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

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8-K - BANNER CORPORATION FORM 8-K - BANNER CORP	k8banr63012.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 $25.4 Million, or $1.27 Per Diluted Share, in Second Quarter;

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

Leading to a Recovery of the Deferred Tax Asset

Walla Walla, WA – July 25, 2012 - Banner Corporation (NASDAQ GSM: BANR), the parent company of Banner Bank and Islanders Bank, today reported that net income increased to $25.4 million in the second quarter of 2012, compared to net income of $9.2 million in the preceding quarter and $2.2 million in the second quarter a year ago. For the first six months of 2012, Banner reported net income of $34.6 million, compared to a net loss of $5.6 million in the same period a year ago. Banner’s results for the quarter ended June 30, 2012 include a $31.8 million tax benefit as a result of the reversal of its deferred tax asset valuation allowance, which was partially offset by a net loss of $19.1 million for fair value adjustments.

“Banner’s continued successful execution of its strategic turnaround plan and return to profitability was punctuated in the second quarter by the elimination of nearly all of the valuation allowance against our deferred tax asset. This decision reflects our confidence in the sustainability of our future profitability,” said Mark J. Grescovich, President and Chief Executive Officer. “However, the real highlights of the second quarter were our continued improvement in asset quality, customer account growth and record revenues from core operations. Banner’s second quarter revenues from core operations* (net interest income before the provision for loan losses plus total other operating income excluding fair value adjustments) increased 8% when compared to the second quarter a year ago. Our net interest margin expanded 17 basis points to 4.26% in the second quarter compared to 4.09% in the second quarter a year ago. Our deposit fees and other service charge income remained strong, increasing by 10% compared to the second quarter a year ago, and revenues from mortgage banking operations were more than three times larger than the second quarter of 2011. This progress clearly demonstrates our strategic turnaround plan is effective and is building shareholder value.”

In the second quarter of 2012, Banner paid a $1.6 million dividend on its $124 million of Series A senior preferred stock and accrued $454,000 for related discount accretion. Including the preferred stock dividend and related accretion, net income available to common shareholders was $1.27 per share for the second quarter of 2012, compared to net income available to common shareholders of $0.40 per share in the first quarter of 2012 and $0.01 per share for the second quarter a year ago.

Second Quarter 2012 Highlights (compared to second quarter 2011 except as noted)

·	Net income was $25.4 million, compared to $2.2 million in the second quarter a year ago.

·	Revenues from core operations* increased 8% to $52.3 million.

·	The net interest margin improved to 4.26%, compared to 4.11% in the preceding quarter and 4.09% in the second quarter of 2011.

·	Net interest income before provision for loan losses increased 3%.

·	Deposit fees and other service charges increased 10%.

·	Revenues from mortgage banking increased 234%.

·	Non-performing assets decreased to $73.2 million, or 1.73% of total assets, at June 30, 2012, a 21% decrease compared to three months earlier and a 61% decrease compared to a year earlier.

·	Non-performing loans decreased to $47.4 million at June 30, 2012, a 27% decrease compared to three months earlier and a 59% decrease compared to a year earlier.

·	The ratio of tangible common equity to tangible assets increased to 10.92% at June 30, 2012.

*Earnings information excluding fair value and other-than-temporary impairment (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.

BANR - Second Quarter 2012 Results

July 25, 2012

Page 2

Credit Quality

“Improving our risk profile and aggressively managing our troubled assets has been, and will remain, a primary focus for our management team,” said Grescovich. “As a result of this focus, credit costs continued to decline and were significantly below those of a year ago, and although they remain above our long-term goal, we are confident credit costs will decline further in the near term. All of our key credit quality metrics have improved and Banner’s reserve levels are substantial.”

Banner recorded a $4.0 million provision for loan losses in the second quarter of 2012, compared to a $5.0 million provision in the preceding quarter and an $8.0 million provision in the second quarter a year ago. The allowance for loan losses at June 30, 2012 totaled $80.2 million, representing 2.50% of total loans outstanding and 169% of non-performing loans. Non-performing loans decreased 27% to $47.4 million at June 30, 2012, compared to $64.9 million three months earlier, and decreased 59% when compared to $115.2 million a year earlier.

Banner’s real estate owned and repossessed assets decreased 7% to $25.8 million at June 30, 2012, compared to $27.7 million three months earlier and decreased 64% when compared to $71.3 million a year ago. Net charge-offs in the second quarter of 2012 totaled $5.3 million, or 0.16% of average loans outstanding, compared to $6.4 million, or 0.20% of average loans outstanding for the first quarter of 2012 and $13.6 million, or 0.41% of average loans outstanding, for the second quarter a year ago.

At June 30, 2012, Banner’s non-performing assets were 1.73% of total assets, compared to 2.24% at March 31, 2012 and 4.48% a year ago. Non-performing assets decreased 21% to $73.2 million at June 30, 2012, compared to $93.1 million three months earlier and decreased 61% when compared to $188.4 million a year ago.

