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[   ]Soliciting Material Pursuant to § 240.14a-12
 
 
BANNER CORPORATION
(Name of Registrant as Specified in Its Charter)
 
 
 
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
 
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March 21, 2011

March 22, 2013


Dear Shareholder:

You are cordially invited to attend the annual meeting of shareholders of Banner Corporation.  The meeting will be held at the Marcus Whitman Hotel, at 6 W. Rose Street, Walla Walla, Washington, on Tuesday, April 26, 2011,23, 2013, at 10:00 a.m., local time.

The Notice of Annual Meeting of Shareholders and Proxy Statement describe the formal business to be transacted at the meeting.  During the meeting, we will also report on our operations.  Directors and officers of Banner Corporation, as well as a representative of Moss Adams LLP, our independent auditor, will be present to respond to appropriate questions of shareholders.

It is important that your shares are represented at this meeting, whether or not you attend the meeting in person and regardless of the number of shares you own.  To make sure your shares are represented, we urge you to promptly vote.  You may vote your shares via the Internet or a toll-free telephone number, or by completing and mailing the enclosed proxy card.  If you attend the meeting, you may vote in person even if you have previously submitted your proxy.

We look forward to seeing you at the meeting.
 
 Sincerely,
  
 /s/ Mark J. Grescovich
  
 
Mark J. Grescovich
President and Chief Executive Officer
 

 
 

 

BANNER CORPORATION
10 S. FIRST AVENUE
WALLA WALLA, WASHINGTON 99362
(509) 527-3636



NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 26, 201123, 2013
 

 
Notice is hereby given that the 20112013 annual meeting of shareholders of Banner Corporation will be held at the Marcus Whitman Hotel, at 6 W. Rose Street, Walla Walla, Washington, on Tuesday, April 26, 2011,23, 2013, at 10:00 a.m., local time, for the purpose of considering and acting upon the following:
 
 Proposal 1.To elect fiveElection of four directors to each serve for a three-year term.
 
 Proposal 2.To provideAn advisory approval of the(non-binding) vote to approve our executive compensation of our named executive officers.as disclosed in this Proxy Statement.

 Proposal 3.To ratifyAn advisory (non-binding) vote on whether an advisory vote on executive compensation should be held every one, two or three years.

Proposal 4.Ratification of the Audit Committee’s selection of Moss Adams LLP as our independent auditor for 2011.2013.

 Proposal 4.5.To approveApproval of an amendment to the amendment of the Amended and Restated Articles of Incorporation of Banner Corporation to effect a 1-for-7 reverse stock split of our common stock.2012 Restricted Stock Plan.

We will also consider and act upon such other matters as may properly come before the meeting or any adjournments or postponements thereof.  As of the date of this notice, we are not aware of any other business to come before the annual meeting.

The Board of Directors has fixed the close of business on March 1, 20112013 as the record date for the annual meeting.  This means that shareholders of record at the close of business on that date are entitled to receive notice of and to vote at the meeting and any adjournment thereof.  To ensure that your shares are represented at the meeting, please take the time to vote by submitting your vote via the Internet or telephone, or by signing, dating and mailing the enclosed proxy card which is solicited on behalf of the Board of Directors.  The proxy will not be used if you attend and vote at the annual meeting in person.  Regardless of the number of shares you own, your vote is very important.  Please act today.

 
 BY ORDER OF THE BOARD OF DIRECTORS
  
 /s/ ALBERT H. MARSHALL
  
 
ALBERT H. MARSHALL
SECRETARY
 
Walla Walla, Washington
March 21, 201122, 2013



IMPORTANT: Voting promptly will save us the expense of further requests for proxies in order to ensure a quorum.  A proxy card and self-addressed envelope are enclosed for your convenience.  No postage is required if mailed in the United States.





 
 

 



PROXY STATEMENT
OF
BANNER CORPORATION
10 S. FIRST AVENUE
WALLA WALLA, WASHINGTON 99362
(509) 527-3636


ANNUAL MEETING OF SHAREHOLDERS
APRIL 26, 201123, 2013

 
The Board of Directors of Banner Corporation is using this Proxy Statement to solicit proxies from our shareholders for use at the 20112013 annual meeting of shareholders.  We are first mailing this Proxy Statement and the form of proxy to our shareholders on or about March 21, 2011.22, 2013.

The information provided in this Proxy Statement relates to Banner Corporation and its wholly-owned subsidiaries, Banner Bank and Islanders Bank.  Banner Corporation may also be referred to as “Banner” and Banner Bank and Islanders Bank may also be referred to as the “Banks.”  References to “we,” “us” and “our” refer to Banner and, as the context requires, the Banks.



INFORMATION ABOUT THE ANNUAL MEETING

 
Time and Place of the Annual Meeting

Our annual meeting will be held as follows:

Date:Tuesday, April 23, 2013
Tuesday, April 26, 2011
 Time:10:00 a.m., local time
 Place:Marcus Whitman Hotel, located at 6 W. Rose Street, Walla Walla, Washington

Matters to Be Considered at the Annual Meeting

At the meeting, you will be asked to consider and vote upon the following proposals:

 Proposal 1.To elect fiveElection of four directors to each serve for a three-year term. 

 Proposal 2.To provideAn advisory approval of the(non-binding) vote to approve our executive compensation of our namedas disclosed in this Proxy Statement.
Proposal 3.An advisory (non-binding) vote on whether an advisory vote on executive officers.compensation should be held every one, two or three years.

 Proposal 3.4.To ratifyRatification of the Audit Committee’s selection of Moss Adams LLP as our independent auditor for 2011.2013.

 Proposal 4.5.To approveApproval of an amendment to the amendment of the Amended and Restated Articles of Incorporation of Banner Corporation to effect a 1-for-7 reverse stock split of our common stock.2012 Restricted Stock Plan.

We also will 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 other business to be presented for consideration at the annual meeting other than the matters described in this Proxy Statement.

Who is Entitled to Vote?

We have fixed the close of business on March 1, 20112013 as the record date for shareholders entitled to notice of and to vote at our annual meeting.  Only holders of record of Banner’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 Banner common stock you own.

On March 1, 2011,2013, there were 114,424,15619,462,483 shares of Banner 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 of record on the voting record date an opportunity to vote on matters scheduled for the annual meeting and described in these materials.  You are a shareholder of record if your shares of Banner common stock are held in your name.  If you are a beneficial owner of Banner common stock held by a broker, bank or other nominee (i.e., in “street name”), please see the instructions in the following question.

Shares of Banner 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.

This year, shareholdersShareholders may vote by proxy via the Internet or a toll-free telephone number, or by mailing a proxy card.  Instructions for voting are found on the proxy card.  Shares of Banner common stock represented by properly executed proxies will be voted by the individuals named on the proxy card in accordance with the shareholder’s instructions.  Where properly executed proxies are returned to us with no specific instruction as how to vote at the annual meeting, the persons named in the proxy will vote the shares FOR election of each of our director nominees, FOR advisory approval of the compensation of our named executive officers,compensation as disclosed in this Proxy Statement, FOR holding an advisory vote on executive compensation every year, FOR ratification of the selection of Moss Adams LLP as our independent auditor and FOR the reverse stock split.approval of an amendment to our 2012 Restricted Stock Plan.  If any other matters are properly presented at the annual meeting for action, the persons named in the enclosed proxy and acting thereunder will have the discretion to vote on these 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 card depending on how your shares are held.  For example, you may hold some of your shares individually, some jointly with your spouse or other party and some in trust for your children.  In this case, you will receive three separate proxy cards to vote.

What if My Shares Are Held in Street Name?

If you are the beneficial owner of shares held in “street name” by a broker, your broker, 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 your broker, your broker 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 proposalproposals to elect directors and amend the 2012 Restricted Stock Plan and the advisory votevotes on executive compensation are considered non-discretionary items; therefore, you must provide instructions to your broker in order to have your shares voted with respect to 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 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 broker, bank or other nominee who holds your shares.

How Will My Shares of Common Stock Held in the Employee Stock Ownership Plan Be Voted?

If a shareholder is a participant in the Banner Corporation Employee Stock Ownership Plan (“ESOP”), the proxy card represents a voting instruction to the trustees of the ESOP as to the number of shares in the participant’s plan account.  Each participant in the ESOP may instruct the trustees how to vote the shares of common stock allocated to the participant’s plan account.  The instructions are confidential and will not be disclosed to Banner.  If an ESOP participant properly executes the proxy card, the ESOP trustee will vote the participant’s shares in accordance with the participant’s instructions.  Unallocated shares of common stock held by the ESOP and allocated shares for which no voting instructions are received or for which proper voting instructions are not received will be voted by the trustees in
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the same proportion as shares for which the trustees have received voting instructions.  The trustees of the ESOP are Directors Adams, Budke, Casper, Epstein, Klaue, Kravas, Lane, Layman, Mitchell, Orrico, Sirmon and Smith.
2


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 Banner 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 the meeting is adjourned for 120 days or more.  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

Directors are elected by a plurality of the votes cast, in person or by proxy, at the annual meeting by holders of Banner common stock.  Accordingly, the fivefour nominees for election as directors who receive the highest number of votes actually cast 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 withheld from each nominee.  Votes that are withheld and broker non-votes will have no effect on the outcome of the election because the fivefour nominees receiving the greatest number of votes will be elected.  Our Board of Directors unanimously recommends that you vote FOR the election of each of our director nominees.

Vote Required to Approve Proposal 2: Advisory Approval of Executive Compensation

The advisory (non-binding) vote to approve the compensation of our named executive officers requires the affirmative vote of a majority of the outstanding shares presentvotes cast, in person or by proxy, at the annual meeting.  Abstentions will have the same effect as a vote against the proposal.  Brokerand broker non-votes will have no effect on the outcome of the proposal.  Our Board of Directors unanimously recommends that you vote FOR approval of the compensation of our named executive officers.

Vote Required to Approve Proposal 3: Advisory Vote on the Frequency of Shareholder Votes on Executive Compensation

The advisory (non-binding) vote regarding the frequency of shareholder votes on executive compensation has three alternatives.  Shareholders may vote that shareholder votes on executive compensation be held every year, every two years or every three years, or shareholders may abstain from voting.  The alternative receiving the greatest number of votes – every year, every two years or every three years – will be the frequency that shareholders approve.  Abstentions and broker non-votes will have no effect on the outcome of the advisory vote because the alternative receiving the greatest number of votes will be the frequency that shareholders approve.  Our Board of Directors unanimously recommends that you vote FOR the adoption of an advisory resolution that shareholders should consider an advisory resolution on executive compensation every year.

Vote Required to Approve Proposal 4: Ratification of the Selection of the Independent Auditor

Ratification of the selection of Moss Adams LLP as our independent auditor for the fiscal year ending December 31, 20112013 requires the affirmative vote of a majority of the outstanding shares presentvotes cast, in person or by proxy, at the annual meeting.  Abstentions will have no effect on the same effect as a vote againstoutcome of the proposal.  Our Board of Directors unanimously recommends that you vote FOR the ratification of the selection of the independent auditor.

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Vote Required to Approve Proposal 4: Reverse5: Amendment of the Restricted Stock SplitPlan

AmendmentApproval of the amendment of our Amended and Restated Articles of Incorporation to effect a reverse stock split of our common stock2012 Restricted Stock Plan requires the affirmative vote of a majority of the outstanding shares entitled to votevotes cast, in person or by proxy, at the annual meeting.  Abstentions and broker non-votes will have no effect on the same effect as a vote againstoutcome of the proposal.  Our Board of Directors unanimously recommends that you vote FOR approval of the reverse stock split.amendment to our Restricted Stock Plan.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to Be Held on April 26, 201123, 2013

Our Proxy Statement and 20102012 Annual Report to Shareholders are available at www.bannerbank.com/proxymaterials.  The following materials are available for review: Proxy Statement; proxy card; and 20102012 Annual Report to Shareholders.  Directions to attend the annual meeting, where you may vote in person, can be found online at http://www.marcuswhitmanhotel.com/index.cfm?page=nav7&psub=4.explore-getdirections.

3

May I Revoke My Proxy?

You may revoke your proxy before it is voted by:

•       submitting a new proxy with a later date;
 
•       notifying theBanner’s Secretary of Banner in writing 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 your shares.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 
The following table sets forth, as of March 1, 2011,2013, the voting record date, information regarding share ownership of:

•       those persons or entities (or groups of affiliated person or entities) known by management to beneficially own more than five percent of Banner’s common stock other than directors and executive officers;

•       each director and director nominee of Banner;

•       each executive officer named in the Summary Compensation Table appearing under “Executive Compensation” below (known as “named executive officers”); and

•       all current directors and executive officers of Banner and Banner Bank as a group.

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

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 the 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
4

exercisable or exercisable within 60 days after the voting record date 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.

As of the voting record date, there were 114,424,15619,462,483 shares of Banner common stock outstanding.
4


Name 
Number of Shares
Beneficially Owned (1)
 
Percent of Shares
Outstanding
  
Number of Shares
Beneficially Owned (1)
 
Percent of Shares
Outstanding
 
            
Beneficial Owners of More Than 5%            
            
Donald Smith & Co., Inc.  10,819,060  (2)  9.46 
Donald Smith Long/Short Equities Fund, L.P.        
152 West 57th Street
        
New York, New York 10019        
BlackRock, Inc.  1,662,517  (2)  8.54 
40 East 52nd Street
        
New York, New York 10022        
                
Sy Jacobs  6,335,280  (3)  5.54 
Jacobs Asset Management, LLC        
11 East 26th Street
        
New York, New York 10010        
        
Thomas K. Brown
Second Curve Capital, LLC
237 Park Avenue, 9th Floor
New York, New York 10017
  9,535,707  (4)  8.33 
        
Wellington Management Company  7,438,200  (5)  6.50 
280 Congress Street        
Boston, Massachusetts 02210        
The Vanguard Group  1,052,634  (3)  5.41 
100 Vanguard Boulevard        
Malvern, Pennsylvania 19355        
                
Directors                
                
Robert D. Adams  119,804  (6)  *   18,579  (4)  * 
Gordon E. Budke  29,036   *   4,159  (5)  * 
David B. Casper  70,205  (7)  * 
Edward L. Epstein  46,610   *   6,660   * 
Jesse G. Foster  69,156  (8)  *   9,874  (6)  * 
D. Michael Jones  22,599  (7)  * 
David A. Klaue  949,142  (9)  *   80,329   * 
Constance H. Kravas  59,614  (10)  *   11,845  (8)  * 
Robert J. Lane  43,500  (11)  *   7,214  (9)  * 
John R. Layman  151,471  (12)  *   19,769  (10)  * 
Dean W. Mitchell  116,850  (13)  * 
Brent A. Orrico  519,871  (14)  *   76,916  (11)  * 
Gary Sirmon  256,517  (15)  *   36,459  (12)  * 
Michael M. Smith  143,589  (16)  *   23,629  (13)  * 
                
Director Nominee        
        
Connie R. Collingsworth  100   * 
        
Named Executive Officers                
                
Mark J. Grescovich**  165,955   *   58,406   * 
D. Michael Jones**  158,112  (17)  * 
Lloyd W. Baker  82,534  (18)  *   15,129  (14)  * 
Richard B. Barton  34,479   *   5,931   * 
Cynthia D. Purcell  23,311   *   2,656   * 
Paul E. Folz  40,981  (19)  * 
Douglas M. Bennett  6,023  (15)  * 
                
All Executive Officers and Directors as a Group (24 persons)  3,225,594   2.82 
All Executive Officers and Directors as a Group (23 persons)  436,085   2.24 
______________                 
*Less than 1% of shares outstanding.
**Also a director of Banner. Mr. Jones retired as an executive officer in 2010.
(1)Shares held in accounts under the ESOP and shares of restricted stock granted under Mr. Grescovich’s employment agreement, as well as under the 2012 Restricted Stock plan, as to which the holders have voting power but not investment power, are included as follows: Mr. Grescovich, 115,95551,264 shares; Mr. Jones, 4,062586 shares; Mr. Baker, 11,7044,693 shares; Mr. Barton, 3,7293,539 shares; Ms. Purcell, 7,3941,069 shares; Mr. Folz, 3,711Bennett, 5,136 shares; and all executive officers and directors as a group, 170,69979,910 shares. The amounts shown also include the following number of shares which the indicated individuals have the right to acquire within 60 days of the voting record date through the exercise of stock options granted pursuant to Banner’s stock option plans: Mr. Adams,Budke, 2,592; Mr. Epstein, 2,592; Dr. Kravas, 2,592; Mr. Klaue, 2,500; Mr. Lane, 2,500; Mr. Layman, 2,500; Mr. Smith, 2,592; Mr. Baker, 1,000; Mr. Budke, 18,150; Mr. Casper,Barton, 1,000; Ms. Purcell, 1,000; Mr. Epstein, 18,150;Bennett, 857; and all executive officers and directors as a group, 24,080.
(2)Based on a Schedule 13G dated February 4, 2013, which reports sole voting and dispositive power over the shares reported.

(Footnotes continue on following page)
 
 
5

 

Ms. Kravas, 18,150; Mr. Klaue, 10,500; Mr. Lane, 10,500; Mr. Layman, 10,500; Mr. Mitchell, 1,000; Mr. Smith, 18,150; Mr. Baker, 11,800; Mr. Barton, 21,000; Ms. Purcell, 11,800; Mr. Folz, 21,000; and all executive officers and directors as a group, 196,700. 
(2)(3)Based on a Schedule 13G dated February 11, 2011,7, 2013, which reports that Donald Smith & Co., Inc. has sole voting power over 9,080,78325,582 shares and sole dispositive power over 10,819,060 shares, and Donald Smith Long/Short Equities Fund, L.P.  has sole voting power over 33,577 shares and sole dispositive power over 10,819,0601,027,652 shares.
(3) Based on a Schedule 13G dated February 14, 2011, which reports shared voting and dispositive power over the shares reported. 
(4)Based on a Schedule 13G dated January 10, 2011, which reports shared voting and dispositive power over the shares reported. 
(5) Based on a Schedule 13G dated February 14, 2011, which reports shared voting and dispositive power over the shares reported. 
(6) Includes 13,2701,895 shares owned by a trust directed by Mr. Adams.
(7) (5)Includes 16,9751,567 shares owned by a trust directed by Mr. Budke and his wife.
(6)Includes 6,832 shares owned solely by his wife.
(7)
Includes 142 shares held as custodian for minors.
(8)Includes 878 shares held jointly with her husband.
(9)Includes 4,714 shares held jointly with his wife.
(8) (10)Includes 39,705 shares owned solely by his wife. 
(9) Includes 611,023 shares owned by companies controlled by Mr. Klaue. 
(10) Includes 6,112 shares held jointly with her husband. 
(11) Includes 33,000 shares held jointly with his wife. 
(12) Includes 75,00010,714 shares which have been pledged.
(13) (11)Includes 35,512 shares held jointly with his wife. 
(14) Includes 312,96444,706 shares owned by companies controlled by Mr. Orrico and 131,35218,827 shares owned by trusts directed by Mr. Orrico.
(15) (12)Includes 90,3029,938 shares held jointly with his wife and 12,900 shares owned by companies controlled by Mr. Sirmon.
(16) (13)Includes 10,2001,457 shares held jointly with his wife, 16,0002,285 shares owned solely by his wife and 50,0007,142 shares owned by a company controlled by Mr. Smith.
(17) (14)Includes 1,000 shares held as custodian for minors. 
(18) Includes 847121 shares owned solely by his wife and 52,4288,489 shares held jointly with his wife.
(19) Includes 12,800 shares held jointly with his wife. 
(15)Includes 3 shares held as custodian to a minor.



PROPOSAL 1 – ELECTION OF DIRECTORS

 
Our Board of Directors currently consists of 1513 members and is divided into three classes.  One-thirdApproximately one-third of the directors are elected annually to serve for a three-year period or until their respective successors are elected and qualified.  However, Dean W. MitchellEffective as of the annual meeting, Edward L. Epstein, who has reached our mandatory retirement age, and will retire effective asretire. The Board of Directors has nominated Connie R. Collingsworth to fill the annual meeting.  At that time, the Board will reduce its size from 15vacancy to 14 members.be created by Mr. Epstein’s retirement.  Ms. Collingsworth was recommended by a non-management director.  The table below sets forth information regarding each director of Banner and each nominee for director.  The Corporate Governance/Nominating Committee of the Board of Directors selects nominees for election as directors.  All of our nominees currently serve as Banner directors.directors, except Ms. Collingsworth.  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 a vote FOR the election of Jesse G. Foster, MarkRobert D. Adams, Connie R. Collingsworth, Robert J. Grescovich, D. Michael Jones, David A. KlaueLane and Brent A. Orrico.Gary Sirmon.

Name
 
Age as of
December 31, 2010
 
Year First Elected
or Appointed Director (1)
 
 
Term to Expire
 
Age as of
December 31, 2012
 
Year First Elected
or Appointed Director (1)
 
 
Term to Expire
            
BOARD NOMINEES
      
Robert D. Adams 71 1984      2016 (2)
Connie R. Collingsworth 54 N/A      2016 (2)
Robert J. Lane 67 2007      2016 (2)
Gary Sirmon 69 1983      2016 (2)
DIRECTORS CONTINUING IN OFFICEDIRECTORS CONTINUING IN OFFICE
            
Jesse G. Foster 72 1996      2014 (2) 74 1996 2014
Mark J. Grescovich 46 2010      2014 (2) 48 2010 2014
D. Michael Jones 68 2002      2014 (2) 70 2002 2014
David A. Klaue 57 2007      2014 (2) 59 2007 2014
Brent A. Orrico 61 1999      2014 (2) 63 1999 2014
DIRECTORS CONTINUING IN OFFICE
      
Gordon E. Budke 68 2002 2012 71 2002 2015
David B. Casper 74 1976 2012
Constance H. Kravas 64 2004 2012 66 2004 2015
John R. Layman 52 2007 2012 54 2007 2015
Michael M. Smith 56 2003 2012 58 2003 2015
      
(Table continues on following page)
___________       
(1) Includes prior service on the Board of Directors of Banner Bank for all directors who have served since 1995 or earlier. 
(2) Assuming election or re-election. 
 
 
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Name
  Age as of
December 31, 2010
 
Year First Elected
or Appointed Director (1)
 Term to Expire
       
Robert D. Adams 69 1984 2013
Edward L. Epstein 74 2003 2013
Robert J. Lane 65 2007 2013
Gary Sirmon 67 1983 2013
_______________      
(1)      Includes prior service on the Board of Directors of Banner Bank for all directors who have served since 1995 or earlier.
(2)      Assuming election or re-election.

Information Regarding Nominees for Election.  Set forth below is the present principal occupation and other business experience during the last five years of each nominee for election, as well as a brief discussion of the particular experience, qualifications, attributes and skills that led the Board to conclude that the nominee should serve as a director of Banner.Banner.
Robert D. Adams sold his business interests in 2005 as a partner in, and retired as President and Chief Executive Officer of, Carroll Adams Tractor Co., which sold and rented farm, industrial and consumer equipment and with which he was affiliated for 36 years.  Through his career, Mr. Adams developed expertise in management, risk assessment, and  agricultural and commercial building construction.

Connie R. Collingsworth serves as General Counsel and Secretary of the Bill & Melinda Gates Foundation in Seattle, Washington, where she manages the Foundation’s legal needs and has provided leadership in the areas of risk management, compliance and corporate governance.  Since 2007, she has also served on the Foundation’s Management Committee which is responsible for the development and execution of Foundation-wide strategy and policy and coordination of overall operations.  Prior to joining the Foundation in 2002, Ms. Collingsworth was a partner of Preston Gates & Ellis, now K&L Gates, a leading Northwest law firm based in Seattle, where she served as lead attorney for a broad range of commercial transactions, mergers and acquisitions, and private equity financings.

Robert J. Lane is a retired banking executive who spent his 29-year banking career with Seattle First National Bank, Idaho First National Bank, West One Bancorp and U.S. Bancorp.  Mr. Lane’s banking career afforded him the opportunity to gain expertise in management, credit-related production, corporate and commercial banking, and commercial real estate.  He is President of Lane Farms, Inc. of La Grande, Oregon and has other real estate and investment interests.

Gary Sirmon is Chairman of the Board and a director of Banner and Banner Bank.  He joined Banner Bank in 1980 as an Executive Vice President and served as its Chief Executive Officer from 1982 until February 2002.  Mr. Sirmon’s extensive career in banking has given him expertise in management, strategic planning, risk management, and mergers and acquisitions.

Information Regarding Incumbent Directors.  Set forth below is the present principal occupation and other business experience during the last five years of each director continuing in office, as well as a brief discussion of the particular experience, qualifications, attributes and skills that led the Board to conclude that the director should serve on Banner’s Board of Directors.

