Document:

ex102to8k07428_04302010.htm

Exhibit 10.2

 

INCENTIVE BONUS AGREEMENT

 

THIS INCENTIVE BONUS AGREEMENT (the “Agreement”), dated this 30th day of April, 2010, by and between BIGLARI HOLDINGS INC., an Indiana corporation (“Company”), and SARDAR BIGLARI (“Executive”).

 

W I T N E S S E T H:

 

WHEREAS, the parties hereto desire to enter into this Incentive Bonus Agreement to define and set forth the terms and conditions of certain compensation to be paid to Executive by Company;

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by Company and Executive as follows:

 

1.    Employment.  Executive is currently the Chairman and Chief Executive Officer of Company.  The terms and provisions of this Agreement shall apply during the term of employment of Executive with Company and for such periods after such term of employment as provided herein.  Executive’s employment with Company is at-will and nothing contained herein shall be deemed to create any other employment relationship between Company and Executive.

 

2.    Compensation and Other Benefits.  Subject to the provisions of this Agreement, Company shall pay and provide the following compensation to Executive (together with Executive’s annual base salary, the “Cash Compensation”):

 

(a)     Incentive Compensation.

 

(i)    Company shall pay to Executive, determined as of the last day of each fiscal year of Company (including any fiscal year in which any of the events set forth in Section 4(a) occur) (“Incentive Compensation Calculation Date”), incentive compensation equal to the Incentive Compensation Amount (as defined below) as of such Incentive Compensation Calculation Date; provided, however, that no duplicate Incentive Compensation Amount shall be paid to Executive in any fiscal year.  The Incentive Compensation Amount shall be paid to Executive as promptly as practicable after each Incentive Compensation Calculation Date, and in no event later than 75 days thereafter (the “Payment Date”), subject to Section 6(c).  The “Incentive Compensation Amount” means the amount computed (subject to proration with respect to any fiscal year during the term of this Agreement in which any of the events set forth in Section 4(a) occurs, determined based on the date of such event) using the following formula where “x” equals 1.05 (subject to proration for the 2010 fiscal year and any short fiscal year during the term of this Agreement) and “n” equals the number of years between the most recent Incentive Compensation Calculation Date and the Incentive Compensation Calculation Date on which the High Water Mark was achieved:

 

(0.25)(New Book Value - ((High Water Mark)(x)n))

 

(ii)    “Book Value” equals the amount of Total Shareholders’ Equity as set forth in the Consolidated Statement of Financial Position of the Company, prepared in accordance with the accounting principles adopted by Company (as set forth in the Company’s Annual Report on Form 10-K for the applicable fiscal year), as of the applicable Incentive Compensation Calculation Date.  Book Value as of the applicable Incentive Compensation Calculation Date shall be determined by reference to the consolidated net income and other comprehensive income of the Company, and appropriate adjustments to such Book Value shall be made for any dividends, shares issuances or buybacks and other factors in accordance with Exhibit A hereto (but Book Value for the next succeeding Incentive Compensation Calculation Date shall not reflect such prior adjustments).  The computations and procedures required to calculate Book Value, including without limitation, any accounting procedures used to implement any adjustments, allocations and other matters, shall be made in such reasonable manner as the Company in good faith shall determine to be appropriate and in accordance with Exhibit A hereto, and shall be subject to the approval of the Governance, Compensation and Nominating Committee (the “Committee”) of the Board of Directors of the Company (the “Board”).

 

  

  

  

 

(iii)    “New Book Value” equals the Book Value as the most recent Incentive Compensation Calculation Date.

 

(iv)    “High Water Mark” equals the highest Book Value after reduction for the Incentive Compensation Amount then paid, as of any preceding Incentive Compensation Calculation Date (but without giving effect to any adjustments made with respect to such Incentive Compensation Calculation Date).  In the case of the first Incentive Compensation Calculation Date, such High Water Mark shall mean the Book Value as of July 7, 2010.

 

(b)    New Book Value and the Incentive Compensation Amount with respect to each Incentive Compensation Calculation Date shall be determined by the Chief Financial Officer of Company in accordance with Section 2(a) and shall be subject to the approval of the Committee.  Company shall deliver to Executive, following approval by the Committee and within forty-five (45) days after the applicable Incentive Compensation Calculation Date, a statement (the “Incentive Compensation Statement”) setting forth the New Book Value and Incentive Compensation Amount with respect to such Incentive Compensation Calculation Date and showing its calculations in reasonable detail.  Executive shall have a period of ten (10) days after the date on which the Incentive Compensation Statement is delivered to him (the “Incentive Compensation Review Period”) to review the Incentive Compensation Statement, during which period Executive shall have access to the relevant books and records of Company.  If Executive objects to the calculation of the New Book Value or the Incentive Compensation Amount as set forth on such Incentive Compensation Statement, Executive shall so inform Company in writing (the “Incentive Compensation Objection”) on or before the last day of the Incentive Compensation Review Period, setting forth in reasonable detail the basis of the Incentive Compensation Objection and the adjustments to New Book Value and/or the Incentive Compensation Amount which Executive believes should be made.  In the event that an Incentive Compensation Objection is not delivered to Company on or before the last day of the Incentive Compensation Review Period, Executive shall be deemed to have agreed to the Incentive Compensation Statement.  In the event that an Incentive Compensation Objection is delivered to Company on or before the last day of the Incentive Compensation Review Period, Company, through the Committee, and Executive shall attempt in good faith to reach an agreement with respect to any matters in dispute.  If Company and Executive are unable to resolve all of their differences within five (5) days after delivery of the Incentive Compensation Objection to Company, they shall refer their remaining differences to a nationally recognized independent public accounting firm mutually agreed upon by the Committee and Executive, which may be Company’s independent registered public accounting firm (the “Accountants”).  The Accountants shall, based on those items as to which Company and Executive have agreed and the Accountants’ determination regarding those items in dispute, make a recommendation as to the New Book Value and Incentive Compensation Amount with respect to the applicable Incentive Compensation Calculation Date within fifteen (15) days after submission of the dispute to the Accountants, but in no event later than two (2) business days prior to the Payment Date.  The Accountants’ determination shall be set forth in writing.  Company shall pay the fees of the Accountants in connection therewith.  The Committee shall consider the recommendation of the Accountants, but the Committee’s final determination shall be conclusive and binding upon the parties hereto. 

