Stephen A. Dennis
74
2005
 
 
 
Jeffrey J. Deuel
61
2019
 
 
 
 
 
Kimberly T. Ellwanger
60
2006
 
Chair
 
 
Deborah J. Gavin
63
2013
Chair
 
 
 
Jeffrey S. Lyon
67
2001
 
 
Gragg E. Miller
68
2009
 
 
 
Chair
Anthony B. Pickering
72
1996
 
 
 
Brian L. Vance
65
2002
 
 
 
 
 
Ann Watson
58
2012
 
Chair
 
 

i


2019 Business Highlights

During 2019 Heritage focused its growth strategies on several key initiatives, including: (1) a sustained emphasis on expanding loans and deposits while deliberately managing deposit mixtures and loan concentrations, designed to increase net interest margin; (2) evolving its online and mobile technology, with the goal of enhancing the customer experience and deepening loyalty; (3) improving the management of data and systems allowing for greater understanding of key business metrics and (4) a commitment to identifying the bank's most profitable business lines and leveraging those to an even greater extent. These initiatives required disciplined attention from all levels of leadership throughout the year, without losing focus on achieving organic growth goals, excellent credit quality, and smart capital and balance sheet management. In summary, throughout 2019, Heritage stayed focused on its core business fundamentals while improving overall financial and operating results, as demonstrated below:
Total Assets
 
Net Income
 
Diluted Earnings Per Share
 
403347486_chart-cb2eb6977d37e832d23.jpg        403347486_chart-bcb38e58e2511fe18aea01.jpg        403347486_chart-19fbabc7b9b96ae2d1ba01.jpg
Total Loans, Net
 
Total Deposits
 
Overhead Ratio (1)
 
403347486_chart-a3b5ab5f47e209c1051a01.jpg    403347486_chart-f17d7f9e87c4d5aee30.jpg        403347486_chart-ff33d39d27510dfdb28.jpg
(1) Non-interest expense divided by average assets
Best Practice Features


WHAT WE DO        

 
WHAT WE DO NOT DO
 
ü
Strong emphasis on variable performance-based pay
 
 
 
x
No excessive perquisites; perquisites are very limited and each has a specific business rationale
 
 
ü
Adhere to stock ownership guidelines
 
 
 
x
No stock option repricing, reloads, or exchanges without shareholder approval
 
 
ü
Enforce clawback provisions
 
 
 
x
No tax gross-ups
 
 
ü
Annually assess incentive compensation risks
 
 
 
x
No hedging of Heritage common stock
 
 
ü
Engage independent compensation consultants
 
 
 
x
No single trigger for accelerated vesting of service- based awards
 
 
ü
Actively reach out to our institutional shareholders
 
 
 
x
No heavy weighting of fixed compensation
 
 
ü
Eliminate annual bonus if Tier I Leverage ratio is below 8%
 
 
 
 
 
 

ii



TABLE OF CONTENTS
Information About the Annual Meeting
 
Report of the Compensation Committee
 
 
 
 
 
Security Ownership of Certain Beneficial Owners and Management
 
Executive Compensation
 
 
 
 
 
Proposal 1—Election of Directors
 
Summary Compensation Table
 
 
 
 
 
Meetings and Committees of the Board of Directors
 
Grants of Plan-Based Awards Table
 
 
 
 
 
Corporate Governance
 
Outstanding Equity Awards Table
 
 
 
 
 
Corporate Responsibility
 
Option Exercises and Stock Vested
 
 
 
 
 
Director Compensation
 
Nonqualified Deferred Compensation
 
 
 
 
 
Proposal 2—Advisory (Non-Binding) Vote on Executive Compensation
 
Potential Payments Upon Termination or Change in Control
 
 
 
 
 
Compensation Discussion and Analysis
 
Employment Agreements and Severance/Change in Control Benefits
 
 
 
 
 
Executive Summary
 
Equity Plans
 
 
 
 
 
Philosophy and Objectives of Our Executive Compensation Program
 
Split-Dollar Agreements
 
 
 
 
 
Role of the Compensation Committee
 
Management Incentive Plan
 
 
 
 
 
Role of Management in Compensation Committee Deliberations
 
Compensation Committee Interlocks and Insider Participation
 
 
 
 
 
Compensation Consultants and Advisors
 
CEO Pay Ratio
 
 
 
 
 
Use of Competitive Data
 
Report of the Audit and Finance Committee
 
 
 
 
 
Performance-Based Equity Peer Group
 
Proposal 3—Ratification of the Appointment of Independent Registered Public Accounting Firm
 
 
 
 
 
Target Pay Mix
 
Shareholder Proposals
 
 
 
 
 
Base Salary
 
Miscellaneous
 
 
 
 
 
Salary Adjustments Made in 2019
 
 
 
 
 
 
 
 
Annual Cash Incentives
 
 
 
 
 
 
 
 
2019 Annual Cash Incentive Award Determinations
 
 
 
 
 
 
 
 
Annual Cash Incentive Performance Goals
 
 
 
 
 
 
 
 
Equity-Based Compensation
 
 
 
 
 
 
 
 
2019 Equity Award Determinations
 
 
 
 
 
 
 
 
Stock Ownership Guidelines
 
 
 
 
 
 
 
 
Retirement Benefits
 
 
 
 
 
 
 
 
Perquisites and Other Benefits
 
 
 
 
 
 
 
 
Regulatory Considerations
 
 
 
 
 
 
 
 
Clawback Policy
 
 
 
 
 
 
 
 
Tax and Accounting Considerations
 
 
 



PROXY STATEMENT
2020 ANNUAL MEETING OF SHAREHOLDERS

HERITAGE FINANCIAL CORPORATION
201 Fifth Avenue S.W.
Olympia, Washington 98501
(360) 943-1500

The Board of Directors of Heritage Financial Corporation (“Board”) is using this Proxy Statement to solicit proxies from our shareholders for use at the annual meeting of shareholders. We first provided access to this Proxy Statement and a form of proxy card on March 19, 2020.

The information provided in this Proxy Statement relates to Heritage Financial Corporation and its wholly-owned bank subsidiary, Heritage Bank. Heritage Financial Corporation may also be referred to as “Heritage” or the “Company.” All references in this Proxy Statement to “Heritage,” “we,” “us” and “our” or similar references mean Heritage Financial Corporation and its consolidated subsidiaries.
Information About the Annual Meeting

Our annual meeting will be held as follows:
Date:    Monday, May 4, 2020
Time:    10:00 a.m., Pacific time
Place:    DoubleTree by Hilton
415 Capitol Way N.
Olympia, Washington 98501
Matters to Be Considered at the Annual Meeting

At the meeting, you will be asked to consider and vote on:

The election of eleven directors to each serve for a one-year term.
An advisory, non-binding, resolution to approve the compensation paid to our named executive officers, as disclosed in this Proxy Statement.
The ratification of the Audit and Finance Committee’s appointment of Crowe LLP as our independent registered public accounting firm for the year ending December 31, 2020.

We will also transact any other business that may properly come before the annual meeting. As of the date of this Proxy Statement, we are not aware of any business to be presented for consideration at the annual meeting other than the matters described in this Proxy Statement.
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to Be Held on May 4, 2020

Our Proxy Statement, the Notice of Internet Availability of Proxy Materials and our Annual Report to Shareholders are available at www.hf-wa.com. The following materials are available for review:
Proxy Statement;
Notice of Internet Availability of Proxy Materials;
Proxy Card;
Annual Report to Shareholders; and
Directions to attend the annual meeting, where you may vote in person.


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We provided access to our proxy materials beginning on March 19, 2020. On that day, we mailed the Notice of Availability of Proxy Materials to our shareholders. The Securities and Exchange Commission ("SEC") allows us to deliver proxy materials to shareholders over the Internet. We believe that this offers a convenient way for shareholders to review our information. It also reduces printing expenses and lessens the environmental impact of mailing paper copies of the annual meeting materials.
Who is Entitled to Vote?

We have fixed the close of business on March 5, 2020, as the record date for shareholders entitled to notice of and to vote at our annual meeting. Only holders of record of Heritage’s common stock on that date are entitled to notice of and to vote at the annual meeting. You are entitled to one vote for each share of Heritage common stock you own, unless you acquired more than 10% of Heritage’s outstanding common stock without prior Board approval. As provided in our Articles of Incorporation, for each vote in excess of 10% of the voting power of the outstanding shares of Heritage’s voting stock, the record holders in the aggregate will be entitled to cast one-hundredth of a vote, and the aggregate power of these record holders will be allocated proportionately among these record holders. On March 5, 2020, there were 36,225,364 shares of Heritage common stock outstanding and entitled to vote at the annual meeting.
How Do I Vote at the Annual Meeting?

Proxies are solicited to provide all shareholders on the voting record date an opportunity to vote on matters scheduled for the annual meeting and described in these materials. This answer provides voting instructions for shareholders of record. You are a shareholder of record if your shares of Heritage common stock are held in your name. If you are a beneficial owner of Heritage common stock held by a broker, bank or other nominee (i.e., in “street name”), please see the instructions below, under "What if My Shares Are Held in "Street Name" by a Broker?"

Shares of Heritage common stock can only be voted if the shareholder is present in person or by proxy at the annual meeting. To ensure your representation at the annual meeting, we recommend you vote by proxy even if you plan to attend the annual meeting. You can always change your vote at the meeting if you are a shareholder of record.

Voting instructions are included on the Notice of Internet Availability of Proxy Materials. Shares of Heritage common stock represented by properly executed proxies will be voted by the persons named on the form of proxy in accordance with the shareholder’s instructions. Where properly executed proxies are returned to us with no specific instruction as to how to vote at the annual meeting, the persons named in the proxy will vote the shares FOR the election of each of our director nominees, FOR advisory approval of the compensation of our named executive officers as disclosed in this Proxy Statement, and FOR ratification of the appointment of Crowe LLP as our independent registered public accounting firm for the year ending December 31, 2020. If any other matters are properly presented at the annual meeting for action, the persons named in the form of proxy and acting thereunder will have the discretion to vote on those matters in accordance with their best judgment. We do not currently expect that any other matters will be properly presented for action at the annual meeting.

You may receive more than one proxy depending on how your shares are held. For example, you may hold some of your shares individually, some jointly with your spouse and some in trust for your children. In this case, you will receive three separate proxies to vote.
What if My Shares Are Held in "Street Name" by a Broker?

If you are the beneficial owner of shares held in “street name” by a broker, bank or other nominee ("nominee"), the nominee, as the record holder of the shares, is required to vote the shares in accordance with your instructions. If you do not give instructions to the nominee, the nominee may nevertheless vote the shares with respect to discretionary items, but will not be permitted to vote your shares with respect to non-discretionary items, pursuant to current industry practice. In the case of non-discretionary items, the shares not voted will be treated as “broker non-votes.” The proposal for the election of directors and the advisory vote on executive compensation are considered non-discretionary items; therefore, you must provide instructions to the nominee in order to have your shares voted on these proposals.

If your shares are held in street name, you will need proof of ownership to be admitted to the annual meeting. A recent brokerage statement or letter from the record holder of your shares are examples of proof of ownership. If you want

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to vote your shares of common stock held in street name in person at the annual meeting, you will have to get a written proxy in your name from the nominee who holds your shares.
How Will My Shares of Common Stock Held in the 401(k) Profit Sharing Plan Be Voted?

We maintain a 401(k) profit sharing plan (“401(k) Plan”) which owned 272,470 shares or 0.75% of Heritage’s common stock as of the record date. Our employees participate in the 401(k) Plan. Each participant may instruct the 401(k) Plan trustee how to vote the shares of Heritage common stock allocated to his or her account under the Plan by completing a vote authorization form. If a participant properly executes a vote authorization form, the 401(k) Plan trustee will vote the participant’s shares in accordance with the participant’s instructions. 401(k) Plan shares for which proper voting instructions are not received will not be voted. In order to give the trustee sufficient time to vote, all vote authorization forms, which are in the form of a proxy card, must be received from 401(k) Plan participants by the transfer agent by April 29, 2020.
How Many Shares Must Be Present to Hold the Meeting?

A quorum must be present at the meeting for any business to be conducted. The presence at the meeting, in person or by proxy, of at least a majority of the shares of Heritage common stock entitled to vote at the annual meeting as of the record date will constitute a quorum. Proxies received but marked as abstentions or broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.
What if a Quorum is Not Present at the Meeting?

If a quorum is not present at the scheduled time of the meeting, a majority of the shareholders present or represented by proxy may adjourn the meeting until a quorum is present. The time and place of the adjourned meeting will be announced at the time the adjournment is taken, and no other notice will be given unless a new record date for the meeting is set. An adjournment will have no effect on the business that may be conducted at the meeting.
Vote Required to Approve Proposal 1: Election of Directors

Our Bylaws provide for the election of directors by the majority of votes cast by shareholders in uncontested elections and provide that in an uncontested election, the number of shares voted "for" a director nominee must exceed the number of shares voted "against" a director nominee, in order for a director nominee to be elected. The following are not considered votes cast: (1) a share otherwise present at the meeting but for which there is an abstention; and (2) a share otherwise present at the meeting as to which a shareholder of record gives no authority or direction. The term of any director, who was a director at the time of the election, but who does not receive a majority of votes cast in an election held under the new majority vote standard will continue to serve as a director until terminated on the earliest to occur of: (1) 90 days after the date election results are determined; (2) the date the Board appoints a new director to fill the position; or (3) the date and time the director's resignation is effective.

Our Bylaws provide that an election is considered a "contested election" if there are shareholder nominees for director pursuant to Heritage's advance notice provision and who are not withdrawn by the advance notice deadline set forth in Heritage's Articles of Incorporation. If the Board determines there is a "contested election," the election of directors will be held under a plurality standard. Under the plurality standard, the nominees who receive the highest number of votes for the directorships for which they have been nominated will be elected.

Pursuant to our Articles of Incorporation, shareholders are not permitted to cumulate their votes for the election of directors. Votes may be cast for or against each nominee, or shareholders may abstain from voting. Abstentions and broker non-votes will have no effect on the outcome of the election. Our Board of Directors unanimously recommends that you vote FOR the election of each of its director nominees.
Vote Required to Approve Proposal 2: Advisory Vote on Executive Compensation

Approval of the advisory (non-binding) resolution to approve the compensation paid to our named executive officers requires the affirmative vote of the majority of the shares of Heritage common stock present, in person or by proxy,

3


and entitled to vote at the annual meeting. Abstentions are not affirmative votes and, therefore, will have the same effect as a vote against the proposal. Broker non-votes are not entitled to vote and therefore will have no effect on the approval of the proposal. Our Board of Directors unanimously recommends that you vote FOR the adoption of an advisory resolution to approve the compensation paid to our named executive officers as disclosed in this Proxy Statement.
Vote Required to Approve Proposal 3: Ratification of the Appointment of Our Independent Registered Public Accounting Firm

Ratification of the Audit and Finance Committee’s appointment of Crowe LLP as our independent registered public accounting firm for the year ending December 31, 2020, requires the affirmative vote of the majority of the shares of Heritage common stock present, in person or by proxy, and entitled to vote at the annual meeting by holders of Heritage common stock. Abstentions are not affirmative votes and, therefore, will have the same effect as a vote against the proposal. Our Board of Directors unanimously recommends that you vote FOR the ratification of the appointment of Crowe LLP as our independent registered public accounting firm for the year ending December 31, 2020.
May I Revoke My Proxy?