Jesse G. Foster is Vice Chairman of the Board and a director of Banner and Banner Bank.  Mr. Foster retired as an officer of Banner as of the end ofin 2003 and has since that time served as a consultant to Banner Bank.Bank until the end of 2010.  He was formerly the Chief Executive Officer, President and a Director of Inland Empire Bank, which he joined in 1962.  Mr. Foster’s banking career gave him expertise in all areas of banking.

Mark J. Grescovich is President and Chief Executive Officer, and a director, of Banner and Banner Bank.  Mr. Grescovich joined Banner and Banner Bank as President in April 2010 and became Chief Executive Officer in August 2010.  Prior to joining Banner and Banner Bank, Mr. Grescovich was the Executive Vice President and Chief Corporate Banking Officer for Akron, Ohio-based FirstMerit Corporation and FirstMerit Bank N.A., a commercial bank with $14.5 billion in assets and over 200 branch offices.  He assumed the role and responsibility for FirstMerit’s commercial and regional line of business in 2007, having served since 1994 in various commercial and corporate banking positions, including that of Chief Credit Officer.  Prior to joining FirstMerit, Mr. Grescovich was a Managing Partner in corporate finance with Sequoia Financial Group, Inc. of Akron, Ohio and a commercial and corporate lending officer and credit analyst with Society National Bank of Cleveland, Ohio.  He has a Bachelor of Business Administration degree in finance from Miami University and a Master of Business Administration degree, also in finance, from The University of Akron.  Mr. Grescovich’s career has provided him with a wealth of expertise in banking.

D. Michael Jones retired in 2010 as President and Chief Executive Officer of Banner and Banner Bank.  He joined Banner Bank in 2002 following an extensive career in banking, finance and accounting.  Mr. Jones is a Certified Public Accountant (Inactive)(inactive) and served as President and Chief Executive Officer from 1996 to 2001 for Source Capital Corporation, a lending company in Spokane, Washington.  From 1987 to 1995, Mr. Jones served as President of West
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One Bancorp, a large regional banking franchise based in Boise, Idaho.  Mr. Jones’ banking career has given him expertise in all areas of banking.

David A. Klaue served as Chairman of the Board of Directors of F&M Bank until its acquisition by Banner Bank in May 2007.  He is Chairman of the Board of Empire Lumber Co., a diversified wood products manufacturer with operations in Washington, Idaho and Montana; Felts Field Aviation, an air transportation company; Park Ranch Land & Cattle Co., a cow/calf feeder and hay producer; and Empire Investments, a real estate investment company, companies with which he has been affiliated for over 3132 years.  He is a managing member in various other real estate investment, equipment and sales companies.  Mr. Klaue’s career has afforded him expertise in business, agricultural and real estate management.

Brent A. Orrico is President of FAO Corporation, an asset management company, and is a principal of B & O Financial Management Company, with which he has been affiliated for 1517 years.  Mr. Orrico has 3132 years of experience in banking and finance-related business activities, including having served as an executive officer at a major financial institution and being a founding member of two community banks.  Mr. Orrico also serves as a director of Islanders Bank.

Information Regarding Incumbent Directors.  Set forth below is the present principal occupation and other business experience during the last five years of each director continuing in office, as well as a brief discussion of the
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particular experience, qualifications, attributes and skills that led the Board to conclude that the director should serve on Banner’s Board of Directors.

Gordon E. Budke is President of Budke Consulting, PLLC, which specializes in general business assistance to small and growing companies.  A Certified Public Accountant with over 3436 years of experience in public accounting, Mr. Budke retired as a partner from Coopers & Lybrand (now PricewaterhouseCoopers) in October 1997.  His qualification as an audit committee financial expert was the primary reason for his nomination to the Board.  Mr. Budke also serves on the Board of Directors of Yokes Foods, Inc.

David B. Casper is President of David Casper Ranch, Inc., a farming operation he has owned since 1973.  Mr. Casper has expertise in the area of agricultural lending and has gained a wealth of experience in his 35 years as a director of Banner.

Constance H. Kravas is the University of Washington’s Vice President for Development and Alumni Relations and also serves as the President of the University of Washington Foundation.  Prior to joining the University of Washington in 2001, she served as Vice Chancellor for University Advancement at the University of California, Riverside, and as Vice President for Advancement of Washington State University and President of the Washington State University Foundation.  Ms.Dr. Kravas has over 3038 years of experience in leadership and management positions for not-for-profit boards.

John R. Layman served as co-Vice Chairman of the Board of Directors of F&M Bank until its acquisition by Banner Bank in May 2007.  He is managing partner of Layman Layman & Robinson,Law Firm, PLLP, with which he has been associated since 1983.  His areas of practice include real estate development, commercial litigation, personal injury and product liability.  He also has experience in corporate duties, securities litigation, fiduciary obligations and reporting requirements.

Michael M. Smith has managed a family-owned farming and orchard operation, B.T. Loftus Ranches, Inc., in Washington’s Yakima valley since 1974.  He is also a founder, director and former president of Yakima Chief, Inc., an international hops sales organization.  Mr. Smith’s career has afforded him experience in managing financial and operational aspects of agricultural companies.

Robert D. Adams recently sold his business interests as a partner in and the President and Chief Executive Officer of Carroll Adams Tractor Co., which sold and rented farm, industrial and consumer equipment and with which he was affiliated for 36 years.  Through his career, Mr. Adams developed expertise in management, risk assessment, and  agricultural and commercial building construction.

Edward L. Epstein retired in 2008 as a partner in the Portland, Oregon, law firm of Stoel Rives LLP, which he joined 1962.  Mr. Epstein is a corporate lawyer who focused on mergers and acquisitions, federal income taxation of corporations, advice to boards of directors and corporate governance matters.  He co-chaired the firm’s mergers and acquisitions practice group for a number of years, and gave advice to businesses of all sizes, including those in the banking and financial services sector.

Robert J. Lane is a retired banking executive who spent his 29-year banking career with Seattle First National Bank, Idaho First National Bank, West One Bancorp and U.S. Bancorp.  Mr. Lane’s banking career afforded him the opportunity to gain expertise in management, credit-related production, corporate and commercial banking, and commercial real estate.  He is President of Lane Farms, Inc. of La Grande, Oregon and has other real estate and investment interests.

Gary Sirmon is Chairman of the Board and a director of Banner and Banner Bank.  He joined Banner Bank in 1980 as an Executive Vice President and served as its Chief Executive Officer from 1982 until February 2002.  Mr. Sirmon’s extensive career in banking has given him expertise in management, strategic planning, risk management, and mergers and acquisitions.

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MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

Board of Directors

The Board of Directors conducts its business through Board meetings and through its committees.  During the year ended December 31, 2010,2012, the Board of Directors held 1312 meetings.  No director attended fewer than 75% of the total meetings of the Board and committees on which such person served during this period.

Committees and Committee Charters

The Board of Directors has standing Executive, Audit, Compensation, Risk and Corporate Governance/Nominating Committees.  The Board has adopted written charters for the Audit, Compensation, Risk and Corporate Governance/ Nominating Committees and although copies of these charters are not available on our website, 
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the charters, excepting the Risk Committee charter, must be attached to the annual meeting proxy statement at least once every three years or when the charter has been materially amended.  The AuditCompensation Committee charter is attached to this Proxy Statement as Appendix A, the Compensation Committee charter was attached to the Proxy Statement for the 2010 annual meeting, and the Corporate Governance/Nominating Committee charter was attached to the Proxy Statement for the 20092012 annual meeting, and the Audit Committee charter was attached to the Proxy Statement for the 2011 annual meeting.

Executive Committee

The Executive Committee, consisting of Directors Orrico (Chairman), Budke, Foster, Grescovich, LaneKlaue and Sirmon, acts for the Board of Directors when formal Board action is required between regular meetings.  The Committee has the authority to exercise all powers of the full Board of Directors, except that it does not have the power to, among other things, declare dividends, authorize the issuance of stock, amend the Bylaws or approve any agreement of merger or consolidation other than mergers with Banner subsidiaries.  The Executive Committee did not meetmet three times during the year ended December 31, 2010.2012.

Audit Committee

The Audit Committee, consisting of Directors Budke (Chairman), Adams, Layman and Smith, oversees management’s fulfillment of its financial reporting responsibilities and maintenance of an appropriate internal control system.  It also has the sole authority to appoint or replace our independent auditor and oversees the activities of our internal audit functions.  The Audit Committee believes it has fulfilled its responsibilities under its charter.  The Committee met 1615 times during the year ended December 31, 2010.2012.

Each member of the Audit Committee is “independent,” in accordance with the requirements for companies quoted on NASDAQ.  In addition, the Board of Directors has determined that Mr. Adams and Mr. Budke meet the definition of “audit committee financial expert,” as defined by the SEC.

Compensation Committee

The Compensation Committee, which consists of Directors Lane (Chairman), Casper,Epstein, Klaue, Kravas and Mitchell,Smith, sets salary policies and levels for senior management and oversees all of our salary and incentive compensation programs.  The Committee believes it has fulfilled its responsibilities under its charter.  The Compensation Committee met fourseven times during the year ended December 31, 2010.2012.

Each member of the Compensation Committee is “independent,” in accordance with the requirements for companies quoted on NASDAQ.  The Committee meets, outside of the presence of Mr. Grescovich, to discuss his compensation and make its recommendation to the full Board, which then votes on his compensation.  Mr. Grescovich makes recommendations to the Compensation Committee regarding the compensation of all other executive officers.  The Committee considers the recommendations of Mr. Grescovich and makes its recommendation to the full Board, which then votes on executive compensation.
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Risk Committee

The Risk Committee, consisting of Directors Orrico (Chairman), Budke, Grescovich, Lane and Sirmon, was established in September 2010 to provide effective oversight of our enterprise-wide risk structure and the processes established to identify, measure, monitor and manage our credit risk, market and liquidity risk, interest rate risk and operating risk, including technology, legal and compliance risk.  The Committee also reviews management’s strategies and policies for managing these risks and serves as the primary point of contact between the Board and senior management in assessing enterprise-wide risk management activities and effectiveness.  The Risk Committee met twicefour times during the year ended December 31, 2010.2012.

Corporate Governance/Nominating Committee

The Corporate Governance/Nominating Committee, consisting of Directors Orrico (Chairman), Epstein and Kravas, assures that we maintain the highest standards and best practices in all critical areas relating to the management
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of the business of Banner.  The Committee also selects nominees for the election of directors and develops a list of nominees for board vacancies.  The Corporate Governance/Nominating Committee believes it has fulfilled its responsibilities under its charter.  Each member of the Committee is “independent,” in accordance with the requirements for companies quoted on NASDAQ.  The Committee met fivethree times during the year ended December 31, 2010.2012.

The Corporate Governance/Nominating Committee met on January 25, 201131, 2013 to nominate directors for election at the annual meeting.  Only those nominations made by the Committee or properly presented by shareholders will be voted upon at the annual meeting.  In its deliberations for selecting candidates for nominees as director, the Committee considers the candidate’s level of success and respect in the candidate’s field, as well as the candidate’s independence, communication skills, education, character and community involvement.  The Committee also considers the candidate’s knowledge of the banking business and whether the candidate would provide for adequate representation of our market area.  Any nominee for director made by the Committee must be highly qualified with regard to some or all these attributes.  The Committee does not specifically consider diversity in identifying nominees for director; however, the Committee believes that the judicious application of the criteria described above provide Banner with a well-rounded and effective Board with a diverse range of experience and perspectives.

In searching for qualified director candidates to fill vacancies in the Board, the Committee solicits its current Board of Directors for names of potentially qualified candidates.  Additionally, the Committee may request that members of the Board of Directors pursue their own business contacts for the names of potentially qualified candidates.  The Committee would then consider the potential pool of director candidates, select the candidate the Committee believes best meets the then-current needs of the Board, and conduct a thorough 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 Banner director.  The Committee will consider director candidates recommended by our shareholders.  If a shareholder submits a proposed nominee, the Committee would consider the proposed nominee, along with any other proposed nominees recommended by members of the Board of Directors, in the same manner in which the Committee would evaluate its nominees for director.  For a description of the proper procedure for shareholder nominations, see “Shareholder Proposals” in this Proxy Statement.

Leadership Structure

The positions of Chairman of the Board and of President and Chief Executive Officer are held by two persons.  This has been the case since 1995, when Banner was formed to become the holding company for Banner Bank.  The Board believes this structure is appropriate for Banner because it provides the Board with capable leadership and independence from management.  It also allows the President and Chief Executive Officer to focus on the day-to-day business of managing Banner, while the Chairman leads the Board.

Board Involvement in the Risk Management Process

The Board of Directors recognizes that effective risk management requires a high level of cooperation between the Board and senior management.  Nonetheless, the Board has established and maintains its independence in overseeing the conduct of Banner, including the risk management process.  The Board’s leadership structure takes into account its risk administration function by the conduct of its business through Board meetings and through its committees, in
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particular the Corporate Governance/Nominating, Audit and Risk Committees, as well as by the separation of the positions of Chairman of the Board and of President and Chief Executive Officer as described above.

Directors keep themselves informed of the activities and condition of Banner and of the risk environment in which it operates by regularly attending Board and assigned Committee meetings, and by review of meeting materials, auditor’s findings and recommendations, and supervisory communications.  Directors stay abreast of general industry trends and any statutory and regulatory developments pertinent to Banner and the Banks by periodic briefings by senior management, counsel, auditors or other consultants, and by more formal director education.  The Corporate Governance/ Nominating Committee monitors and evaluates director training and information resources.

The Board oversees the conduct of Banner’s business and administers the risk management function by:

•         selecting, evaluating, and retaining competent senior management;

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•        establishing, with senior management, Banner’s long- and short-term business objectives, and adopting operating policies to achieve these objectives in a legal and sound manner;

•        monitoring operations to ensure that they are controlled adequately and are in compliance with laws and policies;

•        overseeing Banner’s business performance; and

•        ensuring that the Banks help to meet our communities’ credit needs.

These responsibilities are governed by a complex framework of federal and state law and regulation as well as regulatory guidelines applicable to the operation of Banner and the Banks.

The Board ensures that all significant risk taking activities are covered by written policies that are communicated to appropriate employees.  Specific policies cover material credit, market, liquidity, operational, legal and reputation risks.  The policies are formulated to further Banner’s business plan in a manner consistent with safe and sound practices.  The Board ensures that all such policies are monitored by senior management to make certain that they conform with changes in laws and regulations, economic conditions, and Banner’s and the Banks’ circumstances.  The policies are implemented by senior management who develop and maintain procedures, including a system of internal controls, designed to foster sound practices, to comply with laws and regulations, and to protect Banner against external crimes and internal fraud and abuse.

The Board’s policies also establish mechanisms for providing the Board with the information needed to monitor Banner’s operations.  This includes senior management reports to the Board.  These reports present information in a form meaningful to members of the Board, who recognize that the level of detail and frequency of individual senior management reports will vary with the nature of the risk under consideration and Banner’s and the Banks’ unique circumstances.

The Board further enhanced its involvement in the risk management process in September 2010 by the establishment of a Risk Committee.  The Risk Committee reviews management’s strategies and policies for managing enterprise-wide risks and the processes established to identify, measure, monitor and manage those risks.  The Risk Committee also serves as the primary point of contact between the Board and senior management in assessing enterprise-wide risk management activities and effectiveness.

The Board has also established a mechanism for independent third party review and testing of compliance with policies and procedures, applicable laws and regulations, and the accuracy of information provided by senior management.  This is accomplished, for example, by an internal auditor reporting directly to the Audit Committee.  In addition, an annual external audit is performed. The Audit Committee reviews the auditors’ findings with senior management and monitors senior management’s efforts to resolve any identified issues and recommendations.  The Audit Committee provides regular reports of its activities to the Board.
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The Board also reviews reports of inspection and examination or other supervisory activity, and any other material correspondence received from Banner’s regulators.  Findings and recommendations, if any, are carefully reviewed, and progress in addressing such matters is routinely monitored.

Corporate Governance

We are committed to establishing and maintaining high standards of corporate governance.  The Corporate Governance/Nominating Committee is responsible for initiatives to comply with the provisions contained in the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC adopted thereunder, and NASDAQ rules governing corporate governance.  The Committee will continue to evaluate and improve our corporate governance principles and policies as necessary and as required.

Code of Ethics.  On June 19, 2003, the Board of Directors adopted the Officer and Director Code of Ethics.  The Code is applicable to each of our directors and officers, including the principal executive officer and senior financial officers, and requires individuals to maintain the highest standards of professional conduct.  A copy of the Code of Ethics was filed as an exhibit to Banner’s Annual Report on Form 10-K for the year ended December 31, 2004.

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Communications with Shareholders.  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 communication to the Secretary, Banner Corporation, 10 S. First Avenue, Walla Walla, Washington 99362.  Any communication must state the number of shares beneficially owned by the shareholder making the communication.  The Secretary will forward such communication to the full Board of Directors or to any individual director or directors to whom the communication is directed unless the communication is unduly hostile, threatening, illegal or similarly inappropriate, in which case the Secretary has the authority to discard the communication or take appropriate legal action.

Annual Meeting Attendance by Directors.  We do not have a policy regarding Board member attendance at annual meetings of shareholders.  All directors, except Mr. Lane, attended last year’s annual meeting of shareholders.

Related Party Transactions.  We have a number of written policies governing transactions with related parties.  These policies are intended to ensure that all transactions entered into with related parties are in the best interests of Banner and its shareholders.  As a general rule, transactions with directors and officers, and their related interests are prohibited.  An exception applies to normal banking relationships.

Our Code of Ethics provides that where an officer or director finds that any financial or business relationship with customers, consultants, or vendors may impair, or appear to impair, the independence of business judgment on behalf of Banner, that person must (1) disclose fully to a supervisor, the Chief Executive Officer or to the Board of Directors the existence and nature of the conflict and (2) remove and insulate himself/herself from all decision-making and action related to that financial or business activity of Banner.  Each year, our directors and officers complete a conflict of interest questionnaire to ensure that no conflicts, or potential conflicts, of interest are overlooked.

The Banks have followed a policy of granting loans to our employees, officers and directors, which fully complies with all applicable federal and state regulations.  All outstanding loans to our directors and executive officers: (1) were made in the ordinary course of business; (2) were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Banks; and (3) did not involve more than the normal risk of collectibility or present other unfavorable features when made.  Loans made to executive officers and directors are granted pursuant to the normal underwriting procedures of the Banks.  Loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to that person and his or her related interests, are in excess of the greater of $25,000 or 5% of the institution’s capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors.  All lines of credit to insiders that, combined with other loans, do not exceed $500,000 for directors and their related interests or $100,000 for executive officers and that do not fall within the exceptions to Regulation O of the Board of Governors of the Federal Reserve System must be approved by the Board of Directors at least annually.  All loan approval and review procedures are governed by written policies.

In addition, each director and executive officer completes a form annually to identify all related interests.  Deposit and loan accounts of directors, executive officers and related interests are then coded with special markersin our systems so
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that developments can be tracked.  Our Regulation O officer, a compliance specialist, monitors developments monthly and completes a quarterly report of Regulation O compliance which is submitted to the Board of Directors.

Director Independence.  Our common stock is listed on The NASDAQ Global Select Market.  In accordance with NASDAQ rules, at least a majority of our directors must be independent directors.  The Board has determined that 1210 of our 1513 directors are “independent,” as defined by NASDAQ.  Robert D. Adams, Gordon E. Budke, David B. Casper, Edward L. Epstein, David A. Klaue, Constance H. Kravas, Robert J. Lane, John R. Layman, Dean W. Mitchell, Brent A. Orrico, Gary Sirmon and Michael M. Smith are independent.

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DIRECTORS’ COMPENSATION

 
Director Compensation Table

The following table shows the compensation paid to our non-employee directors for 2010.  Compensation information for2012, with the exception of Mark J. Grescovich, a director and our President and Chief Executive Officer, and D. Michael Jones, a director and our former President and Chief Executive Officer,whose compensation is included in the section entitled “Executive Compensation.”  We do not offer any non-equity incentive plan compensation to directors and the directors did not receive any stock or option awards in 2010; therefore, these columns have been omitted from the table below.

Name
 
Fees Earned or
Paid in Cash ($)(1)
 
Change in Pension
Value and Non-
qualified Deferred
Compensation
Earnings ($)
 
 
All Other
Compensation ($)(2)
 
 
Total ($)
 
Fees Earned or
Paid in Cash ($)(1)
 
Change in Pension Value
and Non-qualified
Deferred Compensation
Earnings ($)
 
 
All Other
Compensation ($)(2)
 
 
Total ($)
                
Robert D. Adams 48,000 --   221   48,221 48,000 -- 2,052 50,052
Gordon E. Budke 71,000 --   290   71,290 75,000 -- 3,281 78,281
David B. Casper 37,000 --   164   37,164
Edward L. Epstein 
      52,000 (3)
 --   209   52,209 
      40,500 (3)
 -- 2,053 42,553
Jesse G. Foster 
         3,000 (4)
 (5) 
 141,247 (6)
 144,247 
       38,500 (3)
 (4) 
    76,437 (5)
 114,937
David A. Klaue 36,000 --   157   36,157 42,000 -- 1,974 43,974
Constance H. Kravas 38,000 -- 
        179 (7)
   38,179 35,000 -- 1,974 36,974
D. Michael Jones        34,000 (3) 10,704 (6)   134,825 (7) 179,529
Robert J. Lane 40,500 --   162   40,662 45,750 -- 2,009 47,759
John R. Layman 49,000 --   236   49,236 47,000 -- 2,000 49,000
Dean W. Mitchell 37,500 --   158   37,658
Brent A. Orrico        70,350 (8) --   209   70,559        67,200 (8) -- 2,146 69,346
Gary Sirmon        58,000 (3) (9) 
   139,228 (10)
 197,228        61,500 (3) (9)     141,774 (10) 203,274
Michael M. Smith 49,000 --   221   49,221 50,000 -- 2,053 52,053
_______________         
____________
(1)The following directors deferred all or a portion of their fees into Banner common stock, or life insurance, pursuant to the deferred fee agreements described below: Adams, Casper,Klaue, Kravas, MitchellLayman, Orrico and Orrico.Smith.
(2)Unless otherwise noted, consists of dividends paid on vested phantom stock awards and business and occupation tax reimbursement. Effective July 1, 2010, Washington State subjects directors’ fees to a 1.8% business and occupation tax, which may be reduced by a small business tax credit allowance. Banner has agreed to reimburse or pay the tax on theeach director’s behalf.
(3)Includes $3,000 in fees for attending meetings of the Board of Directors of Community Financial Corporation, a subsidiary of Banner Bank.Bank as follows: Mr Epstein, $1,000; Mr. Foster, $1,500; Mr. Jones, $1,000; and Mr. Sirmon, $1,500.
(4)Pursuant to the terms of his consulting agreement (described below), Mr. Foster did not receive an annual retainer and did not earn fees for attending Board or committee meetings of Banner or Banner Bank. However, he did receive meeting fees for attending meetings of the Board of Directors of Community Financial Corporation.
(5)The present value of Mr. Foster’s supplemental retirement benefits decreased by $50,552$58,147 in 2010.2012.
(6)(5)Mr. Foster received $66,000 pursuant to his consulting agreement and $72,000 pursuant to his supplemental retirement agreement (each as(as described below), as well as an aggregate; also includes life insurance premiums paid and dividends on vested phantom stock awards.
(6)Consists of $3,247 for a car allowance, country club dues andabove-market earnings on deferred compensation. The present value of Mr. Jones’ supplemental retirement benefits decreased by $29,929 in 2012.
(7)Mr. Jones received $134,050 pursuant to his supplemental retirement agreement (as described below); also includes life insurance premiums paid.
(7)In addition to business and occupation tax reimbursement, includes dividends received on restricted stock.
(8)Includes $20,100$20,700 in fees for attending meetings of the Board of Directors of Islanders Bank.
(9)The present value of Mr. Sirmon’s supplemental retirement benefits and salary continuation plan decreased by $58,800$31,394 in 2010.2012.
(10)
Mr. Sirmon received $77,062 pursuant to his salary continuation agreement and $57,604 pursuant to his supplemental retirement agreement (each as described below), as well as an aggregate of $4,562 for; also includes life insurance premiums paid, country club dues, and business and occupation tax reimbursement.reimbursement, and dividends on vested phantom stock awards.
 
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During the year ended December 31, 2010,2012, non-employee directors of Banner received an annual retainer of $33,000 and a fee of $1,000 per committee meeting attended.  The Chairman of the Board receives an additional $20,000 annual retainer, the Chairman of the Audit Committee receives an additional $20,000 annual retainer and the Chairmen of the Compensation Committee, Risk Committee and Corporate Governance/Nominating Committee receive an additional $250 per committee meeting attended.  Non-employee directors who serve on the Board of Community Financial Corporation, a subsidiary of Banner Bank, receive $500 for each meeting attended. Non-employee directors who serve on the Board of Islanders Bank receive an annual retainer of $17,400 and $300 per committee meeting attended.  Officers of Banner or its subsidiaries who are also directors do not receive any fee or remuneration for services as members of the Board of Directors or any Board committees. The Board of Directors typically determines whether to adjust the annual retainer and meeting fees of directors in April of each year and from time to time requests recommendations from the Compensation Committee.

