Document:

Letter of Understanding

 Exhibit 10.19 
 Letter of Understanding between Heritage Financial Corporation and Donald V. Rhodes 
 

 
 September 21, 2006 
 Mr. Donald V. Rhodes 
 Chairman and Chief Executive Officer 
 Heritage Financial Corporation 
 201 5th Avenue SW 
 Olympia, WA 98501-1114 
 Dear Don: 
 This letter is a non-binding letter of understanding to outline
your employment by Heritage Financial Corporation (“HFC”), Heritage Bank, and Central Valley Bank. You will continue under your current Employment Agreement until December 31, 2006, with your Base Salary of $150,000 per annum,
continuing on a monthly basis until then. Beginning January 1, 2007, you will be an employee at will and serve as Chairman of the Board of HFC, Heritage Bank and Central Valley Bank. As such Chairman, you will perform the duties customarily
attributable to the position and as described in Exhibit A and preside over all meetings of the Board and the Executive Committee. This arrangement shall continue so long as the Board of HFC continues to elect you as Chairman. 
 The terms of your employment beginning January 1, 2007 are: 
 Annual
Base Salary of $75,000 payable under Heritage Bank’s payroll policies; 
 Bonuses as determined by HFC or the Banks’ Boards from time to time, in
those Boards’ sole discretion; 
 Benefits available to employees who work less than 1,000 hours each year; 
 Participation in the 401(k) ESOP allowing deferred compensation, but no eligibility for employer matching contributions; 
 Club memberships deemed appropriate; 
 Reimbursement of reasonable business
expenses; and 
 Automobile as is currently provided as of the date of this letter. 
  

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 Your employment is “at will” but will be terminated in the event of: 
 Death; 
 Disability defined as medically reimbursable physical or mental
impairment that may be expected to result in death, or to be of long, continued duration, and that renders you incapable of performing your duties; 
 Termination for Cause defined as (i) willful misfeasance or gross negligence in the performance of your duties, (ii) conduct demonstrably and significantly harm to the company (which would include willful violation of any final
cease and desist order applicable to employer or a financial institution subsidiary), or (iii) conviction of a felony; and 
 Failure to be elected as
Chairman of the Board of Directors of HFC. 
 In case of any such termination, you will not be entitled to any additional compensation or benefits.

 To indicate your acceptance of the terms described above, please sign below and return this letter to me. 
 Sincerely, 
  

			
	By:	 	 /s/ Peter Fluetsch

	Printed Name:	 	Peter N. Fluetsch
	Title:	 	Chairman, Compensation Committee

 I hereby agree to the above terms. 
  

			
	September 26, 2006	 	 /s/ Donald V. Rhodes

	Date	 	Donald V. Rhodes

  

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 Exhibit “A” 
 Position Description 
 For Donald V. Rhodes 
  

			
	POSITION:	  	CHAIRMAN OF THE BOARD
		  	HERITAGE FINANCIAL CORPORATION
		  	HERITAGE BANK
		  	CENTRAL VALLEY BANK

 REPORTS TO: BOARD OF DIRECTORS 
 FLSA STATUS: EXEMPT 
 Essential Functions: 
 Provides an exceptional level of customer service and customer satisfaction; enhancing and supporting the mission and vision statements of Heritage Financial Corporation. 
 Performs duties as necessary including keeping current with industry and investor trends and expectations to ensure continued safety and soundness of the corporation.

 Provides support, insight, and advice to HFWA CEO in developing a strategic vision for the corporation and for the management and overall profitability of
the corporation. 
 Provides support, insight, and advice to HFWA CEO in exploring new markets for future locations, as well as seeking strategic
alliances/joint ventures to optimize and leverage the corporation’s position. 
 Provides support, insight, and advice to HFWA CEO in planning and
gaining Board approval for all capital management strategies, including stock and cash dividend policies to provide adequate capital levels to support the future growth of the corporation and shareholder expectations. 
 Provides strategic financial input and advice on decision-making issues affecting the corporation such as evaluation of potential alliances, acquisitions and/or mergers
and new lines of business, products, or services. 
 Provides leadership representation for the corporation and subsidiary banks as Chairman of the Board of
Directors and member of various Board committees. Ensures that all policies and by-laws of the Board are observed. Responsible for overseeing reporting to the Board on the overall financial and operational conditions of the corporation and ensuring
that Board members are kept informed about important industry trends and developments. 
 Coordinates with corporate CEO and CFO on setting agendas for the
monthly Board meetings and annual shareholder meetings. 
  

