HERITAGE FINANCIAL CORP /WA/
EMPLOYMENT AGREEMENT WITH BRIAN VANCE
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<TYPE>EX-10.8
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<FILENAME>dex108.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT WITH BRIAN VANCE
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                                                                    EXHIBIT 10.8

                              EMPLOYMENT AGREEMENT
                                  BY AND AMONG
                         HERITAGE FINANCIAL CORPORATION,
                                  HERITAGE BANK
                                       AND
                                 BRIAN L. VANCE

     THIS EMPLOYMENT AGREEMENT is made and entered into effective this 1st day
of June, 2001, by and between HERITAGE FINANCIAL CORPORATION, a Washington
corporation (the "Company"), HERITAGE BANK, a Washington banking corporation
(the "Bank") and BRIAN L. VANCE ("Executive").

                                    RECITALS

     1. The Company is the parent corporation of the Bank. The Bank is a first
tier wholly owned subsidiary of the Company.

     2. Executive is the President and Chief Operating Officer and a board
member of the Bank and Senior Vice President of the Company (hereinafter, the
Company and the Bank are collectively referred to as the "Employer"), and has
developed an intimate and thorough knowledge of Employer's business methods and
operations.

     3. The retention of the Executive's services for and on behalf of the
Employer is of material importance to the preservation and enhancement of the
value of the Employer's business.

     In consideration of the mutual promises made in this Agreement, the parties
agree as follows:

                                    AGREEMENT

     1. EMPLOYMENT.

     Employer hereby employs Executive and Executive hereby accepts employment
with Employer on the terms and conditions set forth in this Agreement.

     2. TERM.

     The original term of this Agreement will commence as of the date first
above written and will continue until June 30, 2004, after which time this
Agreement will automatically renew for additional terms of one year each.
Subject to the terms and conditions set forth below, this Agreement may be
terminated by either party by giving written notice to the other party at least
one year prior to the expiration date of the original term or any renewal term.


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     3. DUTIES.

          3.1 Executive will be the President and Chief Operating Officer of
Bank and Senior Vice President of Company and maintain such other positions with
subsidiaries or affiliates as the respective Boards of Directors of the Company
and the Bank (collectively, the "Board") shall determine. In such capacities,
Executive will render those executive management services and perform those
tasks in connection with the affairs of the Employer which are normal and
customary to the positions assigned.

          3.2 Executive will perform such other duties as may be appropriate to
his office and as may be prescribed from time to time by the Board. Executive
may delegate such duties as he sees fit to other junior officer(s) of the
Employer.

          3.3 Executive will devote his best efforts and all necessary time,
attention, and effort to the business and affairs of the Employer and any
affiliated companies as such business and affairs now exist or hereafter may be
changed or supplemented, in order to properly discharge his responsibilities
under this Agreement.

     4. SALARY, BONUS, AND OTHER COMPENSATION.

          4.1 Base Salary.

               4.1.1 During the term of this Agreement, Employer will pay to
Executive an annual base salary of not less than $150,000 per year effective
beginning on April 1, 2001. Payment of such salary will be made in accordance
with Employer's normal payroll practices applicable to senior executives and
will be subject to required withholding for federal income tax and other
purposes.

               4.1.2 The Company will guarantee payment of any portion of
Executive's compensation that may be allocated to the Bank or any other
subsidiary or affiliate of the Company.

               4.1.3 If this Agreement terminates prior to the end of the
original or any renewal term, then Employer will pay Executive such amount of
Executive's then-current annual base salary as is provided in Section 5.

          4.2 Bonus. During the term of this Agreement, Executive will be
eligible to participate in Employer's Management Incentive Plan or any successor
compensation plan for senior management of Employer as may be established by the
Board or the Employer's Compensation Committee, which plan shall include
specific performance targets, as the same shall be determined and/or amended on
an annual basis by the Board or Employer's Compensation Committee.

          4.3 Benefits. In addition to the base salary and bonus payable to
Executive pursuant to this Section 4, Executive will be entitled to the
following benefits, which shall not be less than those provided in benefit
programs generally maintained for senior executives of the Employer:


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               4.3.1 Participation in health insurance, disability insurance,
and other health and welfare benefit programs generally available to senior
executives;

               4.3.2 Participation in retirement plans, including defined
contribution and 401(k) Plans and any supplements or additions to those plans;

               4.3.3 Participation in stock bonus or stock option plans
generally available to senior executives of the Employer;

               4.3.4 Other employment benefits, as may be approved from time to
time by Employer;

               4.3.5 Memberships in clubs as deemed appropriate; and

               4.3.6 Reimbursement for Executive's reasonable expenses incurred
in promoting the business of Employer. Executive shall present from time to time
itemized accounts of any such expenses, within limits of Employer policy and the
rules and regulations of the Internal Revenue Service.

     5. TERMINATION OF AGREEMENT.

          5.1 Early Termination.

               5.1.1 This Agreement may be terminated at any time by either the
Company or Executive and shall terminate automatically upon Executive's death or
Disability (as defined in Section 8). No termination by the Company other than
termination for Cause (as defined below) shall prejudice the Executive's right
to compensation or other benefits under this Agreement.