 

  

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3.    Purchase of Company Stock.  Executive shall use an amount equal to 30% of the amount payable to Executive pursuant to Section 2 hereof (such amounts payable pursuant to Section 2, “Incentive Payments”), without regard to any taxes that may be withheld pursuant to Section 6(c) hereof, to purchase shares of Company’s common stock (the “Shares”).  Executive shall purchase the Shares on the open market within 120 calendar days of receipt of any Incentive Payments, provided that if the Executive is restricted from buying the Shares for at least 90 calendar days of such 120 calendar days pursuant to Company’s insider trading policy, Executive will use his reasonable best efforts to purchase the Shares as promptly thereafter as practicable, subject to any restrictions imposed by Company’s insider trading policy. Executive shall be required to hold the Shares for a minimum of three (3) years from the date of purchase, unless one of the events set forth in Section 4(a) occurs.  Executive shall notify Company upon his purchase of any Shares pursuant to this provision.  The Committee and Executive shall work together in good faith to establish appropriate procedures to implement and monitor compliance with the provisions of this Section 3, which may include, without limitation, placing stop transfer instructions with respect to such Shares or holding such Shares in a custodial account.

 

4.    Purchase Option.

 

(a)    If, on or prior to the third anniversary of this Agreement (the “Option Expiration Date”), (i) there is a “Change in Control” (as defined below), (ii) Executive is terminated by Company without “Cause” (as defined below) or (iii) Executive resigns from his employment with Company for “Good Reason” (as defined below), Executive shall have the option, exercisable by written notice to Company given within 30 days after the occurrence of any such event, to purchase Biglari Capital Corp. from Company for a purchase price (the “Purchase Option Price”) equal to the sum of (x) the Adjusted Capital (as defined in the Amended and Restated Agreement of Limited Partnership, dated as of July 1, 2002, of The Lion Fund, L.P., as the same may be amended (the “Partnership Agreement”)) balance, if any, of Biglari Capital Corp., in its capacity as general partner of The Lion Fund, L.P., as of the Purchase Option Closing Date (as defined below), plus (y) the total Incentive Reallocation (as defined in, and calculated in accordance with Section 5.02 of, the Partnership Agreement) for the period from January 1 of the year in which such event occurs through the close of business on the Purchase Option Closing Date (the “Purchase Option”).  If, and to the extent that, Company shall have received distributions from Biglari Capital Corp. in respect of such Adjusted Capital balance or Incentive Reallocation prior to the date of purchase, the amount to be paid to Company pursuant to the immediately preceding sentence is to be reduced by the amount of such prior distributions.  The closing of such purchase shall take place on a date mutually agreeable to Company and Executive, but in no event later than 30 days after Executive’s exercise of the Purchase Option (the “Purchase Option Closing Date”).  On the Purchase Option Closing Date, Company shall deliver the certificate or certificates representing the shares of capital stock of Biglari Capital Corp., duly endorsed in blank for transfer or accompanied by a separate stock power duly executed in blank for transfer, against payment therefor by wire transfer of immediately available funds.  Company shall convey such shares to Executive free and clear of all liens, claims and encumbrances.

 

  

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(b)    “Change in Control” means (i) the consummation of a merger or consolidation of Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity’s issued shares or securities outstanding immediately after such merger, consolidation or other reorganization is owned, directly or indirectly, by persons who were not shareholders of Company immediately prior to such merger, consolidation or other reorganization; (ii) the sale, transfer or other disposition of all or substantially all of Company’s assets; (iii) the replacement of a majority of the Board over a two-year period from the directors who constituted the Board at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board then still in office who either were members of the Board at the beginning of such period or whose election as a member of the Board was previously so approved; (iv) any transaction as a result of which any person, other than Executive or his affiliates, is the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of Company representing at least 50% of the total voting power represented by Company’s then outstanding voting securities.

 

(c)    “Cause” means (i) Executive is convicted of a felony involving moral turpitude or (ii) Executive is guilty of willful gross neglect or willful gross misconduct in carrying out his duties, resulting, in either case, in material economic harm to Company.

 

(d)    “Good Reason” means the occurrence of any of the following without Executive’s prior written consent: (i) a material reduction in Executive’s salary unless such reduction is in connection with a company-wide reduction in officers’ salaries; (ii) a material diminution in Executive’s duties, or the assignment to Executive of duties materially inconsistent with his authority, responsibilities and reporting requirements; (iii) the failure of the Board or a committee thereof to nominate Executive for election to the Board, Chairman of the Board and Chief Executive Officer, (iv) Company or the Board requires Executive to relocate his principal place of employment to a location other than San Antonio, Texas unless such relocation is temporary or the result of exigent circumstances; (v) the failure of Company to obtain the assumption in writing of its obligations to perform this Agreement by any successor to all or substantially all of the business or assets of Company not later than the effective date of such transaction; or (vi) a material breach of this Agreement by Company.  In the event that Executive elects to terminate his employment for Good Reason, he shall notify Company in writing of the grounds for such termination within thirty (30) calendar days of the commencement of such condition and Company shall have thirty (30) calendar days from receipt of such notice to cure such condition.

 

(e)    In the event Executive exercises the Purchase Option, Company shall provide to Executive a good faith estimate of the Purchase Option Price, which estimate shall be prepared as of the close of business on a date that is no more than three (3) business days prior to the Purchase Option Closing Date (the “Estimated Purchase Option Price”).  The purchase price payable on the Purchase Option Closing Date shall be based on the Estimated Purchase Option Price.

 

  

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(f)    Company shall deliver, or cause to be delivered, to Executive, within twenty (20) days after the Purchase Option Closing Date, a statement (the “Purchase Option Statement”) setting forth the Purchase Option Price and showing its calculations in reasonable detail.  Executive shall have a period of ten (10) days after the date on which the Purchase Option Statement is delivered to him (the “Purchase Option Review Period”) to review the Purchase Option Statement, during which period Executive shall have access to the relevant books and records of Company.  If Executive objects to the calculation of the Purchase Option Price as set forth on such Purchase Option Statement, Executive shall so inform Company in writing (the “Purchase Option Objection”) on or before the last day of the Purchase Option Review Period, setting forth in reasonable detail the basis of the Purchase Option Objection and the adjustments to the Purchase Option Price which Executive believes should be made.  In the event that a Purchase Option Objection is not delivered to Company on or before the last day of the Purchase Option Review Period, Executive shall be deemed to have agreed to the Purchase Option Statement.  In the event that a Purchase Option Objection is delivered to Company on or before the last day of the Purchase Option Review Period, Company and Executive shall attempt in good faith to reach an agreement with respect to any matters in dispute.  If Company and Executive are unable to resolve all of their differences within ten (10) days after delivery of the Purchase Option Objection to Company, they shall refer their remaining differences to the Accountants.  The Accountants shall, based on those items as to which Company and Executive have agreed and the Accountants’ determination regarding those items in dispute, finally determine the Purchase Option Price within twenty (20) days after submission of the dispute to the Accountants.  The Accountants’ determination shall be set forth in writing and shall be conclusive and binding upon the parties hereto, absent manifest error.  Company shall pay the fees of the Accountants in connection therewith.

