Exhibit 10.1

FORM OF EMPLOYMENT AGREEMENT BY AND BETWEEN

HERITAGE FINANCIAL CORPORATION AND HERITAGE BANK AND BRIAN L. VANCE

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this
3rd day of December, 2010, by and between Heritage Financial Corporation (the
“Company”) and its wholly owned subsidiary Heritage Bank (the “Bank”), and Brian
L. Vance (the “Employee”).

WHEREAS, it is anticipated that the Employee will continue to make a major
contribution to the success of the Company and the Bank in the position of
President and Chief Executive Officer of the Company and the Bank;

WHEREAS, the board of directors of the Company and the board of directors of the
Bank (collectively, the “Board of Directors”, and separately, the “Company Board
of Directors” and the “Bank Board of Directors”, respectively) believe that it
is in the best interests of the Company and the Bank to enter into this
Agreement with the Employee; and

WHEREAS, the Board of Directors has approved and authorized the execution of
this Agreement with the Employee.

NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:

1. Definitions.

“Change in Control” means (i) any “person,” as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) (other than the Company, any of the Consolidated Subsidiaries,
any person (as hereinabove defined) acting on behalf of the Company as
underwriter pursuant to an offering who is temporarily holding securities in
connection with such offering, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of the Consolidated
Subsidiaries, or any corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company), is or becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company or the Bank representing 25% or more of the combined
voting power of the Company’s or the Bank’s then outstanding securities;
(ii) individuals who are members of the Company Board of Directors on the
Effective Date (the “Incumbent Board”) cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the Effective Date whose election was approved by a vote of at
least three-quarters of the directors comprising the Incumbent Board or whose
nomination for election by the Company’s stockholders was approved by the
nominating committee serving under an Incumbent Board or who was appointed as a
result of a change at the direction of the Washington Department of Financial
Institutions (“DFI”) or the Federal Deposit Insurance Corporation (“FDIC”),
shall be considered a member of the Incumbent Board; (iii) the stockholders of
the Company or the Bank approve a merger or consolidation of the Company or the
Bank with any other corporation, other than (1) a merger or consolidation which
would result in the voting securities of the Company or the Bank outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting

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securities of the Company or the Bank, or such surviving entity outstanding
immediately after such merger or consolidation, or (2) a merger or consolidation
effected to implement a recapitalization of the Company or the Bank (or similar
transaction) in which no person (as hereinabove defined) acquires more than 25%
of the combined voting power of the Company’s or the Bank’s then outstanding
securities; or (iv) the stockholders of the Company or the Bank approve a plan
of complete liquidation of the Company or the Bank, or an agreement for the sale
or disposition by the Company or the Bank of all or substantially all of the
Company’s or the Bank’s assets (or any transaction having a similar effect);
provided that the term “Change in Control” shall not include an acquisition of
securities by an employee benefit plan of the Company or the Bank or a change in
the composition of the Company Board of Directors or the Bank Board of Directors
at the direction of the DFI or the FDIC. Notwithstanding anything herein to the
contrary, the merger or consolidation of Central Valley Bank into Heritage Bank
shall not constitute a “Change in Control” hereunder.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Consolidated Subsidiaries” means any subsidiary or subsidiaries of the Company
(or its successors) that are part of an affiliated group (as defined in
Section 1504 of the Code, without regard to subsection (b) thereof) that
includes the Company, specifically including Heritage Bank and Central Valley
Bank.

“Date of Termination” means the date upon which the Employee experiences a
Separation from Service, as specified in a notice of termination pursuant to
Section 8 of this Agreement or the date a succession becomes effective under
Section 13.

“Effective Date” means December 3, 2010.

“Involuntary Termination” means the Employee’s Separation from Service (i) by
the Company and the Bank without the Employee’s express written consent; or
(ii) by the Employee by reason of a material diminution of or interference with
his duties, responsibilities or benefits as described in this sentence, if the
Employee sends written notice to the Company and the Bank in accordance with
Section 8 of this Agreement that an Involuntary Termination has occurred within
30 days of any of the following actions unless consented to in writing by the
Employee: (1) a requirement that the Employee be based at any place other than
Olympia, Washington, or within a radius of 75 miles from the location of the
Company’s administrative offices as of the Effective Date, except for reasonable
travel on Company or Bank business; (2) a material demotion of the Employee
(which shall not include the failure of either Board of Directors to retain the
Employee as President and Chief Executive Officer of the Company or the Bank
subsequent to his appointment on account of the termination of this Agreement,
or if such demotion is necessary to comply with TARP or any other regulatory
compliance requirement, including but not limited to enforcement matters between
the Bank, the FDIC and/or the DFI and the Company and the Federal Reserve Bank
of San Francisco (referred to herein as a “Regulatory Compliance Requirement”));
(3) a material reduction in the Employee’s authority,

 