               5.1.2 Except as provided in Section 6 with respect to a Change of
Control, if Executive voluntarily terminates his employment effective before the
end of the original or any renewal term without "Good Reason" as defined in
section 8 Executive will be entitled to such compensation and benefits as he
would have the right to receive upon termination for Cause under subsection
5.1.4, and Executive's unvested stock options, if any, shall terminate in the
manner provided in such subsection.

               5.1.3 Except in the event of a Change of Control as provided in
Section 6, if (i) Employer terminates this Agreement without Cause or (ii)
Executive terminates this Agreement for Good Reason, and either termination is
effective before the end of the original or any renewal term, Employer shall pay
Executive upon the effective date of such termination all salary and benefits
earned and all reimbursable expenses incurred through such termination date and,
in addition, a severance benefit in an amount equal to the greater of one times
the


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amount of his then-current base annual salary, or the amount of such salary
which would otherwise have been paid to Executive during the then-remaining term
of the Agreement. In such event, all forfeiture provisions regarding restricted
stock awards or vesting requirements regarding options shall lapse or be
considered completed as of the effective date of termination.

               5.1.4 If Employer terminates this Agreement for Cause effective
before the end of the original or any renewal term, Employer shall pay Executive
upon the effective date of such termination only such salary earned and expenses
reimbursable hereunder incurred through such termination date. Executive shall
have no right to receive compensation or other benefits for any period after
termination for Cause, and in the case of termination for Cause before the
effective date of a Change of Control, Executive's unvested stock options, if
any, shall terminate immediately.

               5.1.5 In the event of termination of this Agreement by reason of
Executive's death or Disability, Employer shall pay Executive only such salary
earned and expenses reimbursable hereunder incurred through upon the date of
Executive's death or the effective date of Executive's Disability, and all
forfeiture provisions regarding restricted stock awards or vesting requirements
concerning options shall lapse or be considered completed, as applicable.

               5.1.6 The Board, acting in good faith, shall make the final
determination of whether Executive is suffering under any Disability and, for
purposes of making such determination, may require Executive to submit himself
to a physical examination by a physician mutually agreed upon by Executive and
the Company Board at Employer's expense. For purposes of this Agreement, the
date of such determination shall constitute the effective date of such
Disability.

          5.2 Exercise of Stock Options. Executive's rights to vested but
unexercised stock options will continue for a period of one year after early
termination (provided that the terms of any option grant agreement shall not be
extended by this provision), except in the case of a termination for Cause
pursuant to Section 5.1.4 or without Good Reason pursuant to Section 5.1.2.

     6. CHANGE OF CONTROL.

          6.1 Benefits. The parties recognize that a "Change of Control," as
defined below, could be detrimental to Executive's continued employment.
Accordingly, in order to give further consideration to the Executive to enter
into this Agreement, if there is a Change of Control and either (a) within 365
days following the effective date of such Change of Control Executive or
Employer (or its successor) terminates Executive's employment; or (b) at any
time from and after 180 days prior to the public announcement by Employer or any
other party of the transaction which will result in the Change of Control,
Employer (or its successor) terminates Executive's employment without Cause,
then Executive, upon the date of termination of his employment, subject to the
remaining provisions of this Section 6.1, shall be paid by Employer (or its
successor) a severance benefit in an amount equal to the greater of two times
the amount of his then-current base annual salary or the amount of such salary
which would otherwise have been paid to Executive during the then-remaining term
of this Agreement, and vesting of all stock options and lapse of all
restrictions with respect to restricted stock awards shall occur. As


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a condition to receipt of the benefits described in this Section 6, upon request
by the Company Board, Executive will not voluntarily terminate his employment
with Employer until after the effective date of the Change of Control in order
to assist the Bank and the Company in evaluating and effectuating the Change of
Control.

          6.2 Reimbursement. In the event the provisions of this Section 6
result in imposition of a tax on Executive under the provisions of Internal
Revenue Code Section 4999, Employer agrees to reimburse Executive for the same,
exclusive of any tax imposed by reason of receipt of reimbursement under this
Section 6.2.

     7. RESTRICTIVE COVENANT.

          7.1 Noncompetition. Executive agrees that except as otherwise set
forth in this Agreement, he will not during the term of this Agreement and for a
period of two years after his termination, directly or indirectly, become
interested in, as principal shareholder, director, or officer, any financial
institution that competes with Employer or its successor or any of its
affiliates within the State of Washington, provided that such covenant shall not
apply in the event that Executive's employment is terminated without Cause or
for Good Reason. The provisions restricting competition by Executive may be
waived by action of the Board. Executive recognizes and agrees that any breach
of this covenant by Executive will cause immediate and irreparable injury to
Employer, and Executive hereby authorizes recourse by Employer to injunction
and/or specific performance, as well as to other legal or equitable remedies to
which Employer may be entitled.