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In order to encourage the retention of qualified directors, we have entered into deferred fee agreements whereby directors may defer all or a portion of their regular fees until retirement.  Each director may direct the investment of the deferred fees toward the purchase of life insurance, Banner common stock, mutual fund-style investments or a stable value account.  We have established grantor trusts to hold the common stock and mutual fund-style investments.  The assets of the trusts are considered part of our general assets and the directors have the status of unsecured creditors of Banner with respect to the trust assets.  The deferred fee agreements provide pre-retirement death and disability benefits in an amount equal to the value of the director’s account balance upon the occurrence of either event.  At retirement, a director, as previously elected, may receive the balance of his or her account in a lump sum or in annual installments over a period not exceeding ten years.  In connection with its acquisitions, Banner also assumed liability for certain deferred compensation plans for the acquired institutions’ directors.  At December 31, 2010,2012, our estimated deferred compensation liability accrual with respect to non-employee directors under these agreements was $3.1$3.3 million.

Banner Bank entered into agreements to provide supplemental retirement benefits to Messrs. Foster, Jones and Sirmon while each was employed by Banner as an executive officer.  Banner Bank has purchased life insurance to recover the benefits payable under these agreements upon each man’s death.  The agreements provide that, following retirement at or after attaining age 62 (age 65 for Mr. Jones) and for a minimum of a 180-month period thereafter, Banner Bank will pay each man (or his beneficiary) an annual benefit based on his level of pre-retirement compensation and other retirement benefits.  Mr. Foster’s monthly benefit is $6,000 and was first paid on January 1, 2004.  Mr. Jones’ monthly benefit is $11,171 and was first paid on March 1, 2011.  Mr. Sirmon’s monthly benefit is approximately $4,800 and was first paid on August 1, 2005.

Banner Bank entered into a salary continuation agreement in October 1993 with Mr. Gary Sirmon, a director and former Chairman, President and Chief Executive Officer of Banner and Banner Bank, to ensure his continued service through retirement.  Banner Bank has purchased life insurance to recover the benefits payable under the agreement upon Mr. Sirmon’s death.  Mr. Sirmon retired on July 16, 2005 and will receive monthly payments over a minimum of a 180-month period following retirement.  The annual payment for Mr. Sirmon under this agreementSirmon’s monthly benefit is $77,062, or approximately $6,422 per month.

Banner Bank also is party to an agreement with Mr. Sirmon to provide him with supplemental retirement benefits.  Banner Bank has purchased life insurance to recover these benefits and the benefits payable under the salary continuation agreement upon Mr. Sirmon’s death. The agreement provides that, following Mr. Sirmon’s retirement at or after attaining age 62 (which occurredwas first paid on July 16, 2005) and for a minimum of a 180-month period thereafter, Banner Bank will pay him (or his beneficiary) an annual benefit based on his level of pre-retirement compensation and other retirement benefits.  The annual payment for Mr. Sirmon under this agreement is $57,604, or approximately $4,800 per month.

Banner Bank entered into a consulting agreement with Mr. Jesse G. Foster, a director and former executive officer of Banner, in December 2003.  The agreement originally provided for compensation of $10,000 per month.  Effective JanuaryAugust 1, 2010, the compensation was reduced to $8,000 per month to reflect a reduction in his consulting engagement and effective March 1, 2010, the compensation was further reduced to $5,000 per month.  On November 15, 2010, Mr. Foster submitted a letter terminating the consulting agreement effective December 31, 2010.  The monthly compensation for 2010 includes any Board or committee fees payable to Mr. Foster.2005.

Banner Bank also is party to an agreement with Mr. Foster to provide him with supplemental retirement benefits.  Banner Bank has purchased life insurance to recover the benefits payable under this agreement upon Mr. Foster’s death.  The agreement provides that, following Mr. Foster’s retirement at or after attaining age 62 and for a 12-year period thereafter, Banner Bank will pay him (or his beneficiary) an annual benefit equal to 40% of his average annual salary during the three years preceding his retirement.  Mr. Foster retired as an executive officer effective as of December 31, 2003 and is receiving payments of $6,000 per month under this agreement.
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EXECUTIVE COMPENSATION


Compensation Discussion and Analysis

The Compensation Committee of the Banner Board of Directors is responsible for setting the policies and compensation levels for Banner directors, officers and employees, while the Compensation Committee of the Banner Bank Board of Directors is responsible for setting the policies and compensation levels for Banner Bank directors, officers and employees.  Banner Bank is the primary subsidiary of Banner.  Each Committee is responsible for evaluating the performance of its Chief Executive Officer, while the Chief Executive Officer evaluates the performance of other senior officers and makes recommendations to the appropriate Committee regarding compensation levels.

The Compensation Committee continually reviews executive compensation.  The recent economic downturn has impacted and will continue to impact our compensation for the foreseeable future.  In particular, we did not pay any bonuses to the named executive officers for 2008, 2009 and 2010 and do not anticipate paying any bonuses to the named executive officers for 2011.  On November 21, 2008, Banner received $124 million from the U.S. DepartmentImpact of the Treasury as part of the Capital Purchase Program.  The additional capital is intended to enhance our capacity to support the communities we serve through expanded lending activities and economic development.  Participation in this program affects executive compensation, as described below.

Impact of American Recovery and Reinvestment Act of 2009Troubled Asset Relief Program (“TARP”) on Executive Compensation.Effective November 21, 2008, Banner completed the sale to the U.S. Department of the Treasury (the “Treasury”) of 124,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A (“Preferred Stock”), with a related warrant to purchase 1,707,989243,998 shares (adjusted for the 2011 reverse stock split) of Banner’s common stock (the “Treasury Warrant”).stock.  The issuance was the result of the Treasury’s approval of Banner’s application to participate in the Treasury’s Capital Purchase Program, which was established by Treasurymade pursuant to the authority grantedTreasury’s TARP Capital Purchase Program.  From the date of issuance of the TARP Preferred Stock until the Treasury’s sale of the TARP Preferred Stock to third party investors on March 29, 2012, we were subject to a number of requirements and restrictions on compensation and corporate governance matters applicable to TARP recipients.  These included: certain reviews of our compensation programs by the Emergency Economic Stabilization Act of 2008 (the “EESA”).  Banner was requiredCompensation Committee; general prohibitions on bonuses to make certain changesour five most highly compensated employees and on any payments to itsour named executive compensation arrangements as necessaryofficers and five most highly compensated employees who are not executive officers in connection with a change in control or for departure from Banner; subjecting bonus, incentive and retention payments to comply with the provisions of the EESA.  Effective February 17, 2009, President Obama signed into law the American Recoveryour senior executive officers and Reinvestment Act of 2009 (“ARRA”).  The ARRA amends the provisions of the EESA that20 most highly compensated employees who are applicablenot senior executive officers to Troubled Asset Relief Program (“TARP”) recipients, such as Banner.  Accordingly, Banner is now subject to additional limitations on executive compensation, including a provision for recovery of bonus, retention awards, or incentive compensation paid(clawback) if based on statements of earnings, revenue,revenues, gains or other criteria that are later found to be materially inaccurate,inaccurate; and a prohibitionrequirement that Banner have and enforce a policy on making golden parachute payments (including payments on accountluxury expenses. In addition, all compensation, including performance-based compensation, paid to each of terminationour senior executive officers was limited to tax deductibility of employment),$500,000. As a prohibition on paying or accruing any bonus, retention award or incentive compensation (except for certain grantsresult of long-term restricted stock),
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the sale by the Treasury of the TARP Preferred Stock to third party investors, we are no longer subject to these requirements and providing tax gross-ups.  These restrictions and prohibitions apply to various Banner officers, as discussed in greater detail herein.restrictions.

Objectives and Overview of the Compensation Program.  Our executive compensation policies are designed to establish an appropriate relationship between executive pay and the annual and long-term performance of Banner and Banner Bank, to reflect the attainment of short- and long-term financial performance goals, to enhance our ability to attract and retain qualified executive officers, and to align to the greatest extent possible the interests of management and shareholders.  The principles underlying the executive compensation policies include the following:

•       to attract and retain key executives who are vital to our long-term success and are of the highest caliber;

•       to provide levels of compensation competitive with those offered throughout the financial industry and consistent with our level of performance;

•       to motivate executives to enhance long-term shareholder value by granting awards tied to the value of our common stock; and

•       to integrate the compensation program with our annual and long-term strategic planning and performance measurement processes.

The Committees consider a variety of subjective and objective factors in determining the compensation package for individual executives including: (1) the performance of Banner and Banner Bank as a whole with emphasis on annual
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performance factors and long-term objectives; (2) the responsibilities assigned to each executive; and (3) the performance of each executive of assigned responsibilities as measured by the progress of Banner and Banner Bank during the year.

Use of Compensation Consultant.Consultants.  From time to time, Banner’s Compensation Committee engages outside advisors to assist the Committee with its responsibilities.  In 2010,late 2011, the Banner Compensation Committee engaged Swanson Advisory Services, LLC (“SAS”) to assist the Committee with its periodic review of Banner’s executive pay practices by performing a total compensation benchmarking analysis.  analysis, as described further in the section below titled “Compensation Benchmarking.”  SAS served as an independent advisor to the Committee through March 31, 2012.

In particular, SwansonJuly 2012, the Committee engaged Pearl Meyer & Partners, LLC (“PM&P”), an independent consulting firm, to serve as the independent consultant to the Committee regarding executive compensation matters.  PM&P is retained by, and reports directly to, the Committee, and provides no other services to Banner.

The Committee reviewed and analyzedconsidered information provided to the currentCommittee by SAS and PM&P, the Committee members and Company’s executive officers, and based on its review and such factors as it deemed relevant, the Committee has concluded that the advice it received from SAS and the advice it continues to receive from PM&P is objective and that neither firm’s work raised any conflict of interest.

Compensation Benchmarking.  In the first quarter of 2012, the Compensation Committee engaged SAS to review and analyze Banner’s compensation and benefit practices for the named executive officers, comparing these practices to those of Banner’s peer group.  The 2012 peer group consistsrecommended by SAS and approved by the Committee consisted of 23the following 21 financial institutions, ranging in total assets from $1$1.2 billion to $12.6$13.5 billion and headquartered in Washington, Oregon, Montana, California, Nevada, Colorado, Arizona and New Mexico.  Swanson presented data in two groupings: (1) the subset of 12 Northwest financial institutions Banner has historically monitored, and (2) all 23 financial institutions, including 11 western institutions that are similar in asset size to Banner.  Banner has historically monitored the following 12 financial institutions:Alaska:

 AmericanWest BancorporationCascade BancorpPacific Continental CorporationPremierWest Bancorp
 Cascade BancorpCoBiz FinancialSterling Financial Corp.
 CascadeColumbia Banking SystemTrico Bancshares
CVB Financial Corp.CorporationUmpqua Holdings Corporation
Columbia Banking SystemWashington Banking Co.
 First Interstate BancSystemWashington Banking Company
First National Bank of AlaskaWashington Federal
 Glacier Bancorp Inc.West Coast Bancorp

Banner monitored this peer group because management believes these institutions represent Banner’s most direct competitors in the markets it serves, in terms of services offered as well as competition for employees.  Swanson added the following western financial institutions to its analysis:

 Co BizHeritage FinancialPacWest Bancorp
CVB Financial CorpPremierWest Bancorp
F&M Bank of Long Beach CorporationWestamerica Bancorporation
 First State BancorporationPacific Capital BancorpWestern Alliance Bancorp
 Nara BancorpPacific Continental CorporationWilshire Bancorp
 Pacific CapitalPacWest Bancorp 

These institutions were added to provide better comparative data for financial institutions similar to Banner in terms of asset size.  Swanson
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SAS presented the results of its benchmarking analysis to the Compensation Committee in October 2010.February 2012.  The analysis provided benchmarks for base salary, total cash compensation, total direct compensation and total remuneration, including retirement benefits and perquisites.  For each combination of pay, the data was presented at the 10th, 25th, 50th, 75th and 90th percentile measures.  The Committee does not target a specific percentile measure for any particular component of compensation, but rather uses benchmarking information to provide important context for the competitiveness of its compensation arrangements.  The Committee considered the results of the analysis in determining whether any changes to executive compensation were necessary; however, as a resultappropriate for 2012.
In January 2013, the Banner Compensation Committee asked PM&P to update the total compensation benchmarking analysis for the Chief Executive Officer position.  PM&P recommended changes to the peer group of restrictionscompanies, based primarily on executive compensation as a result of Banner’s participation inmerger and initial public offering activity that had occurred since the Treasury’s Capital Purchase Program,prior analysis.  The 2013 peer group approved by the Committee made no changeswas based on the following criteria: (1) headquartered in the Western United States; (2) listed on either the NYSE or Nasdaq exchanges; (3) within 0.5 to 2.0 times Banner’s asset size (0.3 to 3.0 times, if headquartered in the Pacific Northwest); and (4) likely competitor for executive talent.  These criteria resulted in a revised peer group consisting of the following 20 companies:

BofI Holdings, Inc.National Bank Holdings Corp.
Cascade BancorpPacific Continental Corp.
Central Pacific Financial Corp.PacWest Bancorp
CoBiz FinancialSterling Financial Corp.
Columbia Banking SystemTrico Bancshares
CVB Financial Corp.Umpqua Holdings Corp.
First Interstate BancSystemWashington Banking Company
Glacier BancorpWashington Federal
Heritage Financial Corp.Westamerica Bancorporation
HomeStreet, Inc.Western Alliance Bancorp

The Committee’s primary use of the analysis presentedperformed by Swanson.PM&P in January 2013 will be related to decisions about 2013 Chief Executive Officer compensation.  However, this analysis was also instrumental in helping the Committee come to its conclusions regarding the Chief Executive Officer’s discretionary bonus for 2012, as discussed below.

Compensation Program Elements.  The Compensation Committees focus primarily on the following five components in forming the total compensation package for our named executive officers:

•       base salary;

•       incentive compensation;

•       deferred compensation;

•       long-term incentive compensation; and

•       participation in a supplemental executive retirement program.

The current compensation plans involve a combination of base salary, deferred compensation, long-term incentive compensation and a supplemental executive retirement program to ensure the continued service of executive officers. During the year ended December 31, 2010,2012, there were no at-risk incentives to reward short-term performance and none are contemplated for 2011 asbecause at the time the Compensation Committee would have considered incentives, Banner was a result of Banner’s participationparticipant in the Treasury’s Capital Purchase Program.
Program and such incentives were prohibited.

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Base Salary.  The salary levels of executive officers are designed to be competitive within the banking and financial services industries.  In addition to the benchmarking analysis described above, the Compensation Committees evaluate current salary levels by surveying similar institutions in Washington, Oregon, the Northwest and the United States.  The Committees’ peer group analyses focus on asset size, nature of ownership, type of operation and other common factors.  Specifically, the Committees annually review the 2012 Northwest Financial Industry Salary Survey prepared by Milliman (actuaries and consultants) in association with the Washington Bankers Association, the Washington Financial League and the Oregon Bankers Association, covering 96101 Northwest financial organizations in Washington, Oregon, Idaho and Idaho,Alaska, the American Bankers Association 2010 Compensation and BenefitsNorthwest Information Technology Salary Survey which covers 317 responding financial institutions, prepared by Milliman, with data from 69 major Northwest IT employers,
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the Moss Adams 2010 Bankers’2012 Community Bank Compensation Survey, covering 113123 respondents, the Compensation Data 2010 Banking and Finance West survey published by Compdata Surveys, covering 225 banking and finance companies in the western United States, the 2010/2011 Financial Services Survey Report on Executive and General Industry Personnel Compensation prepared by Towers Watson covering 109 financial services organizations, the 2011 IT Salary Survey prepared by Janco Associates, Inc. covering 281 large companiesas well as similar Towers Watson reports on consumer finance and 703 mid-sized companies representing all industries,mortgage-based banking personnel, commercial lending and trust services personnel and retail banking personnel, and the 20112012 Technology and Accounting and Finance Salary GuideGuides prepared by Robert Half International.

The Compensation Committees take a number of factors into account when setting the base salaries of the named executive officers.  These factors include peer data provided by compensation consultants and the Committees’ review of compensation surveys, the officer’s level of experience, the responsibilities assigned to the officer, and the officer’s performance during the previous year.year, and Banner’s overall financial health.  Based on the Committees’ evaluation of Mr. Grescovich’s performance, and informed by the benchmarking analysis provided by SAS in the first quarter of 2012, the Committees approved an increase in Mr. Grescovich’s base salary from $600,000 to $715,000, effective March 1, 2012.  This was the first salary increase for Mr. Grescovich since he joined Banner in April 2010.  The Committees also approved salary increases for certain other executive officers based on the recommendations of Mr. Grescovich after review of the benchmarking analysis provided by SAS.

Short-term Incentive Compensation Program.  Historically,Prior to Banner’s participation in TARP, a short-term incentive plan had been in effect for the executive officers of Banner Bank which was designed to compensate for performance. The plan was designed to provide for incentive compensation with established targets of 35% of salary for the Chief Executive Officer, 30% of salary for executive vice presidents and 18% to 25% of salary for certain other officers.  In certain circumstances, incentive compensation was payable at higher levels based on exceptional performance.  In making awards under this plan, the Compensation Committee, the President and Chief Executive Officer or executive officers, as appropriate, reviewed quantifiable data related to specific shared corporate goals and individual performance goals.  Individual performance goals varied significantly depending primarily on the assigned responsibilities of each officer and may have included such items as business unit performance measures, staff management, project completion, or individual loan or deposit production totals.  However, as a result of the economic environment and Banner’s anticipated operating results, no awards were contemplated or paid for the year ended December 31, 2010.  In addition,Through March 2012, Banner’s participation in the Treasury’s Capital Purchase Program currently prohibitsprohibited it from paying or accruing any bonus, retention award or incentive compensation to its five most highly compensated employees; therefore,employees (including Mr. Jones,Grescovich, Mr. Barton and Ms. Purcell and three employees who are not named executive officers were not eligible to receive incentive awards for the year ended December 31, 2010.Purcell).  This prohibition will be effectiveremained in effect for as long as the 124,000 shares of Banner’s Series A Preferred Stock continued to be held by the Treasury.  On March 29, 2012, Banner’s Series A Preferred Stock was sold toby the Treasury remain outstanding. Future incentive awards for eligible executive vice presidentsas part of its efforts to manage and certain other officersrecover its investments under TARP, thereby eliminating the compensation restrictions implemented by the Treasury on TARP recipients.  Banner’s Compensation Committee is currently exploring the possibility of reestablishing a formal short-term incentive plan such as that described above, will depend upon Banner’s operating results, among other factors.for executive officers.

2012 Discretionary Bonus for the CEO.  As mentioned above, Banner was prohibited from accruing or paying any bonus or incentive award to Mr. Grescovich for performance through the date of the Treasury’s sale of its Preferred Stock interests in Banner on March 29, 2012.  With the assistance of PM&P, Banner’s Compensation Committee carefully evaluated the performance of Mr. Grescovich and of Banner over the period April 1, 2012 to December 31, 2012 (the post-TARP period), to determine whether, and to what extent, a discretionary bonus was appropriate for performance during that nine month period in 2012.

During the post-TARP period in 2012, Banner delivered exceptional financial performance, in both absolute and relative terms.  In absolute terms, Banner post-TARP period net income available to shareholders was $51.9 million, its return on assets was 1.32%, and non-performing assets declined by $42.9 million or 46%.  In relative terms, Banner’s exceptional financial performance is best evidenced by the increase in shareholder value during this period.  Over the post-TARP period in 2012, market capitalization increased roughly $201 million, more than all but one of Banner’s 2013 peer group companies (median increase among these peers was $4 million over this period), and total shareholder return (TSR) was 40%, higher than all but two of Banner’s peers (median TSR among peer companies was 4.3% over this period).  The charts below illustrate Banner’s performance in these two measures during the post-TARP period, relative to peers.  The darker column is Banner and each of the lighter columns below represents one of the companies in Banner’s 2013 peer group*.
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Total Shareholder Return From 4/1/2012 to
12/31/2012
 Change in Market Capitalization From 4/1/2012 to
12/31/2012 ($ in millions)
* See Compensation Benchmarking above for a listing of the companies in the 2013 Peer Group.  National Bank Holdings Corp. is not included in the charts, as they did not go public until September 2012.

After considering Banner’s financial performance, increase in shareholder value and the individual performance of Mr. Grescovich over the post-TARP period, the Committee awarded Mr. Grescovich a discretionary bonus equal to $515,000.  Of this amount, $290,000 was paid in cash and $225,000 was awarded in the form of restricted stock, which vests ratably over three years.  One-third of the shares will vest on each of the first three anniversaries from the grant date of March 1, 2013; the shares will be fully vested on March 1, 2016.

2012 Discretionary Bonus for the Other Named Executive Officers. Similar to the considerations concerning Mr. Grescovich’s discretionary bonus, the Committee considered Banner’s exceptional financial performance over the post-TARP period in determining the level of discretionary bonuses paid to the named executive officers, basing its decision in part on Mr. Grescovich’s recommendation and evaluation of individual executive officer performance and total compensation.  Individual awards were informed by the benchmarking analysis provided by SAS in the first quarter of 2012 and varied based on the assigned responsibilities, business unit performance measures, staff management, project completion, or individual loan or deposit production totals covering the post-TARP period.  As mentioned above, Banner was prohibited from accruing or paying any bonus or incentive award to its five most highly compensated employees for performance through the date of the Treasury’s sale of its Preferred Stock interests in Banner on March 29, 2012.
Deferred Compensation.  In 2004, we adopted deferred compensation plans which allow executive officers of Banner to defer all or part of their cash compensation or non-qualified stock options until retirement.  Each executive officer may direct the investment of the deferred compensation toward the purchase of life insurance, Banner common stock, mutual fund-style investments or a stable value account.  We established grantor trusts to hold the common stock and mutual fund-style investments.  The assets of the trusts are considered part of our general assets and the executive officers have the status of unsecured creditors of Banner with respect to the trust assets.  The deferred compensation agreements provide pre-retirement death and disability benefits in an amount based on the value of the executive officer’s account balance upon the occurrence of either event.  At retirement, an executive officer, as previously elected, may receive the balance of his or her account in a lump sum or in annual installments over a period not exceeding ten years.  At December 31, 2010,2012, our estimated deferred compensation liability accrual with respect to executive officers under these agreements was $859,000.$295,000.

Section 401(a)(17) of the Internal Revenue Code limits the amount of compensation that is considered for purposes of determining the maximum contribution to Banner Bank’s tax-qualified profit sharing plan by eligible employees.  For 2010,2012, this limit was $245,000 and remains the same for 2011.2013.  In previous years, we have credited executive officers whose total compensation exceeds this amount with additional deferred compensation to restore
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amounts that could not be contributed to the profit sharing plan as a result of the Section 401(a)(17) limitation.  However, for 2010, 2011 and 2012 we did not provide any such credits to our executive officers.

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Long-Term Incentive Compensation.  Our shareholders approved the 2001 Stock Option Plan, under which officers may receive grants of stock options.  Shareholders also approved the 1996 Management Recognition and Development Plan, the 1996 Stock Option Plan, the 1998 Stock Option Plan and the 19982001 Stock Option Plan, under which grants of stock options and awards of restricted shares are outstanding, but no further grants or awards may be made.  On April 24, 2012, our shareholders approved the 2012 Restricted Stock Plan, which provides for awards of restricted stock.  We believe that stock ownership by our officers is a significant factor in aligning the interests of the officers with those of shareholders.  Stock options and stock awards under these plans are allocated based upon the officers’ level of responsibility and expected contributions to Banner and Banner Bank as judged by the Compensation Committee or the Board of Directors.  The Compensation Committee considers a number of factors in granting equity awards.  These factors differ from year to year, but generally include a review of trends in making awards by Banner’s peer group and the Committee’s view on what is necessary for retention, as well as the potential recipient’s other compensation and value to Banner.  The Compensation Committee does not place any specific weight on any of the factors it considers.  As a result of the limited number of stock options available for granting purposes, no stock options were granted in 2010.2010 and 2011, and authority to make additional grants expired effective April 20, 2011.  In 2012, the Committee awarded Mr. Grescovich a grant of restricted stock valued at $300,000 pursuant to amending his employment agreement as described below.  The Committee also awarded grants of restricted stock under the 2012 Restricted Stock Plan to certain other executive officers in July 2012 based on Mr. Grescovich’s recommendation and evaluation of retention considerations, executive responsibilities and expected contributions, as well as the potential recipient’s other compensation and value to Banner.