You may revoke your proxy before it is voted by:
submitting a new proxy with a later date;
notifying the Corporate Secretary of Heritage in writing (or if you hold your shares in street name, your broker, bank or other nominee) before the annual meeting that you have revoked your proxy; or
voting in person at the annual meeting.

If you plan to attend the annual meeting and wish to vote in person, we will give you a ballot at the annual meeting. However, if your shares are held in “street name,” you must bring a validly executed proxy from the nominee indicating that you have the right to vote the shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of the record date or the most currently reported date, information regarding share ownership of:
those persons or entities (or groups of affiliated persons or entities) known by management to beneficially own more than five percent of Heritage’s common stock other than directors and executive officers;
each director of Heritage;
each executive officer of Heritage named in the Summary Compensation Table appearing under “Executive Compensation” below (known as “named executive officers”); and
all current directors and executive officers of Heritage as a group.
On March 5, 2020, there were 36,225,364 shares of Heritage common stock outstanding.

Persons and groups who beneficially own in excess of five percent of Heritage’s common stock are required to file with the Securities and Exchange Commission (“SEC”), and provide a copy to Heritage, reports disclosing their ownership pursuant to the Securities Exchange Act of 1934, as amended (“Securities Exchange Act”). To our knowledge, no other person or entity, other than as set forth below, beneficially owned more than five percent of the outstanding shares of Heritage’s common stock.

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Beneficial Owners of More than 5%
Number of Shares Beneficially Owned
Percent of Common Stock Outstanding
BlackRock Inc. (1)
   55 East 52nd Street
   New York, NY 10055
5,384,280
14.7%
T. Rowe Price Associates, Inc. (2)
   100 E. Pratt Street
   Baltimore, MD 21202
3,575,398
9.7%
The Vanguard Group (3)
   100 Vanguard Boulevard
   Malvern, PA 19355
2,304,202
6.3%
(1)
According to a Schedule 13G filed with the SEC on February 4, 2020 reporting shares owned as of December 31, 2019, BlackRock Inc. has sole voting power over 5,298,664 shares and sole dispositive power over 5,384,280 shares. The interest of BlackRock Fund Advisors in the common stock of Heritage is more than 5% of the total outstanding common stock.
(2)
According to a Schedule 13G filed with the SEC on February 14, 2020 reporting shares owned as of December 31, 2019, T. Rowe Price Associates, Inc. Inc. has sole voting power over 850,705 shares and sole dispositive power over 3,575,398 shares.
(3)
According to a Schedule 13G filed with the SEC on February 12, 2020 reporting shares owned as of December 31, 2019, the Vanguard Group has sole voting power over 36,077 shares, shared voting power over 5,781 shares, sole dispositive power over 2,267,591 shares and shared dispositive power over 36,611 shares.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In accordance with Rule 13d-3 of the Securities Exchange Act, a person is deemed to be the beneficial owner of any shares of common stock if he or she has voting and/or investment power with respect to those shares. Therefore, the table below includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of our named individuals, and other forms of ownership, over which shares the persons named in the table may possess voting and/or investment power. In addition, in computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to outstanding options that are currently exercisable or exercisable within 60 days after March 5, 2020 are included in the number of shares beneficially owned by the person and are deemed outstanding for the purpose of calculating the person’s percentage ownership. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

The following table shows, as of March 5, 2020, the amount of Heritage common stock owned (unless otherwise indicated) by each director and named executive officer, and all of our directors and executive officers as a group.
Directors & Officer
Shares
 
Restricted Stock Units (1)
Total
Beneficial Ownership
Percent of Common Stock Outstanding
Brian S. Charneski
39,412
(2) 
1,291
40,703
*
John A. Clees
49,727
(3) 
1,291
51,018
*
Stephen A. Dennis
30,822
(4) 
1,291
32,113
*
Jeffrey J. Deuel
30,189
(5) 
2,475
32,664
*
Kimberly T. Ellwanger
20,362
(6) 
1,291
21,653
*
Deborah J. Gavin
11,243
 
1,291
12,534
*
Jeffrey S. Lyon
38,082
(7) 
1,291
39,373
*
Gragg E. Miller
25,000
(8) 
1,291
26,291
*
Anthony B. Pickering
54,282
(9) 
1,291
55,573
*
Ann Watson
11,149
(10) 
1,291
12,440
*
Brian L. Vance
119,802
(11) 
7,955
127,757
*
Donald J. Hinson
29,855
(12) 
1,487
31,342
*
Bryan D. McDonald
21,063
(13) 
1,694
22,757
*
David A. Spurling
21,866
(14) 
1,450
23,316
*
Cindy M. Huntley
19,992
(15) 
1,866
21,858
*
Directors and Executive Officers as a group (19 persons)
548,346
 
32,385
580,731
1.6%
*
Less than one percent of shares outstanding

5



(1)
Represents time-based restricted stock units which will vest within 60 days of March 5, 2020.
(2)
Includes 22,816 shares held jointly with his spouse and 10,675 shares owned by an entity controlled by Mr. Charneski.
(3)
Includes 46,177 shares held jointly with his spouse, 1,050 shares owned solely by his spouse and 2,500 shares owned by an entity controlled by Mr. Clees.
(4)
Shares are held jointly with his spouse.
(5)
Includes 912 shares of restricted stock, as to which Mr. Deuel has voting but not dispositive power.
(6)
Shares are held jointly with her spouse.
(7)
Includes 3,235 shares held as custodian for a minor and 2,850 shares held by his daughter.
(8)
Includes 18,955 shares held jointly with his spouse, 4,875 shares owned solely by his spouse and 1,170 shares held in a simplified employee pension plan.
(9)
Includes 42,096 shares held jointly with his spouse, 4,062 shares held in Mr. Pickering's IRA and 4,062 shares held in Mr. Pickering's spouse's IRA.
(10)
Includes 4,000 shares held in Ms. Watson's IRA and 7,149 shares held jointly with her spouse.
(11)
Includes 92,363 shares held jointly with his spouse, 21,065 vested shares in the 401(k) plan and 1,856 shares of restricted stock, as to which Mr. Vance has voting but not dispositive power.
(12)
Includes 798 shares of restricted stock, as to which Mr. Hinson has voting but not dispositive power.
(13)
Includes 7,249 shares held jointly with his spouse, 9,944 vested shares held in the 401(k) plan and 818 shares of restricted stock, as to which Mr. McDonald has voting but not dispositive power.
(14)
Includes 21,108 shares held jointly with his spouse and 778 shares of restricted stock, as to which Mr. Spurling has voting but not dispositive power.
(15)
Includes 2,268 shares held in the 401(k) plan and 651 shares of restricted stock, as to which Ms. Huntley has voting but not dispositive power.

PROPOSAL 1—ELECTION OF DIRECTORS
The eleven directors below have been nominated to serve a one-year term ending at the 2021 annual meeting, or when their respective successors have been duly elected and qualified.
The table below sets forth information regarding each director of Heritage standing for re-election, including his or her age, position and term of office. Each nominee has consented to being named in this Proxy Statement and has agreed to serve if elected. If a nominee is unable to stand for election, the Board of Directors may either reduce the number of directors to be elected or select a substitute nominee. If a substitute nominee is selected, the proxy holders will vote your shares for the substitute nominee, unless you have withheld authority. At this time, we are not aware of any reason why a nominee might be unable to serve if elected.
The Board of Directors recommends you vote FOR the election of each of the nominees in the table below.
Name
Age(1)
Position(s) Held with
Heritage
Director Since
Term to
Expire
(2)
Brian S. Charneski
58
Director
 2000
2021
John A. Clees
72
Director
 2005
2021
Stephen A. Dennis
74
Director
2005*
2021
Jeffrey J. Deuel
61
Director, President & CEO
2019
2021
Kimberly T. Ellwanger
59
Director
 2006
2021
Deborah J. Gavin
63
Director
2013**
2021
Jeffrey S. Lyon
67
Director
 2001
2021
Gragg E. Miller
68
Director
2009**
2021
Anthony B. Pickering
72
Director
1996**
2021
Brian L. Vance
65
Executive Chairman
 2002
2021
Ann Watson
58
Director
 2012
2021
*
Reflects year appointed to Puget Sound Bancorp, Inc. Board of Directors. Puget Sound Bancorp, Inc. merged with Heritage in January 2018.
**
Reflects year appointed to the Washington Banking Company (“Washington Banking”) Board of Directors. Washington Banking merged with Heritage in May 2014.
 
(1)
As of December 31, 2019.
(2)
Assuming re-election.

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Business Experience of Nominees for Re-election

The business experience of each nominee of Heritage for at least the past five years and the experience, qualifications, attributes, skills and areas of expertise of each director that led to the conclusion that the person should serve as a director of Heritage is set forth below. All nominees have held their present positions for at least five years unless otherwise indicated.
BRIAN S. CHARNESKI
AGE: 58            DIRECTOR SINCE 2000
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Biographical Information:
Brian S. Charneski is the President of L&E Bottling Company based in Olympia, Washington and is Chairman of Pepsi Northwest Beverages, LLC, a regional beverage manufacturing joint venture with PepsiCo, Inc. headquartered in Tumwater, Washington. Mr. Charneski is a director of the American Beverage Association and is also a member of the Board of Directors of the Pepsi-Cola Bottlers Association, having chaired the Association from 2005 to 2007. Through his involvement, Mr. Charneski has extensive experience in the consumer products industry from product development, sales and marketing to manufacturing and logistics. Mr. Charneski is a past director of the Washington Center for Performing Arts, the Community Foundation of the South Sound and St. Martin’s University. Mr. Charneski is a 1985 graduate of Seattle University with a Bachelor of Arts in Economics. Mr. Charneski was appointed as Lead Independent Director effective as of July 1, 2019, after having served as our Chairman since 2016.
 
Committees:
  Audit and Finance
 Compensation
 Governance and Nominating
Qualifications:
Mr. Charneski serves as Lead Independent Director and provides a depth of knowledge in corporate and regulatory matters as he is a strong advocate for the beverage industry. He brings significant financial, economic and merger and acquisition expertise to the Board.
 
JOHN A. CLEES
AGE: 72            DIRECTOR SINCE 2005
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Biographical Information:
John A. Clees is an attorney at Worth Law Group with a practice emphasis in estate and business succession planning for closely held companies and their owners. Formerly, Mr. Clees was a Managing Director for nine years with a national certified public accounting firm, McGladrey, after they acquired the Olympia, Washington firm founded by Mr. Clees. Mr. Clees is a graduate of the University of Washington with a Bachelor of Arts in Economics and a graduate of the University of Washington School of Law. Mr. Clees is licensed as a Certified Public Accountant, an attorney and mediator in the State of Washington. Mr. Clees served on Heritage’s Board of Directors from 1990 until 2000 and served as a non-voting consultant to Heritage’s Board of Directors and Audit Committee from 2000 until June 2005, when he was reappointed to the Board. He serves as a Board Member on the Community Foundation of South Puget Sound.
 
Committees:
  Audit and Finance
 Risk (Chair)
 Trust
Qualifications:
Mr. Clees provides important tax and accounting expertise to the Board. He also brings a legal perspective to the Board, with a solid understanding of corporate governance matters.
 
STEPHEN A. DENNIS
AGE: 74            DIRECTOR SINCE 2005
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Biographical Information:
Stephen A. Dennis is a retired President and Chief Executive Officer of Quadrant Homes, Bellevue, Washington, a subsidiary of Weyerhaeuser Real Estate Company. He led the team that built Quadrant Homes into the largest homebuilder in the Puget Sound region and established it as a leader in conservation and sustainability. He was a founding member of the Board of Directors of Puget Sound Bank, the wholly owned subsidiary of Puget Sound Bancorp, Inc., serving from 2005 until its acquisition by Heritage in January 2018. Mr. Dennis currently volunteers at an Issaquah middle school and for Imagine Housing. He is an active docent and writer for the Museum of Flight. He also served on the Board of the Children’s Home Society of Washington and the Board of the Bellevue Convention Center public development authority. Mr. Dennis holds an undergraduate degree in construction management from the University of Washington and a Master of Business Administration from the University of Colorado.
Committees:
 Compensation
 Trust
Qualifications:
Mr. Dennis brings to our Board extensive executive leadership skills and business acumen with a focus on business development and sustainability.

7



JEFFREY J. DEUEL
AGE: 61            DIRECTOR SINCE 2019
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Biographical Information:
Jeffrey J. Deuel is President and Chief Executive Officer of Heritage, positions he has held since July 1, 2019. Previously, Mr. Deuel was President and Chief Executive Officer of Heritage Bank and President of Heritage (July 2018 to July 2019), President and Chief Operating Officer of Heritage Bank and Executive Vice President of Heritage (September 2012 to July 2018), Executive Vice President and Chief Operating Officer of Heritage Bank and Executive Vice President of the Heritage (November 2010 to September 2012) and Executive Vice President of Heritage Bank (February 2010 to November 2010). Prior to joining Heritage, Mr. Deuel held the position of Executive Vice President Commercial Operations with JPMorgan Chase, formerly Washington Mutual. Prior to joining Washington Mutual, Mr. Deuel was based in Philadelphia where he worked for Bank United, First Union Bank, CoreStates Bank, and First Pennsylvania Bank. During his career Mr. Deuel held a variety of leadership positions in commercial banking including lending, credit administration, portfolio management, retail, corporate strategies, and support services. He serves on the board of the Pacific Coast Banking School and earned his Bachelor’s degree at Gettysburg College.
Committees:
Trust
Qualifications:
Mr. Deuel brings significant executive leadership skills, banking experience along with a strategic focus and vision for the Company.
 