Income Statement Review

“The improvement in our net interest margin reflects continuing reductions in our funding costs, particularly in our deposit costs, and a significant reduction in the adverse effect of non-performing assets, as well as collection of some previously unrecognized interest income,” said Grescovich. Banner’s net interest margin was 4.26% in the second quarter of 2012, compared to 4.11% in the preceding quarter and 4.09% in the second quarter a year ago. In the first six months of the year, the net interest margin was 4.19% compared to 4.01% in the first six months of 2011.

Deposit costs decreased by four basis points in the second quarter compared to the preceding quarter and 32 basis points compared to the second quarter a year earlier. Total funding costs for the second quarter of 2012 decreased 11 basis points compared to the previous quarter and 37 basis points from the second quarter a year ago. Asset yields increased four basis points compared to the prior quarter and decreased 19 basis points from the second quarter a year ago. Loan yields increased four basis points compared to the preceding quarter and decreased 16 basis points from the second quarter a year ago. Nonaccrual loans reduced the margin by approximately eight basis points in the second quarter of 2012 compared to approximately 13 basis points in the preceding quarter and approximately 23 basis points in the second quarter of 2011. The collection of previously unrecognized interest on certain nonaccrual loans added five basis points to the margin in the current quarter ended June 30, 2012.

“The continued growth in core deposits and the reduced drag from non-performing assets over the past year have led to a solid increase in our revenues from core operations* compared to the second quarter a year ago,” said Grescovich. Second quarter net interest income, before the provision for loan losses, was $42.3 million, compared to $41.1 million in the preceding quarter and $41.2 million in the second quarter a year ago. In the first six months of 2012, net interest income, before the provision for loan losses, was $83.4 million compared to $81.3 million in the first six months of 2011. Revenues from core operations* were $52.3 million in the second quarter compared to $50.4 million in the first quarter of 2012 and $48.5 million in the second quarter a year ago. Year-to-date revenues from core operations* increased 7% to $102.7 million compared to $95.6 million in the same period a year ago.

“The decision to reverse the deferred tax asset valuation allowance during the second quarter reflects Banner’s return to profitability and our expectation of sustainable profitability in future periods,” said Grescovich. “This expectation also led to the significant adjustment of the fair value estimate for the junior subordinated debentures issued by the Company. The substantial changes to both of these significant accounting estimates are directly linked to the improved performance and profitability of the Company. We expect to recover the remaining $7.0 million balance of the deferred tax asset valuation allowance as an offset to our provision for income taxes in the third and fourth quarters of 2012.”

Banner’s second quarter 2012 results included a net loss of $19.1 million for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value. The net fair value adjustments largely resulted from a $21.2 million increase in the estimated value of the junior subordinated debentures issued by the Company, which was partially offset by

BANR - Second Quarter 2012 Results

July 25, 2012

Page 3

increases in the estimated value of similar trust preferred securities owned by the Company. In the preceding quarter, Banner recorded a net gain of $1.7 million for fair value adjustments and in the second quarter of 2011 Banner recorded a net gain of $1.9 million for fair value adjustments. Banner’s year-to-date results included a net loss of $17.4 million for fair value adjustments compared to a net gain of $2.2 million for the same period a year ago.

Total other operating income (loss), which includes the changes in the valuation of financial instruments, was a loss of $9.1 million in the second quarter of 2012 compared to a net gain of $11.0 million in the preceding quarter and a net gain of $9.3 million in the second quarter a year ago. In the first six months of 2012, total other operating income was a net gain of $1.9 million compared to a net gain of $16.5 million in the first six months of 2011. Other operating income from core operations* (total other operating income, excluding fair value adjustments) for the current quarter was $10.0 million, compared to $9.3 million for the preceding quarter and $7.3 million for the second quarter a year ago, reflecting strong growth in payment processing and mortgage banking revenues.

As a result of continued account growth over recent periods and increased customer activity, deposit fees and other service charges were $6.3 million in the second quarter of 2012, compared to $5.9 million in the preceding quarter and a 10% increase compared to $5.7 million in the second quarter a year ago. Significant homeowner refinance activity contributed to strong revenues from mortgage banking activities, which increased 8% to $2.9 million in the second quarter of 2012, compared to $2.6 million in the immediately preceding quarter. Income from mortgage banking operations was $855,000 in the second quarter of 2011.

“Operating expenses declined for the second quarter compared to the preceding quarter and the second quarter a year ago, largely due to lower costs associated with the real estate owned portfolio, particularly valuation adjustments, and a reduction in our deposit insurance premiums,” said Grescovich. “We believe credit costs, including REO expenses, will continue to decline as we continue to resolve remaining problem assets.”

Total other operating expenses (non-interest expenses) were $35.7 million in the second quarter of 2012, compared to $37.9 million in the preceding quarter and $40.3 million in the second quarter of 2011. In the first six months of 2012, total other operating expenses were $73.6 million compared to $78.4 million in the first six months of 2011. The decrease was largely a result of decreased costs related to real estate owned and FDIC deposit insurance.