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duties or responsibilities; (4) a reduction in the Employee’s Salary, other than
(A) as part of an overall program applied uniformly and with equitable effect to
all members of the senior management of the Company or the Bank, and (B) as
required to comply with a Regulatory Compliance Requirement); and (5) the
failure of the Company Board of Directors (or a board of directors of a
successor of the Company) to reelect the Employee as the President and Chief
Executive Officer of the Company (or a successor of the Company) or any action
by the Company Board of Directors (or a board of directors of a successor of the
Company) removing the Employee from such office, or the failure of the Bank
Board of Directors (or a board of directors of a successor of the Bank) to elect
the Employee as the President and Chief Executive Officer of the Bank (or a
successor of the Bank) or any action by the Bank Board of Directors (or a board
of directors of a successor of the Bank) removing the Employee from such office.
The term “Involuntary Termination” does not include Termination for Cause,
Separation from Service due to death or permanent disability pursuant to
Section 7(f) of this Agreement, retirement or suspension or temporary or
permanent prohibition from participation in the conduct of the Bank’s affairs
under Section 8 of the Federal Deposit Insurance Act (“FDIA”).

“SEO” means “senior executive officer”, as that phrase is defined under the TARP
Requirements.

“MHCE” means “most highly compensated employee”, as that phrase is defined under
the TARP Requirements.

“Section 409A” means Section 409A of the Code and the regulations and guidance
of general applicability issued thereunder.

“Separation from Service” shall have the same meaning as in Section 409A, taking
into account the rules and presumptions provided for in Treasury Regulation
Section 1.409A-1(h) or any successor regulation. Notwithstanding the foregoing,
for purposes of determining whether the Employee is entitled to a payment on
account of Involuntary Termination under Section 7(a) or Section 7(d) of this
Agreement, the term “Separation from Service” shall require the complete
cessation of services to the Bank, the Company and all Consolidated
Subsidiaries.

“TARP” means the Troubled Asset Relief Program of the United States Department
of the Treasury.

“TARP Period” means the period beginning with the Company’s receipt of any
financial assistance under TARP and ending on the last date upon which any
obligation arising from such financial assistance remains outstanding
(disregarding any warrants to purchase common stock of the Company that may be
held by the United States Treasury).

“TARP Recipient” shall mean an entity receiving financial assistance under TARP.

“TARP Requirements” shall mean the regulations and guidance of general

 

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applicability issued by the United States Department of the Treasury pursuant to
TARP (including but not limited to the interim final rule issued under TARP), as
well as any TARP-related restrictions that specifically apply to the Company or
the Bank.

“Termination for Cause” and “Terminated for Cause” mean the Employee’s
Separation from Service with the Company or the Bank because of (i) the
Employee’s personal dishonesty, (ii) the Employee’s misconduct (whether or not
willful), (iii) the Employee’s breach of a fiduciary duty involving the Company
or the Bank (whether or not for personal profit), (iv) the Employee’s
intentional failure to perform stated duties (unless Employee is prevented from
performing such duties because he is disabled (within the meaning of
Section 7(f)) or suffering from a medical condition that reasonably prevents him
from performing such duties despite following a treatment plan provided by a
physician or licensed medical specialist), (v) the Employee’s willful violation
of any law, rule, or regulation (other than traffic violations or offenses that
are classified as misdemeanors) or final cease-and-desist order,
(vi) specifically identified actions or inactions by the Employee that the
Employee knows or reasonably should know would materially and adversely increase
the Company or the Bank’s credit, market, liquidity, operational, legal,
compliance and/or reputational risks, (vii) material violations of the TARP
requirements, or (viii) the Employee’s material breach of any provision of this
Agreement, unless the Employee cures such material breach within thirty
(30) days after a written notice describing such material breach is received by
the Employee. No act or failure to act by the Employee shall be considered
willful unless the Employee acted or failed to act with an absence of good faith
and without a reasonable belief that his action or failure to act was in the
best interest of the Company or the Bank. The Employee shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors at a
meeting of the Board of Directors duly called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee’s counsel, to be heard before the Board of Directors), stating
that in the good faith opinion of the Board of Directors the Employee has
engaged in conduct described in the preceding sentence and specifying the
particulars thereof in detail.

“Voluntary Termination” means the Employee’s Separation From Service pursuant to
Section 7(c).

2. Term. The initial term of this Agreement shall be from the Effective Date
through March 31, 2012. Commencing on April 1, 2012, the term of this Agreement
shall be for a period of three (3) years and on each April 1 beginning on
April 1, 2013, the term of this Agreement shall be extended for a period of one
year, all subject to earlier termination as provided herein. The first two
sentences of this Section 2 are subject to the following conditions: (i) neither
the Employee nor the Company or the Bank has given notice to the other in
writing at least 90 days prior to April 1 of each year, beginning on April 1,
2012, that this Agreement shall not be extended further; and (ii) prior to the
end of the then-current term, the Board of Directors, or with respect to the
Company Board of Directors and the Bank Board of Directors, as the case

 

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may be, a committee of such Board of Directors which has been delegated
authority to act on such matters by such Board of Directors (with respect to
each Board of Directors, the “Committee”), explicitly reviews and approves the
extension. Reference herein to the term of this Agreement shall refer to both
the initial term and any extended terms.