 

(g)    The “Final Purchase Option Price” shall be (i) if no Purchase Option Objection is sent to Company prior to the end of the Purchase Option Review Period, the Purchase Option Price set forth on the Purchase Option Statement delivered by Company, (ii) if a Purchase Option Objection is made but finally determined between Company and Executive prior to referring any such dispute to the Accountants, the Purchase Option Price so finally determined; and (iii) if a Purchase Option Objection is sent to the Accountants, the Purchase Option Price finally determined by the Accountants.

 

(h)    If the Final Purchase Option Price is greater than the Estimated Purchase Option Price, then Executive shall pay the amount of such excess to Company within five (5) business days after the determination of the Final Purchase Option Price.  If the Final Purchase Option Price is less than the Estimated Purchase Option Price, then Company shall pay the amount of such difference to Executive within five (5) business days after the determination of the Final Purchase Option Price.

 

  

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5.    Severance Payment.

 

(a)    If the Purchase Option is not exercised by Executive pursuant to Section 4 on or prior to, and expires on, the Option Expiration Date, then, upon the occurrence of any of the events set forth in Section 4(a), Executive will be entitled to receive a payment (the “Severance Payment”) equal to 299% of the average annual Cash Compensation paid to Executive since the date of this Agreement, payable sixty (60) days after the occurrence of such event (the “Severance Payment Date”).  Notwithstanding the foregoing, if all or any portion of the Severance Payment, either alone or together with other payments and benefits which Executive receives or is then entitled to receive from Company or otherwise, would constitute a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) (or a similar or successor provision), Company shall reduce such Severance Payment hereunder to the extent necessary so that no portion of the Severance Payment shall be subject to the excise tax imposed by Section 4999 of the Code (or a similar or successor provision).  In no event shall Executive be entitled to receive more than one Severance Payment hereunder.

 

(b)    The determination of whether the Severance Payment shall be reduced as provided in Section 5(a) and the amount of any such reduction (the “Severance Payment Reduction”) shall be made by the Chief Financial Officer of Company and shall be subject to the approval of the Committee.  Company shall deliver to Executive, following approval by the Committee and within ten (10) days after the occurrence of any of the events set forth in Section 4(a) entitling Executive to receive the Severance Payment, a statement (the “Severance Payment Statement”) setting forth the Severance Payment Reduction and its determination thereof in reasonable detail.  Executive shall have a period of ten (10) days after the date on which the Severance Payment Statement is delivered to him (the “Severance Payment Review Period”) to review the Severance Payment Statement, during which period Executive shall have access to the relevant books and records of Company.  If Executive objects to the Severance Payment Reduction or the calculation thereof as set forth on such Severance Payment Statement, Executive shall so inform Company in writing (the “Severance Payment Objection”) on or before the last day of the Severance Payment Review Period, setting forth in reasonable detail the basis of the Severance Payment Objection.  In the event that a Severance Payment Objection is not delivered to Company on or before the last day of the Severance Payment Review Period, Executive shall be deemed to have agreed to the Severance Payment Statement.  In the event that a Severance Payment Objection is delivered to Company on or before the last day of the Severance Payment Review Period, Company, through the Committee, and Executive shall attempt in good faith to reach an agreement with respect to any matters in dispute.  If Company and Executive are unable to resolve all of their differences within ten (10) days after delivery of the Severance Payment Objection to Company, they shall refer their remaining differences to the Accountants.  The Accountants shall, based on those items as to which Company and Executive have agreed and the Accountants’ determination regarding those items in dispute, make a recommendation as to the Severance Payment Reduction, if any, within twenty (20) days after submission of the dispute to the Accountants, but in no event later than two (2) business days prior to the Severance Payment Date.  The Accountants’ determination shall be set forth in writing.  Company shall pay the fees of the Accountants in connection therewith.  The Committee shall consider the recommendation of the Accountants, but the Committee’s final determination shall be conclusive and binding upon the parties hereto. 

 

  

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6.    General Provisions.

 

(a)    Release.  Executive covenants and agrees that he shall not be entitled to the Severance Payment unless Executive unconditionally releases, within sixty (60) days after the date of the event giving rise to payment of the Severance Payment, Company and its subsidiaries and affiliates, and their respective directors, officers, employees and stockholders, or any of them, from any and all claims, liabilities or obligations under any severance or termination arrangements of Company or any of its subsidiaries or affiliates.

 

(b)    Shareholder Vote.  No Incentive Payments under this Agreement shall be made to Executive prior to the approval of this Agreement in a separate vote by a majority vote of Company’s shareholders in accordance with the procedures set forth in Treasury Regulation Section 1.162-27(e)(4).  In the event that shareholder approval is not obtained at the first meeting of shareholders at which approval of this Agreement is submitted for shareholder approval, this Agreement shall terminate immediately and be of no further force or effect.  It is the express intention of the parties that Incentive Payments to be made to Executive constitute “qualified performance based compensation” for purposes of Section 162(m) of the Code.  This Agreement is intended to comply with the requirements of Treasury Regulations Section 1.162-27 and shall be interpreted and administered in accordance therewith.

 

(c)    Tax Withholding; Section 409A.  All amounts paid to Executive hereunder shall be subject to all applicable federal, state and local wage withholding.  This Agreement is intended to comply with the requirements of Section 409A of the Code (“409A”) and shall in all respects be administered in accordance with 409A.  All payments not otherwise exempt from 409A which are to be made after a termination of employment under this Agreement may only be made after a “separation from service” under 409A.  If upon Executive’s “separation from service” (within the meaning of 409A) from Company, Executive is then a “specified employee” (as defined by and determined in accordance with 409A), then solely to the extent necessary to comply with 409A and avoid the imposition of taxes under 409A, Company shall defer payment of “nonqualified deferred compensation,” subject to 409A, which is payable as a result of and would otherwise be paid within six (6) months following such separation from service, until the earlier of (a) the first business day of the seventh month after Executive’s separation from service, or (b) ten (10) days after Company receives written notice of Executive’s death.  All such delayed payments shall be paid in a lump sum without accrual of interest.  To the extent permissible by law, each payment and each installment described in this Agreement shall be considered a separate payment from each other payment or installment for purposes of 409A.

 

(d)    Notices.  Any notice hereunder by either party to the other shall be given in writing by personal delivery, or certified mail, return receipt requested, or overnight courier, or facsimile, in any case delivered to the applicable address set forth below:

 

(i) To Company:

 

Biglari Holdings Inc.

175 East Houston Street, Suite 1300

San Antonio, Texas  78205

Attention:   Chief Financial Officer

                                                                     Chairman of Governance, Compensation and

                                                                     Nominating Committee

Facsimile:    (317) 633-4105

 

  

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(ii) To Executive:

 

Sardar Biglari

9311 San Pedro Avenue, Suite 1440

San Antonio, Texas  78216

Facsimile:    (210) 344-3411

 

or to such other persons or other addresses as either party may specify to the other in writing.  Any such notice shall be deemed to have been given upon receipt.