KIMBERLY T. ELLWANGER
AGE: 60            DIRECTOR SINCE 2006
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Biographical Information:
Kimberly T. Ellwanger retired from her position as Senior Director of Corporate Affairs and Associate General Counsel at Microsoft Corporation of Redmond, Washington in 1999. She led Microsoft in developing a corporate presence in government, industry and community affairs including opening a Washington, D.C. office and developing a network of state and local government affairs representation. Prior to joining Microsoft, Ms. Ellwanger was a Partner at Perkins Coie in Seattle, Washington, where her practice included state and local tax planning, tax litigation, bankruptcy, general business and corporate advice and transactions. She has been involved in numerous civic and professional activities including currently serving on the Boards of the Northwest Chapter of the National Association of Corporate Directors (“NACD”) and the Providence St. Peter Foundation. She is past Chair of the Washington Council on International Trade and past Vice President of the Business Software Alliance. 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. She has participated in and presented at a number of director education programs, including Bank Director Conferences, NACD programs and the Direct Women Board Institute, and she completed NACD’s comprehensive program of study to become an NACD Leadership Fellow. 
Committees:
Compensation
 Governance and Nominating (Chair)
Qualifications:
Ms. Ellwanger brings significant legal expertise to the Board, which is complemented by her leadership skills and corporate, government and regulatory expertise.
 
DEBORAH J. GAVIN
AGE: 63            DIRECTOR SINCE 2005
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Biographical Information:
Deborah J. Gavin was employed by the Boeing Company, an aerospace company, for over 20 years and retired from the position of Vice President of Finance and Controller in 2010. Prior to her employment with Boeing, Ms. Gavin held positions as a management consultant for Deloitte (a public accounting firm), and Special Agent with the U.S. Department of Treasury. She also taught undergraduate and graduate adjunct accounting courses at City University, Seattle, Washington. Ms. Gavin is a Certified Public Accountant in the State of Washington. She holds a Bachelor of Science degree in Business from the State University of New York College at Buffalo and a Master of Business Administration in Finance from Seattle University. Other board experiences include private company boards in Malaysia and China, and nonprofit organizations including the Washington Business Alliance and Snoqualmie Summit Central Ski Patrol.

Committees:
 Audit and Finance (Chair)
 Risk
Qualifications:
Ms. Gavin's extensive financial background, leadership skills, and depth of public company knowledge provide the Board with valuable expertise. Ms. Gavin is one of the Company's designated financial experts.
 

8



JEFFREY S. LYON
AGE: 67            DIRECTOR SINCE 2001
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Biographical Information:
Jeffrey S. Lyon is the Chairman and Chief Executive Officer of Kidder Mathews, headquartered in Seattle, Washington and the President of Kidder Mathews of California. Mr. Lyon serves as a director for Kidder Mathews Segner Inc. Mr. Lyon has over 45 years of experience in the commercial real estate industry in the Puget Sound area. He is a member of the Real Estate Advisory Board at the Runstad School of Real Estate at the University of Washington. Mr. Lyon earned a Bachelor of Arts degree in real estate and finance from the University of Oregon and is a certified member of the Commercial Investment Real Estate Institute (CCIM). He is an active community leader serving on the boards of the Economic Development Council for Tacoma-Pierce County, the CCIM Foundation and the Tacoma Sports Commission.
Committees:
 Compensation
 Governance and Nominating
 Risk
Qualifications:
Mr. Lyon provides expertise in the commercial real estate industry and has excellent entrepreneurial, strategic and executive leadership skills.
 
GRAGG E. MILLER
AGE: 68            DIRECTOR SINCE 2009
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Biographical Information:
Gragg E. Miller served as the Principal Managing Broker of Coldwell Banker Bain realtors in Bellingham, Washington from 2011 to 2017. Prior to that, he was the Principal Managing Broker with Coldwell Banker since 1978. Mr. Miller earned his Bachelor of Arts degree from the University of Washington in 1973. He holds the GRI and CRB designations from the National Association of Realtors and was honored with the Lifetime Achievement Award from the Whatcom County Board of Realtors in 2006. He has held numerous board positions with the Washington Association of Realtors as well as the Whatcom County Board of Realtors. Mr. Miller's real estate investment experience includes ownership in Meridian Associates, LLC, Garden Street Associates, LLC and Cornwall Center, Inc.

 
Committees:
 Audit
 Risk
 Trust (Chair)
Qualifications:
Mr. Miller provides expertise in the real estate industry and has extensive involvement in civic and business organizations in Bellingham, Washington.
 
ANTHONY B. PICKERING
AGE: 72            DIRECTOR SINCE 1996
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Biographical Information:
Anthony B. Pickering served as Chairman of the Board of Heritage following the merger between Heritage and Washington Banking from May 1, 2014 until May 1, 2016, and served as the Chairman of the Board of Washington Banking and its subsidiary Whidbey Island Bank from 2005 to 2014. Mr. Pickering owned Max Dale’s Restaurant and Stanwood Grill from 1983 and 2001, respectively, until 2008. He holds a Bachelor’s Degree in Mathematics from Washington State University. He is a past President of the Skagit Valley Hospital Foundation and previously served as a trustee for the Washington State University Foundation Board of Trustees and on the Board of the Economic Development Association of Skagit County. Mr. Pickering serves on the Board of Directors of the Skagit Regional Public Facilities District.
 
Committees:
Governance and Nominating
 Compensation
Qualifications:
Mr. Pickering brings to the Board a business background with financial, human resources management and community relations experience.
 

9



BRIAN L. VANCE
AGE: 65            DIRECTOR SINCE 2002
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Biographical Information:
Brian L. Vance has served as the Executive Chair of Heritage since July 1, 2019. A CEO Transition announcement was made on July 9, 2018 in connection with Heritage's succession planning. Prior to the succession announcement, Mr. Vance was President and Chief Executive Officer of Heritage and Chief Executive Officer of Heritage Bank, positions he has held since 2006 and 2003, respectively. He served as President and Chief Executive Officer of Heritage Bank from 2003 until September 2012, when Jeffrey J. Deuel was promoted to President. Mr. Vance served as President and Chief Operating Officer of Heritage Bank from 1998 until 2003. Mr. Vance joined Heritage Bank in 1996 as its Executive Vice President and Chief Credit Officer. Prior to joining Heritage Bank, Mr. Vance was employed for 24 years with West One Bank, a bank with offices in Idaho, Utah, Oregon and Washington. Prior to leaving West One, he was Senior Vice President and Regional Manager of Banking Operations for the south Puget Sound region. Mr. Vance previously served as a director of the Pacific Bankers Management Institute, the Community Foundation of South Puget Sound, and the Western Independent Bankers Advisory Committee. He was the past President of the Washington Financial League and formerly served as a trustee for the South Puget Sound Community College.
Committees:
 Risk
Qualifications:
Mr. Vance brings valuable management and financial skills to the Board and provides extensive financial services industry knowledge, which includes credit administration, management and strategic forecasting.
 
ANN WATSON
AGE: 58            DIRECTOR SINCE 2013
403347486_annwatsonbwa02.jpg 

Biographical Information:
Ann Watson has served since 2015 as the Chief Operating Officer of Cascadia Capital LLC, an investment banking firm headquartered in Seattle, Washington. Ms. Watson previously served for two years as the Chief Financial Officer of Moss Adams LLP, a regional public accounting firm. She has also served as Chief Human Resources Officer, Management Committee Member, Russell Mellon Board Member overseeing the Russell Indexes and as a Director in the Corporate Finance Group at Russell Investments, spanning a 15-year time period. Prior to joining Russell Investments, she spent seven years with Chemical Bank/Manufacturers Hanover in New York and abroad where she held multiple global roles including strategic planning, loan workouts, client relationship management and credit analysis. Ms. Watson is a graduate of Columbia University with a Master of Business Administration and a graduate of Whitman College with a Bachelor of Arts in Economics. Ms. Watson currently serves as a trustee of the Seattle Foundation where she was the past Board Chair and on the Whitman College Audit Committee. Among her prior community roles, she served on the Board of the Washington Economic Development Finance Authority and on the Executive Committee of the Washington State China Relations Council.
Committees:
 Compensation (Chair)
 Nominating & Governance
Qualifications:
Ms. Watson brings extensive financial services industry and corporate financial knowledge to the Board, including merger and acquisition experience. Her significant leadership, compensation and human resources experience add to the Board's perspective.
 
Summary of Director Nominee Qualifications and Experience

Name
Business
Expertise
Banking
Experience
CPA, MBA or
Financial
Expertise
Attorney
Marketing/
Sales
Community
Presence
Brian S. Charneski
 
John A. Clees
 
Stephen A. Dennis
 
Jeffrey J. Deuel
 
Kimberly T. Ellwanger
 
Deborah J. Gavin
 
 
Jeffrey S. Lyon
 
Gragg E. Miller
 
 
Anthony B. Pickering
 
 
Brian L. Vance
 
Ann Watson
 
 

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Board Diversity

Diversity is an important part of the Company’s corporate governance practices. The Nominating and Governance Committee actively considers diversity in recruitment and nominations of directors. The current composition of our Board reflects those efforts and the importance of diversity to the Board with three women, all of whom chair a committee, and diverse skills and experience represented amongst the nominees.
Age Diversity
Gender Diversity
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Board Tenure and Independence

The Board has an effective mix of experience and fresh perspective as illustrated below. The director nominees have an average tenure of 13 years, which includes director service at Washington Banking and Puget Sound Bancorp, Inc. In addition, 82% of our directors are independent.
Board Tenure
Board Independence
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MEETINGS AND COMMITTEES
OF THE BOARD OF DIRECTORS
Board of Directors

The Board conducts its business through meetings of the Board and through its committees. The Board typically has met eight times per year, holding special meetings as necessary. After each regular Board meeting, the directors meet in executive session, outside of the presence of the Executive Chairman, the Chief Executive Officer (“CEO”) and management. During the year ended December 31, 2019, the Board held eight regular meetings and one special meeting. No director attended fewer than 75% of the total meetings of the Board and committees on which the director served during 2019.
Committees and Committee Charters

The Board has standing Audit and Finance, Governance and Nominating, Compensation, Risk and Trust Committees and has adopted written charters for each of these committees. You may obtain a copy of the Committee charters, free of charge, by writing to: Kaylene M. Lahn, Corporate Secretary, Heritage Financial Corporation, 201 Fifth Avenue S.W., Olympia, Washington, 98501, or by calling (360) 943-1500. The charters of the Audit and Finance, Governance and Nominating, and Compensation committees are also available on our website at www.hf-wa.com under the Governance Documents within the Overview section.
The following table shows the current membership of the Board committees and the number of meetings held by each committee in 2019.
Committee Membership

Name
Audit
and
Finance
Compensation
Governance and
Nominating
Risk
Trust
Brian S. Charneski
 
 
John A. Clees
 
 
Chair
Stephen A. Dennis
 
 
 
Jeffrey J. Deuel
 
 
 
 
Kimberly T. Ellwanger
 
Chair
 
 
Deborah J. Gavin
Chair
 
 
 
Jeffrey S. Lyon
 
 
Gragg E. Miller
 
 
 
Chair
Anthony B. Pickering
 
 
 
Brian L. Vance
 
 
 
 
Ann Watson
 
Chair
 
 
Number of Meetings
10
6
4
4
4
Audit and Finance Committee

The Audit and Finance Committee is composed of independent directors, in accordance with the requirements for companies listed on The Nasdaq Stock Market ("Nasdaq") and applicable SEC rules. Director Gavin has been designated by the Board as the “audit committee financial expert,” as defined by the SEC. In addition, Directors Charneski and Clees both qualify as financially sophisticated, as defined by Nasdaq. The Committee meets quarterly and on an as-needed basis to evaluate the effectiveness of Heritage’s internal controls for safeguarding its assets and ensuring the integrity of the financial reporting. The Committee also appoints the independent registered public accounting firm and reviews the audit reports prepared by the independent registered public accounting firm.

12



Compensation Committee

The Compensation Committee is composed of independent directors, in accordance with the requirements for companies listed on Nasdaq and applicable SEC and Internal Revenue Service rules. The Compensation Committee meets quarterly and on an as-needed basis regarding the personnel, compensation and benefits-related matters of Heritage.

For more information on the responsibilities and activities of the Compensation Committee, including the Committee’s processes for determining executive compensation, see the “Compensation Discussion and Analysis” section below.
Governance and Nominating Committee

The Governance and Nominating Committee is composed of independent directors, in accordance with the requirements for companies listed on Nasdaq. The Committee meets quarterly and on an as-needed basis, and is responsible for selecting qualified individuals to fill expiring directors’ terms and vacancies on the Board. Final approval of director nominees is made by the full Board, based on the recommendations of the Committee. The Committee’s role includes oversight of our corporate governance program, including the development and administration of Heritage’s corporate governance policies, guidelines and practices. The Committee is also responsible for overseeing Heritage's leadership structure, succession planning, board performance, adherence to stock ownership guidelines and strategic planning.
Risk Committee

The Risk Committee meets quarterly and on an as-needed basis to review risks inherent in our business such as credit risk, market and liquidity risk, operational risk and the regulatory component of compliance risk. The Company has established an Enterprise Risk Management model to manage the Company’s risks.
Trust Committee

The Trust Committee meets quarterly and is responsible for regulatory compliance within the Trust department. As a separate function, the Committee also reviews activities and compliance of the Wealth Management department.

13



CORPORATE GOVERNANCE
Heritage is committed to effective corporate governance and acts in a manner that it believes best serves the interests of the Company and its shareholders. The Board reviews Heritage’s policies and business strategies and advises executive management, who manage and implement Heritage’s business model and operations. The Board has adopted Corporate Governance Guidelines, committee charters, Stock Ownership Guidelines and various policies, including the Code of Ethics Policy and Whistleblower Policy, to provide a framework for effective governance practices. The full text of these documents can be found at www.hf-wa.com. Governance is a continuing focus at Heritage and in this section, we describe our key governance policies, guidelines and practices.
Board Independence
   Nine of eleven of directors are independent
Board Performance
   The Board and its Committees regularly assesses its performance through self-evaluation
Board Committees
   Only independent directors serve on the Audit and Finance, Governance and Nominating, and Compensation Committees
Leadership Structure
   The positions of Executive Chairman and Chief Executive Officer are separately held and we have a Lead Independent Director
Risk Oversight
   The Board is responsible for monitoring key risks
Open Communication
   We encourage open communication among our shareholders, directors and management
Stock Ownership
   Directors and the named executive officers are required to hold Company stock
   Directors are required to own 3 times the annual cash retainer paid
   The CEO is required to own 3 times his annual base salary and the other named executive officers are required to own 1.5 times their annual base salaries
Accountability to Shareholders
   We elect all directors annually
   We actively engage with our largest institutional investors through a shareholder outreach process
   Majority voting with plurality voting only in contested elections
Succession Planning
   The Board actively plans for director and management succession
Corporate Governance Guidelines

The Corporate Governance Guidelines outline Heritage’s governance framework by addressing such items as responsibilities of directors, adherence to conflict of interest rules, the selection process for director candidates, required meeting attendance, stock ownership guidelines, the annual completion of Board performance assessments, retirement age of directors, director education, succession planning and other important governance matters.