3. Employment. The Employee shall be employed as the President and Chief
Executive Officer of the Company and the President and Chief Executive Officer
of the Bank. The Employee shall render all services and possess the powers as
are customarily performed by persons situated in similar executive capacities,
and shall have such other powers and duties as the Board of Directors may
prescribe from time to time. The Employee shall also render services to any
subsidiary or subsidiaries of the Company or the Bank as requested by the
Company or the Bank from time to time consistent with his executive position.
The Employee shall devote his best efforts and reasonable time and attention to
the business and affairs of the Company and the Bank to the extent necessary to
discharge his responsibilities hereunder. The Employee shall perform his duties
under this Agreement in accordance with such reasonable standards expected of
persons with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors. The Employee may
(i) serve on charitable or civic boards or committees and, in addition, on such
corporate boards as are approved in a resolution adopted by a majority of the
Board of Directors or the Committee, which approval shall not be withheld
unreasonably, and (ii) manage personal investments, so long as such activities
do not interfere materially with performance of his responsibilities hereunder.
If the Employee is appointed as a Director of the Company, and the Employee
subsequently ceases to be an officer of the Company, the Employee shall
immediately tender his resignation as a Director of the Company. If the Employee
is appointed a Director of the Bank, and the Employee subsequently ceases to be
an officer of the Bank, then the Employee shall immediately tender his
resignation as a Director of the Bank.

4. Cash Compensation.

(a) Salary. The Company and the Bank jointly agree to pay the Employee during
the term of this Agreement a base salary (the “Salary”) in the annualized amount
of $298,008. The Employee’s Salary shall be paid in accordance with the Company
or Bank’s customary payroll practices and shall be subject to applicable tax
withholding. The amount of the Employee’s Salary shall be increased from time to
time in accordance with the amounts of salary approved by both of the Board of
Directors or their Committees. The amount of the Salary shall be reviewed by the
both of the Board of Directors of the Company and the Board of Directors of the
Bank, or their Committees, at least annually during the term of this Agreement.

(b) Bonuses. The Employee shall be entitled to participate in an equitable
manner with all other executive officers of the Company and the Bank in such
performance-based and discretionary bonuses, if any, as are authorized and
declared by the Board of Directors or the Committee for executive officers.
Bonuses provided for under this Agreement shall be paid no later than 2 1/2
months after the end of the year in which the Employee obtains a legally binding
right to such payments (or such other time that still qualifies the payment as a
“short-term deferral” under Section 409A, unless the parties enter into an
agreement that complies

 

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with Section 409A). Notwithstanding the foregoing, during such time as the
Company is a TARP Recipient, if the TARP Requirements would preclude the payment
of such bonuses to the Employee (on account of his being an SEO, MHCE, or
otherwise), then any bonuses payable hereunder shall be reduced or eliminated to
the extent necessary to comply with the TARP Requirements.

(c) Expenses. The Employee shall be entitled to receive prompt reimbursement for
all reasonable expenses incurred by the Employee in performing services under
this Agreement in accordance with the policies and procedures applicable to the
executive officers of the Company and the Bank, provided that the Employee
accounts for such expenses as required under such policies and procedures.

5. Benefits.

(a) Participation in Benefit Plans. The Employee shall be entitled to
participate, to the same extent as executive officers of the Company and the
Bank generally, in all plans of the Company and the Bank relating to pension,
retirement, thrift, profit-sharing, savings, group or other life insurance,
hospitalization, medical and dental coverage, travel and accident insurance,
education, cash bonuses, and other retirement or employee benefits or
combinations thereof. In addition, the Employee shall be entitled to be
considered for benefits under all of the stock and stock option related plans in
which the Company and the Bank’s executive officers are eligible or become
eligible to participate. Notwithstanding the foregoing, if during the TARP
Period the TARP Requirements would preclude the payment, provision or grant of
any of the items described in this Section 5(a) to the Employee (on account of
his being an SEO, an MHCE or otherwise), then the payment, provision or granting
of any such items payable hereunder shall be prohibited to the extent necessary
to comply with the TARP Requirements.

(b) Fringe Benefits. The Employee shall be eligible to participate in, and
receive benefits under, any other fringe benefit plans or perquisites which are
or may become generally available to the Company or the Bank’s executive
officers, including but not limited to supplemental retirement, deferred
compensation programs, supplemental medical or life insurance plans, physical
examinations, financial planning and tax preparation services, except as limited
or prohibited under TARP while the Company is a TARP Recipient.

(c) Automobile. The Employee shall be provided an automobile for his business
use, at the Company and the Bank’s joint expense. The automobile provided shall
be determined by the Committee in its sole discretion, taking into account the
reasonable preferences of the Employee and his position with the Company and the
Bank.