 

(e)    Representation by Company.  Company represents that (i) the execution of this Agreement and the provisions herein have been duly authorized by Company, including, where necessary, by the Board and the Committee, (ii) the execution, delivery and performance of this Agreement does not violate any law, regulation, order, decree, agreement, plan or corporate governance document of or applicable to Company, and (iii) upon the execution and delivery of this Agreement, it shall be the valid and binding obligation of Company enforceable in accordance with its terms.

 

(f)    Assignment; Assumption of Agreement.  No right, benefit or interest hereunder shall be subject to assignment, encumbrance, charge, pledge, hypothecation or setoff by Executive in respect of any claim, debt, obligation or similar process, except by will or by the laws of descent and distribution.  This Agreement shall inure to the benefit of and be enforceable by Executive’s legal personal representatives.  This Agreement shall be binding upon and shall inure to the benefit of Company, its successors and assigns.  Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business or assets of Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that Company would be required to perform it if no such succession or assignment had taken place.  The term “Company” as used herein shall include any such successors and assigns.

 

(g)    Amendment.  No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing and signed by the parties hereto.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

 

(h)    Severability.  If any term or provision hereof is determined to be invalid or unenforceable in a final court or arbitration proceeding, (i) the remaining terms and provisions hereof shall be unimpaired and (ii) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision.

 

  

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(i)    Governing Law and Arbitration.  This Agreement shall be governed by, and construed in accordance with, the laws of the State of Indiana, without giving effect to that body of law relating to choice of laws.  Any controversy, dispute or claim between the parties relating to this Agreement shall be resolved by binding arbitration in Indiana, in accordance with the rules of the American Arbitration Association.

 

(j)    Entire Agreement.  This Agreement contains the entire agreement of Executive, Company and any predecessors or affiliates thereof with respect to the subject matter hereof and all prior agreements, term sheets, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof are superseded hereby.

 

(k)    Counterparts.  This Agreement may be executed by the parties hereto in counterparts, each of which shall be deemed an original, but both such counterparts shall together constitute one and the same document.

 

[Signature page follows]

 

  

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

 

	  	
BIGLARI HOLDINGS INC.

	  	  
	  	
By:

	

/s/ Duane E. Geiger

	  	  	
Name:

	
Duane E. Geiger

	  	  	
Title:

	
Interim Chief Financial Officer

	  	
EXECUTIVE

	  	  
	  	

/s/ Sardar Biglari

	  
	  	
Sardar Biglari

	  

 

 

  

10Unassociated Document

    Exhibit
10.1

    
 

    EMPLOYMENT
AGREEMENT

    

    THIS EMPLOYMENT AGREEMENT (the
“Agreement”) is made and entered into as of this 29th day of April, 2010, by and
between Banner Corporation (the “Company”) and its wholly owned subsidiary
Banner Bank (the “Bank”), and Mark J. Grescovich (the “Employee”).

    

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

    

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

    

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

    

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

    

    1.           Definitions.

    

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

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    securities
of the surviving entity) more than 50% of the combined voting power of the
voting securities of the Company or the Bank, or such surviving entity
outstanding immediately after such merger or consolidation, or (2) a merger or
consolidation effected to implement a recapitalization of the Company or the
Bank (or similar transaction) in which no person (as hereinabove defined)
acquires more than 25% of the combined voting power of the Company’s or the
Bank’s then outstanding securities; or (iv) the stockholders of the Company or
the Bank approve a plan of complete liquidation of the Company or the Bank, or
an agreement for the sale or disposition by the Company or the Bank of all or
substantially all of the Company’s or the Bank’s assets (or any transaction
having a similar effect); provided that the
term “Change in Control” shall not include an acquisition of securities by an
employee benefit plan of the Company or the Bank or a change in the composition
of the Company Board of Directors or the Bank Board of Directors at the
direction of the DFI or the FDIC.  Notwithstanding anything herein to
the contrary, no Change in Control shall be considered to have occurred pursuant
to a transaction or event described herein, if such transaction or event
occurred pursuant to, or in connection with, a public offering approved by the
Company Board of Directors.

    

    (b)         The
term “Consolidated Subsidiaries” means any subsidiary or subsidiaries of the
Company (or its successors) that are part of the affiliated group (as defined in
Section 1504 of the Internal Revenue Code of 1986, as amended (the “Code”),
without regard to subsection (b) thereof) that includes the Bank, including but
not limited to the Company.

    

    (c)                  The
term “Date of Termination” means the date upon which the Employee experiences a
Separation from Service, as specified in a notice of termination pursuant to
Section 8 of this Agreement or the date a succession becomes effective under
Section 11.

    

    (d)          The
term “Effective Date” means February 22, 2010.

    

    (e)          The
term “Involuntary Termination” means the Employee’s Separation from Service (i)
by the Company and the Bank without the Employee's express written consent; or
(ii) by the Employee by reason of a material diminution of or interference with
his duties, responsibilities or benefits as described in this sentence, if the
Employee sends written notice to the Company and the Bank in accordance with
Section 8 of this Agreement that an Involuntary Termination has occurred within
30 days of  any of the following actions unless consented to in
writing by the Employee:  (1) a requirement that the Employee be based
at any place other than Seattle, Washington, or within a radius of 50 miles from
the location of the Company’s administrative offices as of the Effective Date,
except for (A) reasonable travel on Company or Bank business, and (B) services
performed in Walla Walla, Washington (which is anticipated to be considerable
and is understood by the Employee to constitute an essential part of his
responsibilities hereunder); (2) a material demotion of the Employee (which
shall not include the failure of either Board of Directors to appoint the
Employee as Chief Executive Officer of the Company or the Bank within nine (9)
months of the Effective Date but shall include his removal by the respective
Board of Directors as a director from the Company Board of Directors or the Bank
Board of Directors or the failure of either Board of Directors to retain the
Employee as Chief Executive Officer of the Company or the Bank subsequent to his
appointment unless such action was effected in order to comply with TARP or any
other regulatory compliance 

