BANR - Second Quarter Results
July 28, 2005
Page 2

"So far during 2005 we have opened new branches in Kent, Everett, Edmonds, Lynnwood, Mercer Island and East Wenatchee, Washington, and relocated branches in Lynden, Spokane and Walla Walla, Washington. We also saw significant progress on construction and development of new offices in Vancouver, Washington, Boise, Idaho, and Beaverton, Oregon and have moved forward on the four other southwestern Idaho branch offices we expect to open within the next nine months. Operating expenses for the remainder of 2005 will be impacted by these new locations, but over time these new branches should help improve our net interest margin by proportionately reducing our borrowing from the Federal Home Loan Bank," said Jones.

Banner's net interest margin was 3.75% for the second quarter of 2005, a ten basis point improvement from 3.65% in the second quarter a year ago, and a four basis point improvement from the 3.71% margin for the first quarter of 2005. For the first six months of the year, the net interest margin was 3.73%, a six basis point improvement from 3.67% for the same period last year. "Although we experienced higher funding costs this quarter, we saw our net interest margin expand as a result of our strong loan growth and increased asset yields," said Jones. Funding costs were up 20 basis points compared to the previous quarter and up 52 basis points from the same quarter a year earlier. However, asset yields were also higher, increasing by 25 and 62 basis points, respectively, compared to the quarters ended March 31, 2005 and June 30, 2004.

In contrast with last year, for the first six months of 2005 Banner Bank did not record any dividend income on its investment in stock of the Federal Home Loan Bank of Seattle (FHLB). For the quarter and six months ended June 30, 2004, Banner Bank recorded $349,000 and $694,000, respectively, of dividend income on its FHLB stock. In a recent filing with the Securities and Exchange Commission, the FHLB has indicated that it expects to generate only minimal earnings or possibly losses for the next two to three years. As a result, the management of Banner Bank does not expect that it will receive any dividend income on this stock for the foreseeable future. However, for purposes of calculating asset yields and net interest margin for Banner Corporation, the $35.8 million investment in FHLB stock has been included in average securities and earning asset balances. If this currently non-earning investment had been removed from these average balances, Banner Corporation's net interest margin would have been 3.80% and 3.78% for the quarter and six months ended June 30, 2005, and 3.76% for the quarter ended March 31, 2005. Further, this FHLB stock generally cannot be sold and the FHLB, in agreement with its regulator and in contrast with its past practice, is currently not redeeming excess stock holdings of its members. While there is little that Banner Bank can do with regard to this situation at this time, management will monitor the progress of the FHLB and will continue to evaluate the appropriate classification and valuation of this investment.

Banner Corporation's assets reached a record $3.14 billion at June 30, 2005, a 14% increase from $2.76 billion a year earlier. Net loans increased 21%, to $2.28 billion at June 30, 2005, from $1.88 billion a year ago. "The major components of the loan portfolio showed dramatic growth in the last year," said Jones. "We increased commercial and multifamily real estate loans 12%, construction and land loans 46% and commercial and agricultural business loans 17%. As a result, these components of total loans grew by 23% to $1.90 billion, and now represent 82% of the loan portfolio. In particular, our construction and development lending has been outstanding during the first half of 2005, reflecting the strong housing markets in the northwest locations that Banner Bank serves and tremendous efforts from our lenders that focus on that line of business."

Total deposits grew 19%, to $2.17 billion, compared to $1.83 billion at June 30, 2004. Non-interest bearing deposits increased 44% at June 30, 2005 compared to June 30, 2004, and increased 17% compared to March 31, 2005. Transaction and savings accounts grew 31% during the twelve months ending June 30, 2005, while certificates of deposit increased only 9%. "Our significant emphasis on deposit growth is bringing new customers to Banner Bank and is providing sufficient funding to support our loan growth," Jones continued. "Profitably growing our deposit base is the number one focus of our franchise expansion."

Book value per share was $19.00 at June 30, 2005, compared to $18.08 a year earlier. Tangible book value per share was $15.87 at June 30, 2005, compared to $14.82 a year earlier.

"We have been successful at managing credit risk while significantly growing the commercial loan portfolio," said Jones. Non-performing assets were $17.3 million, or 0.55% of total assets, at June 30, 2005, a 40% reduction from $28.9 million, or 1.05% of total assets, at June 30, 2004. At March 31, 2005, Banner's non-performing assets totaled $18.9 million or 0.64% of total assets. The provision for loan losses for the second quarter was $1.3 million, compared to $1.5 million in the same quarter of 2004. Net loan charge-offs in the second quarter of 2005 were 0.06% of average loans outstanding. At June 30, 2005, the allowance for loan losses totaled $29.8 million, representing 1.29% of total loans outstanding.

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