14



Process for Selecting Directors

The process for selecting candidates for nomination as a director is outlined below:
1
 
 
The Governance and Nominating Committee Charter requires the Committee to consider the following when selecting candidates for nomination as a director:
   business acumen and occupational experience;
   integrity and reputation;
   diversity
   education;
   ability to work effectively in a group;
 
   knowledge of and contacts in our market area and ties to the community;
   independence and potential conflicts of interest;
   tenure on the Board;
   specialized knowledge or skills; and
   ability to commit adequate time and attention to serve as a director in light of other commitments.

 
       
 
 
 2
 
 
In selecting nominees, the Committee must consider the criteria above, and any other criteria established by the Board, in the context of an assessment of the operation and needs of the Board as a whole and the Board’s goal of maintaining a diversity of backgrounds among its members.
 
       
 
 
 
3
 
 
In searching for director candidates to fill vacancies on the Board, the Committee utilizes both internal and external resources to seek qualified candidates. The Committee may request that members of the Board pursue their own business contacts for the names of potential candidates as well as utilize the expertise of a board recruitment firm.
 
       
 
 
4
 
 
The Committee then considers the potential pool of director candidates, selects the top candidate(s) based on the candidates’ qualifications and the Board’s needs, and conducts an investigation of the proposed candidate’s background to ensure there is no past history that would cause the candidate not to be qualified to serve as a director of Heritage. The Committee will consider director candidates recommended by Heritage’s shareholders. If a shareholder has submitted a proposed nominee, the Committee would consider the proposed nominee, along with any other proposed nominees recommended by members of the Board or a search firm, in the same manner in which the Committee would evaluate its nominees for director.
Majority Voting

In 2016, the Board adopted majority voting with plurality voting retained in a contested election. This means that in an uncontested election, the number of shares voted “for” a director nominee must exceed the number of shares voted “against” a director nominee, in order for that nominee to be elected.
Board Leadership

The Board annually elects the Chairman of the Board. The Chairman leads the Board and presides at all Board meetings, and is responsible for delivery of information to enable the Board to make informed decisions. The positions of Board Chairman and CEO have been separately held since 2006. During 2019, the positions of Executive Chairman and Lead Independent Director were implemented. The Lead Independent Director's role is to aid and assist the Executive Chairman and lead the activities of the independent Directors. This structure is appropriate for Heritage because it provides segregation of duties between managing Heritage and leadership of the Board.
Director Independence

Our common stock is listed on the Nasdaq Global Select Market. In accordance with Nasdaq requirements, at least a majority of our directors must be independent. The Board has determined that 9 of our 11 directors are independent. Directors Charneski, Clees, Dennis, Ellwanger, Gavin, Lyon, Miller, Pickering, and Watson are all independent. Brian L. Vance, who serves as the Executive Chairman and Jeffrey J. Deuel, who serves as our President and CEO, are not independent.

15



Board Risk Oversight

The Board has the ultimate responsibility and authority for overseeing risk management at Heritage. The Board assesses risks facing Heritage and Heritage Bank. On a regular basis, the Board or its various committees reviews operational and regulatory reports provided by management to assess a variety of risks such as credit risk, interest rate risk, liquidity risk, compliance risk, loan concentrations, strategic risk, cybersecurity risk, operational risk and environmental, social and governance risks. The Board delegates the oversight of risk to the following committees: 
 
Audit & Finance Committee
 
Compensation
Committee
 
Nominating & Governance Committee
 
Risk
Committee
The Audit and Finance Committee oversees the financial, accounting and internal control risk management. The Director of Internal Audit reports directly to the Audit and Finance Committee Chair.
 
The Compensation Committee oversees the management of risks that may be posed by our compensation practices and programs. The Committee is responsible for reviewing compensation policies and practices for all employees to ensure that they do not create or encourage risks that are reasonably likely to have a material adverse effect on Heritage.
 
 
The Nominating and Governance Committee ensures sound principles and practices regarding environmental, social and corporate governance. The Committee ensures the Board has qualified and diverse candidates as well as monitors the Company's strategic plan.
 
The Risk Committee oversees the risks inherent in our business through the Risk Appetite Statement which includes the monitoring of credit risk, market and liquidity risk, loan concentrations, cybersecurity risk, operational risk and the regulatory component of compliance risk. The Chief Risk Officer reports directly to the Risk Committee Chair
Code of Ethics

The Board has adopted a written Code of Ethics Policy that applies to our directors, officers and employees. The Code of Ethics Policy, which is reviewed annually, sets expectations for conducting our business with integrity, due skill, care and diligence while avoiding conflicts of interest.
Shareholder Engagement

The Board believes that accountability to our shareholders represents good corporate governance. To that end, we engage with our shareholders on a variety of topics throughout the year to ensure we are addressing their questions and concerns, to seek input and to provide perspective on Company policies and practices. We entered into our sixth annual targeted shareholder engagement by reaching out to thirteen of our largest institutional investors, which represented approximately 52% of our outstanding shares. The Executive Chairman of the Board, the Lead Independent Director and the Nominating and Governance Committee Chair participated in some of these conversations with management. We discussed with these shareholders our corporate governance practices which included environmental and social factors, executive compensation programs, internal audit practices and shareholder rights. The investors with whom we spoke were supportive of Heritage’s programs and practices.
Communication with the Board of Directors

The Board of Directors maintains a process for shareholders to communicate with the Board. Shareholders wishing to communicate with the Board of Directors should send any request to Kaylene M. Lahn, Corporate Secretary, Heritage Financial Corporation, 201 Fifth Avenue S.W., Olympia, Washington 98501. Any such request should state the number of shares beneficially owned by the shareholder making the communication.
Annual Meeting Attendance

Directors are encouraged, but not required, to attend the annual meeting of shareholders. Nine of the ten directors attended the 2019 annual meeting of shareholders.

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Related Party Transactions

We have followed a policy of granting loans to our executive officers and directors which fully complies with all applicable federal regulations, including those governing loans and other transactions with affiliated persons of Heritage. Loans to our directors and executive officers are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with all non-director and non-employee customers, and do not involve more than the normal risk of collectability or present other unfavorable features.
Each individual loan and aggregate loans to directors, executive officers and their affiliates, without regard to loan amount, are completely documented and underwritten using the same underwriting policies, procedures, guidelines and documentation requirements as are used for non-director and non-employee customers of Heritage. Following the normal underwriting approvals by underwriting personnel, all such loans are then presented for review and approval by the Board of Directors of Heritage Bank pursuant to Regulation O of the Federal Reserve Board, and the requirements of the Federal Deposit Insurance Corporation and the Washington State Department of Financial Institutions, Division of Banks. There are no exceptions to these procedures and all approvals are documented in the meeting minutes. There were $8.1 million in loans outstanding to directors and executive officers as of December 31, 2019, all of which were performing in accordance with their terms.
CORPORATE RESPONSIBILITY
At Heritage, we place a high priority on operating in a responsible and respectful manner. We are committed to sustainability efforts, to our people, our customers and strengthening the communities and markets in which we operate our business. We have utilized the Sustainability Accounting Standards Board ("SASB") commercial bank framework to identify specific areas of focus. We have also utilized guidance published by Ceres to identify risks and to further develop our environmental, social and governance ("ESG") platform.
Sustainability


Reduce, Recycle and Reuse
We demonstrate environmental responsibility in various ways, including:
continually reducing our carbon footprint with the consolidation of facilities;
re-purposing and recycling construction materials;
 
using green janitorial products;
replacing standard light bulbs with LED bulb that have a longer life and use less energy;
repurposing existing furniture whenever possible instead of buying new; and
recycling in most locations with a plan to implement recycling across our entire footprint.

Sustainable Practices
We are focused on sustainability throughout our everyday business practices by:
using technology that provides for a paperless environment and transactional efficiencies;
    eCycling old technology equipment (15 tons to date) to avoid sending it to landfills;
achieving a Gold Sustainability at Work certification for the Portland office; and
having a management-led Green Team Committee focused on sustainability bank-wide.
Social Responsibility


Our Culture and Our People
Heritage's success depends on the success of its people. As a result, Heritage is focused on the following to enhance employee empowerment:
thorough human capital and talent management;

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the designation of a certified Diversity and Equity Inclusion ("DEI") Officer and a formal DEI plan;
the awareness of diversity, equity and inclusion through a variety of educational opportunities;
compliance training offered through Heritage Bank University;
professional development opportunities including the Ken Blanchard Companies, Situational Leadership II program and Pacific Coast Banking School;
leadership training that focuses on communication and employee engagement;
a collaborative culture that enables employees to reach their full potential;
a strong culture with mission and value statements;
listening to our employees through various forms of communication, including a recent corporate culture survey and employee engagement survey;
employee recognition through our online portal, Celebrate Great, and Employee Appreciation Days;
work life balance including telecommuting and virtual meetings;
competitive pay and benefits; and
our management policies, systems and disclosures holding our people to high ethical standards.

Our Customers and Our Communities
We strive to improve our communities by driving positive economic growth for businesses and individuals of all income levels. We continuously demonstrate our commitment to our customers and the communities in which we are based, as exemplified by the array of loan, deposit accounts and service options that we offer, including, but not limited to:
digital banking services that are secure, cost effective and sustainable:
online banking
mobile banking
online bill pay
electronic statements
deposit products such as Fresh Start Checking provides our customers the opportunity to reestablish a positive checking account history
flexible mortgage lending options, such as RDA, FHA, VA and first-time homebuyer loans
flexible small business lending options:
in-house quick decision small business lending
Small Business Administration ("SBA") lending (primarily 7a and 504 programs)
community development loans, investments and grants with a focus on:
affordable housing and community services: working with multiple stakeholders to maximize lending and tax credits to construct multi-family housing and wellness facilities for those most in need, such as struggling families, homeless youths, elders, disabled persons and veterans
economic development: partnering with the SBA for higher dollar small business lending
revitalization and stabilization: Main Street Tax Credit Program and lending in Opportunity Zones
ensuring the privacy and security of customer information is a high priority
Community


Our Community Mission                
We have developed a community investment and giving program named Heritage Helps. Heritage is committed to improving our communities by driving impact in the areas of:
business and economic development
education and youth development
environmental stewardship and social equity
health and human services

403347486_heritagehelpslogoblueandblac.jpg
 Heritage Helps has been an integral part of our values. Community investment is one of the four pillars of our corporate mission statement and is about creating hope and opportunity so our local communities can continue to thrive. As we recognize the significance of our contributions, we have better defined our charitable goals to drive positive impacts in the four areas of our community mission. Our collective effort ensures the communities in which we live and serve remain resilient, sustainable and viable. We actively encourage and empower our employees to volunteer and serve as community leaders as we believe such efforts elevate our philanthropic efforts and social responsibility throughout

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our region. By working together, we create sustainable solutions that will continue to change and improve our communities.
$1.5 Million in Giving
 
6,600 Volunteer Hours
 
$100 Matching Program
Invested in a diverse group of
nonprofits within the communities we serve. Heritage has contributed $8.2 million over the past 10 years.
 
Employees volunteered and served through our Heritage Volunteers Program. Heritage employees are paid eight hours annually for volunteer time.
 
Heritage matches each employee's donation dollar-for-dollar to the employee's community organization of choice, up to $100 annually.

We will pursue all of our community work and support with a holistic focus on equity and inclusion. Our thriving company culture engages our employees and inspires them to serve our communities in the pursuit of positive change. Heritage gives back to the communities we serve as demonstrated below:
Corporate Match Program - employees donated $17,000 and Heritage matched $35,000
United Way Employee Pledge Campaign - employees pledged $49,000 and Heritage matched $15,000
Bank-Wide Food Drive - 43,088 meals collected and Heritage matched $4,000
Capital Campaigns including Mercy Corps Northwest, Lacey's Food Bank and the Shelton YMCA; and
Children's Savings Account Program for the Children of Salishan in partnership with the Tacoma Housing Authority

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DIRECTOR COMPENSATION
The following table shows the compensation paid to Heritage’s directors for their service to Heritage for the year ended December 31, 2019, with the exception of Brian L. Vance, who was the CEO of Heritage from January 1, 2019 to June 30, 2019 and Jeffrey J. Deuel, who became the CEO of Heritage effective July 1, 2019. Compensation received by Messrs. Vance and Deuel in 2019 is included in the section below entitled “Executive Compensation.” Heritage directors do not receive any additional fees for serving as directors of Heritage Bank.
Name
Fees Earned or Paid in Cash ($)
Stock Awards ($) (1)
Total ($)
Brian S. Charneski
70,085
37,504
107,589
John A. Clees
55,581
37,504
93,085
Stephen A. Dennis
44,081
37,504
81,585
Kimberly T. Ellwanger
51,081
37,504
88,585
Deborah J. Gavin
55,581
37,504
93,085
Jeffrey S. Lyon
46,081
37,504
83,585
Gragg E. Miller
51,081
37,504
88,585
Anthony B. Pickering
44,081
37,504
81,585
Ann Watson
53,081
37,504
90,585
(1) Reflects the aggregate grant date fair value of awards, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, “Compensation—Stock Compensation” (“FASB ASC Topic 718”). For a discussion of valuation assumptions, please see footnotes to the financial statements in Heritage’s Annual Report on Form 10-K for the year ended December 31, 2019. Outstanding awards are discussed below under “Equity Compensation.”
2019 Director Compensation Highlights

Director cash fees increased by $5,000 per director during 2019 and the value of equity compensation increased by approximately $5,000 per director. Messrs. Vance and Deuel did not receive any cash or equity compensation for service as a director or Board committee member.
Cash Compensation

For 2019, each non-employee director was paid an annual cash retainer of $37,500 plus committee fees for service as a director. The Chairman of the Board, Mr. Charneski, who served from January to June 30, 2019, also received an additional annual cash retainer of $40,000 in lieu of committee fees and effective July 1, 2019, Mr. Charneski, as the Lead Independent Director, received an additional annual cash retainer of $15,000. The Chairs of the Audit and Finance and Compensation Committees were each paid an additional annual cash retainer of $10,000. The Chairs of the Governance and Nominating Committee and Risk Committee were paid an additional annual cash retainer of $7,500. The Chair of the Trust Committee was paid an additional annual cash retainer of $3,000. Members and Chairs of all committees received an additional per meeting attendance fee of $500.
Equity Compensation

On June 27, 2019, each non-employee director received an award of 1,291 restricted stock units of Heritage common stock, which vest on May 4, 2020, with a grant date fair value of $29.05 per share. As of December 31, 2019, Directors Charneski, Clees, Dennis, Ellwanger, Gavin, Lyon, Miller, Pickering, and Watson each held 1,291 unvested restricted stock units.