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    requirement,
including but not limited to enforcement matters between the Bank, the FDIC
and/or the DFI and the Company and the Federal Reserve Bank of San Francisco);
(3) a material reduction in the Employee’s authority, duties or responsibilities
(but which shall not include not being appointed Chief Executive Officer of the
Company or the Bank within nine (9) months of the Effective Date but shall
include his removal by the respective Board of Directors as a director from the
Company Board of Directors or the Bank Board of Directors or the failure of
either Board of Directors to  retain the Employee as Chief Executive
Officer of the Company or the Bank subsequent to his appointment unless such
action was effected in order to comply with TARP or any other regulatory
compliance requirement, including but not limited to enforcement matters between
the Bank, the FDIC and/or the DFI and the Company and the Federal Reserve Bank
of San Francisco); (4) a reduction in the Employee's Salary, other than (A) as
part of an overall program applied uniformly and with equitable effect to all
members of the senior management of the Company or the Bank, and (B) as required
to comply with TARP or any other regulatory compliance requirement (including
but not limited to enforcement matters between the Bank, the FDIC and/or the DFI
and the Company and the Federal Reserve Bank of San Francisco); (5) the failure
of the Company Board of Directors (or a board of directors of a successor of the
Company) to elect the Employee as President of the Company (or a successor of
the Company) or any action by the Company Board of Directors (or a board of
directors of a successor of the Company) removing the Employee from such office,
or the failure of the Bank Board of Directors (or a board of directors of a
successor of the Bank) to elect the Employee as President of the Bank (or a
successor of the Bank) or any action by the Bank Board of Directors (or a board
of directors of a successor of the Bank) removing the Employee from such office;
(6) involuntary discontinuance or material reduction in the Employee’s incentive
compensation awards, without the Employee’s consent, other than (A) as part of
an overall program applied uniformly and with equitable effect to all members of
the senior management of the Company or the Bank, and (B) as required to comply
with TARP or any other regulatory compliance requirement (including but not
limited to enforcement matters between the Bank, the FDIC and/or the DFI and the
Company and the Federal Reserve Bank of San Francisco); or (7) involuntary
discontinuance of the Employee’s participation in any employee benefit or fringe
benefit plan maintained by the Company or the Bank, without the Employee’s
consent, unless such plan is discontinued (A) by reason of law, (B) on account
of the loss of tax deductibility or material tax benefits to the Company or the
Bank, on account of a material increase in the Company or Bank’s tax obligations
arising from the continued maintenance of the plan, or (C) pursuant to the terms
of the plan relating to plan termination, provided such terms are applied
equally to all participants in such plans.  The term “Involuntary
Termination” does not include Termination for Cause, Separation from Service due
to death or permanent disability pursuant to Section 7(f) of this Agreement,
retirement or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act (“FDIA”).

    

    (f)           The
term SEO shall mean “senior executive officer”, as that phrase is defined under
the TARP Requirements.

    

    (g)           The
term “MHCE” shall mean “most highly compensated employee”, as that phrase is
defined under the TARP Requirements.

     

    
 

    
      
        
        

      

      
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    (h)           The
term “Section 409A” shall mean Section 409A of the Code and the regulations and
guidance of general applicability issued thereunder.

    

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

    

    (j)           The
term “TARP” shall mean the Troubled Asset Relief Program of the United States
Department of the Treasury.

    

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

    

    (l)           The
term “TARP Recipient” shall mean an entity receiving financial assistance under
TARP.

    

    (m)           The
term “TARP Requirements” shall mean the regulations and guidance of general
applicability issued by the United States Department of the Treasury pursuant to
TARP (including but not limited to the interim final rule issued under TARP), as
well as any TARP-related restrictions that specifically apply to the Company or
the Bank.

    

    (n)           The
terms “Termination for Cause” and “Terminated for Cause” mean the Employee’s
Separation from Service with the Company or the Bank because of the Employee's
personal dishonesty, misconduct (whether or not willful), breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties
(unless Employee is prevented from performing such duties because he is disabled
(within the meaning of Section 7(f)) or suffering from a medical condition that
reasonably prevents him from performing such duties despite following a
treatment plan provided by a physician or licensed medical specialist), willful
violation of any law, rule, or regulation (other than traffic violations or
offenses that are classified as misdemeanors) or final cease-and-desist order,
acts or failures to act that may have a material detrimental effect on the
reputation or business of the Company or the Bank or would be reasonably likely
to result in  regulatory sanctions, penalties or restrictions on the
Company’s or the Bank’s operations, material violations of TARP, or material
breach of any provision of this Agreement unless the Employee cures such
material breach within thirty (30) days after a written notice describing such
material breach is received by the Employee.   The Employee shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
Board of Directors at a meeting of the 

     

     

    
      
        
        

      

      
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    Board of
Directors duly called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board of Directors the Employee has engaged in conduct described in the
preceding sentence and specifying the particulars thereof in
detail.

    

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

    

    2.           Term.  The
initial term of this Agreement shall be a period of three years, commencing on
the Effective Date, subject to earlier termination as provided herein. Beginning
on the first anniversary of the Effective Date, and each anniversary thereafter,
the term of this Agreement shall be extended for a period of one year, provided that (i)
neither the Employee nor the Company has given notice to the other in writing at
least 90 days prior to the end of the then current three-year term that this
Agreement shall not be extended further; and (ii) prior to the end of the then
current three-year term, the Board of Directors, or with respect to the Company
Board of Directors and the Bank Board of Directors, as the case may be, a
committee of such Board of Directors which has been delegated authority to act
on such matters by such Board of Directors (with respect to each Board of
Directors, the “Committee”), explicitly reviews and approves the
extension.  Reference herein to the term of this Agreement shall refer
to both the initial term and any extended terms.

    

    3.           Employment; Appointment as
Director.  The Employee shall be employed as the President of
the Company and President of the Bank.  All employees other than the
Chief Executive Officer of the Company and the Bank shall report to the Employee
in his capacity as President of the Company and the Bank.  Within nine
(9) months after the Effective Date, the Company Board of Directors and the Bank
Board of Directors shall also appoint the Employee as Chief Executive Officer of
the Company and the Bank, respectively, provided that each of the Board of
Directors, in its sole and absolute discretion, determines that it is satisfied
with the Employee’s performance with respect to the Company and the
Bank.  The Employee shall render all services and possess the powers
as are customarily performed by persons situated in similar executive
capacities, and shall have such other powers and duties as the Board of
Directors may prescribe from time to time.  The Employee shall also
render services to any subsidiary or subsidiaries of the Company or the Bank as
requested by the Company or the Bank from time to time consistent with his
executive position.  The Employee shall devote his best efforts and
reasonable time and attention to the business and affairs of the Company and the
Bank to the extent necessary to discharge his responsibilities
hereunder.  The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of persons with comparable
positions in comparable organizations and as may be established from time to
time by the Board of Directors.  The Employee may (i) serve on
charitable or civic boards or committees and, in addition, on such corporate
boards as are approved in a resolution adopted by a majority of the Board of
Directors or the Committee, which approval shall not be withheld unreasonably,
and (ii) manage personal investments, so long as such activities do not
interfere materially with performance of his responsibilities
hereunder.  The Employee also shall be appointed as a Director of the
Company and a Director of the Bank in the first month after the 

     

     

    
      
        
        

      

      
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    Effective
Date, or as soon as practical thereafter, subject to any regulatory approval
that may be required.  If the Employee is appointed as a Director of
the Company, and the Employee subsequently ceases to be an officer of the
Company, the Employee shall immediately resign as a Director of the
Company.  If the Employee is appointed a Director of the Bank, and the
Employee subsequently ceases to be an officer of the Bank, then the Employee
shall immediately resign as a Director of the Bank.