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 Assists corporate CEO with shareholder relations to include representing Heritage Financial Corporation at corporate,
investor, and industry meetings in order to educate and generate market interest in the corporation. 
 Represents the corporation and its values in its
relationships with major customers, regulatory bodies, and shareholders. 
 Represents the corporation and provides leadership in key community activities
including business, charitable, civic, and social organizations. 
 In the absence of Executive management at subsidiary organizations, may act in their
capacity. 
 Other Responsibilities: 
 Must be able to travel
within region and nationally to perform job duties and represent the corporation. 
 Education, Skills, and Experience: 
 Ability to read, speak, and understand English well with effective written and oral business communication skills. Ability to make persuasive speeches and presentations
on controversial or complex topics to the Board and outside investors. 
 Prefer college degree in Business, Finance, or related field or applicable
experience. 
 A strategic visionary with sound technical skills, analytical ability, good judgment, and strong customer and growth focus. 
 Fifteen years finance/commercial banking experience at executive level with a demonstrated ability to lead a team and expand profitability. 
 Must have in-depth knowledge of and experience in Pacific Northwest markets, preferably the Puget Sound and Central Washington regions. 
 Desired personal characteristics include: professional sophistication, political awareness, creativity, energy, self-directed, and balanced ego. 
 Maintain a record of business development and participation in community activities. 
  

									
					
	Name:	  	  
	  		  	Date:	 	  

  

 42009 Heritage Bank Management Incentive Plan

 Exhibit 10.20 
 2009 Heritage Bank Management Incentive Plan 
 

 
 MANAGEMENT INCENTIVE 
 COMPENSATION PLAN 
 FOR 
 «FirstName» «LastName» 
 FISCAL YEAR ENDING 
 DECEMBER 31, 2009 
  

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 PLAN OBJECTIVES 
 The
Management Incentive Compensation Plan (“MIP”) has the following primary objectives: 
  

	 	•	 	 To clearly focus the attention of management on organizational priorities. 

  

	 	•	 	 To provide competitive pay opportunities contingent on bank performance. 

  

	 	•	 	 To differentiate and reward the individuals who make the most significant contributions to the Bank’s success. 

 PLAN ELIGIBILITY 
 Participants will be selected by the Chief
Executive Officer and confirmed by the Board of Directors on an annual basis. Those eligible must be judged as individuals who are in a position to materially affect the Bank’s performance. Prior year participation is no guarantee of ongoing
participation. 
 56 officers have been selected to participate during the year ending December 31, 2009. 
 AWARD POTENTIAL 
 Each participant will be assigned a target incentive
expressed as a percentage of his or her January 1, 2009 salary. This defines the amount that should be expected if Heritage Bank and the individual meet ambitious but achievable results. 
 Target incentive levels were set based on competitive practice, ability to impact results, and affordability. As the Company grows and increases in profitability, these
target levels may also increase. However, in 2009, all prior year targets are reduced by 50%. For example, if you were previously eligible for a target bonus of $10,000 – your 2009 target is $5,000. 
 The actual award could be more or less than the target based on actual performance. 
 INCENTIVE COMPENSATION PAYMENT 
 Incentive compensation will be paid annually within
90 days of the fiscal year end or as soon as possible after verifying year-end results. Payments are subject to payroll taxes such as Federal Income Tax and Social Security and Medicare withholding. Heritage Bank’s fiscal year end is
December 31, 2009. The Payment Date is typically March 15th following the end of the fiscal year. 
 Officers who are selected for full participation in this plan must have been employed by Heritage Bank for the entire performance period. Officers selected for the plan
who join Heritage Bank during the plan year will have their targeted payout prorated for the percentage of the year employed or participating in the plan. 
 All participants must be employed as of the Payment Date in order to receive any compensation from the plan. Participants who leave the company at any time prior to the Payment Date are not eligible to receive any payment regardless of
performance or time spent as a participant. 
 All bonus or incentive payments are subject to “clawback” or repayment to the company should the
bonus be paid on statements of earnings, gains, Officer statements, loan criteria, or any other criteria that are later proven to be materially inaccurate regardless of whether or not a formal restatement of earnings is required and regardless of
whether or not the company or the Officer is “at fault”. 
 As a participant in the TARP Capital Purchase Program, Heritage Bank must be in
compliance with current and future governance policies regarding bank employee compensation programs. Participation in this incentive plan, the promise of any payments and the ongoing terms of the program will be subject to all applicable current or
future regulations or policies issued by the Treasury Department or other governing agencies. Those governmental regulations and/or policies may require Heritage Bank to revise, eliminate or otherwise change the eligibility criteria for which
incentive payments may be accrued, distributed or repaid. In the event of any conflict between this policy and governmental regulations and/or policies, the applicable governmental requirements shall control. 
 INCENTIVE FUNDING 
 Incentive funding will be determined by:

  

	 	1.	Heritage Bank achieves 2009 net income and core income goals. 

  

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	 	2.	Performance on personal objectives established with your supervisor. 