Stock ownership is enhanced through participation in our ESOP, under which eligible employees receive an allocation of Banner stock based on a percentage of eligible wages.  We also provide a 401(k) profit sharing plan.  The Board of Directors has appointed an administrative committee of Banner Bank officers to administer the ESOP and the 401(k) plan, and the named executive officers participate in both of these plans.  On an annual basis, the Board of Directors establishes the level of employer contributions to the ESOP and the 401(k) plan, which applies to all eligible participants including the named executive officers.  In 2008, we contributed two percent of eligible wages into the ESOP on behalf of each eligible participant, and we matched the first four percent of participants’ contributions into the 401(k) plan each payroll period.  In 2009, we matched the first four percent of participants’ contributions into the 401(k) plan for the month of January but did not contribute to either the ESOP or 401(k) plan thereafter because the Board of Directors considered it prudent to reduce employee benefit costs as an expense saving measure during a year of reduced profitability.  We did not make any ESOP or 401(k) plan contributions in 2010.2010 or 2011.  In 2012, we did not make any ESOP contribution; however, we matched two percent of participants’ contributions into the 401(k) plan for each payroll period beginning in August.

On June 13, 2006, the Board of Directors adopted the Banner Corporation Long-Term Incentive Plan, in accordance with the recommendations made by Banner’s Compensation Committee.  The plan is an account-based type of benefit, the value of which is directly related to changes in the value of Banner common stock, commonly known as a “phantom stock plan.”  The primary objective of the plan is to encourage retention and reward performance by allowing executives who remain with Banner or Banner Bank for a five-year period of time to share in increases in the value of Banner’s common stock.  Although the plan benefits are tied to the increase in value of Banner stock during the vesting period, the plan benefit is paid in cash rather than Banner stock, hence the term “phantom stock.”  The plan was amended on May 5, 2008 to eliminate the 25% cap on the amount of any annual increase in the value of an award, to clarify certain provisions and to allow for the repricing of existing and future awards.

Within 30 days after a grant of phantom stock, the participant must elect how and when plan benefits will be paid.  One election relates to the timing of when the benefit will be paid: upon separation from service; at a specific time; or upon completion of 60 months of continuous service.  If no election is made, payment will be made upon the participant’s separation from service.  In the case of certain key employees, payment may be delayed for six months in order to comply with Section 409A of the Internal Revenue Code.  The other election relates to the form of payment, with the choices being a lump sum or monthly installments over 120 months.  If no election is made, distribution will be in the form of a lump sum.  With respect to monthly installments, there will be no change in a monthly installment amount based on changes in the value of Banner stock or dividends.  Instead, the value of the long-term incentive benefit will be adjusted annually to reflect Banner Bank’s average earning assets rate for the preceding year.  The initial awards under this program were made in July 2006.  Subsequent awards are granted at the discretion of the Compensation Committee as it deems appropriate.  In 2010,2011, only non-employee directors and non-executive officers received awards under the Long-Term Incentive Plan.  In 2012, one executive officer received an award under the Long-Term Incentive Plan, subject to a three-
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year vesting period.  Through March 2012, Banner’s participation in the Treasury’s Capital Purchase Program currently prohibitsprohibited it from paying or accruing any bonus, retention award or incentive compensation, which includes a grant of phantom stock, to its five most highly compensated employees; therefore, Mr. Jones, Ms. Purcell and three employees who are not named executive officers were not eligible to receive phantom stock awards for the year ended December 31, 2010.  This prohibition will be effective for as long as the 124,000 shares of Banner’s Series A Preferred Stock sold to the Treasury remain outstanding.
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employees.

In connection with Mr. Grescovich’s employment, we entered into an employment agreement with him.  The agreement providesprovided for two grants of Banner’s common stock in the form of restricted stock on the sixth and eighteenth month anniversaries of the effective date of the agreement.  The first grant was made on August 22, 2010 and the second on August 22, 2011.  The aggregate value of each restricted stock grant will bewas $250,000 and one third of each restricted stock grant will vest on each of the next three anniversaries following the grant, unless there is an earlier change in control while Mr. Grescovich is actively employed, in which case all of the restricted stock will vest.  The shares may not be sold while Mr. Grescovich is employed by us and the grants are subject to restrictions imposed by the Treasury as a result of Banner’s participation in the Treasury’s Capital Purchase Program.  The first grant was made on August 22, 2010.us.

Supplemental Executive Retirement Program.  We have adopted a supplemental executive retirement program (“SERP”) for each of the named executive officers.officers except Mr. Grescovich.  The SERP is intended to encourage retention by ensuring that the named executive officers reach a targeted retirement income, recognizing their value to Banner and rewarding them for their long-term service commitments.  At termination of employment at or after retirement age and achievement of a service requirement, the executive’s annual benefit under the SERP, which may be reduced by certain other retirement benefits, would be computed as a percentage of the executive’s final average compensation (as defined in the plan) and the executive’s annual years of service (called the “supplemental benefit”).  The executives are eligible for a reduced benefit upon early retirement if they meet the years of service requirements in their individual agreements; however, no benefit payment will begin before retirement age.  The SERP also provides for payments in the event of an executive’s disability or death, or termination in the event of a change in control, all as discussed in further detail below, under “Potential Payments Upon Termination or Change in Control.”  Executives’ receipt of payments under the SERP are subject to confidentiality and non-competition provisions.  The executive officers have the status of unsecured creditors of Banner Bank with respect to the benefits accrued under the SERP.

Results of Shareholder Vote on Executive Compensation.  Prior to the Treasury’s sale of our TARP Preferred Stock to third party investors on March 29, 2012, we were required to annually permit shareholders to vote to approve executive compensation, commonly known as a say-on-pay proposal.  At last year’s annual meeting of shareholders, the resolution was approved by 98% of the shares present for purposes of voting on executive compensation.  The Board and Compensation Committee considered the affirmative vote of the shareholders on the say-on-pay resolution at last year’s annual meeting and determined that existing executive compensation practices were deemed reasonable.

Allocation of Compensation.  We do not have any specific policies regarding allocation of total compensation between short-term and long-term elements, or cash and non-cash elements.  For 2010,2012, the composition of total compensation for our named executive officers was as follows:

Type of Compensation Percentage of Total Compensation
   
Base salary    66%52%
Discretionary bonus16
Deferred compensation and long-term incentive
  compensation (including restricted stock grant)
   915
Supplemental executive retirement program 2116
All other compensation   41

Compensation Committee Report

The Compensation Committee of Banner’s Board of Directors 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 Committee’s discussion with management, the Compensation Committee recommended that the Board of Directors approve and include the Compensation Discussion and Analysis in this proxy statement.Proxy Statement.

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The Compensation Committee certifies that:

(1)      On March 29, 2012, Banner’s Series A Preferred Stock was sold by the Treasury as part of its efforts to manage and recover its investments under TARP; therefore, January 1, 2012 to March 29, 2012 constituted the “TARP period” during the most recently completed fiscal year.

(2)      It has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the senior executive officer (SEO) compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Banner Corporation and has identified any features of the employee compensation plans that pose risks to Banner Corporation and has limited those features to ensure that Banner Corporation is not unnecessarily exposed to risks.

(3)      It has reviewed during any part of the most recently completed fiscal year that was a TARP period the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of Banner to enhance the compensation of any employee.
(4)      During the abbreviated 2012 TARP period, the following standards were not required to be met:

    (a)     It has reviewed with senior risk officers at least every six months the senior executive officer (SEO)SEO compensation plans and has made all reasonable efforts to ensure that these plans do not encourage SEOs to take unnecessary and excessive risks that threaten the value of Banner; and

(2)    (b)     It has reviewed with senior risk officers at least every six months the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to Banner; andBanner

(3)      It has reviewedIn March 2012, the employeeCompensation Committee met with management and the Senior Risk Management Officer to discuss, evaluate and review Banner Bank’s 2012 incentive compensation plans for officers and employees, other than  senior executive officers, and the risks, if any, these plans posed to eliminateBanner.  They met to determine whether any features in the 2012 plans could lead participating officers to take unnecessary and excessive risks that would threaten the value of Banner, and whether any features in the 2012 plans unnecessarily expose Banner to risks, including any features of thesethe plans that would encourage behavior focused on short-term results rather than long-term value creation.  They also met to discuss, evaluate and review the terms of the 2012 plans for the purpose of determining whether they contain any feature that could encourage the manipulation of the reported earnings of Banner to enhance the compensation of anyan employee.
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In April and October 2010,December 2012, the Banner Compensation Committee met with the Senior Risk Management Officer to discuss, evaluate and review our senior executive officer compensation plans and employee compensation plans and the risks, if any, these plans pose to Banner as required by our participation in the Treasury’s Capital Purchase Program.Banner.  They met to determine whether any features in senior executive officer compensation plans could lead those officers to take unnecessary and excessive risks that would threaten the value of Banner, and whether any features in employee compensation plans unnecessarily expose Banner to risks, including any features of senior executive officer or employee compensation plans that would encourage behavior focused on short-term results rather than long-term value creation.  They also met to discuss, evaluate and review the terms of employee compensation plans for the purpose of determining whether they contain any feature that could encourage the manipulation of the reported earnings of Banner to enhance the compensation of an employee.

The Compensation Committee and Senior Risk Management Officer concluded that our senior executive officer compensation plans do not encourage the senior executive officers to take unnecessary and excessive risks that would threaten the value of Banner; that senior executive officer or employee compensation plans do not unnecessarily expose Banner to risks or contain any features that would encourage senior executive officer or employee behavior focused on short-term results rather than long-term value creation; and that employee compensation plans do not contain any feature that could encourage the manipulation of the reported earnings of Banner to enhance the compensation of an employee.
 
In reaching these conclusions, the Compensation Committee and Senior Risk Management Officer considered Banner’s Strategic Priorities,strategic priorities, including achieving a moderate risk profile, building sustainable revenue growth and profitability, remaining core funded, and improving operating leverage;leverage and retaining, attracting and developing talented people; financial measures;
21

Banner’s unique and material risks, including long-term and short-term risks; and the key features of senior executive officer and employee compensation plans.  They also considered information from the Swanson Advisory Services, LLC totalwork performed by the independent compensation benchmarking analysis described above.consultants.

During 2010,2012, senior executive officer compensation predominately consisted of base salary, deferred compensation,a discretionary bonus, long-term incentive compensation in the form of restricted stock granted to Mr. Grescovich, and the SERP for named executives other than Mr. Grescovich.  The Committee and the Senior Risk Management Officer noted that combined senior executive officer base salaries appeared reasonably balanced as a percentage of total compensation and that the level of combined senior executive officer base salaries appeared similar to peers and are therefore risk neutral with only a slight bias towards risk taking to enhance short-term earnings.  Although long-term

They observed that since the end of the TARP period, Banner’s compensation package for senior executive officers lacked a short-term incentive compensation was not a significant component, and noted the addition of meaningful “at risk” short-term incentives to the total compensation packages would be appropriate to help drive the development of business tactics and the achievement of Banner’s short-term goals that ultimately result in 2010, theythe attainment of longer-term strategic objectives.  They further noted that it would help mitigate the current risk to executive attraction and retention based on our current mix of compensation components versus our peers and competitors

They noted that long-term incentive compensation requires participants to remain in the active employment of Banner for an extended period of time (typically three to five years or more of vesting; three years’ vesting for restricted stock granted to Mr. Grescovich)vesting) to obtain the full benefit.  In addition, the value of long-term incentives are predominantly, if not wholly, dependent on the value of Banner’s common stock; therefore, these incentives serve to promote long-term value creation by each participant.

The Committee and the Senior Risk Management Officer noted that senior executive officers may elect to participate in deferred compensation plans as described elsewhere in this Proxy Statement and that they may direct the investment of deferred compensation toward the purchase of Banner common stock.  Risks associated with this feature of the plan are mitigated by several features of the plan, including: required advance selection of the form and timing of plan distributions; waiting periods in the event of making a change in desired distributions; and the inability of a senior executive officer to accelerate plan payments.  Further, Banner establishes grantor trusts to hold the investments associated with senior executive officer deferred compensation elections.  This means that senior executive officers have the status of unsecured creditors of Banner with respect to trust assets; therefore, participation in the deferred compensation plan creates a bias towards long-term value creation and the financial strength of Banner.

The SERP component of senior executive officer compensation also appears to create a bias towards long-term value creation because each participant is an unsecured creditor of Banner.  While a SERP participant’s benefits are tied, in part, to the value of Banner common stock because of the offset for tax-qualified benefits which includes the ESOP, the risks associated with this feature of the plan are mitigated by several provisions of the plan, including restrictions on changing the form of benefit and prohibitions on accelerating benefits.

The Compensation Committee and Senior Risk Management Officer further observed that Banner’s internal controls over financial reporting and disclosures which provide for an audited review of assets, liabilities, capital, revenues and expenses as well as the financial reports released to regulators, shareholders and the public provide for an
20

extensive array of preventive and detective controls that individually and collectively serve to discourage and deter any senior executive officer or employee from contemplating or taking any action to manipulate reported earnings.  The Compensation Committee and Senior Risk Management Officer further concluded that senior executive officer compensation plans reflect the need for Banner to remain a competitive enterprise and to retain and recruit talented employees who will contribute to Banner’s future success, and ultimately to repay TARP Capital Purchase Program obligations.success.

On June 25, 2010, the Federal Reserve, the Federal Deposit Insurance Corporation, and the other Federal banking regulators issued comprehensive new guidance on incentive compensation practices.  The guidance is intended to assist banks in designing and implementing incentive compensation arrangements and related policies and procedures that effectively consider potential risks and outcomes.  The guidance requires that to be consistent with safety and soundness, incentive compensation arrangements, as defined, at a banking organization should:

•      provide employees incentives that appropriately balance risk and reward;

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•      be compatible with effective controls and risk-management; and

•      be supported by strong corporate governance, including active and effective oversight by the bank’s Board of Directors.

Under the guidance, we must regularly review our incentive compensation arrangements for all executives and non-executive employees who, either individually or as part of a group, have the ability to expose Banner and Banner Bank to material amounts of risk (known as “covered employees”).  We must also regularly review the risk-management,risk management, control and corporate governance processes related to these arrangements.  The goal is to ensure that incentive compensation arrangements do not encourage employees to expose us to “imprudent risks that may pose a threat to the safety and soundness” of the Bank.

In October 2010,March and December 2012, the Compensation Committee met with the Senior Risk Management Officer to discuss, evaluate and review the incentive compensation plans of Banner and Banner Bank employees covered by the new Interagency Guidance.  They met to determine whether incentives appropriately balance risk and reward and are compatible with effective controls and risk-management.  The Compensation Committee and Senior Risk Management Officer concluded that Banner’s and Banner Bank’s covered employee incentive plans do not encourage imprudent risk-taking behavior, they appear to appropriately balance risk and reward, and they are compatible with effective controls and risk management practices.  plans:
1.do not encourage imprudent risk-taking behavior,

2.they appear to appropriately balance risk and reward, and
3.they are compatible with effective controls and risk management practices

In reaching these conclusions, the Compensation Committee and Senior Risk Management Officer considered Banner’s and Banner Bank’s strategic priorities, the long-term and short-term risks faced by Banner and Banner Bank, and the features of the identified incentive compensation plans for covered employees.

The foregoing report is provided by the following directors, who constitute the Committee:

The Compensation Committee

The Compensation Committee 
 Robert J. Lane, Chair
Edward L. Epstein
David A. Klaue
 David B. Casper Constance H. Kravas
 David A. Klaue 
Dean W. Mitchell Michael M. Smith

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.

Summary Compensation Table

The following table presents information regarding compensation for our named executive officers: (1) Mark J. Grescovich, our President and Chief Executive Officer; (2) D. Michael Jones, our former President and Chief Executive Officer; (3) Lloyd W. Baker, our Chief Financial Officer; and (4)(3) our three other most highly compensated executive
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officers, who are Richard B. Barton, Cynthia D. Purcell and Paul E. Folz.Douglas M Bennett.  No executive officer of Islanders Bank or Community Financial Corporation is an executive officer of Banner.  The named executive officers did not receive any bonus, option awards or non-equity incentive plan compensation; therefore, these columns have been omitted from the table below.
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Name and Principal Position
 
 
 
Year
 
 
Salary ($)
 
Stock Awards
($)(1)
 
Change in Pension
Value and Non-
qualified Deferred
Compensation
Earnings ($)(2)
 
All
Other
Compen-
sation
($)(3)
 Total ($) 
 
 
Year
 
 
Salary ($)
 Bonus ($) 
Stock
Awards
($)(1)
 
Change in Pension
Value and Non-
qualified Deferred
Compensation
Earnings ($)(2)
 
All Other
Compen-
sation ($)(3)
 Total ($)
                          
Mark J. Grescovich (4) 2010 496,154 250,000     -- 
      42,626 (5)
 788,780 2012 670,833 290,000 300,000          --   7,540 1,268,373
President and Chief             2011 600,000 
           --
 250,000          -- 69,545 919,545
Executive Officer             2010 496,154 
           --
 250,000          -- 42,626 788,780
            
D. Michael Jones (6) 2010 283,333         -- 104,151 (7) 
      20,177 (8)
 407,661
Former President and 2009 425,000         --     2,516 (7)   9,754 437,270
Chief Executive Officer 2008 425,000         --   81,488 (7) 27,461 533,949
                          
Lloyd W. Baker 2010 250,000   172,675 (9) 10,559 433,234 2012 250,000   50,000   65,820      107,012 (4)   9,238 482,070
Executive Vice President, 2009 250,000         -- 180,550 (9) 10,090 440,640 2011 250,000 
           --
           --      186,705 (4) 18,518 455,223
Chief Financial Officer 2008 220,000 14,400 211,068 (9) 24,488 469,956 2010 250,000 
           --
           --      172,675 (4) 10,559 433,234
                          
Richard B. Barton 2010 254,000         --   116,653 (10) 19,715 390,368 2012 254,000   75,000   65,820        97,426 (5) 22,580 514,826
Executive Vice President, 2009 254,000         --   103,812 (10) 20,168 377,980 2011 254,000 
           --
           --      162,965 (5) 28,526 445,491
Chief Lending Officer 2008 236,250 10,800   173,760 (10) 35,531 456,341 2010 254,000 
           --
           --      116,653 (5) 19,715 390,368
                          
Cynthia D. Purcell 2010 283,750         --     57,324 (11)   5,888 346,962 2012 285,000   45,000 --              134,798 (4)   4,951 469,749
Executive Vice President, 2009 270,000         --   101,815 (11)   6,536 378,351 2011 285,000 
           --
           --      234,116 (4) 14,051 533,167
Retail Banking and 2008 257,650 14,400   220,176 (11) 21,444 513,670
Administration            
Retail Banking and Administration 2010 283,750 
           --
           --        50,201 (4)   5,888 339,839
                          
Paul E. Folz 2010 260,000         --   113,903 (12)   7,676 381,579
Douglas M. Bennett (6) 2012 230,578   50,000   65,820      172,601 (7)   6,461 525,460
Executive Vice President, 2009 260,000         --   101,779 (12)   8,921 370,700              
Commercial Banking 2008 257,500 10,800   168,982 (12) 21,626 458,908
Real Estate Lending Operations              
___________________________
(1)Represents 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”718"). For a discussion of valuation assumptions, see Note 16 of the Notes to Consolidated Financial Statements in Banner’s Annual Report on Form 10-K for the year ended December 31, 2010.2012.
(2)See Pension Benefits below for a detailed discussion of the assumptions used to calculate the Change in Pension Value.
(3)Unless otherwise noted, includes life insurance premiums, club dues and company car allowance.Please see the table below for more information on the other compensation paid to our executive officers in 2012.
(4)Mr. Grescovich was hired effective as of April 6, 2010.
(5)Also includes $29,506 in transition expenses.
(6)Mr. Jones retired on of August 31, 2010.
(7)For 2010, consists of an increase in the value of Mr. Jones’s SERP of $98,911 and above-market earnings on deferred compensation of $5,240. For 2009, represents above-market earnings on deferred compensation. For 2008, consists of an increase in the value of Mr. Jones’s SERP of $76,449 and above-market earnings on deferred compensation of $5,039.
(8)Also includes $11,500 in directors’ fees, paid after Mr. Jones retired as President and Chief Executive Officer, as well as post-retirement health insurance premiums.
(9)Represents an increase in the value of Mr. Baker’sthe executive’s SERP. For Ms. Purcell, the 2010 amount has been recalculated to conform to the current year’s presentation, which more accurately reflects the SERP agreement.
(10)(5)Consists of the following increases in the value of Mr. Barton’s SERP: $97,108 for 2012, $162,709 for 2011 and $116,517 for 2010, $103,753 for 2009 and $173,639 for 2008;2010; and the following amounts of above-market earnings on deferred compensation: $318 for 2012, $256 for 2011 and $136 for 2010, $59 for 2009 and $121 for 2008.2010.
(11)(6)RepresentsMr. Bennett was not a named executive officer in 2011 or 2010.
(7)Consists of an increase in the value of Ms. Purcell’s SERP.
(12)ConsistsMr. Bennett’s SERP of the following increases in the value of Mr. Folz’s SERP: $113,507 for 2010, $101,595 for 2009$172,471 and $168,667 for 2008; and the following amounts of above-market earnings on deferred compensation: $396 for 2010, $184 for 2009 and $315 for 2008.compensation of $130.

All Other Compensation.  The following table sets forth details of “All other compensation,” as presented above in the Summary Compensation Table.  The amounts reflected constitute contributions by Banner or Banner Bank for 2012.

Name            
Employer
401(k)
Matching
Contribution
 
Dividends
on Unvested
Restricted
Stock ($)
 
Life
Insurance
Premium ($)
 
Club Dues
($)
 
Company Car
Allowance ($)
 Total ($)
             
Mark J. Grescovich         -- 1,326 1,272 3,347 1,595   7,540
Lloyd W. Baker 1,275      60 3,273 3,347 1,283   9,238
Richard B. Barton 2,167      60 5,091 9,262 6,000 22,580
Cynthia D. Purcell 1,192       -- 2,062 1,247    450   4,951
Douglas M . Bennett 1,974      60 2,756       -- 1,671   6,461

Employment Agreements.Agreements and Perquisites.  We have entered into employment agreements with Mr. Grescovich on April 29, 2010 (effective February 22, 2010), Mr. Baker on July 1, 1998, Ms. Purcell on March 3, 2001 and Messrs. Barton and Folz on June 3, 2002.  Mr. Jones had an employment agreement which terminated in connection with his retirement on August 31, 2010.  The employmenteach of the named executive officers.  These agreements provide that each executive’s base salary is subject to annual review.  
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The current base salaries for 20112012 for Mr. Grescovich, Mr. Baker, Mr. Barton, Ms. Purcell and Mr. FolzBennett are $600,000, $250,000, $254,000, $285,000 and $260,000, respectively.$232,875, respectively (Mr. Grescovich’s salary is addressed below).  In addition to base salary, the agreements provide for the executive’s participation in the employee benefit plans and other fringe benefits applicable to executive personnel.  The initial three-year term of each agreement may be extended annually for an additional year at the
24

discretion of the Board of Directors of Banner Bank.  The agreements were extended on the following dates: Messrs. Barton and Folz, June 1, 2010, Mr. Baker, July 1, 2010,2012, Mr. Grescovich, February 22, 2011 andBarton, June 1, 2012, Ms. Purcell, March 1, 2011.2012 and Mr. Bennett, August 1, 2012.  The agreements provide that compensation may be paid in the event of disability, death, involuntary termination or a change in control, as described below under “Potential Payments Upon Termination or Change in Control.”

Perquisites.  We entered into anThe initial employment agreement with Mr. Grescovich, on April 29, 2010 (effectiveeffective February 22, 2010) that provides2010, provided for certain benefits, including club dues, company car allowance and transition expenses.  During 2010,2011, these expenses exceeded $25,000 principally due to transition and travel-related expenses, including personal lodging in the State of Washington and personal travel between Washington and Ohio.  The Compensation Committee believes that these expenses were a necessary part of Mr. Grescovich’s employment inducement award and essential to procuring and retaining his services as President and Chief Executive Officer of Banner.  The Board of Directors amended Mr. Grescovich’s employment agreement, effective March1, 2012, increasing Mr. Grescovich’s base salary to $715,000 and eliminating transition or personal travel expenses.  The amended agreement also provided for a grant of restricted stock valued at $300,000 to Mr. Grescovich, pending shareholder approval of the 2012 Restricted Stock Plan.  The Plan was approved by shareholders on April 24, 2012 and the grant of restricted stock, which vests over three years, was subsequently awarded as reflected in the Summary Compensation Table.