6. Vacations; Leave. At such reasonable times as the Board of Directors or the
Committee shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, all such voluntary absences to count as
vacation time; provided that:

 

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(a) The Employee shall be entitled to any annual vacation in accordance with the
policies as periodically established by the Board of Directors or the Committee
for senior management officials of the Company and the Bank, which shall in no
event be less than the current policies of the Company and the Bank.

(b) The timing of vacations shall be scheduled in a reasonable manner by the
Employee. The Employee shall not be entitled to receive any additional
compensation from the Company or the Bank on account of his failure to take a
vacation; nor shall he be entitled to accumulate unused vacation from one fiscal
year to the next except to the extent authorized by the Board or the Committee
for senior management officials of the Company or the Bank.

(c) In addition to the aforesaid paid vacations, the Employee shall be entitled
without loss of pay, to absent himself voluntarily from the performance of his
employment with the Company and the Bank for such additional period of time and
for such valid and legitimate reasons as each Board of Directors or the
Committee in its sole discretion may determine. Further, each Board of Directors
or the Committee shall be entitled to grant to the Employee a leave or leaves of
absence with or without pay at such time or times and upon such terms and
conditions as each Board of Directors or the Committee in its sole discretion
may determine.

(d) In addition, the Employee shall be entitled to annual sick leave as
established by each Board of Directors or the Committee for senior management
officials of the Company and the Bank. In the event any sick leave time shall
not have been used during any year, such leave shall accrue to subsequent years
only to the extent authorized by each Board of Directors or the Committee in its
sole discretion. Upon termination of the Employee’s employment with the Company
and the Bank, the Employee shall not be entitled to receive any additional
compensation from the Company and the Bank for unused sick leave, except to the
extent authorized by each Board of Directors or the Committee.

7. Termination of Employment.

(a) Involuntary Termination. Subject to the applicable provisions of this
Section 7, and the notice provisions in Section 8, the Board of Directors may
terminate the Employee’s employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Employee’s right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination by the Company and the Bank or the Employee,
other than after a Change in Control, the Company and the Bank jointly shall
(1) pay to the Employee, over the remaining term of this Agreement (but not less
than one year nor more than two years from the Date of Termination), an amount
equal to two times’ the Employee’s Salary (at the rate in effect immediately
prior to the Date of Termination, and in accordance with the Bank’s payroll
practices and subject to applicable withholding requirements), (2) pay to the
Employee any bonus or other incentive compensation to which the Employee has a
legally binding right as of the Date of Termination in accordance with the

 

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payment terms of the incentive compensation arrangement, and (3) provide to the
Employee, over the period described in Section 7(a)(1) (subject to the minimum
and maximum terms provided for therein) substantially the same group life
insurance, hospitalization, medical, dental, prescription drug and other health
benefits, and long-term disability insurance (if any) for the benefit of the
Employee and his dependents and beneficiaries who would have been eligible for
such benefits if the Employee had not suffered Involuntary Termination, on terms
substantially as favorable to the Employee, taking into account the amounts of
coverage and deductibles and other costs to him, as if he had not suffered
Involuntary Termination (except that any such coverage shall cease if and when
the Employee is no longer covered under an insurance program made available by
the Bank to employees generally). In addition, any equity awards granted to the
Employee by the Company (under the 2010 Omnibus Equity Plan or otherwise) that
are subject to vesting, performance or target requirements shall be treated as
having satisfied such vesting, performance or target requirements as of the date
of the Employee’s Involuntary Termination.

(b) Termination for Cause. In the event of Termination for Cause, the Company
and the Bank shall jointly pay to the Employee the Salary and provide benefits
under this Agreement only through the Date of Termination, and shall have no
further obligation to the Employee under this Agreement.

(c) Voluntary Termination. The Employee’s employment may be voluntarily
terminated by the Employee at any time upon at least 90 days’ written notice to
the Company and the Bank or such shorter period as may be agreed upon between
the Employee and the Board of Directors. In the event of such voluntary
termination, the Company and the Bank shall be jointly obligated to continue to
pay to the Employee the Salary and provide benefits under this Agreement only
through the Date of Termination, at the time such payments are due, and shall
have no further obligation to the Employee under this Agreement.

(d) Change in Control. In the event of an Involuntary Termination within 12
months after a Change in Control, the Company and the Bank jointly shall (1) pay
to the Employee in a lump sum in cash within 25 business days after the Date of
Termination an amount equal to 2.99 times the Employee’s “base amount” (as
defined in Code Section 280G); and (2) provide to the Employee during the
remaining term of this Agreement (subject to the minimum and maximum terms
described in Section 7(a)(1)), substantially the same group life insurance,
hospitalization, medical, dental, prescription drug and other health benefits,
and long-term disability insurance (if any) for the benefit of the Employee and
his dependents and beneficiaries who would have been eligible for such benefits
if the Employee had not suffered Involuntary Termination, on terms substantially
as favorable to the Employee, taking into account the amounts of coverage and
deductibles and other costs to him, as if he had not suffered Involuntary
Termination. In addition, any equity awards granted to the Employee by the
Company (under the 2010 Omnibus Equity Plan or otherwise) that are subject to
vesting, performance or target requirements shall be treated as having satisfied
such vesting, performance or target requirements as of the date of the
Employee’s Involuntary Termination. Notwithstanding any other provision of this
Agreement, if payments and the value of benefits