As of December 31, 2019, the non-employee directors did not have any remaining unexercised nonqualified stock options.

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Stock Ownership Guidelines

Heritage maintains stock ownership guidelines for its non-employee directors. These guidelines were established to promote a long-term perspective and to align directors' interests with those of Heritage's shareholders. Under the guidelines for non-employee directors, each director is expected to have equity ownership with a value equal to three times his or her annual cash retainer. The guidelines require directors to retain not less than 50% of shares received (on a net after tax basis) until the director satisfies the ownership requirements. If the director fails to satisfy the ownership requirement, 25% of their annual cash director fees will instead be paid in Heritage shares. The guidelines provide the directors with three years to reach the required ownership level. As of December 31, 2019, all directors were in compliance with the guidelines. Information about ownership guidelines for our named executive officers can be found in the “Compensation Discussion and Analysis” section of this Proxy Statement.
PROPOSAL 2—ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 (“Dodd-Frank Act”), we are required to periodically include in our annual meeting proxy statements and present at the annual meeting of shareholders a non-binding proposal to approve the compensation of our named executive officers. This proposal, commonly known as a “say-on-pay” proposal, gives shareholders the opportunity to endorse or not endorse the compensation of Heritage’s executives as disclosed in this Proxy Statement. We currently hold our say-on-pay vote every year. The proposal will be presented at the annual meeting in the form of the following resolution:
RESOLVED, that the shareholders approve the compensation of Heritage Financial Corporation’s named executive officers, as disclosed in the Compensation Discussion and Analysis, the compensation tables and related material in Heritage’s Proxy Statement for the 2020 annual meeting of shareholders.
This vote will not be binding on our Board of Directors or Compensation Committee and may not be construed as overruling a decision by the Board or create or imply any additional fiduciary duty on the Board. The Compensation Committee and the Board will consider the outcome of the vote when determining future executive compensation arrangements.
The purpose of our compensation policies and procedures is to attract and retain experienced, highly qualified executives critical to our long-term success and enhancement of shareholder value. We believe that our compensation policies and procedures are strongly aligned with the long-term interests of our shareholders. As discussed in the Compensation Discussion and Analysis, the Compensation Committee believes that the executive compensation for 2019 is reasonable and appropriate, is justified by Heritage’s performance and is the result of a carefully considered approach.
The Committee regularly reviews our officer compensation strategies, policies and programs in an effort to ensure the program continues to meet its objectives. In considering how to vote on this proposal, the Board requests that you consider the following factors:

Pay for Performance—A significant portion of our named executive officers’ compensation is tied to performance with clearly articulated financial goals.
Annual Compensation Risk Assessment—We have an established process in place whereby we regularly analyze risks related to our compensation programs and we conduct a broad risk assessment annually.
Key Performance Metrics—Objective performance metrics are established to determine annual incentive compensation.
Clawback PolicyOur policy requires recovery of performance-based cash and equity incentive compensation in the event of a financial restatement.
Performance-vesting Equity GrantsPerformance shares vest based on the attainment of objective performance metrics relative to a pre-determined peer group.
Stock Ownership PolicyDirectors and officers are required to own Heritage common stock having a value of at least the following amounts: 3 times annual cash retainer for directors, 3 times annual base salary for the CEO and 1.5 times annual base salary for the remaining named executive officers.

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Independent Compensation Consultant—The Compensation Committee retains an independent consultant to obtain advice on executive compensation matters.
Each of the above factors is discussed more fully in the Compensation Discussion and Analysis below.
The Board of Directors recommends that you vote FOR approval of the compensation of our named executive officers as disclosed in this Proxy Statement.
COMPENSATION DISCUSSION AND ANALYSIS
In this section, we discuss our executive compensation philosophy and programs. The “Committee” refers to the Compensation Committee in this Compensation Discussion and Analysis. Following this discussion, we disclose compensation of our named executive officers (“NEOs”) in the Summary Compensation Table and other compensation tables. The following individuals are our NEOs for 2019:
  NEO
Title
Brian L. Vance
Executive Chairman
Jeffrey J. Deuel
President and Chief Executive Officer
Donald J. Hinson
Executive Vice President and Chief Financial Officer
Bryan D. McDonald
Executive Vice President and Chief Operating Officer
David A. Spurling
Executive Vice President and Chief Credit Officer
Cindy M. Huntley
Executive Vice President and Chief Banking Officer
Effective July 1, 2019, Mr. Vance retired as CEO of Heritage, at which time he became Executive Chairman of the Board and Mr. Deuel was promoted to President and CEO of Heritage.
Executive Summary

Heritage is the parent company of a wholly-owned subsidiary bank, Heritage Bank, headquartered in Olympia, Washington. Heritage Bank, with a branch network of 62 locations from Portland, Oregon to Bellingham, Washington, is committed to being the leading commercial community bank in the Pacific Northwest by continuously improving customer satisfaction, employee empowerment, community investment and shareholder value.
2019 Business Highlights

During 2019 Heritage focused its growth strategies on several key initiatives, including: (1) a sustained emphasis on expanding loans and deposits while deliberately managing deposit mixtures and loan concentrations, designed to increase net interest margin; (2) evolving its online and mobile technology, with the goal of enhancing the customer experience and deepening loyalty; (3) improving the management of data and systems allowing for greater understanding of key business metrics; and (4) a commitment to identifying the Bank's most profitable business lines and leveraging those to an even greater extent. These initiatives required disciplined attention from all levels of leadership throughout the year, without losing focus on achieving organic growth goals, excellent credit quality, and smart capital and balance sheet management. In summary, throughout 2019, Heritage stayed focused on its core business fundamentals while improving overall financial and operating results, as demonstrated below:
Performance Metric
At or for the Year Ended December 31, 2019
At or for the Year Ended December 31, 2018
% Change
Total Assets
$5.6 billion
$5.3 billion
5.7%
Net Income
$67.6 million
$53.1 million
27.3%
Diluted Earnings Per Share
$1.83
$1.49
22.8%
Total Loans, Net
$3.73 billion
$3.62 billion
3.0%
Total Deposits
$4.58 billion
$4.43 billion
3.4%
Overhead Ratio (1)
2.71%
3.00%
(9.7)%
Dividends Paid (special and regular)
$0.84
$0.72
16.7%
(1) Non-interest expense divided by average assets


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2019 Executive Compensation Highlights

During 2019, the Committee acted in accordance with Heritage’s compensation philosophy and provided our NEOs compensation aligned with Heritage’s financial performance and each NEO's individual performance. Compensation was commensurate with market comparisons and the Committee continued to consider shareholder value and prudent risk management.

Base Salary: Base salary increases ranged from 3.0% to 23.0% due to promotions and alignment with compensation at peer group institutions.
Annual Incentive Compensation: Annual cash incentives ranged from $62,681 to $214,662, or 9.7% to 19.7% of total compensation, based on a cash incentive plan with predetermined performance metrics.
Long-Term Incentive Compensation:
Equity incentive awards ranged from $92,380 to $523,037, or 16.0% to 36.4% of total compensation, based on 2018 performance results.
50% of the target equity incentive awards are performance-based, earned according to cumulative results over a three-year performance period and 50% are subject to three-year ratable service-based vesting.
Deferred compensation contributions ranged from $96,026 to $312,860, or 13.3% to 21.8% of total compensation. Deferred compensation contributions are generally performance-based although 16.7% of Mr Vance's base salary is a fixed portion of his Company contribution.
2019 Say-on-Pay Results and Shareholder Outreach

At the 2019 shareholders’ meeting, over 98% of the shares present and entitled to vote voted to approve the compensation of our NEOs, as disclosed in the Proxy Statement. Management, the Board, and the Committee pay careful attention to communications received from shareholders regarding executive compensation, including the results of these non-binding advisory votes. The Committee believes that these votes reflect our shareholders’ affirmation of our compensation philosophy and the manner in which we compensate our executives. We value our shareholders’ feedback and, as a result, entered into our sixth shareholder outreach program during 2019. We requested feedback from thirteen of our institutional shareholders to further understand what, if any, concerns they may have with our compensation, environmental, social and governance programs as well as internal audit practices and board structure. The feedback we obtained from our shareholders during this outreach was very positive and supported these practices.

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Best Practice Features

Embedded in our overall compensation program are additional features that align the interests of our shareholders with those of our executives.  

WHAT WE DO        

 
WHAT WE DO NOT DO
 
ü
Strong emphasis on variable performance-based pay
 
 
 
x
No excessive perquisites; perquisites are very limited and each has a specific business rationale
 
 
ü
Adhere to stock ownership guidelines
 
 
 
x
No stock option repricing, reloads, or exchanges without shareholder approval
 
 
ü
Enforce clawback provisions
 
 
 
x
No tax gross-ups
 
 
ü
Annually assess incentive compensation risks
 
 
 
x
No hedging of Heritage common stock
 
 
ü
Engage independent compensation consultants
 
 
 
x
No single trigger for accelerated vesting of service- based awards
 
 
ü
Actively reach out to our institutional shareholders
 
 
 
x
No heavy weighting of fixed compensation
 
 
ü
Eliminate annual bonus if Tier I Leverage ratio is below 8%
 
 
 
 
 
 
2019 Key Performance Metrics

The graphs below capture the key performance metrics used to determine 2019 incentives for our NEOs. The 2018 and 2017 performance metrics are provided to demonstrate trends and were not used in measuring the 2019 performance for the NEOs. 
403347486_chart-293ac53b0f645121a15.jpg 403347486_chart-979bca980d7a5135a3ba03.jpg
*     Total shareholder return is for a trailing 36-month period. Metric utilized relative to peers for long term incentives.
 
**    Non-interest expense divided by average assets.



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403347486_chart-32a5b9fc32bd577bbc2a03.jpg 403347486_chart-f075aae857e15e9f9bea03.jpg
Philosophy and Objectives of Our Executive Compensation Program

Heritage’s compensation philosophy provides clear guidelines for establishing and managing all elements of compensation. The philosophy is to target total executive compensation at market competitive levels in order to manage base salary levels, allow for meaningful performance-based compensation and recruit and retain key talent. Our compensation philosophy takes into account factors such as internal pay equity, and the experience, tenure and scope of responsibility for each of our NEOs. Officer compensation is weighted toward Heritage’s achievement of stated annual and long-term performance objectives.

Our compensation programs are designed to link a meaningful portion of compensation with performance, taking into account competitive compensation levels at peer group institutions and in the markets where we compete for talent. The policies and underlying philosophy governing our compensation programs include the following:

Employer of Choice—We view compensation as a key factor to being an employer of choice in our markets. We believe that competitive compensation and benefits allow Heritage to attract and retain well-qualified, key employees who are critical to our long-term success.
Pay Aligned with PerformanceWe strive to provide a competitive salary combined with incentive opportunities that reward outstanding individual and Company performance that contributes to creating shareholder value.
Prudent Management of RiskWe evaluate, design and manage compensation programs to ensure that we are properly and prudently assessing and managing any risks created by these programs. The Committee has the authority and responsibility to mitigate such risks, where necessary, through procedural oversight or program modification.
FlexibilityWe recognize that the market for key talent requires flexibility in compensation design in order to attract qualified individuals. Salary ranges and individual compensation decisions take into account local competitive pressures and changing market conditions, as well as regulatory restrictions. Furthermore, the targeted position relative to market may vary depending on the type and level of position, recognizing the different recruiting conditions and relative importance of various qualifications.

This compensation philosophy is reviewed periodically by the Committee and is modified, as appropriate, to reflect market trends and industry best practices.
Role of the Compensation Committee

The Compensation Committee, composed entirely of independent directors, establishes and monitors compensation programs for employees of Heritage and its subsidiaries. The Committee’s responsibilities are to:
review the goals, policies and objectives of the compensation plans of Heritage and Heritage Bank;
review and administer our compensation plans in light of the goals and objectives of these plans, and adopt and recommend new compensation plans or amendments to existing plans, as necessary or advisable;
review and approve actions affecting salaries, annual cash incentives, benefits, equity compensation grants and other compensation arrangements for the CEO and other NEOs;

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review and approve the corporate goals and objectives for the NEOs annually;
review and recommend to the full Board for approval the director fees, benefits and equity compensation grants;
review the results of all shareholder advisory votes regarding executive compensation and consider whether to implement any changes as a result of such advisory votes;
review and evaluate risks posed to Heritage by the design and administration of various compensation programs and ensure appropriate risk management and controls to avoid or mitigate any excessive or unreasonable risk to Heritage;
approve and recommend to the Board for adoption any programs or policies regarding the recovery of previously paid or earned compensation later determined to have been based on inaccurate financial information;
review and discuss the Compensation Discussion and Analysis with management; and
review our policies regarding tax deductibility of compensation paid to executive officers for purposes of Section 162(m) of the Internal Revenue Code.

In order to fulfill these responsibilities, the Committee’s charter provides it the authority and adequate funding to retain and terminate any third-party advisors for the purpose of evaluating the compensation programs for, and performance of, Heritage’s directors, CEO and senior executive officers.
Role of Management in Compensation Committee Deliberations

The Committee frequently requests the CEO and other members of senior management be present at Committee meetings to discuss executive compensation. Executive officers in attendance may provide their insights and suggestions, but only Committee members may vote on decisions regarding executive compensation. The Committee may discuss the CEO's compensation with him, but final deliberations and all votes regarding all compensation are made in executive session with independent directors and without the CEO and other management present. The Committee also reviews input from the independent compensation consultant and/or legal counsel when making decisions regarding the compensation of the CEO and the other NEOs.
Compensation Consultants and Advisors

The Compensation Committee utilizes the services of Pearl Meyer & Partners (“Pearl Meyer”), an independent compensation consulting firm. Pearl Meyer provides assistance and advice related to a variety of Committee responsibilities on an as-needed basis, such as review of incentive plans, review of compensation philosophy and strategy, evaluation of compensation-related proposals from management, and ongoing Committee education on compensation topics. Pearl Meyer does not perform any services for the Company other than those directed by the Committee. After the Committee’s review of applicable rules for independence, the Committee determined that Pearl Meyer is independent. Pearl Meyer reports directly to the Committee.

The Committee has the authority to retain, at Heritage’s expense, legal counsel and other advisors on an as-needed basis, and has and will evaluate the independence of such advisors as the Committee deems appropriate and as may be required by the Nasdaq listing standards.
Use of Competitive Data

During 2018, a peer group benchmarking study was performed by Pearl Meyer. The peer group was identified based, generally, on the following criteria:
publicly-traded financial institutions;
geographic priority given to western United States with a small group outside of the western region which was determined to be appropriate based on size and business model;
asset size and operating revenue range of 0.5 to 2.5 times Heritage as of December 31, 2017;
market capitalization range of 0.33 to 3.0 times Heritage as of December 31, 2017; and
comparable business model.