Grants of Plan-Based Awards

 The following table shows information regarding grants of plan-based awards made to our named executive officers for 2012.

Name 
Grant
Date
 
All Other Stock Awards:
 Number of Shares of Stock or
Units (#)
 
Grant Date Fair Value of
Stock Awards ($)
       
Mark J. Grescovich 04/24/12 14,535 300,000
       
Lloyd W. Baker 07/02/12   3,000   65,820
       
Richard B. Barton 07/02/12   3,000   65,820
       
Cynthia D. Purcell --         --           --
       
Douglas M. Bennett 07/02/12   3,000   65,820

Outstanding Equity Awards

The following information with respect to outstanding stock and option awards as of December 31, 20102012 is presented for the named executive officers.

  Option Awards (1) Stock Awards
Name Grant Date (1) 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
 
Option
Exercise
Price ($)
 
Option
Expira-
tion
Date
 
Number of
Shares or
Units of Stock
That Have
Not Vested
(#)
 
Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)
               
Mark J. Grescovich -- -- -- -- --    115,955 (2) 269,016
               
D. Michael Jones -- -- -- -- -- -- --
               
Lloyd W. Baker 12/19/01   4,800 -- 16.43 12/19/11    
  03/25/03   5,000 -- 15.67 03/25/13    
  12/16/04   2,000 -- 31.71 12/16/14    
                   8,250 (3)     8,830
               
Richard B. Barton 06/03/02 14,000 -- 22.05 06/03/12    
  03/25/03   5,000 -- 15.67 03/25/13    
  12/16/04   2,000 -- 31.71 12/16/14    
                   7,250 (4)     8,450
               
Cynthia D. Purcell 12/19/01   4,800 -- 16.43 12/19/11    
  03/25/03   5,000 -- 15.67 03/25/13    
  12/16/04   2,000 -- 31.71 12/16/14    
                   8,250 (3)     8,830
 
Paul E. Folz 06/03/02 14,000 -- 22.05 06/03/12    
  03/25/03   5,000 -- 15.67 03/25/13    
  12/16/04   2,000 -- 31.71 12/16/14    
                   7,250 (4)     8,450
  Option Awards (1) Stock Awards
Name 
Grant
Date (1)
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
 
Option
Exercise
Price ($)
 
Option
Expira-
tion
Date
 
Number of
Shares or
Units of Stock
That Have
Not Vested
(#)
 
Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)
               
Mark J. Grescovich -- -- -- -- --     31,851 (2) 978,781
               
Lloyd W. Baker 03/25/03 714 -- 109.69 03/25/13    
  12/16/04 285 -- 221.97 12/16/14    
                   571 (3)     1,634
                3,000 (4)   92,190
               
(Table continues on following page)
__________________
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  Option Awards (1) Stock Awards
Name 
Grant
Date (1)
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
 
Option
Exercise
Price ($)
 
Option
Expira-
tion
Date
 
Number of
Shares or
Units of Stock
That Have
Not Vested
(#)
 
Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)
               
Richard B. Barton 03/25/03 714 -- 109.69 03/25/13    
  12/16/04 285 -- 221.97 12/16/14    
                   428 (3)     1,226
                3,000 (4)   92,190
               
Cynthia D. Purcell 03/25/03 714 -- 109.69 03/25/13    
  12/16/04 285 -- 221.97 12/16/14    
                    571 (3)     1,634
 
Douglas M. Bennett 03/25/03 571 -- 109.69 03/25/13    
  12/16/04 285 -- 221.97 12/16/14    
                   428 (3)     1,226
                3,000 (4)   92,190
___________
(1)Option grants vest pro rata over a five-year period from the grant date, with the first 20% vesting one year after the grant date.
(2)Consists of an awardawards of restricted stock on August 22, 2010 and 2011 and April 24, 2012 which vestsvest pro rata over a three-year period from the grant date, with the first one-third vesting one year after the grant date.
(3)Consists of the following awards of phantom stock: 4,250 shares on July 1, 2006 and 4,000 sharesstock awarded on May 5, 2008. These awards vestThe award vests after five years of service from the date of grant.
(4)
Consists of the following awards of phantom stock: 4,250 sharesrestricted stock on July 1, 2006 and 3,000 shares on May 5, 2008. These awards2, 2012 which vest after five years of servicepro rata over a three-year period from the grant date, of grant.with the first one-third vesting one year after the grant date.
Option Exercises and Stock Vested

The following table shows the value realized upon exercise of stock options and vesting of stock awards for our named executive officers in 2012.

  Option Awards Stock Awards
  Number of   Number of  
  Shares Value Shares Value
  Acquired on Realized on Acquired on Realized on
  Exercise Exercise Vesting Vesting
Name (#) ($) (#) ($)
         
Mark J. Grescovich -- -- 11,419 277,368
Lloyd W. Baker -- -- -- --
Richard B. Barton -- -- -- --
Cynthia D. Purcell -- -- -- --
Douglas M. Bennett -- -- -- --



 
23 26

 

Pension Benefits

The following information is presented with respect to the nature and value of pension benefits for the named executive officers at December 31, 2010.2012.

Name Plan Name 
Number of
Years
Credited
Service (#)
 
Present Value
of
Accumulated
Benefit ($)(1)
 
Payments
During Last
Fiscal Year
($)
 
 
Plan Name
 
Number of
Years
Credited
Service (#)
 
Present Value
of
Accumulated
Benefit ($)(1)
 
Payments
During Last
Fiscal Year
($)
                
Mark J. Grescovich N/A -- -- -- N/A -- -- --
D. Michael Jones Supplemental Executive Retirement Program 
        7 (2)
 1,309,538 --
Lloyd W. Baker Supplemental Executive Retirement Program 16 1,442,315 -- Supplemental Executive Retirement Program 18 1,736,032 --
Richard B. Barton Supplemental Executive Retirement Program   4 393,929 -- Supplemental Executive Retirement Program  6 653,746 --
Cynthia D. Purcell Supplemental Executive Retirement Program 26 977,574 -- Supplemental Executive Retirement Program 28 1,195,945 --
Paul E. Folz Supplemental Executive Retirement Program   4 383,769 --
Douglas M. Bennett Supplemental Executive Retirement Program  6 692,560 --
_________________________
(1)Except with respect to Mr. Jones, amountsAmounts shown assume normal retirement age as defined in individual agreements and an assumed life of 82 years for the recipient and recipient’s spouse, with the projected cash flows discounted at five percent to calculate the resulting present value. In 2011, Banner used five and one-half percent and in prior years used six and one-half percent to calculate the resulting present value.  Mr. Jones retired effective August 31, 2010 with his initial six payments deferred until March 1, 2011.values. The amount shown for Mr. Jones assumes payments beginning March 1,changes in the discount rate had the effect of increasing the present values in the current year and increased of the amounts of 2011 and a total of 180 payments (including2012 compensation reported in the six deferred payments) with the projected cash flows discounted at six and one-half percent to calculate the resulting present value.
(2)As of December 31, 2008, Mr. Jones agreed to limit his years of service to seven years.Summary Compensation Table on page 21.

Supplemental Executive Retirement Program.  We have adopted a SERP for each of the named executive officers except for Mr. Grescovich.  Banner Bank has purchased life insurance on each of the executives in an amount sufficient to recover the benefits payable under the SERP, payable upon their deaths.  The SERP provides for payments in the event of retirement, early retirement, disability, involuntary termination following a change in control and death.  These payments are discussed in further detail below, under “Potential Payments Upon Termination or Change in Control.”

Nonqualified Deferred Compensation

The following information is presented with respect to plans that provide for the deferral of compensation on a basis that is not tax-qualified in which the named executive officers participated in 2010.2012.

 
Name
 
Executive
Contributions
in Last FY ($)
 
Registrant
Contributions
in Last FY ($)
 
Aggregate
Earnings in
Last FY ($)(1)
 
Aggregate
Withdrawals/
Distributions ($)
 
Aggregate
Balance
at FYE ($)(2)
           
Mark J. Grescovich -- -- -- -- --
D. Michael Jones -- -- 30,250 -- 676,351
Lloyd W. Baker -- -- (1,135-- 8,322
Richard B. Barton -- -- 828 -- 17,159
Cynthia D. Purcell -- -- 1,192 -- 9,224
Paul E. Folz -- -- 1,991 -- 53,346
_____________
 
Name
 
Executive
Contributions
in Last FY ($)
 
Registrant
Contributions
in Last FY ($)
 
Aggregate
Earnings in
Last FY ($)(1)
 
Aggregate
Withdrawals/
Distributions ($)
 
Aggregate
Balance
at FYE ($)(2)
           
Mark J. Grescovich -- -- --          -- --         
Lloyd W. Baker -- -- 7,045          -- 15,920         
Richard B. Barton -- -- 838          -- 18,831         
Cynthia D. Purcell -- -- 1,540          -- 10,957         
Douglas M. Bennett -- -- 576          -- 8,218         
_______________          
(1)The following amounts, constituting above-market earnings, were reported as compensation in 20102012 in the Summary Compensation Table: for Mr. Jones, $5,240; for Mr. Barton, $136;$318; and for Mr. Folz, $396.Bennett, $130.
(2)Of these amounts, the following amounts were previously reported as compensation to the officers in the Summary Compensation Table: for Mr. Jones, $67,150; for Mr. Baker, $4,310; for Mr. Barton, $5,209;$5,601; and for Ms. Purcell, $4,772;$4,772. Consists of employer contributions to the deferred compensation plan and for Mr. Folz, $7,995.Barton, also includes above-market earnings.

Potential Payments Upon Termination or Change in Control

We have entered into agreements with the named executive officers that provide for potential payments upon disability, termination, early retirement, normal retirement and death.  In addition, our equity plans also provide for potential payments upon termination.  The following table shows, as of December 31, 2010,2012, the value of potential
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payments and benefits following a termination of employment under a variety of scenarios.  However, as a result of Banner’s participation in the Treasury’s Capital Purchase Program, it is currently prohibited from making a golden parachute payment to a named executive officer or any of the next five most highly compensated employees.  For purposes of this restriction, a golden parachute payment means any payment for the departure from a TARP recipient for any reason, or any payment due to a change in control of the TARP recipient, except for payments for services performed or benefits accrued.  Excluded from the restriction are payments made in the event of an employee’s death or disability.  The affected executives signed compensation modification agreements to comply with the restriction against making golden parachute payments.  Accordingly, except for payments for services performed or benefits accrued, our named executive officers are not currently eligible to receive any payments upon termination without just cause or in connection with a change in control pursuant to their employment agreements or supplemental executive retirement program but they, or their beneficiaries, remain eligible to receive payments upon a termination due to death or disability.  The prohibition against golden parachute payments will be effective for as long as the 124,000 shares of Banner’s Series A Preferred Stock sold to the Treasury remain outstanding.
27


Death ($)Disability ($)
Involuntary
Termination ($)
Involuntary
Termination
Following
Change in
Control ($)
Early
Retirement ($)
Normal
Retirement ($)
Mark J. Grescovich
Employment Agreement
     --
485,851 (5)612,678 (1)612,678 (1)
     --
     --
Equity Plans269,016 (2)269,016 (2)
     --
269,016 (1)
     --
     --
D. Michael Jones
SERP  67,025 (2)134,050 (2)134,050 (2)134,050 (2)134,050 (2)134,050 (2)
Equity Plans
     --
     --
     --
     --
     --
     --
Lloyd W. Baker
Employment Agreement
     --
166,667 (2)625,000 (1)770,385 (1)
     --
     --
SERP  64,174 (2)128,347 (2)128,347 (3)128,347 (3)128,347 (3)128,347 (2)
Equity Plans
     --
     --
     --
    8,830 (1)
     --
8,830
Richard B. Barton
Employment Agreement
     --
169,333 (2)613,833 (1)864,602 (1)
     --
     --
SERP  22,736 (2)  45,471 (2)  45,471 (4)  45,471 (4)  45,471 (4)   45,471 (2)
Equity Plans
     --
     --
     --
    8,450 (1)
     --
8,450
Cynthia D. Purcell
Employment Agreement
     --
190,000 (2)617,500 (1)854,045 (1)
     --
     --
SERP  76,664 (2)153,328 (2)  98,881 (3)  98,881 (3)  98,881 (3)153,328 (2)
Equity Plans
     --
     --
     --
    8,830 (1)
     --
8,830
Paul E. Folz
Employment Agreement
     --
173,333 (2)628,333 (1)850,316 (1)
     --
     --
SERP  23,395 (2)  46,789 (2)  46,789 (3)  46,789 (3)  46,789 (3)   46,789 (2)
Equity Plans
     --
     --
     --
    8,450 (1)
     --
8,450
_____________
 Death ($) Disability ($) 
Involuntary
Termination ($)
 
Involuntary
Termination
Following
Change in
Control ($)
 
Early
Retirement ($)
 
Normal
Retirement ($)
                  
Mark J. Grescovich                 
Employment Agreement--  605,766(1) 738,325  738,325  --  -- 
Equity Plans978,781(2) 978,781(2) --  978,781(2) --  -- 
                  
Lloyd W. Baker                 
Employment Agreement--  166,667(3) 625,000  835,469  --  -- 
SERP72,926(4) 145,851(4) 145,851(5) 145,851(5) 145,851(5) 145,851(4)
Equity Plans 92,190(2)   92,190(2) --  93,824(2) --  -- 
                  
Richard B. Barton                 
Employment Agreement--  --  613,833  879,994  --  -- 
SERP34,104(4) 68,207(4) 68,207(6) 68,207(6) 68,207(6) 68,207(4)
Equity Plans 92,190(2)   92,190(2) --  93,416(2) --  -- 
                  
Cynthia D. Purcell                 
Employment Agreement--  190,000(3) 617,500  930,099  --  -- 
SERP75,865(4) 151,729(4) 109,003(5) 109,003(5) 109,003(5) 132,717(4)
Equity Plans--  --  --  1,634  --  -- 
                  
Douglas M. Bennett                 
Employment Agreement--  155,250(3) 601,594  769,001  --  -- 
SERP30,109(4) 60,218(4) 60,218(5) 60,218(5) 60,218(5) 60,218(4)
Equity Plans92,190(2) 92,190(2) --  93,416(2) --  -- 
___________
(1)Payment is prohibited as a result of Banner’s participation in the Treasury’s Capital Purchase Program.
(2)Indicates annual payments.
(3)Indicates annual payments (which may not begin before age 62).
(4)Indicates annual payments (which may not begin before age 68).
(5)Annually through the term of the employment agreement unless the Board exercises an election to discontinue.
(2)Represents one-time accelerated vesting of restricted stock.
(3)Indicates annual payments; payable only until age 65.
(4)Indicates annual payments.
(5)Indicates annual payments (which may not begin before age 62).
(6)Indicates annual payments (which may not begin before age 68).

Employment Agreements.  The employment agreements with Messrs. Grescovich, Baker, Barton and FolzBennett and Ms. Purcell provide for payments in the event of death, disability or termination.  The employment agreement with Mr. Jones was terminated in connection with his retirement.  In the event of an executive’s death during the term of his or her employment agreement, we will pay to histhe executive’s estate the compensation due through the last day of the calendar month in which his death occurred.

Mr. Grescovich’s agreement provides that if he becomes entitled to benefits under the terms of the then-current disability plan, if any, of Banner or Banner Bank or becomes otherwise unable to fulfill his duties under his employment
25

agreement, he shall be entitled to receive such group and other disability benefits as are then provided for executive employees.  In the event of his disability, the employment agreement is not suspended, except that (1) the obligation to pay Mr. Grescovich’s salary will be reduced by the amount of disability income benefits he receives and (2) upon a resolution adopted by a majority of the disinterested members of the Board of Directors or the Compensation Committee, Banner or Banner Bank may discontinue payment of his salary beginning six months following a determination that he has become entitled to benefits under the disability plan or otherwise unable to fulfill his duties under his agreement. If Mr. Grescovich’s disability does not constitute a disability within the meaning of Section 409A of the Internal Revenue Code, and he is a “specified employee” within the meaning of Section 409A, then disability payments will not begin until the earlier of his death or the sixth month anniversary of his separation from service.

The employment agreements with Messrs. Baker, Barton and FolzBennett and Ms. Purcell provide that if the executive becomes disabled or incapacitated to the extent that he or she is unable to perform the duties of his or her position, he or she shall receive short-term disability benefits equal to 100% of his or her monthly compensation beginning on the 15th day of disability and continuing until the 180th day of disability and long-term disability benefits equal to 66 2/3% of monthly salary beginning on the 181st day of disability and continuing until he or she attains age 65.  These benefits will be reduced by the amount of any benefits payable to the executive under any other disability program
28

of Banner Bank.  The Bank currently provides disability benefits with certain limitations to all full time employees.  In addition, during any period of disability, the executive and his or her dependents shall, to the greatest extent possible, continue to be covered under all executive benefits plans of Banner Bank, including without limitation, its retirement plans, life insurance plan and health insurance plans, as if actively employed by Banner Bank.  If the executive is disabled for a continuous period exceeding six calendar months, Banner Bank may, at its election, terminate the employment agreement.

The employment of the executives is terminable at any time for just cause as defined in the agreements.  In addition, the employment of the executive may be terminated without just cause, in which case the agreement provides that he or she would continue to receive base salary over the remaining term, except for Mr. Grescovich, who would continue to receive his base salary for 12 months following the date of termination.  Mr. Grescovich’s agreement also entitles him to continuation of group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance for the remainder of the term of his employment agreement.  As described previously, as a result of Banner’s participation in the Treasury’s Capital Purchase Program, it is currently prohibited from a making a payment upon termination without just cause to a named executive officer.

The employment agreements also provide for benefits in the event of the executives’ termination in connection with a change in control.  If, after a change in control, we (or our acquiror) terminate an executive’s employment or otherwise change the circumstances in which he or she is employed, or cause a reduction in responsibilities or authority or compensation or other benefits provided under the employment agreement without consent, other than for just cause, the agreements provide that we must pay to the executive and provide him or her, or the his or her beneficiaries, dependents and estate, with the following: (1) 2.99 times the executive’s base amount (as defined in Section 280G of the Internal Revenue Code of 1986) (for Mr. Grescovich, one times his base amount); and (2) during the period of 36 calendar months beginning with the event of termination, continued coverage under all Banner employee benefit plans as if the executive were still employed during that period under the employment agreement (for Mr. Grescovich, continued coverage is for the remaining term of his employment agreement).  The employment agreements limit these payments and do not allow payments of amounts in excess of the limits imposed by Section 280G of the Internal Revenue Code.  As described previously, as a result of Banner’s participation in the Treasury’s Capital Purchase Program, it is currently prohibited from making a payment in connection with a change in control to a named executive officer.

Supplemental Executive Retirement Program. We have adopted a supplemental executive retirement program (“SERP”) for each of the named executive officers, except Mr. Grescovich.  At termination of employment at or after attaining age 62 (age 68 for Mr. Barton) and having achieved a service requirement, the executive’s annual benefit under the SERP would be computed as the product of 3% (4% for Messrs. Barton and Folz)Bennett) of the executive’s final average compensation (defined as the three calendar years of the executive’s annual cash compensation, including bonuses, which produce the highest average within the executive’s final eight full calendar years of employment) and the executive’s annual years of service (subsequent to January 1, 2007 for Messrs. Barton and Folz)Bennett) (called the “supplemental benefit”).  However, the supplemental benefit would be limited such that the sum of (1) amounts payable from the executive’s other retirement benefits from Banner and Banner Bank and (2) the supplemental benefit may not
26

exceed 60% of final average compensation (for Messrs. Barton and Folz,Bennett, the supplemental benefit may not exceed the product of 3% times his total years of service and his final average compensation).  Payment of the supplemental benefit begins on the first day of the month next following the executive’s retirement date and continues monthly for the executive’s life, unless the executive is a specified employee (as defined in Section 409A of the Internal Revenue Code), in which case payment begins on the first day of the month following the six-month anniversary of the executive’s termination of employment.  The executives are eligible for a reduced benefit upon retirement prior to age 62 (age 68 for Mr. Barton) if they meet the years of service requirements in their individual agreements; however, no benefit payment will begin before age 62 (age 68 for Mr. Barton) and payments will be subject to the delayed distribution requirements if the executive is a specified employee.  Mr. Jones retired on August 31, 2010 and began receiving payments on March 1, 2011.

In the event of an executive’s death, the executive’s surviving spouse shall receive a spouse’s supplemental benefit.  If the death occurs following the executive’s retirement date, the surviving spouse shall be entitled to a spouse’s supplemental benefit, payable for life, equal to 50% of the monthly amount of the supplemental benefit payable to the executive prior to his or her death.  If the death occurs while the executive is actively employed by Banner or any of its affiliates, the surviving spouse shall receive a spouse’s supplement benefit equal to 50% of the amount the executive would have received as a supplemental benefit if the executive’s retirement date had occurred on the date immediately preceding the executive’s death.

29

With respect to each of the named executive officers, other than Mr. Jones, the agreement provides that in the event of the executive’s involuntary termination of employment on or after the effective date of a change in control, the date of termination shall be treated as the executive’s retirement date and he or she shall be entitled to receive a supplemental benefit.  If the executive had reached his or her retirement date, the supplemental benefit would be calculated as described above for normal retirement and if the executive had not reached his or her retirement date but had satisfied the years of service requirement, the supplemental benefit would be calculated as described above for early retirement.  No benefit payment will begin before age 62 (age 68 for Mr. Barton) and payments will be subject to the delayed distribution requirements if the executive is a specified employee.  As described previously, as a result of Banner’s participation in the Treasury’s Capital Purchase Program, it is currently prohibited from making a payment in connection with a change in control to a named executive officer.

The supplemental benefit shall cease to be paid to the executive (and rights to the spouse’s supplemental benefit shall terminate) if the executive (1) discloses material confidential information or trade secrets concerning Banner Bank or any of its subsidiaries without its consent or (2) engages in any activity that is materially damaging to the Bank including engaging in competitive employment during the three-year period beginning on the executive’s retirement date (or in the case of Messrs. Barton and Folz,Bennett, during the two-year period beginning on the date of his involuntary termination of employment on or after the effective date of a change of control).

Equity Plans.  Our 2001 Stock Option Plan, and Long-Term Incentive Plan and 2012 Restricted Stock Plan provide for accelerated vesting of awards in the event of a change in control.  If a change in control occurs: (1) all options granted and not fully exercisable will become exercisable in full; and (2) awards of phantom stock will vest fully and be payable within 60 days.days; and (3) all unvested awards of restricted stock will vest fully.  In addition, if a tender offer or exchange offer for Banner’s shares commences, options granted under the 2001 Stock Option Plan and not fully exercisable will become exercisable in full.  The Long-Term Incentive Plan also provides that a participant who (1) has attained age 65, (2) voluntarily terminates employment with Banner and its affiliates, (3) is not vested at the time of the termination of employment and (4) enters into a non-competition agreement for a period equal to the greater of two years from the participant’s separation from service or the period of time necessary for the participant to fully vest in his or her benefit, shall have continuous service credited on his or her behalf for vesting purposes for a period equal to the term of the non-competition agreement.  As described previously,Our 2012 Restricted Stock Plan also provides for accelerated vesting of awards if a recipient’s service is terminated as a result of Banner’s participation in the Treasury’s Capital Purchase Program, it is currently prohibited from making golden parachute payments to the named executive officers and this includes accelerating equity awards.death or disability.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are Robert J. Lane, David B. Casper,Edward L. Epstein, David A. Klaue, Constance H. Kravas and Dean W. Mitchell.Michael M. Smith.  No members of the Compensation Committee were officers or employees of Banner or any of its subsidiaries during the year ended December 31, 2010,2012, nor were they formerly Banner officers or had any relationships otherwise requiring disclosure.

27



PROPOSAL 2 – ADVISORY VOTE ON EXECUTIVE COMPENSATION


On February 17, 2009, President Obama signedUnder the American RecoveryDodd-Frank Wall Street Reform and ReinvestmentConsumer Protection Act (“Dodd-Frank Act”), we are required to include in this Proxy Statement and present at the meeting a non-binding shareholder resolution to approve the compensation of 2009 (“ARRA”) into law.  For financial institutions that have received financial assistance underour named executive officers, as disclosed in this Proxy Statement pursuant to the troubled asset relief program (“TARP”) or related programs, such as Banner, the ARRA significantly rewrote the original executive compensation and corporate governance provisions of Section 111disclosure rules of the Emergency Economic Stabilization Act of 2008.  Notably, the ARRA requires that TARP recipients permit shareholders to vote to approve executive compensation.SEC.  This proposal, commonly known as a “say on pay”“say-on-pay” proposal, gives shareholders the opportunity to endorse or not endorse the compensation of our named executive officers.Banner’s executives as disclosed in this Proxy Statement.  The proposal will be presented at the annual meeting in the form of the following resolution:

RESOLVED, that the shareholders approve the compensation of Banner Corporation’s named executive officers, as disclosed in the Compensation Discussion and Analysis, the compensation tables and related material in the Proxy Statement for the 20112013 annual meeting of shareholders.