 

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received or to be received under this Agreement, together with any other amounts
and the value of benefits received or to be received by the Employee, would
cause any amount to be nondeductible by the Company or any of the Consolidated
Subsidiaries for federal income tax purposes pursuant to or by reason of Code
Section 280G, then payments and benefits under this Agreement shall be reduced
(not less than zero) to the extent necessary so as to maximize the economic
present value of benefits to be received by the Employee, as determined by the
Compensation Committee of the Company Board of Directors as of the date of the
Change in Control using the discount rate required by Code Section 280G(d)(4),
without causing any amount to become nondeductible pursuant to or by reason of
Code Section 280G.

(e) Death. In the event of the death of the Employee while employed under this
Agreement and prior to any termination of employment, the Company and the Bank
jointly shall pay to the Employee’s estate, or such person as the Employee may
have previously designated in writing, the Salary which was not previously paid
to the Employee and which he would have earned if he had continued to be
employed under this Agreement through the last day of the calendar month in
which the Employee died, together with the benefits provided hereunder through
such date.

(f) Disability. If the Employee becomes entitled to benefits under the terms of
the then-current disability plan, if any, of the Company or the Bank (the
“Disability Plan”) or becomes otherwise unable to fulfill his duties under this
Agreement, he shall be entitled to receive such group and other disability
benefits, if any, as are then provided by the Company or the Bank for executive
employees. In the event of such disability, this Agreement shall not be
suspended, except that (i) the obligation to pay the Salary to the Employee
shall be reduced in accordance with the amount of disability income benefits
received by the Employee, if any, pursuant to this paragraph such that, on an
after-tax basis, the Employee shall realize from the sum of disability income
benefits and the Salary the same amount as he would realize on an after-tax
basis from the Salary if the obligation to pay the Salary were not reduced
pursuant to this Section 7(f); and (ii) upon a resolution adopted by a majority
of the disinterested members of the Board of Directors or the Committee, the
Company or the Bank may discontinue payment of the Salary beginning six months
following a determination that the Employee has become entitled to benefits
under the Disability Plan or otherwise unable to fulfill his duties under this
Agreement. If the Employee’s disability does not constitute a disability within
the meaning of Section 409A, and the Employee is a “specified employee” within
the meaning of Section 409A, then payments under this Section 7(f) shall not
commence until the earlier of the Employee’s death or the sixth month
anniversary of the Employee’s Separation from Service, with any delayed payments
being made with the first permissible payment.

(g) Limitations on Payments Under Sections 7(a) and 7(d).

(1) No benefit shall be paid under Section 7(a) or Section 7(d) if the
Employee’s termination of employment is not on account of an Involuntary
Termination or if the Employee is Terminated for Cause. No benefit shall be paid
under Section 7(d) unless a Change in Control has occurred.

 

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(2) If amounts are payable under Section 7(a), then no amount shall be due under
Section 7(d), and vice versa.

(3) No payment shall be made under Section 7(a) or Section 7(d) that would cause
the Bank to be “undercapitalized” for purposes of 12 C.F.R. Part 325 or any
successor provision.

(4) Payments due under Sections 7(a) and 7(d) shall be conditioned on the
Employee’s signing of a release substantially in the form provided in Exhibit A,
which is attached hereto and incorporated into this Agreement by this reference.

(5) Payments due under Section 7(a) and 7(d) shall be conditioned on the
Employee’s compliance with Sections 9, 10 and 11 of this Agreement. If the
Employee does not comply with Sections 9, 10 or 11 of this Agreement, then he
shall be required to return to the Company and the Bank (upon written request)
the amounts received by him under Section 7(a) or Section 7(d), as the case may
be. In the case of noncash benefits, the equivalent value of the benefit shall
be repaid, as determined by the Company (or in the case of a Change in Control,
its successor).

(6) To the extent the taxable payments under Section 7(a) or Section 7(d) would
be considered deferred compensation to which no exception under Section 409A
applies (e.g., short-term deferrals), and the Employee is considered a
“specified employee” (as defined in Section 409A), then no deferred compensation
shall be paid until the 185th day following the Employee’s Separation from
Service (and any deferred compensation the payment of which is delayed on
account of the foregoing shall be paid on such 185th day). The preceding
sentence shall be applied by (i) treating as much of the payment as “separation
pay due to involuntary separation from service” (within the meaning of Treasury
Regulation Section 1.409A-1(b)(9)) (“Separation Pay”) as is possible, so that
such Separation Pay may be paid without regard to the preceding sentence, and
(ii) treating the Separation Pay as paid prior to the deferred compensation, to
the extent permitted by Section 409A.