  

	 	3.	Should an individual loan or transaction result in significant exposure to the Bank as determined solely by management, the individual performance scoring may be overruled and no
incentive payment provided. 

 The Incentive plan funding is determinate on the achievement of net and core income. Personal objectives include
production goals as well as branch or department management, customer retention, credit quality and individual project or plan execution. The plan is designed to include objectives other than production objectives for each participant to underscore
the expectations of the Board that the incentive plan does not encourage or reward unnecessary or excessive risk to the shareholder by senior management, lenders or other participants in order to receive a payment. 
 PRIME FUNDING MEASURE 
 The prime funding measure will be Heritage
Bank’s estimated net and core profit. In February, the Board of Directors approved the 2009 Financial Plan reflecting the net and core profit targets for Heritage Bank. These targets place eligibility for any bonus payouts to plan
participants only when 2009 net income and core income targets have been met or exceeded. Both the Heritage Financial Corporation and Heritage Bank plan reflect profitability after reserving fully for the incentive plan. 
 Net Income is the net income as reported on the income statement at year-end, total revenue less all business expenses. 
 Core Income is defined as net income “pre” certain expenses. As detailed above the planned core income for 2009 includes a substantially increased
provision for loan losses, but does not include other potential adjustments. Management will track all potential adjustments and report these to Officers monthly – however, at year-end the Board will make the final determination of what, if
any, adjustments are added to 2009 planned core income for the purposes of MIP bonus payment eligibility. Examples of potential adjustments include: 
  

	 	•	 	 Provisions for loan losses 

  

	 	•	 	 Impairment charges 

  

	 	•	 	 Adjustments to FDIC premiums 

  

	 	•	 	 Gains or losses on OREO sales 

  

	 	•	 	 Some expenses associated with a decision by Heritage to acquire all or a portion of the assets of another bank 

 DETERMINATION OF FINAL INCENTIVE POOL 
 Participants in the 2009
Management Incentive Plan will be eligible to receive a bonus if Heritage Bank achieves or exceeds planned net and core income. Your personal award will be based, 100% on your personal success in meeting individual objectives determined with
your supervisor. Bonus payouts will not be paid if the individual performance rating is .74 or below. Individual performance ratings between .75 and 1.00 will result in both the payout being reduced on a prorated basis ranging from a 50% payout on a
..75 individual performance score to a 100% payout on a 1.0 individual performance score. As an example, an individual performance rating of .85 would result in a total payout of .70 X the otherwise earned result. 
 FOR EXAMPLE ASSUME: 
 (1) Heritage Bank achieves planned Net and Core
Income in 2009. 
 (2) Your 2009 personal target incentive is $3,000 which results in the following performance components: 
 100% Personal = $3,000 
 Total = $3,000 
 (3) Actual Performance Results Achieved: 
 Personal (Scale 0 - 2.00) = 1.125 
 (4) Your payout would be calculated as follows: 
  

	 	(a)	100% personal = $3,000 $3,000 x 1.125 = $3,375 

 Total
Earned Incentive $3,375 
  

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 (5) If (1) and (2) above remain the same but personal performance is .85 rather than 1.125: 
  

	 	(a)	100% personal = $3,000 $3,000 x .85 = $2,550 

  

	 	(b)	Total earned Incentive $2,550 

  

	 	(c)	Total Payout prorated for .85 

 Personal
performance x .70 
 Total Earned Incentive $1,785 
 (6) If in (5) above the personal performance score was .74 or less, there would be no payout. 
 (7) If in
(1) above, Heritage Bank does NOT achieve planed 2009 net and core income, there would be no payout. 
 SUMMARY 
 The costs of the program are controlled by the plan components: 
  

	1.	Individuals covered by the plan 

  

	2.	Target incentive opportunities 

  

	3.	Corporate / individual funding allocations’ 

  

	4.	Performance measures 

  

	5.	Performance goals 

 Each of these will be reviewed annually and modified
to best reflect current circumstances and business objectives. 
  

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