As provided under the ARRA, thisThis 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.  It will also not affect any compensation paid or awarded to any executive.  The Compensation Committee and the Board may, however, take into account the outcome of the vote when considering future executive compensation arrangements.

30

Our executive compensation policies are designed to establish an appropriate relationship between executive pay and the annual and long-term performance of Banner and Banner Bank, to reflect the attainment of short- and long-term financial performance goals, to enhance our ability to attract and retain qualified executive officers, and to align to the greatest extent possible the interests of management and shareholders.  Our Board of Directors believes that our compensation policies and procedures achieve these objectives.  The Board of Directors unanimously recommends that you vote FOR approval of the compensation of our named executive officers.officers as disclosed in this Proxy Statement.


PROPOSAL 3 – ADVISORY VOTE ON THE FREQUENCY OF
FUTURE ADVISORY VOTES ON EXECUTIVE COMPENSATION
Under the Dodd-Frank Act, we are required to include in this Proxy Statement and present at the meeting a non-binding shareholder vote to determine the timing of future shareholder votes on executive compensation.  This proposal gives shareholders the opportunity to vote on whether a resolution to approve the compensation of our named executive officers should be presented to shareholders every one, two or three years, or to abstain from voting.

The Board of Directors believes that a resolution to approve the compensation of our executives should be presented to shareholders every year because the Board is committed to strong corporate governance and an annual cycle provides for the greatest accountability to our 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.  It also will not affect when the shareholders will be asked to vote on executive compensation in future years.  The Compensation Committee and the Board may, however, take into account the outcome of the vote when considering when to present shareholders with a resolution to approve executive compensation.

The Board of Directors recommends that you vote FOR conducting an advisory vote on executive compensation every year.



AUDIT COMMITTEE MATTERS

 
Audit Committee Charter.  The Audit Committee operates pursuant to a charter approved by our Board of Directors.  The Audit Committee reports to the Board of Directors and is responsible for overseeing and monitoring our financial accounting and reporting, system of internal controls established by management and audit process.  The charter sets out the responsibilities, authority and specific duties of the Audit Committee.  The charter specifies, among other things, the structure and membership requirements of the Audit Committee, as well as the relationship of the Audit Committee to our independent auditor, the internal audit department and management.

Report of the Audit Committee.  The Audit Committee reports as follows with respect to Banner’s audited financial statements for the year ended December 31, 2010:2012:


•         The Audit Committee has completed its review and discussion of the 20102012 audited financial statements with management;

•         
The Audit Committee has discussed with the independent auditor (Moss Adams LLP) the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T;

•         The Audit Committee has received written disclosures and the letter from the independent auditor required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor’s communications with the Audit Committee concerning independence, and has discussed with the independent auditor the independent auditor’s independence; and

31

•        
The Audit Committee has, based on its review and discussions with management of the 20102012 audited financial statements and discussions with the independent auditors, recommended to the Board of Directors that Banner’s audited financial statements for the year ended December 31, 20102012 be included in its Annual Report on Form 10-K.10-K.
28

 
The foregoing report is provided by the following directors, who constitute the Audit Committee:

Audit Committee

Audit Committee 
 Gordon E. Budke, Chairman
 
Robert D. Adams
 John R. Layman
 Michael M. Smith

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.



PROPOSAL 34 – RATIFICATION OF SELECTION OF INDEPENDENT AUDITORAUDITO

 
The Audit Committee of the Board of Directors has selected Moss Adams LLP as our independent auditor for the year ending December 31, 20112013 and that selection is being submitted to shareholders for ratification.  Although ratification is not required by our Bylaws or otherwise, the Board is submitting the selection of Moss Adams LLP to our shareholder for ratification as a matter of good corporate practice.  If the selection is not ratified, the Audit Committee will consider whether it is appropriate to select another registered public accounting firm.  Even if the selection is ratified, the Audit Committee in its discretion may select a different registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of Banner and our shareholders.  Moss Adams LLP served as our independent auditor for the year ended December 31, 20102012 and a representative of the firm will be present at the annual meeting to respond to shareholders’ questions and will have the opportunity to make a statement if he or she so desires.

The Board of Directors unanimously recommends that you vote FOR the ratification of the appointment of Moss Adams LLP as our independent auditor.

The following table sets forth the aggregate fees billed, or expected to be billed, to us by Moss Adams LLP for professional services rendered for the fiscal years ended December 31, 20102012 and 2009.2011.

 Year Ended December 31,
 2012 2011
    
Audit Fees (1)
$468,081 $445,233
Audit-Related Fees
    86,826   61,866
Tax Fees
  100,250 106,190
All Other Fees
            -- 
           --
 Year Ended December 31,
 2010 2009
    
Audit Fees (1)
  473,693 $556,231
Audit-Related Fees
  136,172     96,034
Tax Fees
            --             --
All Other Fees
            3,126 (2) 
            --
____________
(1)
Fees for 20102012 include estimated amounts to be billed.
(2) Consists of subscription service for accounting research database.

The Audit Committee will establish general guidelines for the permissible scope and nature of any permitted non-audit services to be provided by the independent auditor in connection with the Committee’s annual review of its charter.  Pre-approval may be granted by action of the full Audit Committee or by delegated authority to one or more members of the Audit Committee.  If this authority is delegated, all approved non-audit services will be presented to the Audit Committee at its next meeting.  In considering non-audit services, the Audit Committee or its delegate will consider various factors, including but not limited to, whether it would be beneficial to have the service provided by the independent auditors and whether the service could compromise the independence of the independent auditors.  For the
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year ended December 31, 2010,2012, the Audit Committee approved all of the services provided by Moss Adams LLP that were designated as audit-related fees, tax fees and all other fees as set forth in the table above.

The Audit Committee of the Board of Directors determined that all of the services performed by Moss Adams LLP in fiscal year 20102012 were not incompatible with Moss Adams LLP maintaining its independence.


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PROPOSAL 45REVERSEAPPROVAL OF AN AMENDMENT TO THE 2012 RESTRICTED STOCK SPLITPLAN

 
General
We are asking our shareholders to approve an amendment to the Banner Corporation 2012 Restricted Stock Plan (now known as the “2012 Restricted Stock and Incentive Bonus Plan”), which makes the following changes:
•         provides Banner with the flexibility to grant incentive-based awards under the Plan, which awards may be paid either in cash or Banner stock.

•         adds performance goals and incentive awards to the Plan for the purpose of making incentive-based awards fully deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).

•         in the case of a restricted stock award granted after the amended Plan is approved, permits accelerated vesting of that award on account of a change in control event only if the participant also is involuntarily terminated within 12 months of the change in control event.

•         in the case of restricted stock awards granted after the amended Plan is approved, the vested status of the award will not be affected by the commencement of a tender or exchange offer.

On February 24, 2011, our Board of Directors unanimously approved anThe amendment to Banner’s Amendedthe Plan was adopted on January 31, 2013, and Restated Articles of Incorporationis subject to effect a reverse stock split, as described below.  The Board of Directors further directed that the reverse stock split be submitted to the holders of our common stock for approval at the annual meeting.  If approved, the reverse stock split would permit (but not require) the Board of Directors to effect a 1-for-7 reverse stock split of the common stock at any time prior to October 26, 2011.shareholder approval.

IfCurrently, the reversePlan provides only for the granting of restricted stock.  Based on the current terms of the Plan, no form of award granted pursuant to the Plan is eligible to qualify as “qualified performance-based compensation” for the purposes of Section 162(m) of the Code.  In order for awards granted pursuant to the Plan to qualify as fully tax-deductible qualified performance-based compensation, the Plan must, among other things, be amended to provide for the granting of qualified performance-based awards, and the material terms of the performance goals adopted under the Plan must be approved by our shareholders. Also, the Plan currently provides that restricted stock splitawards will become fully vested upon a change in control event, as defined in the Plan, without a corresponding involuntary termination from service, and that restricted stock awards become fully vested upon the commencement of a tender or exchange offer.

This amendment does not increase the number of shares available for grant under the Plan nor does it make any other material amendment other than as described in this Proxy Statement.

Section 162(m) of the Code generally disallows a tax deduction to a publicly-held company for compensation in excess of $1,000,000 paid to its chief executive officer and certain other executive officers (“Covered Employees”). However, under Section 162(m) of the Code, the deduction limit does not apply to qualified performance-based compensation if, among other requirements, (1) the compensation is awarded by a qualifying independent compensation committee (as explained further herein), (2) the compensation is disclosed to, and approved by, shareholders, (3) in the case of equity awards, the plan sets the maximum number of shares that can be granted to any person within a specified period and (3) the qualified performance-based awards are based on objective performance metrics using shareholder-approved performance goals that are set no later than 90 days into the incentive compensation performance period.

Our Board of Directors determinesbelieves that it is in the best interests of Banner and its shareholders to provide an incentive bonus plan, which may include incentive awards made to Covered Employees that may be fully deducted by Banner will executefor federal income tax purposes, and submitto provide us with flexibility with respect to the Washington Secretaryforms of State for filing articles ofawards, between restricted stock and incentive compensation.  While this amendment, of the Amended and Restated Articles of Incorporation providing for the reverse stock split, which will become effective at the close of business on the date the articles of amendment are accepted for filing by the Secretary of State (the “effective time”).  The articles of amendment would also reduce the authorized number of shares of our common stock from 200,000,000 to 50,000,000.  The Board will determine the exact timing of the filing of the articles of amendment based on its evaluation regarding when such action is the most advantageous to Banner and its shareholders.  In addition, the Board of Directors reserves the right, notwithstanding shareholder approval and without further action by the shareholders, to elect not to proceed with the reverse stock split if at any time prior to filing the articles of amendment, the Board, in its sole discretion, determines that it is no longer in Banner’s best interests and best interests of its shareholders to proceed with the reverse stock split.  If articles of amendment effecting the reverse stock split have not been filed with the Washington Secretary of State by the close of business on October 26, 2011, the Board of Directors will abandon the reverse stock split.

We believe that enabling the Board of Directors with the discretion regarding whether and when to implement the reverse stock splitapproved, will provide usthe Compensation Committee with the flexibility to do so in a manner most advantageous to Banner and its shareholders.  In determining whether and when to implementgrant awards under the reverse stock split,Plan that qualify as qualified performance-based compensation under Section 162(m) of the BoardCode, the approval of Directors may consider the following factors, among others:


•  the historical trading price and trading volume of Banner’s common stock;

•  the number of shares of Banner’s common stock outstanding;

•  the then-prevailing trading price and trading volume of Banner’s common stock and the anticipated impact of the reverse stock split on the trading market for the common stock; and

•  prevailing general market and economic conditions

If common shareholders approve the reverse stock split and the Board of Directors implements it, the articles ofthis amendment to be filed with the Washington Secretary of State would amend the first paragraph of Article IV of Banner’s Amended and Restated Articles of Incorporation to replace the first sentence with the following language:

ARTICLE IV.  Capital Stock.  The total number of shares of all classes of capital stock which the corporation has authority to issue is 50,500,000, of which 50,000,000 shall be common stock of par value of $0.01 per share, and of which 500,000 shall be serial preferred stock of par value $0.01 per share.  Upon the filing and effectiveness pursuant to the Washington Business Corporation Act of these Articles of Amendment (“Effective Time”), each seven (7) shares of common stock issued and outstanding immediately prior to the Effective Time shall be combined and changed into one (1) validly issued, fully paid and non-assessable share of common stock without any further action by the corporation or the holder thereof (the “reverse stock split”).  Any fractional shares resulting from the reverse stock split will not be issued (exceptrequire the Committee to grant awards that qualify as permitted below), but will be paid out in cash (without interest or deduction) in the amount equal to the number of shares exchanged into such fractional share multiplied by the closing trading price of the corporation’s common stock on the NASDAQ Global Select on the trading day immediately before the Effective Time.  Participants in the corporation’s Employee Stock Ownership Plan and Dividend Reinvestment and Direct Stock
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Purchase and Sale Plan will receive their whole and fractional shares resulting from the reverse stock split credited to their accounts.

The remaining text of Article IV of Banner’s Amended and Restated Articles of Incorporation would remain unchanged.
Reasons for the Reverse Stock Split

The Board is submitting the reverse stock split for approval with the primary intent of increasing the market price per share of our common stock.  The Board of Directors believes that a higher price per share could result in greater interest in Banner’s common stock among institutional owners, members of the financial community and the investing public.  In addition, the Board believes the reverse stock split could possibly create a more liquid market for Banner’s shareholders.

We believe that the reverse stock split will make our common stock more attractive to a broader range of institutional and other investors, as we have been advised that the current market price of our common stock may affect its acceptability to certain institutional investors, professional investors and other members of the investing public.  Many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. In addition, some of those policies and practices may function to make the processing of trades in low-priced stocks economically unattractive to brokers.  Moreover, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, the current average price per share of common stock can result in individual shareholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were substantially higher.  We believe that the reverse stock split will make our common stock a more attractive and cost effective investment for many investors, which will enhance the liquidity of the holders of our common stock.

Reducing the number of outstanding shares of our common stock through the reverse stock split is intended, absent other factors, to increase the per share market price of our common stock.  However, other factors, such as our financial results, market conditions and the market perception of our business may adversely affect the market price of our common stock.  As a result, there can be no assurance that the reverse stock split, if completed, will result in the intended benefits described above, that the market price of our common stock will increase following the reverse stock split or that the market price of our common stock will not decrease in the future.  Additionally, we cannot assure you that the market price per share of our common stock after a reverse stock split will increase in proportion to the reduction in the number of shares of our common stock outstanding before the reverse stock split.  Accordingly, the total market capitalization of our common stock after the reverse stock split may be lower than the total market capitalization before the reverse stock split.

Potential Effects of the Reverse Stock Split

If shareholders approve the reverse stock split, there will be no impact unless and until the Board of Directors determines to implement it.  The reverse stock split, once implemented, would affect all of Banner’s common shareholders and would not affect any shareholder’s percentage ownership interests or proportionate voting power, except as described below under “Fractional Shares.”

The principal effects of the reverse stock split would be that:

•  seven shares of common stock would be reclassified and combined into one share of common stock;
•  the total number of outstanding shares of common stock would be decreased by a factor of seven;

•  the total number of authorized shares of common stock would decrease from 200,000,000 to 50,000,000;

•  based on the 1-for-7 reverse stock split ratio, the per share exercise price of all outstanding equity awards would be increased proportionately and the number of shares of common stock issuable upon
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the exercise of all such awards and the number of vested and unvested shares subject to outstanding option and other stock awards would be decreased proportionately; and
•  based on the 1-for-7 reverse stock split ratio, the conversion price of all other outstanding securities that are exercisable or exchangeable for or convertible into shares of common stock would be increased proportionately and the number of shares of common stock issuable upon such exercise, exchange or conversion would be decreased proportionately.

Because the reverse stock split, if implemented, would result in a reduction of the number of outstanding shares of our common stock, it would be accompanied by a significant reduction in the number of shares of common stock that our Board is authorized to issue.  The reverse stock split would not affect the number of shares of preferred stock the we may issue, which would remain at 500,000 shares.  Although the number of outstanding shares of common stock would decrease following the proposed reverse stock split, we do not intend for the reverse stock split to be the first step in a “going private transaction” within the meaning of Rule 13e-3 of the Securities Exchange Act.  The reverse stock split would not affect the terms of or par value of the common stock.

Except for minor adjustments that may result from the treatment of fractional shares as described below, the reverse stock split will not have any dilutive effect on our shareholders since each shareholder would hold the same percentage of our common stock outstanding immediately following the reverse split as such shareholder held immediately prior to the reverse split.  After the reverse stock split, all shares of common stock would have the same voting rights, and rights to dividends and other distributions (if any) by Banner.  The Board of Directors reviews dividends on a quarterly basis and has not yet determined whether it would make any change in the dividend paid per share on the common stock as a result of the reverse stock split. At the effective time of the reverse stock split, each seven shares of common stock would be reclassified and combined into one share of common stock, automatically and without further action on the shareholders’ part.

We estimate that after the implementation of the reverse stock split, we will have approximately the same number of shareholders.  However, the reverse stock split may result in some shareholders owning less than 100 shares of common stock, which are known as “odd lots.”  Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares.
The reverse stock split, if implemented, will concurrently reduce the authorized number of shares of Banner’s common stock from 200,000,000 to 50,000,000. Accordingly, the additional authorized shares of common stock will be available for issuance at such times and for such purposes as the Board of Directors may deem advisable without further action by our shareholders, except as required by applicable laws and regulations. The Board believes that the availability of additional authorized shares of common stock will provide it with additional flexibility.  We currently do not have any plan, commitment, arrangement, understanding or agreement, either written or oral, to issue any shares of additional authorized common stock, however, the additional shares of common stock would be available for issuance by action of the Board without the need for further action by our shareholders, unless shareholder action is specifically required by applicable law. The number of shares of authorized preferred stock will remain the same.

Fractional Shares

No fractional shares of common stock will be issued in connection with the reverse stock split, other than to participants in Banner’s Employee Stock Ownership Plan and Dividend Reinvestment and Direct Stock Purchase and Sale Plan.  All other shareholders who would otherwise be entitled to receive a fractional share due to holding a number of shares not evenly divisible by seven would receive cash in lieu of a fractional share.  The cash amount to be paid to each such shareholder will be paid out (without interest or deduction) in an amount equal to the number of whole shares exchanged into such fractional share multiplied by the closing trading price of our common stock on the NASDAQ Global Select Market on the trading day immediately before the articles of amendment are filed with the Washington Secretary of State.

If a shareholder who holds shares in certificated form is entitled to a payment in lieu of any fractional share interest, the shareholder will receive a check as soon as practicable after the effective time and after the shareholder has submitted an executed letter of transmittal and surrendered all stock certificates, as described below in “Exchange of
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Stock Certificates.”  Shareholder who hold shares of our common stock with a broker, bank or other nominee should contact their broker, bank or other nominee for information on the treatment and processing of fractional shares.  By signing and cashing the check, shareholders will warrant that they owned the shares of common stock for which they received a cash payment.  The cash payment is subject to applicable federal and state income tax and state abandoned property laws.  Shareholders will not be entitled to receive interest for the period of time between the effective time and the date payment is received.

Exchange of Stock Certificates

If the shareholders approve the reverse stock split and the Board of Directors implements it, the combination of, and reduction in, the number of shares of our outstanding common stock as a result of the reverse stock split will occur automatically on the date that the articles of amendment are filed with the Washington Secretary of State, without any action by shareholders and without regard to the date that stock certificates representing the outstanding shares of our common stock prior to the effective time are physically surrendered for new stock certificates.

Our transfer agent will mail a letter of transmittal to each holder of record of certificates for our common stock to be used in forwarding the certificates for surrender and exchange for certificates representing the number of shares of our common stock the shareholder is entitled to receive as a result of the reverse stock split, as soon as practicable after the effective time.  The letter of transmittal will contain instructions on how a shareholder should surrender the certificate(s) representing shares of common stock to the transfer agent in exchange for certificates representing the appropriate number of shares of post-reverse stock split common stock.  No post-split certificates will be issued to a shareholder until the shareholder has surrendered all pre-split certificates, together with a properly completed and executed letter of transmittal, to the transfer agent.  There will be no fee for exchanging certificates.  Shareholders should not destroy any stock certificate(s) and should not submit any stock certificate(s) until requested to do so.

If your shares of Banner common stock are held in book-entry form with the transfer agent, meaning you do not have stock certificates evidencing your ownership of the common stock and receive a statement reflecting the number of shares registered in your accounts, you will not need to take action to receive shares of post-reverse stock split common stock.  The exchange will be automatic and you will receive cash in lieu of fractional shares.

If you are a beneficial owner of Banner common stock held by a broker, bank or other nominee (i.e., in “street name”), you will be treated in the same manner as shareholders whose shares are registered in their names.  Brokers, banks and other nominees will be instructed to effect the reverse stock split for their beneficial holders holding common stock in street name.  However, these banks, brokers or other nominees may have different procedures than registered shareholders for processing the reverse stock split. If your shares are held in street name and you have any questions in this regard, we encourage you to contact your broker, bank or other nominee.

Certain Federal Income Tax Consequences of the Reverse Stock Split

The following is a summary of certain United States federal income tax consequences of a reverse stock split.  It does not address any state, local or foreign income or other tax consequences. It applies to you only if you held pre-reverse stock split Banner common stock shares and post-reverse stock split Banner common stock shares as capital assets for tax purposes. This section does not apply to you if you are a member of a class of holders subject to special rules, such as (i) a dealer in securities, (ii) a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings, (iii) a bank or (iv) a tax-exempt organization. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis, which could have a material effect on the U.S. federal income tax consequences of the reverse stock split.

If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.  Partnerships that hold our common stock, and partners in such partnerships, should consult their own tax advisors regarding the U.S. federal income tax consequences of the reverse stock split.
 
 
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qualified performance-based compensation.  The Committee reserves the right to continue to grant awards under the Plan, regardless of whether or not the grant of such award results in compensation that is deductible for federal income tax purposes.

Please consult your own tax advisor concerningOur Board further believes that it is in the consequencesbest interests of Banner and its shareholders to require that restricted stock awards granted after the amended Plan is approved to not vest upon a change in control event unless the award recipient experiences an involuntary termination within 12 months following the change in control event, and that the commencement of a reversetender or exchange offer should not itself result in the accelerated vesting of the restricted stock splitaward.
The following summary of the terms of the Plan and the proposed amendment is qualified in your particular circumstancesits entirety by reference to the text of the Plan attached as Appendix B to this Proxy Statement.

Description of Proposed Amendments

Under the current terms of the Plan, none of the awards are eligible to qualify as qualified performance-based compensation for the purposes of Section 162(m) of the Code.  The proposed amendment will allow (1) the granting of cash-denominated incentive-based awards, including those that are eligible to qualify as qualified performance-based compensation for the purposes of Section 162(m) and (2) restricted stock awards that are currently available for grant under the Internal Revenue CodePlan to be eligible to qualify as qualified performance-based compensation for the purposes of Section 162(m) of the Code.  The amendments include a list of performance goals for shareholder approval and related performance adjustments, in each case, that Banner may use as the laws of any other taxing jurisdiction.underlying performance goals and performance adjustments (if applicable) when granting qualified performance-based awards.  The amendment also provides for a process for granting qualified performance-based awards and cash awards that constitute qualified performance-based awards.

U.S. Federal Income Tax Consequences to U.S. Holders. A U.S. holder, as used herein, isAll qualified performance-based awards must be granted by a shareholder that is: (i) a citizencommittee comprised solely of two or residentmore “outside directors” for the purposes of Section 162(m) of the United States; (ii) a domestic corporation; (iii) an estate whose income is subject to United States federal income tax regardlessCode.  Such awards will be earned, vested and/or payable solely upon the achievement of its source; or (iv) a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust. This discussion applies only to U.S. holders.

Other than with respect to any cash payments received in lieu of fractional shares discussed below, no gain or loss will be recognized by a U.S. holder upon such holder’s exchange of pre-reverse stock split shares for post-reverse stock split shares pursuant to a reverse stock split. The aggregate tax basisshareholder-approved performance goals that this committee approves at the time of the post-reverse stock split shares received in the reverse stock split (including any fraction of a new share deemed to have been received) will be the same as the holder’s aggregate tax basis in the pre-reverse stock split shares exchanged therefor. In general, U.S. holders who receive cash in exchange for their fractional share interests in the post-reverse stock split shares as a result of a reverse stock split will be deemed for U.S. federal income tax purposes to have first received the fractional share interests and then to have had those fractional share interests redeemed for cash. The U.S. holder’s holding period for the post-reverse stock split shares will include the period during which the holder held the pre-reverse stock split shares surrendered in the reverse stock split.grant.