(7) If paying or providing any benefit described in Section 7(a) or Section 7(d)
would give rise to an excise tax to the Company or the Bank or not be deductible
by the Company or the Bank (other than on account of Section 162(m) of the
Code), or the coverage is no longer available to the Employee but still is
available to employees generally, then the Company, at its sole discretion, may
not provide such benefit to the Employee, and instead provide the Employee (in
consultation with the Bank and the Employee) with an alternative form of
compensation with an equivalent value to the benefit(s) that is not paid.

(8) Notwithstanding anything herein to the contrary, no amount shall be payable
under Section 7(a) or Section 7(d) if such payment becomes an obligation of the
Company or the Bank while the Company is a TARP Recipient during the TARP Period
and the Employee is not permitted to receive those payments under the TARP
Requirements (on account of being an SEO, MHCE, or otherwise).

 

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(h) Temporary Suspension or Prohibition. If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank’s affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C.
Section 1818(e)(3) and (g)(1), or pursuant to Section 30.12.040 of the Revised
Code of Washington (“R.C.W.”), the Bank’s obligations under this Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended, all in a manner that
does not violate Section 409A.

(i) Permanent Suspension or Prohibition. If the Employee is removed and/or
permanently prohibited from participating in the conduct of the Bank’s affairs
by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C.
Section 1818(e)(4) and (g)(1), or pursuant to R.C.W. Section 30.12.040, all
obligations of the Bank under this Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.

(j) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.

(k) Termination by Regulators. All obligations under this Agreement shall be
terminated, except to the extent determined that continuation of this Agreement
is necessary for the continued operation of the Bank: (1) at the time the FDIC
enters into an agreement to provide assistance to or on behalf of the Bank under
the authority contained in Section 13(c) of the FDIA; or (2) by the FDIC, at the
time it approves a supervisory merger to resolve problems related to operation
of the Bank. Any rights of the parties that have already vested, however, shall
not be affected by any such action.

(l) Further Reductions. Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and FDIC regulation 12 C.F.R. Part 359, Golden
Parachute and Indemnification Payments.

8. Notice of Termination. In the event that the Company or the Bank, or both,
desire to terminate the employment of the Employee during the term of this
Agreement, the Company or the Bank, or both, shall deliver to the Employee a
written notice of termination, stating whether such termination constitutes
Termination for Cause or Involuntary Termination, setting forth in reasonable
detail the facts and circumstances that are the basis for the termination, and
specifying the date upon which employment shall terminate, which date shall be
at least 30 days after the date upon which the notice is delivered, except in
the case of Termination for Cause. In the event that the Employee determines in
good faith that he has experienced an Involuntary Termination of his employment,
he shall send a written notice to the Company and the Bank stating the
circumstances that constitute such Involuntary Termination and the date upon
which his employment shall have ceased due to such Involuntary Termination. In
the event that the Employee desires to effect a Voluntary Termination, he shall
deliver a written notice to the Company and the Bank, stating the date upon
which employment shall terminate, which date shall be at least 90 days after the
date upon which the notice is delivered, unless the parties agree to a date
sooner.

 

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9. Noncompetition; Confidentiality; Nonsolicitation.

(a) Noncompetition. During the period described in Section 7(a)(1), subject to
any minimum or maximum period provided for therein (the “Noncompete Period”),
the Employee shall not become involved, directly or indirectly, with a Competing
Business or serve, directly or indirectly, a Competing Business in any manner,
including, without limitation, as a shareholder, member, partner, director,
officer, manager, investor, organizer, founder, employee, consultant or agent.
However, the Employee may acquire and own an interest not to exceed one percent
(1%) of the total equity interest in any publicly held entity whose securities
are listed on a national exchange, whether or not such entity is a Competing
Business. “Competing Business” means any financial institution or trust company
that maintains a banking office in any county in which the Company, the Bank or
any of its Affiliates maintain a banking office. The term “Competing Business”
includes, without limitation, any start-up or other financial institution or
trust company in formation. The term “Affiliates” means any subsidiary of the
Company, a Consolidated Subsidiary, or any entity (whether or not incorporated)
controlled by any of the foregoing entities, specifically including but not
limited to Heritage Bank and Central Valley Bank.

(b) Confidential Information. The Employee acknowledges that in the course of
the Employee’s employment, the Employee will have or obtain knowledge of
confidential information and other secrets concerning the Company, Heritage Bank
and Central Valley Bank and their businesses, plans and strategies, their actual
and prospective customers, and other matters which are valuable to Company,
Heritage Bank and Central Valley Bank and which the Company, Heritage Bank and
Central Valley Bank do not want disclosed (“Confidential Information”). The
Employee will not during and after the term of this Agreement, disclose to any
other person or entity any Confidential Information concerning the Company,
Heritage Bank and Central Valley Bank, their business operations or customers,
or use for his own purposes or permit or assist others in the use of such
Confidential Information, unless (1) the Company Board of Directors consents to
the use or disclosure of the information, (2) the use or disclosure is
consistent with the Employee’s duties under this Agreement, (3) such information
is generally available to the public, or (4) disclosure is required by law or
court order.

