STOCK-BASED COMPENSATION PLANS

The Company operates the following stock-based compensation plans as approved by the shareholders: the 1996 Stock Option Plan, the 1998 Stock Option Plan and the 2001 Stock Option Plan (collectively, SOPs) and the Banner Corporation 2012 Restricted Stock and Incentive Bonus Plan. In addition, during 2006 the Board of Directors approved the Banner Corporation Long-Term Incentive Plan, an account-based benefit plan which for reporting purposes is considered a stock appreciation rights plan.

Restricted Stock Grants. Under the 2012 Restricted Stock Plan, which was approved on April 24, 2012, the Company is authorized to issue up to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers of Banner Corporation and its affiliates. Shares granted under the Plan have a minimum vesting period of three years. The Plan will continue in effect for a term of ten years, after which no further awards may be granted. Vesting requirements may include time-based conditions, performance-based conditions, or market-based conditions. Concurrent with the approval of the 2012 Restricted Stock Plan was the approval of a grant of $300,000 of restricted stock (14,535 restricted shares) that vests in one-third increments over a three-year period to Mark J. Grescovich, President and Chief Executive Officer of Banner Corporation and Banner Bank. Subsequent to that initial issuance was the issuance of 174,891 additional shares to certain other officers of the Company. The 2012 Restricted Stock Plan was amended on April 23, 2013 to provide for the ability to grant (1) cash-denominated incentive-based awards payable in cash or common stock, including those that are eligible to qualify as qualified performance-based compensation for the purposes of Section 162(m) of the IRS Code and (2) restricted stock awards that qualify as qualified performance-based compensation for the purposes of Section 162(m) of the IRS Code. As of December 31, 2013, the Company had granted 189,426 shares of restricted stock from the 2012 Restricted Stock Plan, of which 31,178 shares had vested and 158,248 shares remain unvested.

Additionally, the Company granted shares of restricted common stock to Mark J. Grescovich, President and Chief Executive Officer of Banner Bank and Banner Corporation on August 22, 2010 and on August 23, 2011. The restricted shares were granted to Mr. Grescovich in accordance with his employment agreement, which, as an inducement material to his joining the Company and the Bank, provided for the granting of restricted shares on the six-month and the 18-month anniversaries of the effective date of the agreement. The shares vest in one-third annual increments over the subsequent three-year periods following the grants. A total of 34,257 shares were granted. As of December 31, 2013, 28,359 shares had vested and 5,898 shares remain unvested.

The expense associated with restricted stock was $1.5 million, $434,000 and $111,000 respectively, for the years ended December 31, 2013, 2012 and 2011. Unrecognized compensation expense for these awards as of December 31, 2013 was $3.3 million and will be amortized over the next 28 months.

A summary of the Company's Restricted Stock award activity during the years ended December 31, 2011, 2012 and 2013 follows:



	Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2010	16,565		$	15.09
Granted	17,692		14.13
Vested	(5,522	)	15.09
Forfeited	—		—
Unvested at December 31, 2011	28,735		14.50
Granted	92,035		21.77
Vested	(11,419	)	14.60
Forfeited	(1,500	)	21.94
Unvested at December 31, 2012	107,851		20.59
Granted	98,891		30.81
Vested	(42,596	)	19.85
Forfeited	—		—
Unvested at December 31, 2013	164,146		26.94

Stock Options. Under the SOPs, Banner reserved 2,284,186 shares for issuance pursuant to the exercise of stock options to be granted to directors and employees. Authority to grant additional options under the 1996 Stock Option Plan terminated on July 26, 2006. Authority to grant additional options under the 1998 Stock Option Plan terminated on July 24, 2008 with all options having been granted. Authority to grant additional options under the 2001 Stock Option Plan terminated on April 20, 2011. The exercise price of the stock options is set at 100% of the fair market value of the stock price on the date of grant. Options granted vest at a rate of 20% per year from the date of grant and any unexercised incentive stock options will expire ten years after date of grant or 90 days after employment or service ends.

During the years ended December 31, 2013, 2012 and 2011, the Company did not grant any stock options. Additionally, there were no significant modifications made to any stock option grants during the period. The fair values of stock options granted are amortized as compensation expense on a straight-line basis over the vesting period of the grant.