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The resulting benchmarking peer group consisted of the following 19 companies:
Peer Banks
Banner Corporation
Glacier Bancorp, Inc.
Seacoast Banking Corporation of FL
Bank of Marin Bancorp
Guaranty Bancorp
Southside Bancshares, Inc.
Bryn Mawr Bank Corporation
Heritage Commerce Corp.
State Bank Financial Corp.
Byline Bancorp, Inc.
HomeStreet Inc.
TriCo Bancshares
CenterState Bank Corporation
Lakeland Bancorp, Inc.
Westamerica Bancorp
CoBiz Financial Inc.
Mercantile Bank Corporation
 
CVB Financial Corp.
Pacific Premier Bancorp
 
In addition to analyzing the pay practices and performance of our benchmarking peer group, the Pearl Meyer executive compensation study was considered by the Committee in making pay decisions for 2019.
The following summary data for the benchmarking peer group was obtained from S&P Global's database as of December 31, 2019.
Percentile
Market Capitalization
($ in millions)
Total Assets
($ in thousands)
25th Percentile
$799.64
$5,457,172
50th Percentile
$1,250.93
$6,730,075
75th Percentile
$1,960.94
$11,405,841
Heritage Financial Corporation
$1,036.3
$5,552,929
Heritage Financial Corporation Percent Rank
42%
28%
When the Committee selected the above benchmarking peer group, Heritage was at the 46th percentile of the peer group in total assets as of December 31, 2017. During 2018, CoBiz Financial, Inc., Guaranty Bancorp and State Bank Financial Corp. were acquired. The Committee approved a new peer group at the February 2020 meeting and will utilize this for 2020 compensation decisions.
Performance-Based Equity Peer Group

We have also developed a performance peer group solely for determining payouts under our performance-based equity awards by measuring our performance relative to that of the performance peer group. The composition of the performance peer group is established by the Compensation Committee at the beginning of each performance cycle and generally consists of all U.S. commercial banks (or their holding companies) traded on a major exchange with total assets at the beginning of the performance period between one-half and twice the total assets of Heritage. See "2019 Equity Award Determinations" below for a description of performance-based equity granted to the NEOs in 2019. No performance-based equity performance cycles were completed during 2019.
Components of Compensation

Component
Key Characteristics
Purpose
Base Salary
Fixed compensation component— reviewed annually and adjusted, if and when appropriate.
Intended to compensate an executive officer appropriately for the responsibility level of the position held as well as be competitive within the banking industry.
Cash Incentives
Annual incentives, variable compensation component.
Intended to motivate and reward executives for achieving annual goals. The annual incentives are performance-based and reflect the actual performance results compared to pre- established goals.
Equity-Based Compensation
Long-term incentives, variable compensation component, typically granted annually. Equity is awarded with 50% performance vesting and 50% time vesting.
Intended to motivate executives to achieve our business objectives by tying incentives to long- term performance. The stock ownership aligns executive and shareholder interests and serves as a retention tool.
Deferred
Compensation
Long-term incentives, variable compensation component— performance-based award opportunity, typically granted annually.
Intended to provide a retirement planning mechanism while motivating executives to achieve our business objectives by tying incentives to long-term performance.
Post-Employment Compensation
Fixed compensation component.
Intended to provide temporary income following an executive’s involuntary termination of employment and to retain senior executives in a competitive marketplace.

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Target Pay Mix

Target pay mix represents the relative value of each of the primary compensation components as a percentage of total compensation. We seek to compensate our executives through an appropriate balance of fixed and performance-based pay, as well as short- and long-term pay. The graphs below represent the target pay mix as outlined in the NEOs' employment agreements for 2019. The graphs below do not include Mr. Vance's compensation. Mr. Deuel, our CEO, and other NEOs have significant variable pay at-risk, with 50% of their target 2019 equity award and a meaningful portion of deferred compensation opportunity subject to pre-established performance goals for 2019. In total, performance-based pay represents 57% of target total compensation for the CEO and 47% of target total compensation for the other NEOs.
CEO
Other NEOs
403347486_ceotargetpaymix022120.jpg
403347486_neotargetpaymix022120.jpg
Base Salary

Salary levels are designed to be competitive within the banking industry and are based on the experience, tenure, performance and responsibility of each executive. We utilize various compensation surveys and peer group comparisons to ensure that executive compensation is reasonable in comparison to competitors of a similar size or within our market areas. The Committee generally meets in June of each year in order to approve the base salaries of our NEOs effective July 1 of that year. This timing coincides with the review of the NEOs' performance and the prior year performance of Heritage and its subsidiaries, as well as the availability of current proxy information for members of our peer group. If warranted, base salaries may be adjusted at other times during the year to accommodate for promotions or added responsibilities.
Salary Adjustments Made in 2019

Salary adjustments were made during 2019 to provide for alignment with peers and for promotions related to succession planning and new responsibilities. The base salaries for 2019 and 2018 were as follows:
Name
2019 Base Salary ($) (effective July 1, 2019)
2018 Base Salary ($) (effective July 1, 2018)
Year over Year % Change
Brian L. Vance
200,000
640,000
(69)%
Jeffrey J. Deuel
575,000
468,000
23%
Donald J. Hinson
339,694
329,800
3%
Bryan D. McDonald
385,020
356,500
8%
David A. Spurling
317,137
307,900
3%
Cindy M. Huntley
263,040
219,167
20%

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Annual Cash Incentives

We use annual cash incentives to focus attention on annual strategic priorities and encourage achievement of corporate objectives. These incentives are provided under our Management Incentive Plan. The objectives of the plan are to reward and retain high performers, to drive Heritage’s long-term financial success, to encourage teamwork and to create an environment where executives are rewarded if Heritage achieves or exceeds pre-determined annual performance criteria. The Management Incentive Plan’s design incorporates annual incentive awards that are linked to the achievement of pre-defined performance goals with targets and maximum percentages determined by roles and responsibilities. The incentive ranges (as a percentage of salary) are designed to provide market competitive payouts for the achievement of threshold, target and maximum levels of performance. The annual awards are determined by previously approved goals, calculated based on actual financial and individual performance results and then recommended to the Committee. The Committee then reviews and approves or disapproves the annual cash incentive recommendations.

The Committee approves the funding level for the Management Incentive Plan based on meeting or exceeding corporate performance goals. Each performance goal has an established threshold (minimum), target and maximum expectation level. No payment will be made for a goal if performance falls below the threshold level. Performance ratings for each specific corporate and individual goal between threshold and target or between target and maximum will result in a proration of the annual cash incentive payout. Each NEO has a scorecard with performance results. The 2019 Management Incentive Plan provided that no bonus payments will be paid from the plan should the corporate Tier 1 Leverage Ratio drop below 8% as of December 31, 2019. The Committee reserves the right, in its sole discretion, to adjust incentive payouts when extraordinary circumstances occur during the performance period.
2019 Annual Cash Incentive Award Determinations

The opportunities for 2019 cash incentive awards and resulting payouts for our NEOs were as follows:
Name
Target Opportunity as % of Base Salary
Maximum Opportunity as % of Base Salary
Actual Annual Cash Incentive Received as a % of 2019 Base Salary Earned
Earned Annual Cash
 Incentive ($)
Brian L. Vance
50%
75%
33.0%
$138,653
Jeffrey J. Deuel
50% (1)
75% (1)
41.2% (3)
$214,662
Donald J. Hinson
35%
52.5%
30.3%
$101,530
Bryan D. McDonald
40%
60%
34.7%
$128,517
David A. Spurling
35%
52.5%
30.4%
$94,903
Cindy M. Huntley
35% (2)
52.5% (2)
26.0% (3)
$62,681
(1)Effective July 1, 2019; prior to that date, Mr. Deuel's target and maximum opportunities were 45% and 67.5%, respectively.
(2)Effective July 1, 2019; prior to that date, Ms. Huntley's target and maximum opportunities were 25% and 37.5%, respectively.
(3)The actual incentives received by Mr. Deuel and Ms. Huntley, as a percentage of base salary, reflects a blended rate for 2019.

Annual Cash Incentive Performance Goals

For 2019, the Committee approved the following corporate performance goals for our NEOs:
Corporate Goal
Weighting
Threshold
Target
Maximum
Actual 2019 Performance
Earnings per Share
40% (1)
$1.72
$1.91
$2.10
$1.83
Net Charge Offs/Average Loans
20% (2)
0.16%
0.08%
0.03%
0.09%
Overhead Ratio
40% (3)
2.84%
2.74%
2.64%
2.71%
(1)35% for Mr. Spurling.
(2)30% for Mr. Spurling.
(3)35% for Mr. Spurling.
Equity-Based Compensation

Equity-based compensation is intended to more closely align the financial interests of our executives with our shareholders in the creation of long-term shareholder value, and to assist in the retention of key executives. Beginning in 2017, the equity-based compensation program design was modified to incorporate a target percentage of base

29



salary dependent on roles and responsibilities, with a portion granted as time-based vesting awards and a portion granted as performance-based vesting awards linked to the achievement of the pre-defined performance goals relative to the pre-defined peer group. The Committee reviews and approves or disapproves the equity-based compensation recommendations from management and the equity-based compensation awards are ultimately discretionary.

The Heritage Financial Corporation 2014 Omnibus Equity Plan allows for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, restricted performance stock, unrestricted stock or performance unit awards to directors, officers and other employees of Heritage and its subsidiaries.

Restricted stock grants awarded prior to 2017 vest ratably based on continued service over four years from the date of grant. Heritage applies target award opportunities expressed as a percentage of salary, as described in the table below. Each NEO target opportunity is based upon factors such as his or her role and scope of responsibilities. If an NEO did not meet the performance goals under the Management Incentive Plan for the prior year, the officer may also receive a reduced equity award or no award. Additionally, the NEO is required to maintain a satisfactory performance rating to receive an equity award. The Committee may make discretionary grants of equity awards, based on factors relating primarily to the responsibilities of individual executives, their expected future contributions to Heritage and the recruitment and development of new officers.
2019 Equity Award Determinations

In February 2019, our NEOs were granted restricted stock units based on their respective target percentages of their respective January 1, 2019 base salaries as outlined in the table below. For our NEOs, 50% of the target award is subject to three-year ratable service-based vesting and 50% of the target award may be earned based on cumulative performance over the three-year period of January 1, 2019 through December 31, 2021. Ms. Huntley was not determined to be a NEO at the time of grant. Therefore, 100% of her 2019 awards vest based on continued service. The performance metrics selected by the Committee for the performance-based awards were return on average assets and three-year total shareholder return, in each case, relative to an established bank peer group. The Committee chose this mix to increase the pay-for-performance feature while preserving the retention benefit of the awards.

The following table contains the target opportunity, expressed as a percentage of base salary, for each of our NEOs, as well as their actual 2019 awards.
Name
Target Opportunity as % of January 1, 2019 Base Salary
Equity Awards Granted ($ Value)
50% in Target Performance Stock Units
50% in Restricted Stock Units
Brian L. Vance (1)
70%
$448,022
$224,011
$224,011
Jeffrey J. Deuel
40%
$187,205
$93,602
$93,602
Donald J. Hinson
30%
$98,922
$49,461
$49,461
Bryan D. McDonald
35%
$124,760
$62,380
$62,380
David A. Spurling
30%
$92,380
$46,190
$46,190
Cindy M. Huntley (2)
20%
$47,148
$47,148
(1)Mr. Vance also received $75,015 in restricted stock units effective July 1, 2019 per his Transitional Agreement.
(2)Ms. Huntley also received discretionary restricted stock units valued at $25,005 effective March 27, 2019 with ratable vesting of 3 years and $75,018 effective November 4, 2019 with ratable vesting of 8 years.

The performance metrics for the performance awards granted in 2019 are as follows:
Corporate Goal
Weighting
Threshold
Target
Maximum
Return on Average Assets
50%
25th Percentile
50th Percentile
75th Percentile
3 Year Total Shareholder Return
50%
25th Percentile
50th Percentile
75th Percentile


30



2017 Performance Share Award Payout

Performance shares granted in 2017 were subject to performance vesting conditions tied to the Company's return on average assets and three-year total shareholder return relative to a defined peer group of banks, in each case over the period from January 1, 2017 through December 31, 2019. In February 2020, the Committee reviewed the Company's actual performance against the defined peer group of banks to determine the payout. A summary of the Company's performance as measured against the goals, and the resulting payout, is set forth below:
Corporate Goal
Weighting
Threshold
Target
Maximum
Actual Performance
% of Target Payout
Return on Average Assets
50%
25th Percentile
50th Percentile
75th Percentile
46th Percentile
84%
3 Year Total Shareholder Return
50%
25th Percentile
50th Percentile
75th Percentile
71st Percentile
142%
Stock Ownership Guidelines

Heritage maintains stock ownership guidelines for its NEOs. These guidelines were established to promote a long-term perspective in managing Heritage and to align the interests of our NEOs with our shareholders. The stock ownership goals are three times base salary for the CEO and one and one half times base salary for the other NEOs. The guidelines require NEOs to retain not less than 50% of shares received (on a net after tax basis) until the NEO satisfies the ownership requirements. If an NEO fails to satisfy the ownership requirement, 25% of the NEOs' annual cash incentive bonus will instead be paid in Heritage shares. The guidelines provide the NEOs with five years to reach the required ownership level. As of December 31, 2019, all NEOs were in compliance with the guidelines. Information about ownership guidelines for our non-employee directors can be found in “Director Compensation” of this Proxy Statement.
Retirement Benefits

401(k) Plan: We maintain the Heritage Financial Corporation 401(k) Plan Profit Sharing Plan and Trust as a tax-qualified retirement plan. The Plan is a defined contribution plan and is designed to provide employees (including NEOs) with savings opportunities and financial security during retirement. There are two possible Company contributions to the Plan:
A matching contribution equal to 50% of an employee’s salary deferral contributions up to a maximum of 6% of an employee’s eligible compensation; and
A profit-sharing contribution that includes a discretionary contribution, based on a percentage of an employee’s eligible compensation, Heritage’s financial performance and management’s recommendation, as may be approved by the Board. For 2019, the Company did not make a discretionary contribution to the Plan.

Deferred Compensation Plan: Under the Deferred Compensation Plan, participants are permitted to elect to defer compensation and Heritage has the discretion to make additional contributions to the plan on behalf of any participant based on a number of factors. The notional account balances earn interest on an annual basis and the Committee may change this crediting rating prospectively, at its discretion. The current applicable crediting rate, as initially selected by the Committee, is the Moody’s Seasoned Aaa Corporate Bond Yield as of January 1 of each year. Generally, a participant’s account is payable upon the earliest of the participant’s separation from service with Heritage, the participant’s death or disability, or a specified date that is elected by the participant in accordance with applicable rules of the Internal Revenue Code. Heritage’s obligation to make payments under the Deferred Compensation Plan is a general obligation of the Company and is to be paid from Heritage’s general assets. As such, participants are general unsecured creditors of Heritage with respect to their participation under the Plan. The Committee believes that the Deferred Compensation Plan provides Heritage with another tool to attract and retain the best qualified individuals to serve in key roles within the organization.