The receiptCompensation Committee may, in its discretion, establish specific performance objectives (including any adjustments) that must be achieved in order for qualified performance-based awards held by an eligible employee to vest. For each qualified performance-based award granted, the Committee will establish in writing one or more objectively determinable performance objectives for such qualified performance-based awards, based upon one or more of cash insteadthe following business criteria, any of which may be measured in absolute terms, as compared to any incremental increase or as compared to the results of a fractional share of Banner common stock by a U.S. holder of Banner common stock will generally result in a taxable gain or loss equal to the difference between the amount of cash received and the holder’s adjusted federal income tax basis in the fractional share. Gain or loss will generally constitute a capital gain or loss. Capital gain of a noncorporate U.S. holder is generally taxed at a maximum rate of 15 percent where the holder has a holding period for federal income tax purposes in the property of more than one year. There are limits on the deductibility of capital losses for both corporate and noncorporate holders.peer group:
•        net income;

Persons who, actually or constructively for U.S. federal income tax purposes, own more than one percent of the outstanding shares of Banner common stock should consult their tax advisors as to whether the cash in lieu of fractional shares is treated as being “essentially equivalent to a dividend” and taxed accordingly.
•        earnings per share;

U.S. Information Reporting and Backup Withholding.  Information returns generally will be required to be filed with the Internal Revenue Service (“IRS”) with respect to the receipt of cash in lieu of a fractional share of our common stock pursuant to the reverse stock split in the case of certain U.S. holders.  In addition, U.S. holders may be subject to a backup withholding tax (at the current applicable rate of 28%) on the payment of such cash if they do not provide their taxpayer identification numbers in the manner required or otherwise fail to comply with applicable backup withholding tax rules.  Backup withholding is not an additional tax.  Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the U.S. holder’s federal income tax liability, if any, provided the required information is timely furnished to the IRS.
•        return on equity;

U.S. Federal Income Tax Consequences to Non-U.S. Holders. Generally, a non-U.S. holder, defined as any beneficial owner of Banner common stock that is neither a U.S. holder nor a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes, will not be subject to U.S. federal income tax on gain recognized on a deemed disposition of fractional shares for cash unless (i) the gain is “effectively connected” with the conduct of a trade or business in the United States, and the gain is attributable to a permanent establishment or fixed base maintained in the United States by the Non-U.S. Holders, if that is required by an applicable income tax treaty as a condition for being subjected to United States federal income tax on a net income basis, or (ii) the holder is an individual, is present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist.  A corporate non-U.S. holder’s “effectively connected” recognized gains may also, under certain circumstances, be subject to an additional “branch profits tax” on earnings and profits for the taxable year that are effectively connected to the conduct of a trade or business within the United States at a 30 percent gross rate (or at a lower rate if the holder is eligible for the benefits of an income tax treaty that provides for a lower rate). Non-U.S. Holders should consult their own tax advisors regarding these rules.
•        return on average equity;

•        return on tangible common equity (defined as a ratio, the numerator of which is income before amortization of intangibles, and the denominator of which is tangible common equity);

•        return on assets;

•        return on average assets;

•        “efficiency ratio” determined as the ratio of total non-interest operating expenses (less amortization of intangibles) divided by total revenues (less net security gains and adjustments for financial instruments carried at fair value);

•        non-interest income to total revenue ratio;

•        net interest margin;

•        revenues;
 
 
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Non-U.S. holders who, actually or constructively for U.S. federal income tax purposes, own more than one percent of the outstanding Banner common stock shares should consult their tax advisors as to whether the cash in lieu of fractional shares is treated as being “essentially equivalent to a dividend” and taxed accordingly.
•       
credit quality measures (including non-performing asset ratio, net charge-off ratio, and reserve coverage of non-performing loans);
 
Tax Consequences to Banner
•       net operating profit;
 
•       loan growth;

•       deposit growth;

•       non-interest income growth;

•       total shareholder return;

•       market share;

•       productivity ratios;

•       interest income;

•       pre-tax pre-provision, which is pre-tax income on a tax equivalent basis adjusted for provision expense, security gains and losses, and amortization of intangibles; or

•       other strategic milestones based on objective criteria established by the Committee, provided that, with respect to Covered Employees, such strategic milestones must be approved by Banner shareholders prior to the payment of any award.

The performance objectives may be expressed in terms of Banner’s overall performance or the performance of a business function or business unit and/or Banner’s subsidiaries.  The performance objectives may be applied either to Banner as a whole or to a business unit or subsidiary, as determined by the Compensation Committee.  Performance objectives may be different for different participants.  The Committee may include or exclude extraordinary events or any other objective events or occurrences either establishing the performance objective or in determining whether the performance objective has been achieved.  However, the Committee does not have discretion to increase the amount of an award that would otherwise be due to a participant who is a Covered Employee based on such Covered Employee’s pre-established performance goals for the applicable performance period.

Additional Restrictions on the Accelerated Vesting of Future Restricted Stock Awards

BannerRestricted stock awards granted after the amended Plan is approved will not recognizebe permitted to fully vest upon a change in control event unless the award recipient also is involuntarily terminated within 12 months of the change in control event (unless an earlier vesting event occurs).  The definition of a change in control event is not amended.  In addition, the vested status of a restricted stock award granted after the amended Plan is approved will not be affected by the commencement of a tender or exchange offer.

No Other Amendments

This amendment does not amend the Plan in any gain or lossrespect other than to reflect the changes specifically described above.

Purposes of the Plan

The purposes of the Plan are to promote the long-term interests of Banner and its shareholders by providing a means for attracting and retaining officers of Banner and its affiliates, and to provide additional incentive to officers to promote the success of our business.

The aggregate number of shares of common stock subject to awards under the Plan is 300,000 shares. As of March 1, 2013, 54 restricted stock awards for up to an aggregate of 97,995 shares were outstanding under the 2012 Stock Plan, and 202,005 shares (plus any shares that might in the future be returned to the 2012 Stock Plan as a result of any reverse stock split.cancellations, forfeitures, repurchases, surrender or expiration of awards) remained available for future grants. The aggregate authorized number may be adjusted for changes in Banner’s capitalization and certain corporate transactions, as described below under the heading “Changes in Control and Corporate Transactions.” To the extent that an award
 
Accounting Matters
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expires, terminates or is cancelled, without having been exercised in full or settled, any unexercised shares subject to the award will be available for future grant or sale under the Plan. Shares of restricted stock which are forfeited, repurchased by us or surrendered pursuant to the Plan may again be granted or awarded under the Plan.

Administration

The proposed amendmentPlan is administered by the Compensation Committee.  The Committee is authorized to Banner’s Amendedmake all determinations and Restated Articlesdecisions under the Plan, including the individuals to whom awards will be made, the amount of Incorporationawards that will be made and the terms and conditions applicable to all awards.  The Committee is also authorized to establish rules for the administration of the Plan.  Where necessary to qualify an award as qualified performance-based compensation under Section 162(m) of the Code, the Committee shall be composed solely of two or more “outside directors.”

Eligibility

The Compensation Committee may grant awards under the Plan to officers of Banner and its affiliates.  The Committee will select persons to receive awards among the eligible participants and determine the terms of each award granted.  As of March 1, 2013, outstanding restricted stock awards have been issued to approximately 53 of our approximately 231 eligible officers.

Awards Under the Plan

Restricted Stock.  Unless otherwise provided in the applicable award agreement, participants generally have all of the rights of a shareholder with respect to restricted stock.  Restricted stock may be issued for a nominal purchase price or for no purchase price in exchange for services previously rendered and may be subject to vesting over time or upon attainment of performance targets.  Any dividends or other distributions paid on restricted stock may be subject to restrictions to the same extent as the underlying stock.  Award agreements related to restricted stock may provide that restricted stock is subject to repurchase by Banner or subject to forfeiture in the event that the participant ceases to be an employee prior to vesting.  Restricted stock may be awarded as an incentive bonus award.

Cash Awards.  An incentive bonus award granted under the Plan may be denominated in cash.  Each cash award will be granted subject to terms and conditions, if any, that are not inconsistent with the Plan, as determined by the Compensation Committee and set forth in the applicable award agreement.

Awards Generally Not Transferable

A restricted stock award may be transferred upon the death of the holder to whom it was awarded, by will or the laws of inheritance, as well as pursuant to a qualified domestic relations order.

Changes in Capitalization and Corporate Transactions

Shares awarded under the Plan may be adjusted by the Compensation Committee in the event of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure of shares of Banner.

Federal Income Tax Consequences Associated with the Plan

The following is a general summary under current law of the material federal income tax consequences to participants in the Plan.  This summary deals with the general tax principles that apply and is provided only for general information.  Some kinds of taxes, such as state, local and foreign income taxes and federal employment taxes, are not discussed.  Tax laws are complex and subject to change and may vary depending on individual circumstances and from locality to locality.  The summary does not discuss all aspects of income taxation that may be relevant in light of a holder’s personal investment circumstances.  This summarized tax information is not tax advice.

36

Restricted Stock.   An individual to whom restricted stock is issued generally will not affectrecognize taxable income upon such issuance, and we generally will not then be entitled to a deduction, unless an election is made by the parparticipant under Section 83(b) of the Code.  However, when restrictions on shares of restricted stock lapse, such that the shares are no longer subject to a substantial risk of forfeiture, the individual generally will recognize ordinary income, and we generally will be entitled to a deduction for an amount equal to the excess of the fair market value of the commonshares at the date such restrictions lapse over the purchase price.  If a timely election is made under Section 83(b) with respect to restricted stock, per share, whichthe participant generally will continuerecognize ordinary income on the date of the issuance equal to have a parthe excess, if any, of the fair market value of $0.01 per share.  As a result, asthe shares at that date over the purchase price of the effective time, the stated capital attributable to common stocksuch shares, and the additional paid-in capital account on our balance sheet will not change due to the reverse stock split.  Reported per share net income or losswe will be higher because there will be fewer shares of common stock outstanding.entitled to a deduction for the same amount.

Dissenters’ RightsSection 162(m) of the Code.  As described above, in general, under Section 162(m) of the Code, income tax deductions of publicly-held corporations may be limited to the extent a Covered Employee’s total compensation (including base salary, annual bonus, stock option exercises, full-value equity award vesting and settlement, and non-qualified benefits paid) exceeds $1,000,000 in any one year.  However, under Section 162(m) of the Code, the deduction limit does not apply to qualified performance-based compensation as provided in the Treasury Regulations under Section 162(m) of the Code if, among other requirements, the compensation is awarded by an independent compensation committee and adequately disclosed to, and approved by, shareholders.  In particular, equity awards will satisfy the qualified performance-based compensation exception if the awards are made by an independent compensation committee, the underlying plan sets the maximum number of shares or maximum amount of cash that can be granted, and the qualified performance-based awards, other than stock options, are based on performance metrics using shareholder-approved performance goals.

Under Washington lawThe Compensation Committee can determine the terms and our Amended and Restated Articlesconditions of Incorporation, holdersawards granted under the Plan such that remuneration attributable to such awards constitute qualified performance based compensation that is not subject to the $1,000,000 limitation under Section 162(m) of the common stockCode.  No assurance is given that any specific award will qualify as qualified performance-based compensation under the Plan.

Section 409A of the Code.  Section 409A of the Code provides certain requirements on non-qualified deferred compensation arrangements.  The Plan does not be entitledprovide deferred compensation, and as such is not subject to appraisal or other dissenters’ rights with respect toSection 409A of the reverse stock split.Code.
 
Plan Benefits

No awards are currently proposed under the Plan.

Voting Recommendation of the Board of Directors

The Board of Directors unanimously recommends that you vote FOR adoption of the reverse stock split.amendment to the Banner Corporation 2012 Restricted Stock Plan.

37



EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share and exercise price information about Banner’s equity compensation plans as of December 31, 2012.

      (c)
      Number of securities
  (a) (b) remaining available
  Number of securities Weighted-average for future issuance
  to be issued upon exercise price under equity
  exercise of of outstanding compensation plans
  outstanding options, options, warrants (excluding securities
Plan category warrants and rights and rights reflected in column (a))
       
Equity compensation plans approved      
by security holders: 42,521 $ 173.98 209,465
       
Equity compensation plans not      
approved by security holders: -- N/A --
       
               Total                                 42,521   209,465


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of any registered class of Banner’s equity securities, to file reports of ownership and changes in ownership with the SEC.  Executive officers, directors and greater than 10% shareholders are required by regulation to furnish us  with copies of all Section 16(a) forms they file.  Based solely on our review of the copies of such forms we have received and written representations provided to us by these persons, we believe that during the year ended December 31, 2010,2011, all filing requirements applicable to our reporting officers, directors and greater than 10% shareholders were properly and timely complied with, except for Mr. Adams, who filed a late Form 4 covering one transaction.with.



MISCELLANEOUS

 
The Board of Directors is not aware of any business to come before the annual meeting other than those matters described in this Proxy Statement.  However, if any other matters should properly come before the meeting, it is intended that proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons voting the proxies.

We will bear the cost of solicitation of proxies, and will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of Banner’s common stock.  In addition to solicitations via the Internet and by mail, our directors, officers and regular employees may solicit proxies personally or by telecopier or telephone without additional compensation.

Banner’s 20102012 Annual Report to Shareholders, including financial statements, has been mailed to all shareholders of record as of the close of business on March 1, 2011.2013.  Any shareholder who has not received a copy of the Annual Report may obtain a copy by writing to us or by accessing our proxy materials online at www.bannerbank.com/proxymaterialshttp://www.investorvote.com/banr.proxymaterial.  The Annual Report is not to be treated as part of the proxy solicitation material or having been incorporated herein by reference.
 
A copy of Banner’s Annual Report on Form 10-K for the year ended December 31, 2010,2012, as filed with the SEC, will be furnished without charge to shareholders of record as of March 1, 20112013 upon written request to
35

Albert H. Marshall, Secretary, Banner Corporation, 10 S. First Avenue, Post Office Box 907, Walla Walla, Washington 99362.

38

SHAREHOLDER PROPOSALS

 

SHAREHOLDER PROPOSALS

Proposals of shareholders intended to be presented at our annual meeting to be held in 20122014 must be received by us no later than November 22, 20112013 to be considered for inclusion in the proxy materials and form of proxy relating to that meeting.  Any such proposals shall be subject to the requirements of the proxy rules adopted under the Securities Exchange Act.

In addition, our Articles of Incorporation provide that in order for business to be brought before the annual meeting, a shareholder must deliver notice to the Secretary not less than 30 nor more than 60 days prior to the date of the annual meeting; provided that if less than 31 days’ notice of the annual meeting is given to shareholders, such notice must be delivered not later than the close of the tenth day following the day on which notice of the annual meeting was mailed to shareholders.  The notice must state the shareholder’s name, address and number of shares of Banner common stock held, and briefly discuss the business to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any interest of the shareholder in the proposal.

Our Articles of Incorporation provide that if a shareholder intends to nominate a candidate for election as a director, the shareholder must deliver written notice of his or her intention to our Secretary not less than 30 days nor more than 60 days prior to the date of the annual meeting of shareholders; provided, however, that if less than 31 days’ notice of the annual meeting is given to shareholders, such written notice must be delivered to our Secretary not later than the close of the tenth day following the day on which notice of the annual meeting was mailed to shareholders.  The notice must set forth (1) the name, age, business address and, if known, residence address of each nominee for election as a director, (2) the principal occupation or employment of each nominee, (3) the number of shares of Banner common stock which are beneficially owned by each such nominee, (4) such other information as would be required to be included pursuant to the Securities Exchange Act in a proxy statement soliciting proxies for the election of the proposed nominee, including, without limitation, such person’s written consent to being named in the proxy statement as a nominee and to serving as a director, if elected, and (5) as to the shareholder giving such notice (a) his or her name and address as they appear on our books and (b) the class and number of Banner shares which are beneficially owned by such shareholder.
 
 BY ORDER OF THE BOARD OF DIRECTORS
  
 /s/ ALBERT H. MARSHALL
  
 
ALBERT H. MARSHALL
SECRETARY
Walla Walla, Washington
March 21, 201122, 2013

 
36 39

 

 Appendix A

COMPENSATION COMMITTEE CHARTER
FOR
THE COMPENSATION COMMITTEE
OF BANNER CORPORATION
AUDITAND
THE COMPENSATION COMMITTEE CHARTER

OF BANNER BANK

I.  Purpose

The primary function of the AuditCompensation Committee of Banner Corporation (“AuditCorporation Compensation Committee” or “Committee”) and the Compensation Committee of Banner Bank (“Bank Compensation Committee,” and together with the Corporation Compensation Committee, the “Committees”) is to assistwork together to coordinate the Boardcompensation paid to the directors, officers and employees of Directors (“Board”) in fulfilling its oversight responsibilities by reviewing the quality and integrity of financial reports and other financial information provided byboth Banner Corporation (“Corporation”); and Banner Bank (“Bank”).  In achieving this goal, the Corporation’s systemsCommittees shall operate separately but shall coordinate their efforts in order to achieve a coordinated policy.  The Corporation Compensation Committee shall set the policies and compensation levels for directors, officers and employees of internal controls regarding finance, accounting, legal compliancethe Corporation, while the Bank Compensation Committee shall set the policies and ethicscompensation levels for directors, officers and employees of the Bank.  The Committees shall coordinate their efforts to ensure that managementcompensation policies are administered fairly and the Board have established; and the Corporation’s auditing, accounting and financial reporting processes generally.  Consistent with the function, the Audit Committee should encourage continuous improvement of, and should foster adherence to, the Corporation’s policies, procedures and practices at all levels.  The Audit Committee’s primary duties and responsibilities are to:consistently.

1.Serve as an independent and objective party to monitor the Corporation’s financial reporting process and internal control system.

2.Review and appraise the audit efforts of the Corporation’s independent accountants and internal auditing department.

3.Provide an open avenue of communication among the independent accountants, financial and senior management, the internal auditing department and the Board of Directors.
II.  Composition

The Audit Committee will primarily fulfill these responsibilities by carrying out the activities enumerated in Section IV of this charter.

II.Composition

The Audit CommitteeCommittees shall each be comprised of three or more directors as determined by the Board each of whomDirectors of the Corporation or the Bank, as appropriate.  Each member shall be an independent directors, anddirector of the respective entity, who is free from any relationships that, in the opinion of the relevant Board, would interfere with the exercise of his or her independent judgment as a member of the Committee.  All members of the Committee shall have a working familiarity with basic finance and accounting practices.  Member independence experience and financial expertise will be in conformanceconformity with rules established by the SEC, NASD, FDIC,Securities and Exchange Commission and the AICPA.National Association of Securities Dealers.  The members of the CommitteeCommittees shall be elected by the Board of Directors of the Corporation or the Bank, as appropriate, at the annual organizational meeting of the relevant Board and shall serve until their successors shall beare duly elected and qualified.  Unless a Chair is selected by the fullrelevant Board, the members of theeach Committee may designate a Chair by majority vote of the full Committee membership.

III.  Meetings

The CommitteeCommittees shall each meet at least four times annually, or more frequently as circumstances dictate.  As part of itsthe job to foster open communication, theset executive compensation levels, each Committee should meet at least annually with management, the Internal Auditappropriate Chief Executive Officer in order to discuss the Chief Executive Officer’s evaluation of the senior officers and recommendations for compensation levels.  In addition to the separate meetings of the Corporation Compensation Committee and the independent accountants in separate executive session to discuss any matters thatBank Compensation Committee, the Committee or each of these groups believes should be discussed privately.  In addition, the Committee orCommittees shall meet together at least its Chair should meet withannually, or more frequently as circumstances dictate, to ensure that compensation policies for the independent accountantsCorporation and management quarterly to review the Corporation’s financial statements consistent with IV.4 below.Bank are administered consistently.

IV.  Responsibilities and Duties

To fulfill its responsibilities and duties, each Committee shall (with the Auditunderstanding that the Corporation Compensation Committee shall:shall take all action with respect to the Corporation and the Bank Compensation Committee shall take all action with respect to the Bank):

Documents/Reports ReviewCompensation Policies

 1.ReviewDevelop guidelines and update this Charter periodically, at least annually, as conditions dictate.policies for director compensation, coordinating actions between the Corporation Compensation Committee and the Bank Compensation Committee.
 2.ReviewDevelop guidelines and policies for executive compensation, coordinating actions between the Corporation’s annual financial statementsCorporation Compensation Committee and any submittedthe Bank Compensation Committee.
3.Make regular reports to the public, including any certification, report, opinion, or review rendered by the independent accountants.appropriate Board of Directors.
 
 
A-1

 
 
 3.Review the regular internal reports prepared by the internal auditing department and management’s response.
4.Review with financial managementAt least annually, review the compensation policies to ensure that they are effective in meeting goals for compensation and the independent accountants the financial statements, including disclosures made in Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Corporation’s reports on Forms 10-Q and 10-K and annual reports to shareholders prior to its filing or prior to the release of earnings.  The Committee shall recommend to the Board whether or not the audited financial statements should be included in the Corporation’s 10-K.make new recommendations, as needed.
 5.Review disclosures made byand approve the Corporation’s chief executive officer and chief financial officer regarding compliance with their certification obligations as required underlist of a peer group of companies to which the Sarbanes-Oxley Act of 2002Corporation and the rules promulgated thereunder, including the Corporation’s disclosure controls and procedures and internal controlsBank shall compare themselves for financial  reporting and evaluations thereof.compensation purposes.

Independent Accountants

 6.Be directly responsible for the appointment,If necessary, engage independent consultants and outside counsel to provide comparative information regarding compensation retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report of performing other audit, review or attest services for the Corporation,benefits, and each such registered accounting firm shall report directly to the Audit Committee.advice on issues involving laws and regulations governing compensation.
 7.Approve all audit engagement feesReview and terms and all non-audit engagements with the independent accountants.  The Committee may delegate authority to pre-approve non-audit services to one or more members of the Committee.  If this authority is delegated, all approved non-audit services will be presented to the Committee at its next scheduled meeting.approve other large compensation expense categories such as employee benefit plans.
 8.Ensure receipt from the independent accountants of a formal written statement delineating all relationships between the accountants and the Corporation, consistent with Independence Standards Board Standard 1.  On an annual basis, the Committee shouldAt least annually, review and discuss with the accountants any such relationships to determine the accountants’ independence and objectivity.  The Committee should take, or recommend to the Board that it take appropriate action to oversee the independence of the accountants.update (if necessary) this Charter, as conditions dictate.

Compensation

 9.EnsureReview director compensation levels and recommend, as necessary, changes in the independent accountants’ ultimate accountability tocompensation levels, with equity ownership in the Board and the Committee, as representatives of the shareholders, receiving direct reports from the accountants.Corporation encouraged.
 10.Periodically consult withReceive and review an annual report from the independent accountants out ofChief Executive Officer which includes the presence of management about internal controlsperformance assessment for all senior officers and the completenessrecommendations for compensation levels, and accuracy of the organization’s financial statements.which also includes salary recommendations for all employees.
 11.Discuss withSet compensation for all senior officers, other than the independent auditors all matters required by Statement of Auditing Standards No. 61 relating toChief Executive Officer, based on the conductrecommendations of the audit.Chief Executive Officer.
 12.Ensure that the lead audit partnerOn an annual basis, review and approve goals and objectives relevant to compensation of the independent accountantsChief Executive Officer, evaluate the Chief Executive Officer’s performance in light of those goals and objectives, and determine the audit partner responsible for reviewing the audit are rotated at least every five years, and that all other audit partners are rotated at least every seven years.Chief Executive Officer’s compensation based on this evaluation.

Financial Reporting Processes

 13.In consultation withFor the independent accountantssenior officers, annually review and the internal auditors, review the integrity of the organization’s financial reporting processes, both internalapprove (i) employment agreements, severance agreements and external.change in control agreements or provisions, in each case, when and if appropriate, and (ii) any special or supplemental benefits.
 14.ConsiderAdopt, administer, approve and ratify awards under incentive compensation and stock plans, including amendments to the independent accountants’ judgments about the qualityawards made under any such plans, and appropriateness of the Corporation’s accounting principles as applied in its financial reporting.review and monitor awards under such plans.

Succession Planning

 15.Consider and approve, if appropriate, major changesIn conjunction with the Corporate Governance/Nominating Committee, recommend to the Corporation’s auditing and accounting principles and practices as suggested byappropriate Board of Directors a policy on succession planning for the independent accountant’s, management, or the internal auditing department.Chief Executive Officer.

Process ImprovementsReporting

 16.Establish regular and separate systems of reporting to the Audit Committee by each of management, the independent accountants and the internal auditors regarding any significant judgments made in management’s preparation of the financial statements and the view of each as to appropriateness of such judgments.
A-2

17.Establish procedures that allow employees of the Corporation or any of its subsidiaries to submit confidential and anonymous concerns regarding questionable accounting or auditing matters.
18.Establish procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters.
19.Following completion of the annual audit, review separately, as needed, with each of management, the independent accountants and the internal auditing department any significant difficulties encountered during the course of the audit, including any restrictionsPrepare a report on the scope of work or access to required information.
20.Review (and in the case of the independent accountants, settle) any disagreement among management and the independent accountants or the internal auditing department in connection with the preparation of the financial statements.
21.Review with the independent accountants, the internal auditing department and management the adequacy and effectiveness of the accounting and financial controls of the Corporation and elicit any recommendations for the improvement of such internal control procedures or particular areas where new or more detailed controls or procedures are desirable.
22.Review with the independent accountants, the internal auditing department and management the extent to which changes or improvements in financial or accounting practices, as approved by the Audit Committee, have been implemented.