For the year ended December 31, 2013, there was no stock option compensation expense recorded. For the years end December 31, 2012 and 2011, stock-based compensation costs related to the SOPs were $7,000 and $25,000, respectively. The SOPs' stock option grant compensation costs are generally based on the fair value calculated from the Black-Scholes option pricing on the date of the grant award. The Black-Scholes model assumes an expected stock price volatility based on the historical volatility at the date of the grant and an expected term based on the remaining contractual life of the vesting period. The Company bases the estimate of risk-free interest rate on the Treasury's Constant Maturities Indices in effect at the time of the grant. The dividend yield is based on the current quarterly dividend in effect at the time of the grant.

The Company is required to estimate potential forfeitures of stock option grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and also impact the amount of stock compensation expense to be recognized in future periods.

A summary of the Company’s stock option award activity (post reverse split) for the years ended December 31, 2011, 2012 and 2013 follows:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term, In Years	Aggregate Intrinsic Value
Outstanding at December 31, 2010	61,725		$	162.12	3.1	n/a
Granted	—		—
Exercised	—		—
Forfeited	(9,996	)	127.54
Outstanding at December 31, 2011	51,729		168.98		2.4	n/a
Granted	—		—
Exercised	—		—
Forfeited	(9,208	)	145.97
Outstanding at December 31, 2012	42,521		173.98		1.75	n/a
Granted	—		—
Exercised	—		—
Forfeited	(16,157	)	121.29
Outstanding at December 31, 2013	26,364		206.27		1.58	n/a
Outstanding at December 31, 2013, net of expected forfeitures	—		—		n/a	n/a
Exercisable at December 31, 2013	26,364		206.27		1.58

The intrinsic value of stock options is calculated as the amount by which the market price of Banner's common stock exceeds the exercise price at the time of exercise or the end of the period as applicable.

A summary of the Company’s unvested stock option activity for the years ended December 31, 2011, 2012 and 2013 follows:



	Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2010	3,000		$	216.16
Granted	—		—
Vested	(1,500	)	216.16
Forfeited	—		—
Unvested at December 31, 2011	1,500		216.16
Granted	—		—
Vested	(1,500	)	216.16
Forfeited	—		—
Unvested at December 31, 2012	—		—
Granted	—		—
Vested	—		—
Forfeited	—		—
Unvested at December 31, 2013	—		—

At December 31, 2013, financial data pertaining to outstanding stock options was as follows:



Exercise Price	Weighted Average Exercise Price of Option Shares Granted		Number of Option Shares Granted	Weighted Average Option Shares Vested and Exercisable	Weighted Average Exercise Price of Option Shares Exercisable		Remaining Contractual Life
$0.00 to $184.00	$	180.22	7,993	7,993	$	180.22	0.2 years
$184.01 to $220.00	203.76		9,071	9,071	203.76		1.1 years
greater than $220.00	221.97		9,300	9,300	221.97		0.3 years
	206.27		26,364	26,364	206.27

During the year ended December 31, 2013, there were no exercises of stock options. Cash was not used to settle any equity instruments previously granted. The Company issues shares from authorized but unissued shares upon the exercise of stock options. The Company does not currently expect to repurchase shares from any source to satisfy such obligations under the SOPs.

The following are the stock-based compensation costs recognized in the Company’s consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011 (in thousands):



	Years Ended December 31
	2013		2012			2011
Salary and employee benefits	$	—	$	11		$	39
Decrease in provision for income taxes	—		(4		)	(14		)
Decrease in equity, net	$	—	$	7		$	25

Banner Corporation Long-Term Incentive Plan: In June 2006, the Board of Directors adopted the Banner Corporation Long-Term Incentive Plan effective July 1, 2006. The Plan is an account-based type of benefit, the value of which is directly related to changes in the value of Company common stock, dividends declared on Company common stock and changes in Banner Bank’s average earnings rate, and is considered a stock appreciation right (SAR). Each SAR entitles the holder to receive cash, upon vesting, equal to the excess of the fair market value of a share of the Company’s common stock on the date of exercise over the fair market value of such share on the date granted plus, for some grants, the dividends declared on the stock from the date of grant to the date of vesting. The primary objective of the Plan is to create a retention incentive by allowing officers who remain with the Company or the Banks for a sufficient period of time to share in the increases in the value of Company stock. The Company re-measures the fair value of SARs each reporting period until the award is settled and compensation expense is recognized each reporting period for changes in fair value and vesting. The Company recognized compensation expense of $1.0 million, $314,000, and $148,000, respectively, for the years ended December 31, 2013, 2012 and 2011 related to the increase in the fair value of SARs and additional vesting during the period. At December 31, 2013, the aggregate liability related to SARs was $1.6 million and is included in deferred compensation.