Each of the NEOs has entered into participation agreements pursuant to which Heritage will make performance-based contributions to accounts maintained on the NEO's behalf under the Deferred Compensation Plan. A portion of Mr. Vance's annual contribution is fixed and a portion is performance-based. The terms of the particular participation agreements for the NEOs are described in more detail following the Nonqualified Deferred Compensation table below.


31



The Committee approved the following performance goals for the 2018 performance period:
Corporate Goal
Weighting
Threshold
Target
Maximum
Actual 2018 Performance
Earnings per Share
50%
$1.33
$1.48
$1.63
$1.61
Net Charge Offs/Average Loans
50%
0.25%
0.15%
0.05%
0.06%

The following table reflects the 2019 deferred compensation contributions based on 2018 performance results:
Name
Earned Deferred Compensation Incentives ($)
Earned Deferred Compensation Incentive as Percentage of Total Compensation (%)
Brian L. Vance
$312,860
21.8%
Jeffrey J. Deuel
$145,958
13.3%
Donald J. Hinson
$102,856
15.8%
Bryan D. McDonald
$111,183
14.9%
David A. Spurling
$96,026
15.8%
Cindy M. Huntley (1)
$—
—%
(1)
Ms. Huntley's eligibility for Company contributions begins in the 2020 plan year.

The Committee approved the following performance goals for the 2019 performance period:
Corporate Goal
Weighting
Threshold
Target
Maximum
Actual 2019 Performance
Earnings per Share
50%
$1.72
$1.91
$2.10
$1.83
Net Charge Offs/Average Loans
50%
0.16%
0.08%
0.03%
0.09%

In February 2020, the Compensation Committee approved Company contributions to the Deferred Compensation Plan of $120,870, $99,301, $58,664, $66,492, and $54,769 on behalf of Messrs. Vance, Deuel, Hinson, McDonald, and Spurling, respectively, based on 2019 performance results.
Perquisites and Other Benefits

Heritage NEOs participate in all Heritage benefit plans on the same terms as other employees. These plans include medical, dental and vision insurance, life insurance, long-term disability insurance and flexible spending accounts. Messrs. Vance, Deuel and Hinson additionally receive perquisites in the form of club memberships and Messrs. Vance, Deuel and McDonald receive perquisites in the form of Company provided automobiles. These perquisites are considered a priority for these individuals because of their community involvement and business development activities.

In addition, each of our NEOs is a party to an endorsement-method split-dollar insurance agreement with Heritage that provides additional life insurance in an amount equal to 100% of the NEO's base salary. Under the agreements, NEOs have insurance coverage with a death benefit payable in an amount equal to the lesser of 100% of the net amount-at-risk or the annual base salary then in effect. Heritage pays all premiums and is entitled to the cash value of the policy and the remainder of the executive’s death benefit, if any. In addition, the policies permit the NEOs to access an accelerated eligible death benefit in an amount equal to the lesser of 100% of the net amount-at-risk or $500,000 in the event the NEO incurs a chronic or terminal illness during employment, following termination of employment, on or after the NEO's attainment of age 62, or when the NEO is involuntarily terminated or terminates employment for good reason following a change in control. The economic value of such agreements for 2019, representing the imputed income amount of the insurance coverage for tax purposes is set forth as part of “All Other Compensation” in the Summary Compensation Table below.
Regulatory Considerations

As a publicly-traded financial institution, Heritage must contend with multiple layers of regulations when considering and implementing compensation decisions. These regulations do not set specific parameters within which compensation decisions must be made, but do require the Company and the Committee to be mindful of the risks associated with compensation programs designed to incentivize superior performance. While the regulatory focus has been heightened over the last several years, the incorporation of general risk assessment concepts into compensation decisions is not a recent development.

32




Under its Interagency Guidelines Establishing Standards for Safety and Soundness (Safety and Soundness standard), the Federal Deposit Insurance Corporation ("FDIC") has held that excessive compensation is prohibited as an unsafe and unsound practice. In describing a framework to determine whether compensation is excessive, the FDIC has indicated that financial institutions should consider whether aggregate cash amounts paid, or noncash benefits provided, to employees are unreasonable or disproportionate to the services performed by an employee. The FDIC encourages financial institutions to review an employee’s compensation history and to consider internal pay equity, and, as appropriate, to consider benchmarking compensation to peer groups. Finally, the FDIC provides that such an assessment must be made in light of the institution’s overall financial condition.

In addition, the various financial institution regulatory agencies have jointly issued, Guidance on Sound Incentive Compensation Policies (Guidance), which serves as a complement to the Safety and Soundness standards. As its title would imply, the Guidance sets forth a framework for assessing the soundness of incentive compensation plans, programs, and arrangements maintained by financial institutions. The Guidance is narrower in scope than the Safety and Soundness standards because it applies only to senior executive officers and those other individuals who, either alone or as a group, could pose a material risk to the institution. With respect to those identified individuals, the Guidance is intended to focus the institution’s attention on balanced risk-taking incentives, compatibility with effective controls, and risk management, with a focus on general principles of strong corporate governance.

Also, as a publicly-traded corporation, the Company is subject to the SEC’s rules regarding risk assessment. Those rules require a publicly-traded company to determine whether any of its existing incentive compensation plans, programs, or arrangements create risks that are reasonably likely to have a material adverse effect on the Company. The Committee completed its annual risk assessment of all of the Company’s compensation programs and components in September 2019. We do not believe that our incentive compensation plans, programs, or arrangements create risks that are reasonably likely to have a material adverse effect on the Company.

The Committee believes that a sensible approach to balancing risk-taking and rewarding reasonable, but not necessarily easily attainable, goals has always been a component of its overall assessment of the compensation plans, programs and arrangements it has established for the Company’s NEOs. In this regard, the Committee has revisited the components of the frameworks set forth in the Safety and Soundness standards and the Guidance as an effective tool for conducting its own assessment of the balance between risk and reward built into the Company’s compensation programs for its NEOs.

In making decisions about executive compensation, we also consider the impact of other regulatory provisions, including: the provisions of Section 162(m) of the Code that may limit the tax deductibility of certain compensation; Section 409A of the Code regarding nonqualified deferred compensation; Section 280G of the Code regarding excise taxes and deduction limitations on golden parachute payments made in connection with a change in control; and the impact of FASB ASC Topic 718, which requires us to recognize the compensation cost of grants of equity awards based upon their grant date fair value.
Clawback Policy

Heritage maintains a clawback policy which provides the Board with the authority to recover certain bonus or other incentive compensation (whether paid in cash or stock) paid to any NEO in appropriate circumstances where there has been a restatement of Heritage’s financial statements filed with the SEC. While the Committee believes its risk assessment procedures are effective, it is prepared to implement any additional steps that may be deemed necessary to fully comply with the rules required to be issued under the Dodd-Frank Act.
Tax and Accounting Considerations

Heritage takes into account tax and accounting implications in the design of its compensation programs. For example, in the selection of long-term incentive instruments, the Committee reviews the projected expense amounts and expense timing associated with alternative types of awards. In selecting appropriate incentive devices, the Committee reviews extensive financial scenarios and analyses and considers the related tax and accounting issues.

Section 162(m) of the Internal Revenue Code, as amended, generally limits the tax deduction for compensation in excess of $1 million paid by a public company to anyone covered by the recently expanded definition of a "covered

33



employee" in a taxable year. During 2019, compensation otherwise payable to Mr. Vance exceeded the $1 million deductibility threshold, and accordingly, such excess was automatically deferred pursuant to the terms of his transitional employment agreement. More information can be found on Mr. Vance's transitional agreement in the "Employment Agreements and Severance/Change in Control Benefits" section of this Proxy Statement. These deferred amounts will be paid to Mr. Vance in the first tax year in which such payments will be deductible by Heritage. The Committee retains the discretion, however, to pay non-deductible compensation if it believes doing so would be in Heritage's best interests.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of Heritage Financial Corporation for the year ended December 31, 2019 has submitted the following report for inclusion in this Proxy Statement:

The Compensation Committee has reviewed and approved the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on the Compensation Committee’s discussion with management, the Committee recommended that the Board of Directors approve and include the Compensation Discussion and Analysis in this Proxy Statement.
Respectfully submitted by:
Ann Watson, Chair
Brian S. Charneski
Stephen A. Dennis
Kimberly T. Ellwanger
Jeffrey S. Lyon
Anthony B. Pickering

This report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, and shall not otherwise be deemed filed under such Acts.


34



EXECUTIVE COMPENSATION
Summary Compensation Table

The following table shows the aggregate compensation for services rendered to Heritage or its subsidiaries by our NEOs paid or accrued for the years ended December 31, 2019, 2018 and 2017.
Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
Non-Equity
Incentive Plan
Compensation
($)(2)
Change in
Pension Value &
Nonqualified
Deferred
Compensation
Earnings
($)(3)
All Other
Compensation
($)(4)
Total
($)
Brian L. Vance
Executive Chairman
2019
420,000

523,037
138,653
14,445

340,538
1,436,673
2018
586,307

266,322
315,384
4,818

257,485
1,427,316
2017
524,857
24,670

258,570
281,024
8,874

209,061
1,307,056
Jeffrey J. Deuel
President and Chief Executive Officer
2019
521,500

187,205
214,662
5,279

158,693
1,087,339
2018
429,000

136,493
197,200
1,632

113,798
878,123
2017
337,386
12,690

116,357
144,517
2,878

88,997
702,825
Donald J. Hinson
Executive Vice President and Chief Financial Officer
2019
334,747

98,922
101,530
4,390

112,340
651,929
2018
302,302

82,467
113,829
1,420

90,456
590,474
2017
270,802
8,910

80,055
101,497
2,557

70,327
534,148
Bryan D. McDonald
Executive Vice President and Chief Operating Officer
2019
370,760

124,759
128,517
2,954

120,952
747,942
2018
333,250

92,999
135,071
813

94,361
656,494
2017
279,734
9,210

82,692
104,845
1,170

73,477
551,128
David A. Spurling
Executive Vice President and Chief Credit Officer
2019
312,519

92,380
94,903
3,807

105,259
608,868
2018
290,786

82,110
112,504
1,208

90,327
576,935
2017
269,686
7,770

79,700
105,299
2,084

70,613
535,152
Cindy M. Huntley (6)
Executive Vice President and Chief Banking Officer
2019
241,104

147,171
62,681

8,904
459,860
(1)
Reflects the aggregate grant date fair value of awards, computed in accordance with FASB ASC Topic 718. Awards subject to performance conditions for Messrs. Vance, Deuel, Hinson, McDonald and Spurling are reported assuming target level performance, the probable outcome at the time of grant. The February 27, 2019 grant date fair value was $33.04 per share. For a discussion of valuation assumptions, see the Consolidated Financial Statements in the Form 10-K for the year ended December 31, 2019. If awards subject to performance conditions were reported assuming maximum level performance, the combined values reported above for stock awards for 2019 would have been as follows: $635,043 for Mr. Vance, $234,006 for Mr. Deuel, $123,652 for Mr. Hinson, $155,949 for Mr. McDonald and $115,475 for Mr. Spurling. In addition, the aggregate value for Mr. Vance includes an award of restricted stock units with a July 1, 2019 grant date fair value of $29.97 per share, and the aggregate value for Ms. Huntley includes awards of restricted stock units with a March 27, 2019 grant date fair value of $30.09 per share and a November 4, 2019 grant date fair value of $28.33 per share.
(2)
Reflects amounts earned under the Management Incentive Plan. The material terms of the Management Incentive Plan for 2019 are described in the Compensation Discussion and Analysis under “2019 Annual Cash Incentive Award Determinations.”
(3)
Consists of above market interest on deferred compensation under the Deferred Compensation Plan.
(4)
The following table reflects all other compensation to our NEOs for 2019:
Name
Employer
401(k)
Match ($)
Cell
Phone
($)
Deferred
Compensation
Plan
Contributions
($)
Club
Membership
($)
Automobile
Provision
($)
Executive
Life
Insurance
($)
Other (5)
Total
($)
Brian L. Vance
8,400
1,290
312,860

2,655

1,627

256
13,450

340,538
Jeffrey J. Deuel
8,400
165
145,958

2,858

783

529

158,693
Donald J. Hinson
8,400
531
102,856

295


258

112,340
Bryan D. McDonald
8,400
695
111,183


515

159

120,952
David A. Spurling
8,400
385
96,026



448

105,259
Cindy M. Huntley
8,400
330



174

8,904
(5)
Retirement gift to Mr. Vance.
(6)
Not a NEO in 2018 or 2017.


35



Grants of Plan-Based Awards Table

The following table discloses each plan-based award made to our NEOs during the year ended December 31, 2019.
 
 
Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards (1)
Estimated Possible Payouts
Under Equity Incentive
Plan Awards (2)
All Other Stock Awards Number of Shares of Stock or Units (#) (3)
Grant Date Fair Value of Stock and Option Awards ($)(4)
Name
Grant Date
Threshold (#)
Target (#)
Maximum (#)
Threshold (#)
Target (#)
Maximum (#)
Brian L. Vance



160,000

240,000






02/27/2019





6,780

10,170

0

224,011

02/27/2019







6,780

224,011

07/01/2019







2,503

75,015

Jeffrey J. Deuel



260,750

391,125






02/27/2019





2,833

4,250


93,602

02/27/2019







2,833

93,602

Donald J. Hinson



117,161

175,742






02/27/2019





1,497

2,246

 
49,461

02/27/2019





 
 
1,497

49,461

Bryan D. McDonald



148,304

224,456






02/27/2019





1,888

2,832


62,380

02/27/2019







1,888

62,380

David A. Spurling



109,382

164,072






02/27/2019





1,398

2,097


46,190

02/27/2019







1,398

46,190

Cindy M. Huntley



72,331

108,497






02/27/2019





 
 
1,427

47,148

03/27/2019







831

25,005

11/04/2019




 
 
 
2,648

75,018

(1)
Reflects the target and maximum award opportunities under the Management Incentive Plan for 2019. The actual awards for 2019 are presented in the Summary Compensation Table. There were no threshold opportunity levels under the Management Incentive Plan for 2019. For a participant to be eligible to receive any award, corporate performance had to exceed a threshold level and the participant had to achieve a satisfactory individual performance evaluation. The material terms of the Management Incentive Plan for 2019 are described in the Compensation Discussion and Analysis under “2019 Annual Cash Incentive Award Determinations”.
(2)
Reflects the threshold, target and maximum performance stock unit opportunities granted in 2019. The material terms of these awards are described in the Compensation Discussion and Analysis under the "2019 Equity Award Determinations".
(3)
Reflects service-based restricted stock units granted in 2019. The material terms of these awards are described in the Compensation Discussion and Analysis under “2019 Equity Award Determinations.”
(4)
Reflects the aggregate grant date fair value of awards, computed in accordance with FASB ASC Topic 718. Awards subject to performance conditions are reported assuming target level performance, the probable outcome at the time of grant. The February 27, 2019 grant date fair value was $33.04 per share. The March 24, 2019 grand date fair value was $33.09 per share. The November 4, 2019 grant date value was $28.33 per share. For a discussion of valuation assumptions, see Note 20 to the Consolidated Financial Statements in the Form 10-K for the year ended December 31, 2019.