(c) Nonsolicitation. During the term of this Agreement and the Noncompete
Period, the Employee will not solicit any Customer of the Company or the Bank
for services or products then provided by the Company, Heritage Bank and Central
Valley Bank,. For purpose of this Section, “Customers” are defined as (1) all
customers serviced by the Company, Heritage Bank and Central Valley Bank, or any
of the Consolidated Subsidiaries at any time within 12 months before termination
of the Employee’s employment, (2) all customers and potential customers whom the
Company, Heritage Bank and Central Valley Bank, or any of the

 

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Consolidated Subsidiaries, with the knowledge or participation of the Company,
Heritage Bank and Central Valley Bank, or any of the Consolidated Subsidiaries,
actively solicited at any time during 12 months before termination of the
Employee’s employment, and (3) all successors, owners, directors, partners and
management personnel of the customers described in (1) or (2).

(d) Nonraiding of Employees. The Employee recognizes that the workforce of the
Company, Heritage Bank and Central Valley Bank is a vital part of their
businesses; therefore, during the Noncompete Period, the Employee will not
directly or indirectly recruit or solicit any Employee (as defined below) to
leave his or her employment with the Company, the Bank, or any of the
Consolidated Subsidiaries. Without limiting the foregoing, this includes that
the Employee will not (1) disclose to any third party the names, backgrounds, or
qualifications of any of the Employees or otherwise identify them as potential
candidates for employment, or (2) personally or through any other person
approach, recruit, interview or otherwise solicit Employees to work for any
other employer. For purposes of this Section, “Employees” means all employees
working for the Company, Heritage Bank and Central Valley Bank, or any of the
Consolidated Subsidiaries at the time of the Employee’s Date of Termination.

(e) Injunctive Relief. The Employee acknowledges that it is impossible to
measure in money the damages that will accrue to the Company, Heritage Bank and
Central Valley Bank, if the Employee fails to observe the covenants in this
Section 9 (the “Restrictive Covenants”); therefore, the Restrictive Covenants
may be enforced by an action at law for damages and by an injunction or other
equitable remedies to prohibit the restricted activity. The Employee hereby
waives the claim or defense that an adequate remedy at law is available to the
Company, Heritage Bank and Central Valley Bank. Nothing set forth herein shall
prohibit the Company, Heritage Bank and Central Valley Bank from pursuing all
remedies available to them.

(f) Reasonableness. The parties agree that this Agreement in its entirety, and
in particular the Restrictive Covenants, are reasonable both as to time and
scope. The parties additionally agree (1) that the Restrictive Covenants are
necessary for the protection of the Company and the Bank’s business and
goodwill; (2) that the Restrictive Covenants are not any greater than are
reasonably necessary to secure the Company and the Bank’s business and goodwill;
and (3) that the degree of injury to the public due to the loss of the service
and skill of the Employee or the restrictions placed upon the Employee’s
opportunity to make a living with the Employee’s skills upon enforcement of said
restraints, does not and will not warrant non-enforcement of said restraints.
The parties agree that if the scope of the Restrictive Covenants is adjudged too
broad to be capable of enforcement, then the parties authorize said court or
arbitrator to narrow the Restrictive Covenants so as to make them capable of
enforcement, given all relevant circumstances, and to enforce the same.

(g) Survival. This Section 9 shall survive the termination of this Agreement.

10. Creative Work. The Employee agrees that all creative work and work product,
including but not limited to all technology, business management tools,
processes, software, patents, trademarks, and copyrights developed by the
Employee during employment with the Company and the Bank, regardless of when or
where such work or work product was produced, constitutes work made for hire,
all rights of which are owned by the Company or the Bank. The

 

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Employee hereby assigns to the Bank or the Company, as they may designate, all
rights, title, and interest, whether by way of copyrights, trade secret,
trademark, patent, or otherwise, in all such work or work product, regardless of
whether the same is subject to protection by patent, trademark, or copyright
laws.

11. Return of Property. If and when the Employee ceases for any reason to be
employed by the Company and the Bank, the Employee shall, on the Date of
Termination, return to the Company and the Bank all keys, pass cards,
identification cards and any other property of the Company or the Bank, and
disclose all computer user identifications and passwords used by Employee in the
course of employment or necessary for accessing information on Company and the
Bank’s computer systems. At the same time, the Employee also must return to the
Company and the Bank no later than the Date of Termination, all originals and
copies (whether in hard copy, electronic or other form) of any documents,
drawings, notes, memoranda, designs, devices, diskettes, tapes, manuals, and
specifications which constitute proprietary information or material of the
Company and the Bank. The obligations in this paragraph include the return of
documents and other materials that may be in any location under the Employee’s
control.

12. No Assignments.

(a) This Agreement is personal to each of the parties hereto, and no party may
assign or delegate any of its rights or obligations hereunder without first
obtaining the written consent of the other party; provided, however, that the
Company and the Bank shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company and/or the Bank would be required to perform it, if no
such succession or assignment had taken place. Failure to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation and benefits from the Company and the Bank in the same amount and
on the same terms as the compensation and benefits that would be payable to
Employee pursuant to Section 7(d) of this Agreement without regard to whether a
Change in Control has occurred. For purposes of implementing the provisions of
this Section 12(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.