    

    4.           Cash Compensation;
Restricted Stock.

    

    (a)           Salary.  The
Company and the Bank jointly agree to pay the Employee during the term of this
Agreement a base salary (the “Salary”) in the annualized amount of
$600,000.    Of this amount, (1) $450,000 shall be paid on a
semi-monthly basis on the 15th day
and last day of each month, and (2) $150,000 shall be paid in quarterly
installments on the last day of the first month of each calendar quarter (with
the first payment prorated to reflect the partial quarter from the Effective
Date to the last day of the first month of the quarter that includes the
Effective Date).   The Employee’s Salary shall be subject to
customary tax withholding.  The amount of the Employee's Salary shall
be increased (but shall not be decreased) from time to time in accordance with
the amounts of salary approved by both of the Board of Directors or their
Committees.  The manner in which increases in Salary are paid shall
reflect the proportions described in the second sentence of this Section
4(a)).  The amount of the Salary shall be reviewed by the both of the
Board of Directors of the Company and the Board of Directors of the Bank, or
their Committees, at least annually during the term of this
Agreement.

    

    (b)           Bonuses.   The
Employee shall be entitled to participate in an equitable manner with all other
executive officers of the Company and the Bank in such performance-based and
discretionary bonuses, if any, as are authorized and declared by the Board of
Directors or the Committee for executive officers.  Bonuses provided
for under this Agreement shall be paid no later than 21⁄2 months after the end of
the year in which the Employee obtains a legally binding right to such payments
(or such other time that still qualifies the payment as a “short-term deferral”
under Section 409A).  Notwithstanding the foregoing, during such time
as the Company is a TARP Recipient, if the TARP Requirements would preclude the
payment of such bonuses to the Employee (on account of his being an SEO, MHCE,
or otherwise), then any bonuses payable hereunder shall be reduced or eliminated
to the extent necessary to comply with the TARP Requirements.

    

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

    

    (d)           Restricted
Stock.

    

    (1)           Provided
the Employee is employed by the Bank on the six-month anniversary of the
Effective Date, he will receive a grant of Company common stock 

     

     

    
      
        
        

      

      
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    (“Restricted
Stock”) with the number of shares then granted equal in aggregate market value
to two hundred and fifty thousand dollars ($250,000) (with the value being
determined based on the average of the closing stock price of the Company common
stock for the ten (10) day period immediately preceding the grant
date).  Provided the Employee is employed by the Bank on the
eighteen-month anniversary of the Effective Date, he will receive a second grant
of Restricted Stock with the number of shares then granted equal in aggregate
value to two hundred and fifty thousand dollars ($250,000) (with the value being
determined based on the average of the closing stock price of the Company common
stock for the ten (10) day period immediately preceding the grant
date).    The timing of Restricted Stock grants under this
Section 4(d)(1) is subject to Section 4(d)(4)(A).

    

    (2)           (A)           On
each of the first three anniversaries of the date of a grant of Restricted Stock
pursuant to this Section 4(d), the Employee shall become vested in one-third
(1/3) of the shares of Restricted Stock included in such grant, provided the
Employee is an Employee of the Company and the Bank (or is on vacation or leave
as provided for in Section 6) on such date.

    

    (B)           Special
TARP Rules.  Notwithstanding Section 4(d)(2)(A), while the TARP
Requirements apply to the Company or the Bank, the Employee shall forfeit the
Restricted Stock (whether or not vested in accordance with Section
4(d)(2)(A))_if the Employee does not continue to perform substantial services
for the Company and the Bank for at least two years from the date the Restricted
Stock was granted, other than due to the Employee’s death, disability or a
“change in control event” (as defined in Treasury Regulation Section
1.409A-3(i)(5)(i)).   Any Restricted Stock that would have vested
in accordance with Section 4(d)(2)(A), but which is forfeited under this Section
4(d)(2)(B), shall vest (or revest) in the Employee in accordance with Section
4(d)(2)(A) when the TARP Requirements no longer apply to the Company and the
Bank.

    

    (C)           Accelerated
Vesting.   Notwithstanding Section 4(d)(2)(A), if the Employee
dies or becomes disabled (within the meaning of Section 409A) while actively
employed by the Company and the Bank, or if a Change in Control occurs while the
Employee is actively employed by the Company and the Bank, then the Employee
shall have a 100 percent vested interest in the Restricted Stock upon such
death, disability or Change in Control.   The preceding sentence
shall apply only to the extent it does not violate the TARP Requirements, or the
TARP Requirements do not apply.

    

    (3)           The
Restricted Stock may not be sold while the Employee is employed by the Company,
the Bank or a Consolidated Subsidiary.

    

    (4)           The
Employee’s Restricted Stock shall be subject to the TARP Requirements during the
TARP Period (and thereafter if required by under the TARP
Requirements).  Accordingly, during such time, the following
restrictions shall apply (in addition to any other restrictions provided for
under this Agreement):

     

    
 

    
      
        
        

      

      
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    (A)           The
amount of Restricted Stock granted may not exceed more than one-third of the
Employee’s annual compensation for the year it is granted.  For this
purpose, the value of the Restricted Stock is taken into account (at its full
value on the grant date) as annual compensation.   Restricted
Stock that may not be granted on account of this Section 4(d)(A) shall be
granted as of the next grant date provided for in Section 4(d)(1), or if not
then permitted, as soon as possible during any subsequent year in which the
grant would be permitted under the TARP Requirements, or as soon as possible
after the TARP Requirements do not apply.

    

    (B)           The
Restricted Stock is subject to the following transferability restrictions
(regardless of vested status and in addition to the restrictions contained in
Section 4(d)(3) of this Agreement):  Prior to 25 percent of the
Company’s financial assistance under TARP being repaid, no Restricted Stock
shall be transferable. When 25 percent of the Company’s financial assistance
under TARP is repaid, 25 percent of the Restricted Stock shares shall become
transferable (if vested).  When 50 percent of the Company’s financial
assistance under TARP is repaid, an additional 25 percent of the Restricted
Stock shall become transferable (if vested).   When 75 percent of
the Company’s financial assistance under TARP is repaid, an additional 25
percent of the Restricted Stock shall become transferable (if
vested).  Upon full repayment of the Company’s TARP financial
assistance, all of the Restricted Stock shall be transferable (if
vested).  Notwithstanding the foregoing provisions of this Section
4(d)(4)(B), vested Restricted Stock may be transferred to pay for tax
liabilities triggered by the vesting of the shares (except in the case of an
election under Code Section 83(b)).  The preceding sentence shall not
operate to accelerate the transferability of the Restricted Stock under Section
4(d)(3) of this Agreement.