          7.2 Noninterference. During the noncompetition period described in
Section 7.1, Executive shall not solicit or attempt to solicit any other
employee of Employer or its affiliates to leave the employ of those companies,
or in any way interfere with the relationship between Employer and any other
employee of Employer.

          7.3 Interpretation. If a court or any other administrative body with
jurisdiction over a dispute related to this Agreement should determine that the
restrictive covenant set forth above is unreasonably broad, the parties hereby
authorize said court or administrative body to narrow same so as to make it
reasonable, given all relevant circumstances, and to enforce same. The covenants
in this paragraph shall survive termination of this Agreement.

     8. DEFINITIONS.

          8.1 Cause. "Cause" shall mean only (i) willful misfeasance or gross
negligence in the performance of his duties, (ii) conduct demonstrably and
significantly harmful 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.

          8.2 Change of Control. "Change of Control" shall mean the occurrence
of one or more of the following events:


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               8.2.1 One person or entity acquiring or otherwise becoming the
owner of twenty-five percent (25%) or more of the Company's outstanding common
stock.

               8.2.2 Replacement of incumbent directors or election of newly-
elected directors constituting a majority of the Board of the Company where such
replacement or election has not been supported by the Board.

               8.2.3 Dissolution, or sale of fifty percent (50%) or more in
value of the assets, of either the Company or the Bank.

               8.2.4 The merger of the Company into any corporation, twenty-
five percent (25%) or more of the outstanding common stock of which is owned by
other than owners of the common stock of the Company prior to such merger.

          8.3 Disability. "Disability" shall mean a medically reimbursable
physical or mental impairment that may be expected to result in death, or to be
of long, continued duration, and that renders Executive incapable of performing
the duties required under this Agreement.

          8.4 Good Reason. "Good Reason" shall mean (i) termination by Executive
as a result of any material breach of this Agreement by Employer, (ii)
termination by Executive or Employer following a Change of Control pursuant to
Section 6.1, (iii) Any reduction of Executive's salary or any reduction or
elimination of any compensation or benefit plan, which reduction or elimination
is not of general application to substantially all employees of the Bank or such
employees of any successor entity or of any entity in control of the Bank, or
(iv) the assignment to Executive of any authority or duties substantially
inconsistent with Executive's position.

     9. MISCELLANEOUS.

          9.1 This Agreement contains the entire agreement between the parties
with respect to Executive's employment with Employer and his covenant not to
compete with Employer, and is subject to modification or amendment only upon
amendment in writing signed by both parties.

          9.2 This Agreement shall bind and inure to the benefit of the heirs,
legal representatives, successors, and assigns of the parties. The provisions of
Section 7.1 of this Agreement are intended to confer upon Employer and any of
its subsidiaries and affiliates the benefits of Executive's covenant not to
compete.

          9.3 If any provision of this Agreement is invalid or otherwise
unenforceable, all other provisions shall remain unaffected and shall be
enforceable to the fullest extent permitted by law.

          9.4 Notwithstanding any other provision in this Agreement, Employer
shall make no payment of any severance benefit provided for herein to the extent
that such payment would be prohibited by the provisions of Part 359 of the
regulations of the Federal Deposit Insurance Corporation as the same may be
amended from time to time, and if such payment is so


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prohibited, Employer shall use its best efforts to secure the consent of the
FDIC or other applicable banking agencies to make such payments in the highest
amount permissible, up to the amount provided for in this Agreement.

          9.5 This Agreement is made with reference to and is intended to be
construed in accordance with the laws of the State of Washington. Venue for any
action arising out of or concerning this Agreement shall lie in Thurston County,
Washington. In the event of a dispute under this Agreement not involving
injunctive relief, the dispute shall be arbitrated pursuant to the Superior
Court Mandatory Arbitration Rules ("MAR") adopted by the Washington State
Supreme Court, irrespective of the amount in controversy. This Agreement shall
be deemed as stipulation to that effect pursuant to MAR 1.2 and 8.1 The
arbitrator, in his or her discretion, may award attorney's fees to the
prevailing party or parties.

          9.6 This Agreement replaces any and all previous employment and
severance agreements including the Severance Agreement between Heritage Savings
Bank and Brian L. Vance dated October 1, 1997.

          9.7 Any notice required to be given under this Agreement to either
party shall be given by personal service or by depositing a copy thereof in the
United States registered or certified mail, postage prepaid, addressed to the
following address, or such other address as addressee shall designate in
writing:

          Employer:   Heritage Bank
                      201 5th Avenue S.W.
                      Olympia, WA 98501
                      Attn:  Donald V. Rhodes

          Executive:  Brian L. Vance
                      201 5th Avenue S.W.
                      Olympia, WA  98501

IN WITNESS WHEREOF, the parties have executed this Agreement effective on the
date first above written.

HERITAGE FINANCIAL CORPORATION                   HERITAGE BANK

By:                                              By:
    -----------------------------                    ---------------------------
Its:                                             By:
     -----------------------------                   ---------------------------

EXECUTIVE:

---------------------------------
Brian L. Vance


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