(b) This Agreement and all rights of the Employee hereunder shall inure to the
benefit of and be enforceable by the Employee’s personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. In the event of the death of the Employee, unless
otherwise provided herein, all amounts payable hereunder shall be paid to the
Employee’s devisee, legatee, or other designee or, if there be no such designee,
to the Employee’s estate.

13. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to

 

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the Company and the Bank at their home offices, to the attention of the Board of
Directors with a copy to the Secretary of the Company and the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Company or the Bank.

14. Amendments. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties, except as herein otherwise
provided.

15. Headings. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.

16. Severability. The provisions of this Agreement shall be deemed severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.

17. Governing Law. This Agreement shall be governed by the laws of the State of
Washington.

18. Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator’s award in any court having jurisdiction.
Notwithstanding the foregoing, the Company, the Bank or both may resort to the
Superior Court of Thurston County, Washington for injunctive and such other
relief as may be available in the event that the Employee engages in conduct,
after termination of the Agreement that amounts to a violation of the Washington
Trade Secrets Act or amounts to unlawful interference with the business
expectations of the Company or the Bank. The FDIC may appear at any arbitration
hearing but the decision is not binding on the FDIC.

19. Deferral of Non-Deductible Compensation. In the event that the Employee’s
aggregate compensation (including compensatory benefits which are deemed
remuneration for purposes of Code Section 162(m)) from the Company and the
Consolidated Subsidiaries for any calendar year exceeds the maximum amount of
compensation deductible by the Company or any of the Consolidated Subsidiaries
in any calendar year under Code Section 162(m) (the “maximum allowable amount”),
then any such amount in excess of the maximum allowable amount shall be
mandatorily deferred with interest thereon at four percent (4%) per annum to a
calendar year such that the amount to be paid to the Employee in such calendar
year, including deferred amounts and interest thereon, does not exceed the
maximum allowable amount. Subject to the foregoing, deferred amounts including
interest thereon shall be payable at the earliest time permissible, as required
by Section 409A.

20. Global TARP Limitation. Notwithstanding anything herein to the contrary:
during the TARP Period all amounts payable hereunder shall be subject to and
limited by the TARP Requirements as in effect from time to time (regardless of
whether the terms hereof specifically refer to TARP or the TARP Requirements).
The Employee hereby voluntarily

 

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waives any claim against the Company or the Bank for any changes to his
compensation, bonus, incentive and other benefit plans, arrangements, policies
and agreements (including golden parachute agreements and tax gross-ups) that
are required to comply with the TARP Requirements (regardless of whether the
compensation, benefit or other amount is payable under this Agreement). This
waiver includes all claims the Employee may have under the laws of the United
States or any state related to the requirements imposed by the TARP
Requirements, including, without limitation, a claim for any compensation or
other payments Employee would otherwise receive.

21. Adjustments to Comply with Final Interagency Guidance on Sound Incentive
Compensation Policies. Notwithstanding anything herein to the contrary, the
compensation or benefits provided under this Agreement are subject to
modification, elimination, adjustment, deferral or return as necessary to comply
with requirements imposed by the Company’s Board of Directors to comply with the
“Final Interagency Guidance on Sound Incentive Compensation Policies” issued on
an interagency basis by the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation and the
Office of Thrift Supervision, effective June 25, 2010 (the “Interagency Guidance
Compliance Requirements”). The Employee hereby voluntarily waives any claim
against the Company or the Bank for any changes to his compensation, bonus,
incentive and other benefit plans, arrangements or policies provided for under
this Agreement that are required to comply with the Interagency Guidance
Compliance Requirements.

22. Scope of Company and Bank Obligations. Although the Company and the Bank
have jointly obligated themselves to the Employee under certain provisions of
this Agreement, in no event is the Employee entitled to more than what is
provided for hereunder, i.e., no duplicative payments shall be provided for
hereunder.

23. Knowing and Voluntary Agreement. Employee represents and agrees that he has
read this Agreement, understands its terms, and that he has the right to consult
counsel of choice and has either done so or knowingly waives the right to do so.
Employee also represents that he has had ample time to read and understand the
Agreement before executing it and that he enters into this Agreement without
duress or coercion from any source.

* * * * *

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.

 

Attest:         HERITAGE FINANCIAL CORPORATION

        /s/ Kaylene Lahn

    By:  

/s/ Kimberly Ellwanger

Kaylene Lahn, Corporate Secretary           Its:  

Compensation Committee Chair

Attest:         HERITAGE BANK

        /s/ Kaylene Lahn

    By:  

/s/ Kimberly Ellwanger

Kaylene Lahn, Corporate Secretary           Its:  

Compensation Committee Chair

    EMPLOYEE    

    /s/ Brian L. Vance

 

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