    

    5.           Benefits.

    

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

    

    (b)           Fringe
Benefits.  The Employee shall be eligible to participate in,
and receive benefits under, any other fringe benefit plans or perquisites which
are or may become generally available to the Bank's executive officers,
including but not limited to supplemental retirement, deferred compensation
program, supplemental medical or life insurance plans, 

     

     

    
      
        
        

      

      
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    physical
examinations, financial planning and tax preparation services, except as limited
or prohibited under TARP while the Company is a TARP Recipient.  In
addition, a life insurance policy will be acquired on the life of the Employee
that provides him a death benefit of $250,000 while he is employed as President
of the Company and the Bank.  This life insurance policy shall be
acquired as soon as practical after the Effective Date, and all premiums
thereunder shall be paid by the Company or the Bank.  The Employee
shall have no interest in the life insurance policy other than the
above-referenced death benefit (e.g., no interest in any cash value in the
policy), and no rights under the policy other than to name a
beneficiary(ies).  The Employee shall reasonably cooperate in
obtaining the policy, including submitting to insurance physicals as
necessary.

    

    (c)           Automobile.   The
Employee shall be provided an automobile for his business use, at the Company
and the Bank’s joint expense.  The automobile provided shall be
determined by the Company Board of Directors in its sole discretion, taking into
account the reasonable preferences of the Employee and his position with the
Company and the Bank.  The initial value of the automobile shall not
exceed $45,000.

    

    (d)           Country
Club.  The Company and the Bank shall jointly pay the
initiation fee and dues (provided that the amount of dues paid by the Company
and the Bank shall not exceed $12,000 annually) for the Employee to join a
country club of his choosing in the Seattle, Washington area (but subject to the
consent of the Company Board of Directors or the Committee, which consent shall
not be unreasonably withheld).   The Company and the Bank shall
not pay for meals, including meal minimums, with respect to the club, except if
such meals represent a legitimate business expense that is reimbursable under
Section 4(c).

    

    (e)           Apartment in Walla Walla,
Washington.   The Company and the Bank, at their joint
expense, will provide and pay for a furnished apartment in Walla Walla,
Washington, for the Employee’s use while he is on business in that community on
behalf of the Company and the Bank.

    

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

    

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

    

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

     

     

    
      
        
        

      

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

    

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

    

    7.           Termination of
Employment.

    

    (a)           Involuntary
Termination.  Subject to the notice provisions in Section 8,
the Board of Directors may terminate the Employee's employment at any time, but,
except in the case of Termination for Cause, termination of employment shall not
prejudice the Employee's right to compensation or other benefits under this
Agreement.  In the event of Involuntary Termination by the Company and
the Bank or the Employee, other than after a Change in Control, the Company and
the Bank jointly shall (in addition to amounts due the Employee in connection
with services performed for the Company and the Bank prior to the Date of
Termination): (1) continue to pay to the Employee the Salary provided in Section
4(a)(1) of this Agreement at the rate in effect immediately prior to the Date of
Termination for an additional 12 month period commencing on the Date of
Termination, subject to the approval of the Federal Deposit Insurance
Corporation and the Federal Reserve Bank of San Francisco prior to such payment,
and (2) provide to the Employee, during the remaining term of this Agreement,
substantially the same group life insurance, hospitalization, medical, dental,
prescription drug and other health benefits, and long-term disability insurance
(if any) for the benefit of the Employee and his dependents and beneficiaries
who would have been eligible for such benefits if the Employee had not suffered
Involuntary Termination, on terms substantially as favorable to the Employee,
taking into account the amounts of coverage and deductibles and other costs to
him, as if he had not suffered Involuntary
Termination.  Notwithstanding the foregoing, to the extent the taxable
payments under this Section 7(a) would be considered deferred compensation, and
the Employee is considered a “specified employee” (as defined in Section 409A),
then no deferred compensation shall be paid until the 185th day
following the Employee’s Separation from Service (and any deferred compensation
the payment of which is delayed on account of the foregoing shall be paid on
such 185th
day).The preceding sentence shall be applied by (i) treating as much of the
payment due under this Section 7(a) as “separation pay due to involuntary
separation from service” (within the meaning of Treasury Regulation Section
1.409A-1(b)(9)) 

     

     

    
      
        
        

      

      
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    (“Separation
Pay”) as is possible, so that such Separation Pay may be paid without regard to
the preceding sentence, and (ii) treating the Separation Pay as paid prior to
the deferred compensation, to the extent permitted by Section
409A.  Furthermore, and notwithstanding anything herein to the
contrary, no amount shall be payable under this Section 7(a) if such payment
becomes an obligation of the Company or the Bank while the Company is a TARP
Recipient during the TARP Period and the Employee is not permitted to receive
those payments under the TARP Requirements (on account of being an SEO, MHCE, or
otherwise).    In addition, no payment shall be made under
this Section 7(a) that would cause the Bank to be “undercapitalized” for
purposes of 12 C.F.R. Part 225 or any successor provision.  Payments
due under this Section 7(a) shall be conditioned on the Employee’s compliance
with Section 9(b) of this Agreement.

    

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

    

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

    

    (d)           Change in
Control.  In the event of an Involuntary Termination within 12
months after a Change in Control, the Company and the Bank jointly shall (in
addition to amounts due the Employee in connection with services performed for
the Company and the Bank prior to the Date of Termination): (i) pay to the
Employee in a lump sum in cash within 25 business days after the Date of
Termination an amount equal to one (1) times the Employee’s annual Salary as in
effect on the Date of Termination, subject to the approval of the Federal
Deposit Insurance Corporation and the Federal Reserve Bank of San Francisco
prior to such payment; and (ii) provide to the Employee during the remaining
term of this Agreement substantially the same group life insurance,
hospitalization, medical, dental, prescription drug and other health benefits,
and long-term disability insurance (if any) for the benefit of the Employee and
his dependents and beneficiaries who would have been eligible for such benefits
if the Employee had not suffered Involuntary Termination, on terms substantially
as favorable to the Employee, taking into account the amounts of coverage and
deductibles and other costs to him, as if he had not suffered Involuntary
Termination; provided, however, that no payment shall be made under this Section
7(d) that would cause the Bank to be “undercapitalized” for purposes of 12
C.F.R. Part 225 or any successor provision.  Notwithstanding the
foregoing, to the extent the taxable payments under this Section 7(d) would be
considered deferred compensation, and the Employee is considered a “specified
employee” (as defined in Section 409A), then such deferred compensation shall be
paid on the 185th day
following the Employee’s Separation from Service.  Furthermore, and
notwithstanding anything herein to the contrary, no amount shall be

     

     

    
      
        
        

      

      
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    payable
under this Section 7(d) if such payment becomes an obligation of the Company and
the Bank while the Company is a TARP Recipient during the TARP Period, and the
Employee is not permitted to receive those payments under the TARP Requirements
(on account of being an SEO, MHCE, or otherwise).  Payments due under
this Section 7(d) shall be conditioned on the  Employee’s compliance
with Section 9(b) of this Agreement.