Compliance

23.Review the Corporation’s financial statements, reports and other information disseminated to the public.  Assess compliance with legal requirements and engage outside consultants or counsel, when necessary.
24.Review activities, organizational structure, and qualifications of the internal audit department.
25.Review, with the organization’s counsel, legal compliance matters including corporate securities trading policies.
26.Review, with the organization’s counsel, any legal matter that could have a significant impact on the organization’s public financial statements.
27.On an ongoing basis, review all related party transactions for potential conflict of interest situations.  Approve related party transactions when warranted.
28.Perform any other activities consistent with this Charter, the Corporation’s By-laws and governing law, as the Committee or Board deems necessary or appropriate.

Reporting

29.Prepare an audit committee reportexecutive compensation for inclusion in the Corporation’s annual proxy statement, consulting with the Corporation’s legal counsel, if necessary.

Miscellaneous

30.Determine the appropriate funding for payment of (i) compensation to the independent accountants, (ii) compensation to any advisers employed by the Committee and (iii) ordinary administrative expenses of the Audit Committee that are necessary or appropriate in carrying out its duties.
31.Discuss with management any second opinions sought from an accounting firm other than the Corporation’s independent accountants, including the substance and reasons for seeking any such opinion.
32.Review the internal audit function of the Corporation, including the independence, competence, staffing, adequacy and authority of the internal auditing department, the reporting relationships among the internal auditing department, financial management and the Audit Committee, the internal audit reporting obligations, the proposed internal audit plans for the coming year, and the coordination of such plans with the independent accountants.
33.Review findings from completed internal audits and progress reports on the proposed internal audit plan, together with explanations for any deviations from the original plan.
34.Review the appointment, reassignment or dismissal of the director of the internal audit.
 
 
 
A-3A-2

 

35Review at least annually the material exceptions noted in the reports to the Audit Committee by the internal auditors and the independent accountants, and the progress made in responding to the exceptions.
Appendix B
36.Inquire of management and the independent auditors about significant risks or exposures, review the Corporation’s policies for risk assessment and risk management, and assess the steps management has taken to control such risk to the Corporation.

37.Review the Corporation’s policies and procedures for regular review of the expense accounts of the Corporation’s executive management.
BANNER CORPORATION
38.Review with management and legal counsel the Corporation’s system for assessing whether the Corporation’s financial statements, reports and other financial information required to be disseminated to the public and filed with governmental organizations satisfy the requirements of the SEC and NASD.
2012 RESTRICTED STOCK AND INCENTIVE BONUS PLAN
39.Discuss with management and the independent accountants any correspondence with regulators or governmental agencies and any employee complaints or published reports, which raise material issues regarding the Corporation’s financial statements or accounting policies.
(AMENDED AND RESTATED)
40.Discuss with the Corporation’s legal counsel any regulatory matters that may have a material impact on the Corporation’s financial statements or its compliance and reporting policies.

41.At its discretion, request that management, the independent accountants or the internal auditors undertake special projects or investigations which the Audit Committee deems necessary to fulfill its responsibilities.

V.Limitations1.  Plan Purpose.  The purpose of Audit Committee’s Rolesthe Plan is to promote the long-term interests of the Corporation and its stockholders by providing a means for attracting and retaining executive officers of the Corporation and its Affiliates, including the Banks, and in the case of certain Awards, preserving tax deductibility by satisfying the Section 162(m) Exemption (as defined herein).  The Plan has been restated to include amendments approved by the Board on January 31, 2013.  The effective date of this amended and restated Plan shall be the date it is approved by
the shareholders of the Corporation.

2.  Definitions.  The following definitions are applicable to the Plan:

While“Affiliate” -- means any “parent corporation” or “subsidiary corporation” of the Corporation, as such terms are defined in Section 424(e) and (f), respectively, of the Code.

“Award” -- means the grant by the Committee hasof Restricted Stock or an Incentive Bonus, as provided in the responsibilitiesPlan.

“Award Agreement” -- means the agreement evidencing the grant of an Award made under the Plan.

“Banks” -- means Banner Bank, Islanders Bank or any successor entity.

“Board” -- means the board of directors of the Corporation.

“Change in Control” -- means each of the events specified in the following clauses (a) through (c): (a) any third person, including a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial owner of Shares of the Corporation with respect to which 25% or more of the total number of votes for the election of the Board may be cast; (b) as a result of, or in connection with, any cash tender offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Corporation shall cease to constitute a majority of the Board; or (c) the stockholders of the Corporation shall approve an agreement providing either for a transaction in which the Corporation will cease to be an independent publicly-owned corporation or for a sale or other disposition of all or substantially all the assets of the Corporation.

“Code” -- means the Internal Revenue Code of 1986, as amended.

“Committee” -- means the committee referred to in Section 3 hereof.  Where necessary to comply with Section 162(m) in the case of the awarding and powers set forthadministration of Qualified Performance-Based Awards, the Committee (which may be a subcommittee of the committee referred to in this Audit Committee Charter, itSection 3 hereof) shall be comprised solely of two or more members who satisfy the requirements for being “outside directors” for purposes of the Section 162(m) Exemption.

“Corporation” -- means Banner Corporation, a Washington corporation, and any successor thereto.

“Covered Employee” -- means “covered employee” within the meaning of Section 162(m)(3) of the Code and the regulations and guidance of general applicability issued thereunder.

“Incentive Bonus” -- means a bonus opportunity awarded under Section 7 pursuant to which a Participant may become entitled to receive an amount based on satisfaction of such Performance Goals as are specified in the Award Agreement.

“Participant” -- means any officer of the Corporation or any Affiliate who is not the duty ofselected by the Committee to prepare financial statements, plan or conduct audits or to determine that the Corporation’s financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable rules and regulations.  These are the responsibilities of management and the independent accountants.receive an Award.


 
A-4B-1 

 
“Performance Goals” -- means the business criteria allowed under the performance goal requirements of Section 162(m), including any one or more of the following objective performance criteria upon which the achievement of specific, pre-established, objective performance goals for each Participant are based as determined by the Committee in connection with the grant and certification of Awards: (a) net income, (b) earnings per share, (c) return on equity, (d) return on average equity, (e) return on tangible common equity (defined as a ratio, the numerator of which is income before amortization of intangibles, and the denominator of which is tangible common equity), (f) return on assets, (g) return on average assets, (h) “efficiency ratio” determined as the ratio of total non-interest operating expenses (less amortization of intangibles) divided by total revenues (less net security gains and adjustments for financial instruments carried at fair value), (i) non-interest income to total revenue ratio, (j) net interest margin, (k) revenues, (l) credit quality measures (including non-performing asset ratio, net charge-off ratio, and reserve coverage of non-performing loans), (m) net operating profit, (n) loan growth, (o) deposit growth, (p) non-interest income growth, (q) total shareholder return, (r) market share, (s) productivity ratios, (t) interest income, (u) pre-tax pre-provision, which is pre-tax income on a tax equivalent basis adjusted for: provision expense, security gains and losses, and amortization of intangibles, or (v) other strategic milestones based on objective criteria established by the Committee, provided that, with respect to Covered Employees, such strategic milestones must be approved by the shareholders of the Corporation prior to the payment of any Award.  Performance Goals may be expressed in terms of (1) attaining a specified absolute level of the criteria, or (2) a percentage increase or decrease in the criteria compared to a pre-established target, previous years’ results, or a designated market index or comparison group, all as determined by the Committee. The Performance Goals may be applied either to the Corporation as a whole or to a business unit or subsidiary, as determined by the Committee.  Performance Goals may be different for different Participants, as determined in the discretion of the Committee. The Committee may include or exclude extraordinary events or any other objective events or occurrences either establishing the Performance Goal or in determining whether the Performance Goal has been achieved; provided, however, that the Committee shall not have the discretion to increase the amount of an Award that would otherwise be due to a Participant who is a Covered Employee based on such Covered Employee’s pre-established performance goals for the applicable Performance Period.

“Performance Period” -- means that period established by the Committee at the time any applicable Qualified Performance-Based Award is granted or at any time thereafter during which any Performance Goals specified by the Committee with respect to such Award are to be measured.

“Plan” -- means this amended and restated Banner Corporation 2012 Restricted Stock and Incentive Bonus Plan.

“Qualified Performance-Based Award” -- means an Award intended to qualify for the Section 162(m) Exemption.

“Restricted Period” -- means the period of time selected by the Committee for the purpose of determining when restrictions are in effect under Section 5 hereof with respect to Restricted Stock awarded under the Plan, which period shall not be less than three years.

“Restricted Stock” -- means Shares awarded to a Participant by the Committee pursuant to Section 5 hereof.

“Section 162(m)” -- means Section 162(m) of the Code and the regulations and guidance of general applicability issued thereunder.

“Section 162(m) Exemption” -- means the exemption from the limitation on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(C) of the Code.”

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

“Shares” -- means the shares of common stock of the Corporation.

“Termination of Service” -- means cessation of service, for any reason, whether voluntary or involuntary, so that the affected individual is not a director, emeritus director or employee of the Corporation or any Affiliate.  Service shall not be considered to have ceased in the case of sick leave, military leave or any other leave of absence approved
B-2 

by the Corporation or any Affiliate or in the case of transfers between payroll locations of the Corporation or between the Corporation, its subsidiaries or its successor.
       3.  Administration.  The Plan shall be administered by the Company’s Compensation Committee consisting of two or more members of the Board, each of whom (i) shall be an “outside director,” as defined under Section 162(m), and (ii) shall be a “non-employee director,” as defined under Rule 16(b) of the Securities Exchange Act of 1934 or any similar or successor provision.  The members of the Committee shall be appointed by the Board.  Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee shall have sole and complete authority and discretion to: (i) select Participants and grant Awards; (ii) determine the number of Shares to be subject to types of Awards generally, as well as to individual Awards granted under the Plan; (iii) determine the terms and conditions upon which Awards shall be granted under the Plan, including whether an Award shall be a Qualified Performance-Based Award; (iv) prescribe the form and terms of Award Agreements; (v) establish from time to time regulations for the administration of the Plan; and (vi) interpret the Plan and make all determinations deemed necessary or advisable for the administration of the Plan.

A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be acts of the Committee.

The Plan is intended to provide benefits that are not deferred compensation within the meaning of Section 409A and the Plan shall be administered and interpreted accordingly.

4.  Shares Subject to Plan.  Subject to adjustment by the operation of Section 8, the maximum number of Shares with respect to which Awards may be made under the Plan is 300,000 Shares.  The Shares with respect to which Awards may be made under the Plan may be either authorized and unissued Shares or previously issued Shares reacquired and held as treasury stock.  An Award shall not be considered to have been made under the Plan with respect to Restricted Stock which is forfeited, and new Awards may be granted under the Plan with respect to the number of Shares as to which such forfeiture has occurred.

5.  Terms and Conditions of Restricted Stock.  The Committee is hereby authorized to grant Awards of Restricted Stock to Participants with the following terms and conditions and with such additional terms and conditions as the Committee shall determine, subject to the provisions of this Section 5 and Section 6 (which shall govern with respect to Qualified Performance-Based Awards):

(a)  At the time of an Award of Restricted Stock, the Committee shall establish for each Participant a Restricted Period, during which or at the expiration of which, as the Committee shall determine and provide in the Award Agreement, the Shares awarded as Restricted Stock shall no longer be subject to restriction.  Subject to any such other terms and conditions as the Committee shall provide, Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, except as hereinafter provided, during the Restricted Period.  Except for such restrictions, and subject to this Section 5, Section 6 and Section 8 hereof, the Participant as owner of such Shares shall have all the rights of a stockholder, including the right to vote the Restricted Stock and the right to receive dividends with respect to the Restricted Stock.

Except to the extent prohibited by Section 162(m), with respect to Qualified Performance-Based Awards, the Committee shall have the authority, in its discretion, to accelerate the time at which any or all of the restrictions shall lapse with respect thereto, or to remove any or all of such restrictions, whenever it may determine that such action is appropriate by reason of changes in applicable tax or other laws or other changes in circumstances occurring after the commencement of such Restricted Period.

(b)  If a Participant incurs a Termination of Service for any reason (other than death, disability or in connection with a Change in Control, except as provided in Section 9), all Shares of Restricted Stock awarded to such Participant and which at the time of such Termination of Service are subject to the restrictions imposed pursuant to paragraph (a) of this Section 5, or Section 6, shall upon such Termination of Service be forfeited and returned to the Corporation. If a Participant incurs a Termination of Service by reason of death or disability, the Restricted Period with respect to the Participant’s Restricted Stock then still subject to restrictions shall thereupon lapse.

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(c)  Each certificate in respect of Shares of Restricted Stock awarded under the Plan shall be registered in the name of the Participant and deposited by the Participant, together with a stock power endorsed in blank, with the Corporation and shall bear the following (or a similar) legend:

The transferability of this certificate and the Shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in the Banner Corporation 2012 Restricted Stock and Incentive Bonus Plan.  Copies of such Plan are on file in the office of the Secretary of Banner Corporation, 10 South First Avenue, Walla Walla, Washington, 99362.

(d)  At the time of any Award, the Participant shall enter into an Award Agreement with the Corporation in a form specified by the Committee, agreeing to the terms and conditions of the Award and such other matters as the Committee, in its sole discretion, shall determine.

(e)  Upon the lapse of the Restricted Period, the Corporation shall redeliver to the Participant (or where the relevant provision of paragraph (b) of this Section 5 applies in the case of a deceased Participant, to his legal representative, beneficiary or heir) the certificate(s) and stock power deposited with it pursuant to paragraph (c) of this Section 5, and the Shares represented by such certificate(s) shall be free of the restrictions imposed pursuant to paragraph (a) of this Section 5.

(f)  No term or condition of any Restricted Stock shall be included that would cause the Restricted Stock to be subject to Section 409A.  Any such term or condition shall be void ab initio.

6.  Performance-Based Restricted Stock.  The provisions of this Section 6 are intended to allow Restricted Stock granted hereunder to any Participant who is or may be a Covered Employee in the tax year in which such Restricted Stock is expected to be deductible by the Corporation or one or more of the Banks, to qualify for the Section 162(m) Exemption.  The Committee may grant Awards of Restricted Stock that qualify as Qualified Performance-Based Awards (provided, without limitation, that all such Awards be granted by a committee comprised of two or more members who satisfy the requirements for being “outside directors” for purposes of the Section 162(m) Exemption). With respect to Qualified Performance-Based Awards, as required to comply with the Section 162(m) Exemption, no later than 90 days following the commencement of a Performance Period or, if earlier, by the expiration of 25 percent of a Performance Period, the Committee shall designate one or more Performance Periods, determine the Covered Employees for the Performance Periods and establish the Performance Goals for the Performance Periods.  Each Award of Restricted Stock that is intended to be a Qualified Performance-Based Award shall be earned, vested and/or payable (as applicable) upon the achievement of one or more Performance Goals, together with the satisfaction of any other conditions, such as continued employment, as the Committee may determine to be appropriate.  With respect to Restricted Stock that is intended to be granted pursuant to a Qualified Performance-Based Award, the provisions of this Section 6 shall be applied in accordance with Treasury Regulations Section 1.162-27(e), and the Plan and any related Award Agreement shall be administered and interpreted accordingly.

7.  Incentive Bonus Awards.  Incentive Bonus Awards may be granted under the Plan at any time and from
time to time. Each Incentive Bonus Award shall be evidenced by an Award Agreement that shall be executed by the Company and the Participant.  Payment of the amount due under an Incentive Bonus Award may be made in cash or in Restricted Stock, as determined by the Committee.  With respect to Incentive Bonus Awards intended to qualify as Qualified Performance-Based Awards, the Committee shall establish and administer Performance Goals in the manner described in Section 6 as an additional condition to the vesting and payment of such Incentive Bonus Awards, and the provisions of Treasury Regulations Section 1.162-27(e) shall apply (and the Plan and the Award Agreement pertaining to the Incentive Bonus Award shall be administered and interpreted accordingly).  No Participant may be granted Incentive Bonus Awards intended to qualify as Qualified Performance-Based Awards in excess of $1,000,000 in any calendar year.  If the Participant vests in his Incentive Bonus Award, then payment of such Incentive Bonus Award shall be paid at such time as would qualify the payment as a “short term deferral” within the meaning of Treasury Regulations Section 1.409A-1(b)(4). The Incentive Bonus Award for any Performance Period to any Participant may be reduced or eliminated by the Committee in its discretion, but may not be increased.  Incentive Bonus Awards payable hereunder may be pursuant to one or more subplans.

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8.  Adjustments Upon Changes in Capitalization.  In the event of any change in the outstanding Shares subsequent to the effective date of the Plan by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of Shares, merger, consolidation or any change in the corporate structure or Shares of the Corporation, the maximum aggregate number and class of Shares as to which Awards may be granted under the Plan and the number and class of Shares with respect to which Awards have been granted under the Plan shall be appropriately and equitably adjusted by the Committee, whose determination shall be conclusive.  Any Award which is adjusted as a result of this Section 8 shall be subject to the same restrictions as the original Award, and the certificate[s] or other instruments representing or evidencing such Restricted Stock shall be legended and deposited with the Corporation in the manner provided in Section 5(c) hereof.

9.  Effect of Tender or Exchange Offer or Change in Control.  With respect to Restricted Stock attributable to Awards granted prior to the effective date of this amended and restated Plan, if a tender offer or exchange offer for Shares (other than such an offer by the Corporation) is commenced, or if a Change in Control shall occur, then unless the Committee shall have otherwise provided in the Award Agreement, the Restricted Period with respect to Restricted Stock theretofore awarded to such Participant shall lapse and all Shares awarded hereunder as Restricted Stock shall become fully vested in the Participant to whom such Shares were awarded; provided, however, that no Award which has previously been forfeited shall become vested.  With respect to Restricted Stock attributable to Awards granted on or after the effective date of this amended and restated Plan, the commencement of a tender offer or exchange offer for Shares shall have no effect on the vested status of the Awards; however, if a Change in Control shall occur, the Restricted Period with respect to such Restricted Stock theretofore awarded to such Participant shall lapse and all Shares awarded hereunder as Restricted Stock shall become fully vested in the Participant to whom such Shares were awarded if the Participant also experiences an “involuntary separation from service” (within the meaning of Treasury Regulations Section 1.409A-1(n), which shall include a voluntary separation from service for good reason as defined therein) during the 12-month period following the effective date of the Change in Control.

10.  Assignments and Transfers.  During the Restricted Period, no Award nor any right or interest of a Participant in any instrument evidencing an Award may be assigned, encumbered or transferred other than by will, the laws of descent and distribution, or pursuant to a “domestic relations order,” as defined in Section 414(p)(1)(B) of the Code.

11. Employee Rights Under the Plan.  No person shall have a right to be selected as a Participant nor, having been so selected, to be selected again as a Participant, and no employee or other person shall have any claim or right to be granted an Award under the Plan or under any other incentive or similar plan of the Corporation or any Affiliate.  Neither the Plan nor any action taken thereunder shall be construed as giving any employee any right to be retained in the employ of the Corporation or any Affiliate.

12.  Delivery and Registration of Stock.  The Corporation’s obligation to deliver Shares with respect to an Award shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the Participant to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of the Securities Act of 1933 or any other federal, state or local securities legislation.  It may be provided that any representation requirement shall become inoperative upon a registration of the Shares or other action eliminating the necessity of such representation under such Securities Act or other securities legislation.  The Corporation shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed and (ii) the completion of such registration or other qualification of such Shares under any state or federal law, rule or regulation, as the Committee shall determine to be necessary or advisable.

13.  Withholding Tax.  Upon the termination of the Restricted Period with respect to any Shares of Restricted Stock (or at any such earlier time, if any, that an election is made by the Participant under Section 83(b) of the Code, or any successor provision thereto, to include the value of such Shares in taxable income), the Corporation shall have the right to require the Participant or other person receiving such Shares to pay the Corporation the amount of any taxes which the Corporation is required to withhold with respect to such Shares, or, in lieu thereof, to retain or sell without notice, a sufficient number of Shares held by it to cover the amount required to be withheld.  The Corporation shall have the right to deduct from all dividends paid with respect to Shares of Restricted Stock the amount of any taxes which the Corporation is required to withhold with respect to such dividend payments.

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14.  Amendment or Termination.

(a)  The Board may amend, alter, suspend, discontinue, or terminate the Plan without the consent of stockholders or Participants, except that any such action will be subject to the approval of the Corporation’s stockholders if, when and to the extent (i) such stockholder approval is necessary or required for purposes of any applicable federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, (ii) such amendment or alteration is deemed by the Board to be of a material nature or (iii) if the Board, in its discretion, determines to seek such stockholder approval.

(b)  The Committee may waive any conditions of, or rights of, the Corporation or modify or amend the terms of any outstanding Award, except in the case of a Qualified Performance-Based Award if such waiver, modification or amendment would cause the Qualified Performance-Based Award not to qualify for the Section 162(m) Exemption. The Committee may not, however, amend, alter, suspend, discontinue or terminate any outstanding Award without the consent of the Participant or holder thereof, except as otherwise provided herein.

(c)  No amendment of the Plan or any Award shall be permitted that would cause the Plan or any benefit provided for hereunder to be subject to Section 409A. Nor shall the termination of the Plan be effected in a manner that would give rise to the application of Section 409A.

15.  Effective Date and Term of Plan.  The Plan shall become effective upon the later of its initial adoption by the Board or its initial approval by the stockholders of the Corporation.  It shall continue in effect for a term of ten years from the initial adoption of the Plan, unless sooner terminated under Section 14 of this Plan.

* * * * *

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REVOCABLE PROXY
BANNER CORPORATION

ANNUAL MEETING OF SHAREHOLDERS
APRIL 26, 201123, 2013

The undersigned hereby appoints Robert D. AdamsBrent A. Orrico and David B. Casper,Edward L. Epstein, and each of them, with full powers of substitution to act as attorneys and proxies for the undersigned, to vote all shares of common stock of Banner Corporation (“Banner”) which the undersigned is entitled to vote at the annual meeting of shareholders, to be held at the Marcus Whitman Hotel, at 6 W. Rose Street, Walla Walla, Washington, on Tuesday, April 26, 2011,23, 2013, at 10:00 a.m., local time, and at any and all adjournments thereof, as indicated.

  
 
FOR
VOTE
WITHHELD
  
 
11.
The election as director of the nominees listed below
(except (except as marked to the contrary below)
[   ]
[   ]
 
 Jesse G. FosterRobert D. Adams 
 Mark J. GrescovichConnie R. Collingsworth 
 D. Michael JonesRobert J. Lane 
 David A. Klaue
Brent A. OrricoGary Sirmon 
   

  FORAGAINSTABSTAIN
     
22.Advisory approval of(non-binding) vote to approve the compensation of Banner Corporation’s named executive officers.[   ][   ][   ]

1 YR.2 YRS.3 YRS.ABSTAIN
3.Advisory (non-binding) vote on how often shareholders shall vote on executive compensation – every one, two or three years.[   ][   ][   ][   ]

FORAGAINSTABSTAIN
     
34.The ratification of the Audit Committee’s selection of Moss Adams LLP as the independent auditor for the year ending December 31, 2011.2013.[   ][   ][   ]
     
45.The approvalamendment of the amendment of Banner’s Articles of Incorporation to effect a reverse stock split.Banner Corporation 2012 Restricted
Stock Plan.[   ][   ][   ]
     
56.In their discretion, upon such other matters as may
properly come before the meeting.   
 
 
The Board of Directors recommends a vote “FOR” the above proposals.
propositions 1, 2, 4 and 5, and for “1 Year” for Proposition 3.

The proxies or the trustees of the ESOP, as the case may be, will vote your shares as directed on this card.  If you do not indicate your choices on this card, the proxies will vote your shares in accordance with the directors’ recommendations.  If any other business is presented at the annual meeting, the proxies will vote your shares in accordance with the directors’ recommendations.  At the present time, the Board of Directors knows of no other business to be presented at the annual meeting.  This proxy card also confers discretionary authority on the Board of Directors to vote with respect to the election of any person as director where the nominees are unable to serve or for good cause will not serve and on matters incident to the conduct of the annual meeting.

 
 

 


THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

Should the undersigned be present and elect to vote at the annual meeting or at any adjournment thereof and after notification to the Secretary of Banner at the annual meeting of the shareholder’s decision to terminate this proxy, then the power of said attorneys and proxies shall be deemed terminated and of no further force and effect.

The undersigned acknowledges receipt from Banner prior to the execution of this proxy of the Notice  of Annual Meeting of Shareholders, a Proxy Statement dated March 21, 201122, 2013 and the 20102012 Annual Report to Shareholders.



Dated:                                   , 2011 2013
 
 
 
 
   
PRINT NAME OF SHAREHOLDER PRINT NAME OF SHAREHOLDER
 
 
 
 
   
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
 





Please sign exactly as your name appears on the enclosed card.  When signing as attorney, executor, administrator, trustee or guardian, please give your full title.  If shares are held jointly, each holder should sign.




PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE.