BANNER CORP - FORM 8-K - EX-99.1 - EXHIBIT 99.1

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8-K - BANNER CORPORATION FORM 8-K - BANNER CORP	k812512.htm

Exhibit 99.1

		Contact: Mark J. Grescovich, President & CEO Lloyd W. Baker, CFO (509) 527-3636
		News Release

Banner Corporation Reports Net Income of $5.1 Million in Fourth Quarter;

2011 Net Income Highlighted by Improved Credit Quality and Strong Revenue Generation

Walla Walla, WA – January 25, 2012 - Banner Corporation (NASDAQ GSM: BANR), the parent company of Banner Bank and Islanders Bank, today reported net income of $5.1 million in the fourth quarter of 2011, compared to net income of $6.0 million in the immediately preceding quarter and a net loss of $12.7 million in the fourth quarter a year ago. For the full year ended December 31, 2011, Banner reported net income of $5.5 million compared to a net loss of $61.9 million in 2010.

“Banner’s 2011 performance provided consistent evidence that we are successfully executing on our strategies and priorities to strengthen our franchise and deliver sustainable profitability to Banner,” said Mark J. Grescovich, President and Chief Executive Officer. “Our return to profitability for the last three quarters, and now for the year, reflects significant progress on the key objectives of those strategies: reducing the adverse effect of non-performing assets, increasing client relationships and reducing our cost of funds. This progress and our 2011 operating results clearly demonstrate that our strategic turnaround plan is effective and is building shareholder value.

“Banner’s credit quality metrics further improved during the fourth quarter, with non-performing loans, real estate owned and total non-performing asset levels all decreasing at year end, leading to reduced credit costs for the current quarter and for the full year. Also notable during the quarter was an increase in net loans and continued growth in non-interest-bearing deposits, as we experienced further success in acquiring new client relationships and account balances.”

In the fourth quarter of 2011, Banner paid a $1.6 million dividend on the $124 million of senior preferred stock it issued to the U.S. Treasury under the Capital Purchase Program. In addition, Banner accrued $425,000 for related discount accretion. Including the preferred stock dividend and related accretion, net income available to common shareholders was $0.18 per share for the fourth quarter of 2011, compared to net income available to common shareholders of $0.24 per share in the third quarter of 2011 and a net loss to common shareholders of $0.91 per share for the fourth quarter a year ago. For the year ended December 31, 2011, the net loss to common shareholders, including the preferred stock dividend and related accretion, was $0.15 per share, compared to a net loss of $7.21 per share for the year ended December 31, 2010.

Credit Quality

“Credit costs continue to decline and were significantly below those of a year ago as our special asset teams continued to make meaningful progress at reducing problem assets,” said Grescovich. “Charge-offs and delinquencies as well as real estate owned expenses and valuation adjustments continued to be concentrated in loans for the construction of single-family homes and residential land development projects. However, our exposure to one-to-four family residential construction and land development loans has continued to decline and at the end of December 31, 2011 had been reduced to 7.3% of our loan portfolio. Importantly, strong sales activity reduced our portfolio of real estate owned through foreclosure by $23.5 million during the fourth quarter, resulting in a net decrease of $57.9 million during 2011. We are encouraged by the recent pace of problem asset resolution as well as the significant reduction in non-performing assets over the last year and remain diligent in our efforts to further improve our risk profile.”

Banner recorded a $5.0 million provision for loan losses in the fourth quarter of 2011, equal to the provision in the preceding quarter and reduced substantially from $20.0 million in the fourth quarter a year ago. The allowance for loan losses at December 31, 2011 totaled $82.9 million, representing 2.52% of total loans outstanding and 110% of non-performing loans. Non-performing loans decreased to $75.3 million at December 31, 2011, compared to $151.5 million at December 31, 2010 and $83.1 million at September 30, 2011.

Banner’s real estate owned and repossessed assets decreased to $43.0 million at December 31, 2011, compared to $100.9 million a year earlier and $66.5 million three months earlier. Net charge-offs in the fourth quarter of 2011 totaled $8.2 million, or 0.25% of average loans outstanding, compared to $10.9 million, or 0.33% of average loans outstanding for the third quarter of 2011 and $19.0 million, or 0.55% of average loans outstanding, for the fourth quarter a year ago. For all of 2011, net charge-offs were $49.5 million, compared to $67.9 million in 2010.

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 2

Non-performing assets decreased to $118.9 million at December 31, 2011, compared to $151.6 million at September 30, 2011 and $254.3 million at December 31, 2010. At December 31, 2011, Banner’s non-performing assets were 2.79% of total assets, compared to 3.53% at the end of the September 2011 and 5.77% a year ago.

One-to-four family residential construction, land and land development loans were $241.7 million, or 7.3% of the total loan portfolio at December 31, 2011, compared to $321.1 million, or 9.4% of the total loan portfolio a year earlier. The geographic distribution of these residential construction, land and land development loans was approximately $80.0 million, or 33%, in the greater Puget Sound market, $109.9 million, or 45%, in the greater Portland, Oregon market and $4.9 million, or 2%, in the greater Boise, Idaho market as of December 31, 2011. The remaining $46.9 million, or 20%, was distributed in the various eastern Washington, eastern Oregon and northern Idaho markets served by Banner Bank.

Income Statement Review

“The realignment of our delivery platforms and execution by our sales teams, as well as further maturing of our expanded branch system along with a targeted marketing campaign, have allowed Banner Bank to add client relationships and increase core deposits. That core deposit growth has enabled us to significantly reduce our cost of funds during the year through changes in our deposit mix and pricing strategies and has supported increased deposit fees despite the adverse impact of regulatory changes on overdraft revenues. The reduced cost of funds coupled with changes in our asset mix made it possible for us to maintain a strong net interest margin in recent quarters and to increase it by 26 basis points compared to the fourth quarter a year ago, despite continued downward pressure on asset yields,” said Grescovich. Banner’s net interest margin was 4.07% in the fourth quarter of 2011, compared to 4.10% in the preceding quarter and 3.81% in the fourth quarter a year ago. For the year 2011, Banner’s net interest margin was 4.05%, a 38 basis point improvement compared to 3.67% for 2010.

Deposit costs decreased by 11 basis points compared to the preceding quarter and 44 basis points compared to the fourth quarter a year earlier. Funding costs for the fourth quarter of 2011 decreased 10 basis points compared to the previous quarter and 41 basis points from the fourth quarter a year ago. Asset yields decreased 13 basis points compared to the prior quarter and decreased 14 basis points from the fourth quarter a year ago. Loan yields remained unchanged from the preceding quarter and decreased 14 basis points from the fourth quarter a year ago. Nonaccruing loans reduced the margin by approximately 14 basis points in the fourth quarter of 2011 compared to approximately 21 basis points in the preceding quarter and approximately 33 basis points in the fourth quarter of 2010.

“The continued growth in core deposits and reduced drag from non-performing assets over the past year have led to a solid increase in our revenues from core operations compared to a year earlier,” said Grescovich. Net interest income, before the provision for loan losses, was $41.6 million in the fourth quarter of 2011, compared to $41.7 million in the preceding quarter and $40.8 million in the fourth quarter a year ago. For the year 2011, net interest income, before the provision for loan losses, increased 4% to $164.6 million, compared to $157.8 million for 2010. Revenues from core operations* (net interest income before the provision for loan losses plus total other operating income excluding fair value and other-than-temporary impairment (OTTI) adjustments) was $50.5 million in the fourth quarter of 2011, compared to $50.1 million in the third quarter of 2011 and $49.0 million in the fourth quarter a year ago. For the year, revenues from core operations increased 4% to $196.2 million, compared to $189.4 million a year earlier.

Banner’s fourth quarter 2011 results included a net loss of $1.8 million for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value. In the immediately preceding quarter, Banner’s results included a net recovery of $3.0 million of principal and $881,000 of interest as a result of the full cash repayment of a security that had been written off a year earlier as an OTTI charge. That recovery was partially offset by a net loss of $1.0 million for fair value adjustments in the third quarter. In the fourth quarter of 2010, Banner recorded a net loss of $706,000 for fair value adjustments.

Total other operating income, which includes the above-mentioned changes in the valuation of financial instruments and OTTI adjustments, was $7.2 million in the fourth quarter of 2011 compared to $10.3 million in the preceding quarter and $7.6 million in the fourth quarter a year ago. For the year 2011, total other operating income was $34.0 million, compared to $29.1 million for 2010. In addition to net fair value adjustments, the third quarter of 2011 and the full year 2011 included a $3.0 million recovery of a prior-period OTTI charge, while the third quarter of 2010 and the full year 2010 included net OTTI charges of $3.0 million and $4.2 million, respectively. Other operating income from core operations* (total other operating income, excluding fair value and OTTI adjustments) for the current quarter was $8.9 million, compared to $8.4 million for the preceding quarter and $8.3 million for the fourth quarter a year ago. For the year 2011, other operating income from core operations* was $31.6 million, the same as in 2010, as lower revenues from mortgage banking operations were offset by increased deposit fees and other income items.

Deposit fees and other service charges were $5.9 million in the fourth quarter of 2011 compared to $6.1 million in the preceding quarter and $5.5 million in the fourth quarter a year ago. Income from mortgage banking operations increased to $1.9 million in the fourth quarter of 2011, compared to $1.4 million in the immediately preceding quarter, but was lower than the $2.1 million recorded in the fourth quarter of 2010. For the year 2011, deposit fees were $23.0 million and mortgage banking revenues were $5.2 million compared to $22.0 million and $6.4 million, respectively, for the year 2010.

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 3

“Operating expenses declined for both the fourth quarter and the full year compared to the respective periods a year ago, largely due to lower costs associated with the real estate owned portfolio, particularly valuation adjustments,” said Grescovich. “While we expect collection expenses and costs associated with real estate owned to remain elevated in the near term, these credit costs should continue to decline as further problem asset resolution occurs.”

Total other operating expenses, or non-interest expenses, were $38.7 million in the fourth quarter of 2011, compared to $41.0 million in both the preceding quarter and in the fourth quarter of 2010. For the year 2011, total other operating expenses decreased 2% to $158.1 million compared to $160.8 million for 2010, largely as a result of decreased costs related to real estate owned and FDIC deposit insurance which were partially offset by increased compensation-related expenses.

*Earnings information excluding fair value and OTTI adjustments (alternately referred to as other operating income from core operations or revenues from core operations) represent non-GAAP (Generally Accepted Accounting Principles) financial measures. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company’s core operations reflected in the current quarter’s results. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures.

Balance Sheet Review

“We increased net loan balances by $74.3 million during the quarter, primarily in the commercial real estate and commercial business portfolios, as our production levels for targeted loans remained encouraging. Further, the calling efforts and responsiveness of our local bankers are resulting in a consistent pipeline of lending opportunities. While we expect a continued challenging economic environment, we believe that these well focused marketing efforts will allow us to capitalize on additional lending opportunities going forward,” said Grescovich.

Net loans increased $74.3 million during the quarter to $3.21 billion at December 31, 2011, compared to $3.14 billion at September 30, 2011. Net loans were $3.31 billion a year ago. Commercial and agricultural business loans increased to $819.6 million at December 31, 2011 compared to $792.4 million at September 30, 2011, and $790.4 million a year ago. Commercial and multi-family real estate loans were $1.23 billion at December 31, 2011, reflecting a modest increase from $1.20 billion at both September 30, 2011 and a year earlier.

The combined total of securities at fair value, available for sale and held to maturity, increased to $622.0 million at December 31, 2011 compared to $548.4 million at September 30, 2011 and $367.7 million at December 31, 2010. However, the aggregate total of securities and interest-bearing deposits decreased to $691.7 million at December 31, 2011 compared to $783.2 million at September 30, 2011 and was nearly unchanged compared to $689.6 million at December 31, 2010. The increase in the securities holdings reflects a modest extension of the expected duration of this aggregate total designed to increase the yield relative to interest-bearing deposits. The securities purchased in recent periods were primarily short- to intermediate-term U.S. Government Agency notes and mortgage-backed securities.

Total assets were $4.26 billion at December 31, 2011, compared to $4.29 billion at the end of the preceding quarter and $4.41 billion a year ago. Deposits totaled $3.48 billion at December 31, 2011, compared to $3.54 billion at September 30, 2011 and $3.59 billion a year ago. Non-interest-bearing accounts increased 29% to $777.6 million at December 31, 2011, compared to $600.5 million a year ago. At September 30, 2011, non-interest-bearing accounts totaled $763.0 million. Interest-bearing transaction and savings accounts were $1.45 billion at December 31, 2011, compared to $1.46 billion at September 30, 2011 and $1.43 billion at December 31, 2010.

“The improvement in our deposit mix helped lower our funding costs by reducing our reliance on higher cost certificates of deposit, increasing new client relationships and improving our core funding position. To that point, our non-interest-bearing deposits increased 29% from a year ago and 100% of this organic growth was from our existing branch network,” said Grescovich

At December 31, 2011, total stockholders’ equity was $532.5 million, including $120.7 million attributable to preferred stock, and common stockholders’ equity was $411.7 million, or $23.50 per share. During 2010, Banner completed a common stock offering, issuing a total of 85,639,000 shares in the offering, resulting in net proceeds of approximately $161.6 million. In May 2011, Banner announced a 1-for-7 reverse stock split, which took effect on June 1, 2011. Every seven shares of Banner’s pre-split common shares were automatically consolidated into one post-split share. Taking the reverse stock split into account, Banner had 17.6 million shares outstanding at December 31, 2011, compared to 16.2 million shares outstanding a year ago. Tangible common stockholders’ equity, which excludes preferred stock and other intangibles, was $405.4 million at December 31, 2011, or 9.54% of tangible assets, compared to $394.3 million, or 9.20% of tangible assets at September 30, 2011 and $383.9 million, or 8.73% of tangible assets a year ago. Tangible book value per common share was $23.14 at December 31, 2011.

Augmented by the stock offering and continued sales of common stock under its Dividend Reinvestment and Direct Stock Purchase and Sale Plan (DRIP), Banner Corporation and its subsidiary banks continue to maintain capital levels significantly in excess of the requirements to be categorized as “well-capitalized” under applicable regulatory standards. Banner Corporation used a significant portion of the net proceeds from last year’s offering to strengthen Banner Bank’s regulatory capital ratios while retaining the balance for general working capital purposes, including additional capital investments in its subsidiary banks if appropriate. Through December 31, 2011, Banner Corporation had invested $110.0 million of the net proceeds as additional paid-in common equity in

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 4

Banner Bank, although no additional equity investment was made during the current year. Banner Corporation’s Tier 1 leverage capital to average assets ratio was 13.44% and its total capital to risk-weighted assets ratio was 18.07% at December 31, 2011. Banner Bank’s Tier 1 leverage ratio was 11.71 % at December 31, 2011, which is in excess of the 10% minimum level targeted in its Memorandum of Understanding with the Federal Deposit Insurance Corporation (FDIC) and the Washington State Department of Financial Institutions (Washington DFI).

Conference Call

Banner will host a conference call on Thursday, January 26, 2012, at 8:00 a.m. PST, to discuss its fourth quarter and year end results. The conference call can be accessed live by telephone at (480) 629-9770 to participate in the call. To listen to the call online, go to the Company’s website at www.bannerbank.com. A replay will be available for a week at (303) 590-3030, using access code 4503316.

About the Company

Banner Corporation is a $4.26 billion bank holding company operating two commercial banks in Washington, Oregon and Idaho. Banner serves the Pacific Northwest region with a full range of deposit services and business, commercial real estate, construction, residential, agricultural and consumer loans. Visit Banner Bank on the Web at www.bannerbank.com.

This press release contains statements that the Company believes are “forward-looking statements.” These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiaries by the FDIC, the Washington DFI or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of the Banks which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; our compliance with regulatory enforcement actions; the requirements and restrictions that have been imposed upon Banner Corporation and Banner Bank under the memoranda of understanding with the Federal Reserve Bank of San Francisco (in the case of Banner Corporation) and the FDIC and the Washington DFI (in the case of Banner Bank) and the possibility that Banner Corporation and Banner Bank will be unable to fully comply with the memoranda of understanding, which could result in the imposition of additional requirements or restrictions; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuations; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common and preferred stock and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; future legislative changes in the United States Department of Treasury Troubled Asset Relief Program Capital Purchase Program; and other risks detailed in Banner Corporation’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2010. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2012 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating and stock price performance.

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 5

RESULTS OF OPERATIONS				Quarters Ended						Twelve Months Ended
(in thousands except shares and per share data)				Dec 31, 2011		Sep 30, 2011		Dec 31, 2010		Dec 31, 2011		Dec 31, 2010


INTEREST INCOME:
	Loans receivable		$	45,115	$	45,641	$	49,390	$	184,357	$	205,784
	Mortgage-backed securities			922		799		902		3,455		4,045
	Securities and cash equivalents			2,414		3,121		1,936		9,751		8,253
				48,451		49,561		52,228		197,563		218,082
INTEREST EXPENSE:
	Deposits			5,169		6,169		9,521		26,164		52,320
	Federal Home Loan Bank advances			64		64		314		370		1,318
	Other borrowings			559		559		584		2,265		2,448
	Junior subordinated debentures			1,073		1,041		1,052		4,193		4,226
				6,865		7,833		11,471		32,992		60,312

	Net interest income before provision for loan losses			41,586		41,728		40,757		164,571		157,770

PROVISION FOR LOAN LOSSES				5,000		5,000		20,000		35,000		70,000
	Net interest income			36,586		36,728		20,757		129,571		87,770
OTHER OPERATING INCOME:
	Deposit fees and other service charges			5,894		6,096		5,515		22,962		22,009
	Mortgage banking operations			1,936		1,401		2,086		5,154		6,370
	Loan servicing fees			136		289		177		1,078		951
	Miscellaneous			972		586		514		2,420		2,302
				8,938		8,372		8,292		31,614		31,632
	Other-than-temporary impairment recovery (loss)			- -		3,000		- -		3,000		(4,231	)
	Net change in valuation of financial instruments carried at fair value			(1,787	)	(1,032	)	(706)		(624	)	1,747
	Total other operating income			7,151		10,340		7,586		33,990		29,148
OTHER OPERATING EXPENSE:
	Salary and employee benefits			18,730		18,226		17,045		72,499		67,490
	Less capitalized loan origination costs			(2,404	)	(1,929	)	(2,123)		(8,001	)	(7,199	)
	Occupancy and equipment			5,379		5,352		5,501		21,561		22,232
	Information / computer data services			1,388		1,547		1,531		6,023		6,132
	Payment and card processing services			2,156		2,132		1,942		7,874		7,067
	Professional services			1,210		1,950		1,740		6,017		6,401
	Advertising and marketing			2,036		1,602		1,740		7,281		7,457
	Deposit insurance			1,367		1,299		1,999		6,024		8,622
	State/municipal business and use taxes			562		553		616		2,153		2,259
	Real estate operations			4,365		6,698		7,044		22,262		26,025
	Amortization of core deposit intangibles			555		554		600		2,276		2,459
	Miscellaneous			3,323		3,054		3,399		12,135		11,856
	Total other operating expense			38,667		41,038		41,034		158,104		160,801
	Income (loss) before provision for (benefit from) income taxes			5,070		6,030		(12,691	)	5,457		(43,883	)
PROVISION FOR (BENEFIT FROM ) INCOME TAXES				- -		- -		- -		- -		18,013
NET INCOME (LOSS)				5,070		6,030		(12,691	)	5,457		(61,896	)
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION:
	Preferred stock dividend			1,550		1,550		1,550		6,200		6,200
	Preferred stock discount accretion			425		425		398		1,701		1,593
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS			$	3,095	$	4,055	$	(14,639	) $	(2,444	) $	(69,689	)

Earnings (loss) per share available to common shareholder
		Basic	$	0.18	$	0.24	$	(0.91	) $	(0.15	) $	(7.21	)
		Diluted	$	0.18	$	0.24	$	(0.91	) $	(0.15	) $	(7.21	)
Cumulative dividends declared per common share			$	0.01	$	0.01	$	0.07	$	0.10	$	0.28
Weighted average common shares outstanding
		Basic		17,269,269		16,808,589		16,008,467		16,724,113		9,664,906
		Diluted		17,298,004		16,837,324		16,008,467		16,752,848		9,664,906
Common shares issued in connection with exercise of stock options or DRIP				522,223		346,489		241,653		1,375,185		836,989

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 6

FINANCIAL CONDITION
(in thousands except shares and per share data)			Dec 31, 2011		Sep 30, 2011		Dec 31, 2010

ASSETS
Cash and due from banks		$	62,678	$	53,503	$	39,756
Federal funds and interest-bearing deposits			69,758		234,824		321,896
Securities - at fair value			80,727		85,419		95,379
Securities - available for sale			465,795		383,670		200,227
Securities - held to maturity			75,438		79,289		72,087
Federal Home Loan Bank stock			37,371		37,371		37,371
Loans receivable:
	Held for sale		3,007		2,003		3,492
	Held for portfolio		3,293,331		3,223,243		3,399,625
	Allowance for loan losses		(82,912	)	(86,128	)	(97,401	)
			3,213,426		3,139,118		3,305,716

Accrued interest receivable			15,570		16,101		15,927
Real estate owned held for sale, net			42,965		66,459		100,872
Property and equipment, net			91,435		92,454		96,502
Other intangibles, net			6,331		6,887		8,609
Bank-owned life insurance			58,563		58,058		56,653
Other assets			37,255		38,611		55,087
		$	4,257,312	$	4,291,764	$	4,406,082

LIABILITIES

Deposits:
	Non-interest-bearing	$	777,563	$	763,008	$	600,457
	Interest-bearing transaction and savings accounts		1,447,594		1,461,383		1,433,248
	Interest-bearing certificates		1,250,497		1,313,043		1,557,493

			3,475,654		3,537,434		3,591,198

Advances from Federal Home Loan Bank at fair value			10,533		10,572		43,523
Customer repurchase agreements and other borrowings			152,128		139,704		175,813
Junior subordinated debentures at fair value			49,988		48,770		48,425

Accrued expenses and other liabilities			23,253		19,593		21,048
Deferred compensation			13,306		14,200		14,603

			3,724,862		3,770,273		3,894,610

STOCKHOLDERS' EQUITY

Preferred stock - Series A			120,702		120,276		119,000
Common stock			531,149		523,284		509,457
Retained earnings (accumulated deficit)			(119,465	)	(122,384	)	(115,348	)
Other components of stockholders' equity			64		315		(1,637	)
			532,450		521,491		511,472
		$	4,257,312	$	4,291,764	$	4,406,082

Common Shares Issued:
Shares outstanding at end of period			17,553,472		17,031,249		16,164,781
	Less unearned ESOP shares at end of period		34,340		34,340		34,340
Shares outstanding at end of period excluding unearned ESOP shares			17,519,132		16,996,909		16,130,441
Common stockholders' equity per share (1)		$	23.50	$	23.61	$	24.33
Common stockholders' tangible equity per share (1) (2)		$	23.14	$	23.20	$	23.80
Common stockholders' tangible equity to tangible assets (2)			9.54	%	9.20	%	8.73	%
Consolidated Tier 1 leverage capital ratio			13.44	%	13.19	%	12.24	%
(1)	- Calculation is based on number of common shares outstanding at the end of the period rather than weighted average shares
	outstanding and excludes unallocated shares in the ESOP.
(2)	- Common stockholders' tangible equity excludes preferred stock, core deposit and other intangibles.
	Tangible assets excludes other intangible assets. These ratios represent non-GAAP financial measures.

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 7

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
				Dec 31, 2011		Sep 30, 2011		Dec 31, 2010
LOANS (including loans held for sale):
Commercial real estate
	Owner occupied		$	469,806	$	474,863	$	515,093
	Investment properties			621,622		586,652		550,610
Multifamily real estate				139,710		134,146		134,634
Commercial construction				42,391		38,124		62,707
Multifamily construction				19,436		16,335		27,394
One- to four-family construction				144,177		145,776		153,383
Land and land development
	Residential			97,491		96,875		167,764
	Commercial			15,197		19,173		32,386
Commercial business				601,440		580,876		585,457
Agricultural business including secured by farmland				218,171		211,571		204,968
One- to four-family real estate				642,501		639,909		682,924
Consumer				103,347		98,794		99,761
Consumer secured by one- to four-family real estate				181,049		182,152		186,036
		Total loans outstanding	$	3,296,338	$	3,225,246	$	3,403,117
Restructured loans performing under their restructured terms			$	54,533	$	51,990	$	60,115
Loans 30 - 89 days past due and on accrual			$	9,962	$	7,895	$	28,847
Total delinquent loans (including loans on non-accrual)			$	85,274	$	91,044	$	180,336
Total delinquent loans / Total loans outstanding				2.59	%	2.82	%	5.30	%

GEOGRAPHIC CONCENTRATION OF LOANS AT
		December 31, 2011		Washington		Oregon		Idaho		Other		Total

Commercial real estate
	Owner occupied		$	352,965	$	62,354	$	51,321	$	3,166	$	469,806
	Investment properties			478,798		94,855		42,736		5,233		621,622
Multifamily real estate				121,699		9,344		8,260		407		139,710
Commercial construction				24,386		2,255		15,750		- -		42,391
Multifamily construction				19,436		- -		- -		- -		19,436
One- to four-family construction				79,294		63,058		1,825		- -		144,177
Land and land development
	Residential			49,611		43,382		4,498		- -		97,491
	Commercial			12,874		890		1,433		- -		15,197
Commercial business				392,390		81,984		66,156		60,910		601,440
Agricultural business including secured by farmland				106,212		49,721		62,210		28		218,171
One- to four-family real estate				399,566		213,782		26,901		2,252		642,501
Consumer				72,349		25,871		5,127		- -		103,347
Consumer secured by one- to four-family real estate				126,507		42,412		11,631		499		181,049
		Total loans outstanding	$	2,236,087	$	689,908	$	297,848	$	72,495	$	3,296,338

		Percent of total loans		67.8	%	20.9	%	9.0	%	2.3	%	100.0	%

DETAIL OF LAND AND LAND DEVELOPMENT LOANS AT
		December 31, 2011		Washington		Oregon		Idaho		Other		Total

Residential
	Acquisition & development		$	13,200	$	17,343	$	3,607	$	- -	$	34,150
	Improved lots			22,651		23,055		408		- -		46,114
	Unimproved land			13,760		2,984		483		- -		17,227

		Total residential land and development	$	49,611	$	43,382	$	4,498	$	- -	$	97,491
Commercial & industrial
	Acquisition & development		$	2,557	$	- -	$	481	$	- -	$	3,038
	Improved land			5,892		- -		191		- -		6,083
	Unimproved land			4,425		890		761		- -		6,076
		Total commercial land and development	$	12,874	$	890	$	1,433	$	- -	$	15,197

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 8

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

				Quarters Ended						Twelve Months Ended
CHANGE IN THE				Dec 31, 2011		Sep 30, 2011		Dec 31, 2010		Dec 31, 2011		Dec 31, 2010
ALLOWANCE FOR LOAN LOSSES

Balance, beginning of period			$	86,128	$	92,000	$	96,435	$	97,401	$	95,269

Provision				5,000		5,000		20,000		35,000		70,000

Recoveries of loans previously charged off:
		Commercial real estate		37		1		- -		53		- -
		Multifamily real estate		- -		- -		- -		- -		- -
		Construction and land		762		89		112		1,602		897
		One- to four-family real estate		241		34		11		356		136
		Commercial business		511		414		776		1,082		2,865
		Agricultural business, including secured by farmland		5		10		36		20		45
		Consumer		73		69		79		304		284
				1,629		617		1,014		3,417		4,227
Loans charged off:
		Commercial real estate		(1,575	)	(1,644	)	(1,575	)	(6,079	)	(1,668	)
		Multifamily real estate		(11	)	- -		- -		(682	)	- -
		Construction and land		(3,269	)	(6,445	)	(11,811	)	(26,328	)	(43,592	)
		One- to four-family real estate		(3,324	)	(2,483	)	(2,483	)	(9,910	)	(7,860	)
		Commercial business		(1,172	)	(863	)	(3,211	)	(8,396	)	(15,244	)
		Agricultural business, including secured by farmland		(188	)	- -		(460	)	(477	)	(1,940	)
		Consumer		(306	)	(54	)	(508	)	(1,034	)	(1,791	)
				(9,845	)	(11,489	)	(20,048	)	(52,906	)	(72,095	)
		Net charge-offs		(8,216	)	(10,872	)	(19,034	)	(49,489	)	(67,868	)

Balance, end of period			$	82,912	$	86,128	$	97,401	$	82,912	$	97,401

Net charge-offs / Average loans outstanding				0.25	%	0.33	%	0.55%		1.50	%	1.88	%


ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES				Dec 31, 2011		Sep 30, 2011		Dec 31, 2010
Specific or allocated loss allowance
	Commercial real estate		$	16,457	$	14,217	$	11,779
	Multifamily real estate			3,952		2,958		3,963
	Construction and land			18,184		22,683		33,121
	Commercial business			15,159		16,894		24,545
	Agricultural business, including secured by farmland			1,548		1,257		1,846
	One- to four-family real estate			12,299		11,249		5,829
	Consumer			1,253		1,277		1,794

		Total allocated		68,852		70,535		82,877

	Estimated allowance for undisbursed commitments			678		508		1,426
	Unallocated			13,382		15,085		13,098

		Total allowance for loan losses	$	82,912	$	86,128	$	97,401

Allowance for loan losses / Total loans outstanding				2.52	%	2.67	%	2.86	%

Allowance for loan losses / Non-performing loans				110	%	104	%	64	%

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 9

				Dec 31, 2011		Sep 30, 2011		Dec 31, 2010

NON-PERFORMING ASSETS

Loans on non-accrual status
	Secured by real estate:
		Commercial	$	9,226	$	8,908	$	24,727
		Multifamily		362		- -		1,889
		Construction and land		27,731		35,841		75,734
		One- to four-family		17,408		15,274		16,869
	Commercial business			13,460		15,754		21,100
	Agricultural business, including secured by farmland			1,896		1,301		5,853
	Consumer			2,905		4,232		2,332
				72,988		81,310		148,504

Loans more than 90 days delinquent, still on accrual
	Secured by real estate:
		Commercial		- -		- -		- -
		Multifamily		- -		- -		- -
		Construction and land		- -		- -		- -
		One- to four-family		2,147		1,111		2,955
	Commercial business			4		687		- -
	Agricultural business, including secured by farmland			- -		- -		- -
	Consumer			173		41		30
				2,324		1,839		2,985
Total non-performing loans				75,312		83,149		151,489
Securities on non-accrual				500		1,942		1,896
Real estate owned (REO) and repossessed assets				43,039		66,538		100,945
		Total non-performing assets	$	118,851	$	151,629	$	254,330
Total non-performing assets / Total assets				2.79	%	3.53	%	5.77	%

DETAIL & GEOGRAPHIC CONCENTRATION OF
	NON-PERFORMING ASSETS AT
			December 31, 2011		Washington		Oregon		Idaho		Other		Total
Secured by real estate:
	Commercial			$	8,723	$	368	$	135	$	- -	$	9,226
	Multifamily				362		- -		- -		- -		362
	Construction and land
		One- to four-family construction			4,039		2,278		306		- -		6,623
		Commercial construction			949		- -		- -		- -		949
		Multifamily construction			- -		- -		- -		- -		- -
		Residential land acquisition & development			6,668		3,709		1,592		- -		11,969
		Residential land improved lots			1,563		3,352		73		- -		4,988
		Residential land unimproved			702		916		485		- -		2,103
		Commercial land acquisition & development			308		- -		- -		- -		308
		Commercial land improved			454		- -		- -		- -		454
		Commercial land unimproved			337		- -		- -		- -		337
			Total construction and land		15,020		10,255		2,456		- -		27,731
	One- to four-family				14,830		3,376		1,349		- -		19,555
Commercial business					12,627		113		724		- -		13,464
Agricultural business, including secured by farmland					1,486		- -		410		- -		1,896
Consumer					2,441		131		506		- -		3,078
Total non-performing loans					55,489		14,243		5,580		- -		75,312
Securities on non-accrual					- -		- -		500		- -		500
Real estate owned (REO) and repossessed assets					18,380		17,967		6,692		- -		43,039
			Total non-performing assets at end of the period	$	73,869	$	32,210	$	12,772	$	- -	$	118,851

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 10

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

			Quarters Ended				Twelve Months Ended
REAL ESTATE OWNED			Dec 31, 2011		Dec 31, 2010		Dec 31, 2011		Dec 31, 2010

Balance, beginning of period		$	66,459	$	107,159	$	100,872	$	77,743
	Additions from loan foreclosures		7,482		16,855		53,197		87,761
	Additions from capitalized costs		150		1,650		4,404		4,006
	Dispositions of REO		(28,299	)	(19,095	)	(99,070	)	(51,651	)
	Gain (loss) on sale of REO		(170	)	(524	)	(1,374	)	(1,891	)
	Valuation adjustments in the period		(2,657	)	(5,173	)	(15,064	)	(15,096	)

Balance, end of period		$	42,965	$	100,872	$	42,965	$	100,872

			Quarters Ended
REAL ESTATE OWNED- FIVE COMPARATIVE QUARTERS			Dec 31, 2011		Sep 30, 2011		Jun 30, 2011		Mar 31, 2011		Dec 31, 2010

Balance, beginning of period		$	66,459	$	71,205	$	94,945	$	100,872	$	107,159
	Additions from loan foreclosures		7,482		18,881		11,918		14,916		16,855
	Additions from capitalized costs		150		1,107		1,532		1,615		1,650
	Dispositions of REO		(28,299	)	(19,440	)	(32,437	)	(18,894	)	(19,095	)
	Gain (loss) on sale of REO		(170	)	(725	)	58		(537	)	(524	)
	Valuation adjustments in the period		(2,657	)	(4,569	)	(4,811	)	(3,027	)	(5,173	)
Balance, end of period		$	42,965	$	66,459	$	71,205	$	94,945	$	100,872

REAL ESTATE OWNED- BY TYPE AND STATE			Washington		Oregon		Idaho		Total

Commercial real estate		$	1,852	$	- -	$	1,620	$	3,472
One- to four-family construction			405		2,323		- -		2,728
Land development- commercial			3,876		112		200		4,188
Land development- residential			5,333		11,881		3,316		20,530
One- to four-family real estate			6,896		3,651		1,500		12,047
Total		$	18,362	$	17,967	$	6,636	$	42,965

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 11

DEPOSITS & OTHER BORROWINGS
	Dec 31, 2011		Sep 30, 2011			Dec 31, 2010
DEPOSIT COMPOSITION

Non-interest-bearing	$	777,563	$	763,008		$	600,457

Interest-bearing checking		362,542		362,090			357,702
Regular savings accounts		669,596		670,210			616,512
Money market accounts		415,456		429,083			459,034
Interest-bearing transaction & savings accounts		1,447,594		1,461,383			1,433,248
Interest-bearing certificates		1,250,497		1,313,043			1,557,493
Total deposits	$	3,475,654	$	3,537,434		$	3,591,198