36



Outstanding Equity Awards Table

The following table shows the outstanding option awards and unvested stock awards held by our NEOs as of December 31, 2019.
 
 
Option Awards
Stock Awards
Name
Grant Date
Number of Securities Underlying Unexercised Options (#) Exercisable
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units That Have Not Vested
 
Market Value of Shares or Units of Stock That Have Not Vested ($)
Equity Incentive Plan Awards Number of Unearned Shares or Units of Stock that Have Not Vested (#) (1)
Equity Incentive Plan Awards Market Value of Unearned Shares or Units of Stock that Have Not Vested ($) (2)
Brian L. Vance




15,823

(3) 
447,791

16,446

465,422

Jeffrey J. Deuel




6,039

(4) 
170,904

8,704

246,323

Donald J. Hinson




3,745

(5) 
105,984

6,354

179,818

Bryan D. McDonald




4,291

(6) 
121,435

5,962

168,725

David A. Spurling
05/25/2010

1,587

14.77

05/25/2020


 







3,620

(7) 
102,446

5,093

144,132

Cindy M. Huntley




7,233

(8) 
204,694



(1)
Reflects outstanding performance-based stock units assuming: (a) maximum level of performance for the three-year total shareholder return goals for shares granted in 2017 and for the return on average asset goal for shares granted in 2019; and (b) target level performance for the return on average asset goal for shares granted in 2017 and 2018 and three-year total shareholder return for 2019 and 2018. The performance stock units cliff vest after three years and are measured relative to peers for total shareholder return and return on average assets.
(2)
Represents grants of restricted shares or units of Heritage common stock. The market value of these shares or units is the number of shares that had not vested as of December 31, 2019 multiplied by the December 31, 2019 closing price of Heritage common stock of $28.30.
(3)
Reflects 1,856 shares granted on February 25, 2016, which vest ratably over the four years from the date of grant. In addition, reflects 1,700 restricted stock units granted on February 23, 2017, 2,984 restricted stock units granted on February 28, 2018, and 6,780 restricted stock units on February 27, 2019, which vest ratably over the three years from the date of grant. Reflects 2,503 restricted stock units granted on July 1, 2019, which vest on May 4, 2020.
(4)
Reflects 912 shares granted on February 25, 2016, which vest ratably over the four years from the date of grant. In addition, reflects 765 restricted stock units granted on February 23, 2017, 1,529 restricted stock units on February 28, 2018, and 2,833 restricted stock units granted on February 27, 2019, which vest ratably over the three years from the date of grant.
(5)
Reflects 798 shares granted on February 25, 2016, which vest ratably over the four years from the date of grant. In addition, reflects 526 restricted stock units granted on February 23, 2017, 924 restricted stock units granted on February 28, 2018, and 1,497 restricted stock units granted on February 27, 2019, which vest ratably over the three years from the date of grant.
(6)
Reflects 818 shares granted on February 25, 2016, which vest ratably over four years from the date of grant. In addition, reflects 543 restricted stock units granted on February 23, 2017, 1,042 restricted stock units granted on February 28, 2018, and 1,888 restricted stock units granted on February 27, 2019, which vest ratably over the three years from date of grant.
(7)
Reflects 778 shares granted on February 25, 2016, which vest ratably over the four years from the date of grant. In addition, reflects 524 restricted stock units granted on February 23, 2017, 920 restricted stock units granted on February 28, 2018, and 1,398 restricted stock units granted on February 27, 2019, which vest ratably over the three years from the date of grant.
(8)
Reflects 651 shares granted on February 25, 2016 which vest ratably over four years from the date of grant. In addition, reflects 549 restricted stock units granted on February 23, 2017, 1,127 restricted stock units granted on February 28, 2018, 1,427 restricted stock units granted on February 27, 2019, and 831 restricted stock units granted on March 27, 2019 which vest ratably over three years from the date of grant. Reflects 2,648 restricted stock units granted on November 4, 2019 which vest ratably over eight years.


37



Option Exercises and Stock Vested

The following table shows the value realized upon the exercise of stock options and the vesting of stock awards for the NEOs during the year ended December 31, 2019.
 
Option Awards
Stock Awards
Name
Number of Shares Acquired on Exercise (#)
Value Realized on Exercise ($)
Number of Shares Acquired on Vesting (#)
Value Realized on Vesting ($)
Brian L. Vance


7,504

232,652

Jeffrey J. Deuel


3,648

113,088

Donald J. Hinson
1,330

19,258

2,914

90,189

Bryan D. McDonald


2,609

80,861

David A. Spurling
1,500

25,248

2,533

78,475

Cindy M. Huntley


2,568

79,630

Nonqualified Deferred Compensation

The following table provides information for the NEOs regarding participation in plans that provide for the deferral of compensation on a non-tax qualified basis during the year ended December 31, 2019.
Name
Executive Contributions ($)
Registrant Contributions ($) (1)
Aggregate Earnings ($) (2)
Aggregate Withdrawals/Distributions ($)
Aggregate Balance at December 31, 2019 ($) (3)
Brian L. Vance

312,860

68,613


1,788,226

Brian L. Vance (162(m) Salary Deferral)


7,635

40,000

158,519

Jeffrey J. Deuel

145,958

25,075


653,531

Donald J. Hinson

102,856

20,851


543,422

Bryan D. McDonald

111,183

14,030


365,652

David A. Spurling

96,026

18,085


471,346

Cindy M. Huntley





(1)
All amounts are reported as compensation for 2019 in the Summary Compensation Table above.
(2)
Of the aggregate earnings for the year ended December 31, 2019, the following amounts are reported as nonqualified deferred compensation earnings for 2019 in the Summary Compensation Table above: $14,445, $5,279, $4,390, $2,954 and $3,807 for Messrs. Vance, Deuel, Hinson, McDonald and Spurling, respectively.
(3)
The following amounts were reported as compensation in the Summary Compensation Table in previous years: Messrs. Vance, Deuel, Hinson, McDonald and Spurling had prior year contributions and above market earnings of $1,258,847, $438,003, $379,638, $226,660 and $326,982, respectively.

Heritage adopted a deferred compensation plan in 2012. Heritage has since entered into contribution agreements with each of the NEOs and, with respect to each NEO other than Ms. Huntley, amendments that provided for 2019 contributions to each executive’s account based on 2018 performance. The potential contributions were based on a percentage of the respective executive’s salary, with a pre-determined minimum, target and maximum level, with the amount of the contributions based on the achievement of performance goals under the Deferred Compensation Plan. The performance metrics used to determine the amount of the contributions are described in the "Deferred Compensation Plan" section of the Compensation Discussion and Analysis under "Retirement Benefits."

Under Mr. Vance’s Deferred Compensation Plan participation agreement, as amended, Heritage’s contributions for 2019 based on 2018 performance were set at 16.66% of salary for minimum achievement of performance goals, 33.33% for target achievement and 50% for maximum achievement. With respect to Mr. Vance only, the 16.66% minimum achievement is a fixed amount to be contributed annually, which may be increased based upon performance that is greater than the minimum performance threshold. The Compensation Committee intends for this minimum 16.66% annual contribution to act as a retirement benefit in addition to the performance-based component. Company contributions on behalf of Mr. Vance were 100% vested as of January 1, 2019. Mr. Vance’s participation agreement provides for Company contributions under the Deferred Compensation Plan for the years 2012 through and including 2019.

In addition, under Mr. Vance’s transitional employment agreement, any compensation otherwise payable that would exceed the $1 million deductibility threshold under Code Section 162(m) will automatically be deferred until such tax

38



year in which such payment will be deductible by Heritage. All deferred amounts will be credited with an annual interest crediting rate of 4% per year until paid. In addition, pursuant to the agreement, the Company contribution for 2019 will be based on Mr. Vance’s salary earned during 2019 rather than his salary rate as of December 31, 2019. The Company also made a discretionary contribution of $20,000 to Mr. Vance’s account balance during 2019 as a retirement gift.

Under their respective Deferred Compensation Plan participation agreements, as amended, Heritage’s contributions on behalf of Messrs. Deuel, Hinson, McDonald and Spurling for 2019 based on 2018 performance were set at 10% of salary for minimum achievement of performance goals, 20% for target achievement and 35% for maximum achievement. Company contributions on behalf of Messrs. Deuel and Hinson under the Deferred Compensation Plan were 80% vested as of January 1, 2020 and will vest an additional 10% as of each January 1 thereafter. Company contributions on behalf of Mr. Spurling under the Deferred Compensation Plan were 100% vested as of January 1, 2019. Company contributions on behalf of Mr. McDonald under the Deferred Compensation Plan were 50% vested as of January 1, 2020 and will vest an additional 10% as of each January 1 thereafter. Their participation agreements, as amended in 2016 and 2019 with respect to Messrs. Deuel and Hinson, and in 2019 with respect to Messrs. McDonald and Spurling, provide for Company contributions under the Deferred Compensation Plan through and including 2022.

Under Ms. Huntley’s Deferred Compensation Plan participation agreement, entered into in 2019, Heritage’s contributions for 2020 based on 2019 performance is set at 10% of salary for minimum achievement of performance goals, 20% for target achievement and 35% for maximum achievement. Company contributions on behalf of Ms. Huntley under the Deferred Compensation Plan were 0% vested as of January 1, 2020 and will vest an additional 10% as of each January 1 thereafter until January 1, 2028, at which time Ms. Huntley will become fully vested. Her participation agreement provides for Company contributions under the Deferred Compensation Plan for 2020 through and including 2022.

Under all of the Deferred Compensation participation agreements, Heritage’s contributions fully vest upon a change in control or the participant’s death or disability. In the event of the participant’s separation from service other than for cause, the participant forfeits all unvested amounts and if the separation from service is for cause, the participant forfeits all vested and unvested amounts.

Distributions of the vested portion begin on the later to occur of the participant’s 65th birthday, or the participant’s separation from service but may be distributed earlier upon the participant’s death or disability.

Distributions that are made as a result of the participant attaining age 65 (age 67 for Mr. Spurling) or separating from service, other than due to death or disability, are made in monthly installments over 24 or 60 months. If, however, the separation from service occurs within 24 months following a change in control or as a result of the participant’s death or disability, the payment would be made in a lump sum in the month following such separation from service, death or disability.


39



Potential Payments Upon Termination or Change in Control

The following table reflects the estimated amount of compensation that would be paid to each NEO in the event of various terminations of employment and in the event of a change in control of Heritage. The values assume a termination date of December 31, 2019. The exact values would need to be calculated upon the actual termination of employment. The calculations do not include compensation and benefits the NEOs would receive that are generally available to our salaried employees. Amounts set forth in the following table are gross amounts and, to the extent paid in connection with a change in control, may be subject to cutback which may result in a reduced payment being made to the NEOs.
Name
Compensation/Benefits Payable upon Termination
Termination Without Cause by the Employer or Termination for Good Reason by the Employee ($)
Qualifying Termination in Connection with a Change in Control ($)
Termination in the Event of Disability ($)
Termination in the Event of Death ($)
Change in Control - No Termination ($)
Brian L. Vance
Cash Severance
66,667

66,667




Accelerated Vesting of Equity Awards (1)
910,666

910,666

910,666

910,666

462,875

Accelerated Vesting of Deferred Compensation (2)





Continued Medical and Dental Coverage
3,364

3,364




Split Dollar Benefit (3)



200,000


MIP (4)


138,653

138,653


Total
980,697

980,697

1,049,319

1,249,319

462,875

Jeffrey J. Deuel
Cash Severance
1,146,339

2,292,677




Accelerated Vesting of Equity Awards (1)
380,946

380,946

380,946

380,946

210,043

Accelerated Vesting of Deferred Compensation (2)
196,059

196,059

196,059

196,059

196,059

Continued Medical and Dental Coverage
19,088

19,088




Split Dollar Benefit (3)



575,000


MIP (4)


225,960

225,960


Total
1,742,432

2,888,770

802,965

1,377,965

406,102

Donald J. Hinson
Cash Severance
445,313

890,625




Accelerated Vesting of Equity Awards (1)
232,258

232,258

232,258

232,258

126,275

Accelerated Vesting of Deferred Compensation (2)
163,026

163,026

163,026

163,026

163,026

Continued Medical and Dental Coverage
12,688

19,031




Split Dollar Benefit (3)



339,694


MIP (4)


101,530

101,530


Total
853,285

1,304,940

496,814

836,508

289,301

Bryan D. McDonald
Cash Severance
507,831

1,015,662




Accelerated Vesting of Equity Awards (1)
265,256

265,256

265,256

265,256

143,821

Accelerated Vesting of Deferred Compensation (2)
219,391

219,391

219,391

219,391

219,391

Continued Medical and Dental Coverage
12,726

19,088




Split Dollar Benefit (3)



435,020


MIP (4)


128,517

128,517


Total
1,005,204

1,519,397

613,164

1,048,184

363,212


40



Name
Compensation/Benefits Payable upon Termination
Termination Without Cause by the Employer or Termination for Good Reason by the Employee ($)
Qualifying Termination in Connection with a Change in Control ($)
Termination in the Event of Disability ($)
Termination in the Event of Death ($)
Change in Control - No Termination ($)
David A. Spurling
Cash Severance
421,372

842,745




Accelerated Vesting of Equity Awards (1)
225,551

225,551

225,551

225,551

123,105

Accelerated Vesting of Deferred Compensation (2)





Continued Medical and Dental Coverage
10,093

15,139




Split Dollar Benefit (3)



317,137


MIP (4)


94,903

94,903


Total
657,016

1,083,435

320,454

637,591

123,105

Cindy M. Huntley
Cash Severance
283,934

567,867




Accelerated Vesting of Equity Awards (1)
204,694

204,694

204,694

204,694


Accelerated Vesting of Deferred Compensation (2)