UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004.

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 FOR THE TRANSITION PERIOD FROM

to

:

Commission File Number 0-26584

BANNER CORPORATION

(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction of incorporation or organization)

91-1691604
(I.R.S. Employer Identification Number)

10 South First Avenue, Walla Walla, Washington 99362

(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (509) 527-3636

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       X      No               

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of class:
Common Stock, $.01 par value per share

As of July 31, 2004
11,636,484 shares*

* Includes 438,985 shares held by employee stock ownership plan (ESOP) that have not been released, committed to be released, or allocated to participant accounts.

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements. The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:

Consolidated Statements of Financial Condition as of June 30, 2004 and December 31, 2003

2

Consolidated Statements of Income for the Quarters and Six Months Ended June 30, 2004 and 2003

3

Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Six Months Ended June 30, 2004
  and 2003

4

Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2004 and 2003

5

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003

7

Selected Notes to Consolidated Financial Statements

9

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation

Special Note Regarding Forward-Looking Statements

13

General

13

Recent Developments and Significant Events

13

Comparison of Financial Condition at June 30, 2004 and December 31, 2003

13

Comparison of Results of Operations for the Quarters and Six Months Ended June 30, 2004 and 2003

14

Asset Quality

20

Liquidity and Capital Resources

21

Financial Instruments with Off-Balance-Sheet Risk

22

Capital Requirements

23

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management

24

Sensitivity Analysis

24

Item 4 - Controls and Procedures

28

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

29

Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

29

Item 3 - Defaults upon Senior Securities

29

Item 4 - Submission of Matters to a Vote of Stockholders

29

Item 5 - Other Information

29

Item 6 - Exhibits and Reports on Form 8-K

30

SIGNATURES

(Unaudited)

June 30

December 31

ASSETS

2004

2003

Cash and due from banks

$

53,699

$

77,298

Securities available for sale, cost $606,539 and $670,033

   Encumbered

42,815

55,228

   Unencumbered

557,233

619,714

600,048

674,942

Securities held to maturity, fair value $51,697 and $28,402

   Encumbered

225

216

   Unencumbered

50,986

27,016

51,211

27,232

Federal Home Loan Bank stock

35,387

34,693

Loans receivable:

   Held for sale, fair value $5,937 and $16,199

5,887

15,912

   Held for portfolio

1,903,532

1,711,013

   Allowance for loan losses

(28,037

)

(26,060

)

1,881,382

1,700,865

Accrued interest receivable

14,341

13,410

Real estate owned, held for sale, net

3,564

2,967

Property and equipment, net

32,815

22,818

Goodwill and other intangibles, net

36,441

36,513

Deferred income tax asset, net

7,024

1,941

Bank-owned life insurance

34,529

33,669

Other assets

9,629

8,965

$

2,760,070

$

2,635,313

LIABILITIES

Deposits:

   Non-interest-bearing

$

209,704

$

205,656

   Interest-bearing

1,622,889

1,465,284

1,832,593

1,670,940

Advances from Federal Home Loan Bank

555,058

612,552

Junior subordinated debentures

72,168

56,703

Other borrowings

72,539

69,444

Accrued expenses and other liabilities

17,911

18,444

Deferred compensation

4,739

4,252

Income taxes payable

2,768

178

2,557,776

2,432,513

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

Common stock - $0.01 par value per share, 27,500,000
shares authorized, 13,201,419 shares issued:

   11,630,434 shares and 11,473,311 shares outstanding at
   June 30, 2004 and December 31, 2003, respectively.

125,438

123,375

Retained earnings

85,494

80,286

Accumulated other comprehensive income (loss):

   Unrealized gain (loss) on securities available for sale

(4,461

)

3,191

Unearned shares of common stock issued to Employee
Stock Ownership Plan (ESOP) trust:

   438,985 and 434,299 restricted shares outstanding

   at June 30, 2004 and December 31, 2003,
   respectively, at cost

(3,628

)

(3,589

)

Carrying value of shares held in trust for stock
related compensation plans

(3,669

)

(3,554

)

Liability for common stock issued to deferred, stock related,
compensation plans

3,120

3,091

(549

)

(463

)

202,294

202,800

$

2,760,070

$

2,635,313

Quarters Ended

Six Months Ended

June 30

June 30

2004

2003

2004

2003

INTEREST INCOME:

   Loans receivable

$

30,298

$

29,396

$

59,317

$

58,240

   Mortgage-backed securities

4,394

3,183

8,921

6,235

   Securities and cash equivalents

3,140

2,833

6,221

5,655

 37,832

35,412

74,459

70,130

INTEREST EXPENSE:

   Deposits

 8,404

8,851

16,268

17,722

   Federal Home Loan Bank advances

4,962

5,747

10,087

11,447

   Junior subordinated debentures/Trust preferred securities

843

546

1,535

1,113

   Other borrowings

 223

203

460

375

14,432

15,347

28,350

30,657

   Net interest income before provision for loan losses

23,400

20,065

46,109

39,473

PROVISION FOR LOAN LOSSES

1,450

2,250

2,900

4,500

   Net interest income

21,950

17,815

43,209

34,973

OTHER OPERATING INCOME:

   Loan servicing fees

347

(83

)

613

447

   Other fees and service charges

2,057

1,839

3,900

3,497

   Mortgage banking operations

 1,452

3,244

2,704

5,306

   Gain on sale of securities

62

--

73

3

   Miscellaneous

207

383

651

948

     Total other operating income

4,125

5,383

7,941

10,201

OTHER OPERATING EXPENSES:

   Salary and employee benefits

13,024

11,589

25,127

22,800

   Less capitalized loan origination costs

(1,891

)

(1,975

)

(3,378

)

(3,550

)

   Occupancy and equipment

2,645

2,349

5,132

4,721

   Information/computer data services

1,016

868

2,042

1,706

   Professional services

790

844

1,705

1,274

   Advertising

1,341

801

2,449

1,667

   Miscellaneous

2,611

2,799

5,287

5,714

     Total other operating expenses

19,536

17,275

38,364

34,332

     Income before provision for income taxes

6,539

5,923

12,786

10,842

PROVISION FOR INCOME TAXES

NET INCOME

$

4,548

$

4,121

$

8,911

$

7,550