INCLUDED IN TOTAL DEPOSITS

Public transaction accounts	$	72,064	$	67,753		$	64,482
Public interest-bearing certificates		67,112		69,321			81,809
Total public deposits	$	139,176	$	137,074		$	146,291


Total brokered deposits	$	49,194	$	59,576		$	102,984



INCLUDED IN OTHER BORROWINGS
Customer repurchase agreements / "Sweep accounts"	$	102,131	$	89,633		$	125,140



GEOGRAPHIC CONCENTRATION OF DEPOSITS AT
December 31, 2011	Washington		Oregon			Idaho		Total

	$	2,657,016	$	595,801		$	222,837	$	3,475,654




						Minimum for Capital Adequacy
REGULATORY CAPITAL RATIOS AT	Actual					or "Well Capitalized"
December 31, 2011	Amount		Ratio			Amount		Ratio

Banner Corporation-consolidated
Total capital to risk-weighted assets	$	615,091		18.07	%	$	272,242		8.00	%
Tier 1 capital to risk-weighted assets		572,036		16.80	%		136,121		4.00	%
Tier 1 leverage capital to average assets		572,036		13.44	%		169,639		4.00	%

Banner Bank
Total capital to risk-weighted assets		511,614		15.81	%		323,499		10.00	%
Tier 1 capital to risk-weighted assets		470,668		14.54	%		194,100		6.00	%
Tier 1 leverage capital to average assets		470,668		11.71	%		200,955		5.00	%

Islanders Bank
Total capital to risk-weighted assets		30,627		16.06	%		19,068		10.00	%
Tier 1 capital to risk-weighted assets		28,237		14.81	%		11,441		6.00	%
Tier 1 leverage capital to average assets		28,237		12.08	%		11,689		5.00	%

BANR – Fourth Quarter 2011 Results

January 25, 2012

Page 12

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
		Quarters Ended									Twelve Months Ended
OPERATING PERFORMANCE		Dec 31, 2011			Sep 30, 2011			Dec 31, 2010			Dec 31, 2011			Dec 31, 2010


Average loans		$	3,237,305		$	3,271,728		$	3,458,400		$	3,297,650		$	3,607,151
Average securities			670,807			544,468			418,647			548,446			398,297
Average interest earning cash			148,070			224,993			368,194			219,025			291,968
Average non-interest-earning assets			207,609			206,420			254,242			215,646			262,888
	Total average assets	$	4,263,791		$	4,247,609		$	4,499,483		$	4,280,767		$	4,560,304

Average deposits		$	3,477,587		$	3,498,594		$	3,669,442		$	3,510,274		$	3,768,748
Average borrowings			294,675			270,648			344,906			292,555			350,636
Average non-interest-bearing liabilities			(38,703	)		(41,337	)		(38,355	)		(40,266	)		(37,378	)
	Total average liabilities		3,733,559			3,727,905			3,975,993			3,762,563			4,082,006

Total average stockholders' equity			530,232			519,704			523,490			518,204			478,298
	Total average liabilities and equity	$	4,263,791		$	4,247,609		$	4,499,483		$	4,280,767		$	4,560,304

Interest rate yield on loans			5.53	%		5.53	%		5.67	%		5.59	%		5.70	%
Interest rate yield on securities			1.92	%		2.75	%		2.46	%		2.32	%		2.91	%
Interest rate yield on cash			0.23	%		0.26	%		0.26	%		0.23	%		0.24	%
	Interest rate yield on interest-earning assets		4.74	%		4.87	%		4.88	%		4.86	%		5.07	%

Interest rate expense on deposits			0.59	%		0.70	%		1.03	%		0.75	%		1.39	%
Interest rate expense on borrowings			2.28	%		2.44	%		2.24	%		2.33	%		2.28	%
	Interest rate expense on interest-bearing liabilities		0.72	%		0.82	%		1.13	%		0.87	%		1.46	%

Interest rate spread			4.02	%		4.05	%		3.75	%		3.99	%		3.61	%

Net interest margin			4.07	%		4.10	%		3.81	%		4.05	%		3.67	%

Other operating income / Average assets			0.67	%		0.97	%		0.67	%		0.79	%		0.64	%

Other operating income EXCLUDING fair value and OTTI
	adjustments / Average assets (1)		0.83	%		0.78	%		0.73	%		0.74	%		0.69	%

Other operating expense / Average assets			3.60	%		3.83	%		3.62	%		3.69	%		3.53	%

Efficiency ratio (other operating expense / revenue)			79.34	%		78.82	%		84.88	%		79.62	%		86.03	%

Return (Loss) on average assets			0.47	%		0.56	%		(1.12	%)		0.13	%		(1.36	%)

Return (Loss) on average equity			3.79	%		4.60	%		(9.62	%)		1.05	%		(12.94	%)

Return (Loss) on average tangible equity (2)			3.84	%		4.67	%		(9.78	%)		1.07	%		(13.21	%)

Average equity / Average assets			12.44	%		12.24	%		11.63	%		12.11	%		10.49	%

(1)	- Earnings information excluding fair value and OTTI adjustments (alternately referred to as other operating income from
	core operations or revenues from core operations) represent non-GAAP financial measures.

(2)	- Average tangible equity excludes core deposit and other intangibles and represents a non-GAAP financial measure.

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