    

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

    

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

    

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

    

     

    
      
        
        

      

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

    

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

    

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

    

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

    

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

    

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

     

     

     

    
      
        
        

      

      
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    stating
the circumstances that constitute such Involuntary Termination and the date upon
which his employment shall have ceased due to such Involuntary
Termination.  In the event that the Employee desires to effect a
Voluntary Termination, he shall deliver a written notice to the Company and the
Bank, stating the date upon which employment shall terminate, which date shall
be at least 90 days after the date upon which the notice is delivered, unless
the parties agree to a date sooner.

    

    9.           Loyalty;
Noncompetition.

    

    (a)           The
Employee shall devote his full time and best efforts to the performance of his
employment under this Agreement.  During the term of this Agreement,
the Executive shall not, at any time or place, either directly or indirectly,
engage in any business or activity in competition with the business affairs or
interests of the Company or the Bank or be a director, officer or executive of
or consultant to any bank, savings and loan association, credit union or similar
thrift, savings bank or institution or holding company of any such entity in any
county  in which the Company, the Bank or any other affiliate of the
Company operates a full service branch office.

    

    (b)           Upon
termination of this Agreement for any reason other than the reasons set forth in
Section 7(a) and (d) of this Agreement, for a period of one (1) year from the
termination of this Agreement, the Employee shall not be a director, officer or
employee of or consultant to any bank, savings and loan association, credit
union or similar thrift, savings bank or institution or holding company of any
such entity in any county  in which the Company, the Bank or any other
affiliate of the Company operates a full service branch office on the Date of
Termination of this Agreement.

    

    (c)           Nothing
in Sections 9(a) and 9(b) shall limit the right of the Employee to invest in the
capital stock or other securities of any business dissimilar from that of
Company or the Bank, or solely as a passive investor in any
business.

    

    (d)           Directly
or indirectly engaging in any business or activity in competition with the
business affairs or interests of the Company or the Bank shall include engaging
in business as owner, partner, agent or employee of any person, firm or
corporation engaged in such business individually or as beneficiary by interest
in any partnership, corporation or other business entity or in being interested
directly or indirectly in any such business conducted by any person, firm or
corporation.  The preceding sentence shall not apply with respect to
ownership by the Employee of less than one percent of a publicly traded
entity.

    

    (e)           In
the event of violation by the Employee of this Agreement for loyalty and
noncompetition, the Employee will be subject to damages and because of the
relationship of employer and employee, it is hereby agreed injunctive relief is
necessary for the Company and the Bank to enforce these provisions of the
Agreement to protect its business and good will.

     

    10.           Attorneys'
Fees.  The Company and the Bank jointly shall pay all legal
fees and related expenses (including the costs of experts, evidence and counsel)
incurred by the Employee as a result of (i) the Employee's contesting or
disputing any termination of employment, or (ii) 

     

     

    
      
        
        

      

      
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    the
Employee's seeking to obtain or enforce any right or benefit provided by this
Agreement or by any other plan or arrangement maintained by the Company or the
Bank (or a successor) or the Consolidated Subsidiaries under which the Employee
is or may be entitled to receive benefits; provided that the
Company’s and the Bank's obligation to pay such fees and expenses is subject to
the Employee's prevailing with respect to the matters in dispute in any action
initiated by the Employee or the Employee's having been determined to have acted
reasonably and in good faith with respect to any action initiated by the Company
or the Bank.

     

    

    11.           No
Assignments.

    

    (a)           This
Agreement is personal to each of the parties hereto, and no party may assign or
delegate any of its rights or obligations hereunder without first obtaining the
written consent of the other party; provided, however,
that the Company and the Bank shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company and/or the Bank would be required to perform
it, if no such succession or assignment had taken place.  Failure to
obtain such an assumption agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
the Employee to compensation and benefits from the Company and the Bank in the
same amount and on the same terms as the compensation and benefits that would be
payable to Employee pursuant to Section 7(d) of this Agreement without regard to
whether a Change in Control has occurred.  For purposes of
implementing the provisions of this Section 11(a), the date on which any such
succession becomes effective shall be deemed the Date of
Termination.

    

    (b)             This
Agreement and all rights of the Employee hereunder shall inure to the benefit of
and be enforceable by the Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.

    

    12.           Notice.  For
the purposes of this Agreement, notices and all other communications provided
for in this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or sent by certified mail, return receipt
requested, postage prepaid, to the  Company and the Bank at their home
offices, to the attention of the Board of Directors with a copy to the Secretary
of the Company and the Secretary of the Bank, or, if to the Employee, to such
home or other address as the Employee has most recently provided in writing to
the Company or the Bank.

     

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

     

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

     

    

    
      
        
        

      

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

     

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

     

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

    

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

    

    19.           Global TARP
Limitation.   Notwithstanding anything herein to the
contrary: during the TARP Period all amounts payable hereunder shall be subject
to and limited by the TARP Requirements as in effect from time to time
(regardless of whether the terms hereof specifically refer to TARP or the TARP
Requirements).  The Employee hereby voluntarily waives any claim
against the Company or the Bank for any changes to his compensation, bonus,
incentive and other benefit plans, arrangements, policies and agreements
(including golden parachute agreements and tax gross-ups) that are required to
comply with the TARP Requirements (regardless of whether the compensation,
benefit or other amount is payable under this Agreement).  This waiver
includes all claims the Employee may have under the laws of the United States or
any state related to the requirements imposed by the TARP Requirements,
including, without limitation, a claim for any compensation or other payments
Employee would otherwise receive.

    

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

     

    
 

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    

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

     

    * * * *
*

    

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

     

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

    

     

    

     

    
      	
              Attest:

            	
              BANNER
      CORPORATION

            
	 	 
	 	 
	/s/Albert
      Marshall               
      	By:/s/D. Michael
      Jones            
      
	Secretary 	 
	 	Its: Chief Executive
      Officer  
	 	 
	 	 
	 	
              BANNER
      BANK

            
	 	 
	 	 
	/s/Albert
      Marshall                   	By: /s/D.
      Michael
      Jones               
	Secretary  	 
	 	Its: Chief
      Executive Officer  
	 	 
	 	 
	 	 
	 	 
	 	EMPLOYEE 
	 	 
	 	 
	 	/s/Mark J.
      Grescovich                  
      
	 	Mark J.
      Grescovich 

    

     

     

     

     

     

    17

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