Balance Sheet Review

“Loan balances declined modestly compared to the previous quarter primarily as a result of the impact of refinancing activity on residential mortgage loans and further reductions in commercial construction and land development loans. Aside from seasonal increases in agricultural loans, net loan originations and credit line utilizations have remained modest, and a bit disappointing, as the weak economy continues to temper loan demand by both businesses and consumers. We expect a continued challenging economic environment going forward as businesses and consumers maintain a cautious approach to spending and borrowing,” said Grescovich.

Net loans were $3.13 billion at June 30, 2012, compared to $3.15 billion at March 31, 2012 and $3.21 billion a year ago. Commercial and agricultural business loans were $811.8 million at June 30, 2012 compared to $798.5 million at March 31, 2012 and $774.7 million a year ago. Commercial real estate and multifamily real estate loans were $1.22 billion at June 30, 2012, compared to $1.21 billion at March 31, 2012 and $1.24 billion at June 30, 2011.

The combined total of securities at fair value, available for sale and held to maturity, was $596.8 million at June 30, 2012 compared to $541.3 million at March 31, 2012 and $453.2 million at June 30, 2011. The aggregate total of securities and interest-bearing deposits increased to $729.3 million at June 30, 2012 compared to $685.2 million at March 31, 2012 and $621.4 million a year ago. The change in the mix of interest-bearing deposits and securities holdings compared to a year ago reflects a modest extension of the expected duration of this aggregate position 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 and, to a lesser extent, intermediate-term tax-exempt municipal securities.

Deposits totaled $3.43 billion at June 30, 2012, the same as at the end of the preceding quarter. Deposits were $3.47 million at June 30, 2011. Non-interest-bearing accounts increased 4% to $804.6 million at June 30, 2012, compared to $771.8 million at March 31, 2012, and increased 25% compared to $645.8 million at June 30, 2011. Interest-bearing transaction and savings accounts were $1.45 billion at June 30, 2012, compared to $1.46 billion at March 31, 2012 and $1.42 billion a year ago.

“The improvements in our deposit mix are reflective of our super community bank strategy that is reducing our funding cost by remixing our deposits away from high-priced CDs, growing new client relationships, and improving our core funding position. All of this growth is organic growth from our existing branch network,” said Grescovich. Banner’s cost of deposits declined four basis points to 0.48% for the quarter ended June 30, 2012 compared to 0.52% for the quarter ended March 31, 2012, and declined 32 basis points from 0.80% for the quarter ended June 30, 2011.

BANR - Second Quarter 2012 Results

July 25, 2012

Page 4

Assets totaled $4.22 billion at June 30, 2012, compared to $4.16 billion at the end of the preceding quarter and $4.21 billion a year ago. At June 30, 2012, total stockholders’ equity was $587.2 million, including $121.6 million attributable to preferred stock, and common stockholders’ equity was $465.6 million, or $24.80 per share. Banner had 18.8 million shares of common stock outstanding at June 30, 2012, compared to 16.7 million shares of common stock outstanding a year ago. At June 30, 2012, tangible common stockholders’ equity, which excludes other intangible assets and preferred stock, was $460.3 million, or 10.92% of tangible assets, compared to $421.9 million, or 10.15% of tangible assets at March 31, 2012 and $383.7 million, or 9.14% of tangible assets a year ago.

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’s Tier 1 leverage capital to average assets ratio increased to 15.07% and its total capital to risk-weighted assets ratio increased to 19.76% at June 30, 2012.

Conference Call

Banner will host a conference call on Thursday, July 26, 2012, at 8:00 a.m. PDT, to discuss its second quarter results. The conference call can be accessed live by telephone at (480) 629-9645 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 4548321.

About the Company

Banner Corporation is a $4.22 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 Department of Financial Institutions 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; 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; 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, 2011. 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 the remainder of 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 - Second Quarter 2012 Results

July 25, 2012

Page 5

RESULTS OF OPERATIONS				Quarters Ended						Six Months Ended
(in thousands except shares and per share data)				Jun 30, 2012		Mar 31, 2012		Jun 30, 2011		Jun 30, 2012		Jun 30, 2011


INTEREST INCOME:
	Loans receivable		$	44,040	$	43,988	$	46,846	$	88,028	$	93,601
	Mortgage-backed securities			995		927		859		1,922		1,734
	Securities and cash equivalents			2,230		2,283		2,183		4,513		4,216
				47,265		47,198		49,888		94,463		99,551

INTEREST EXPENSE:
	Deposits			4,035		4,448		7,014		8,483		14,826
	Federal Home Loan Bank advances			64		63		64		127		242
	Other borrowings			74		549		568		623		1,147
	Junior subordinated debentures			802		1,012		1,041		1,814		2,079
				4,975		6,072		8,687		11,047		18,294
	Net interest income before provision for loan losses			42,290		41,126		41,201		83,416		81,257

PROVISION FOR LOAN LOSSES				4,000		5,000		8,000		9,000		25,000
	Net interest income			38,290		36,126		33,201		74,416		56,257

OTHER OPERATING INCOME:
	Deposit fees and other service charges			6,283		5,869		5,693		12,152		10,972
	Mortgage banking operations			2,855		2,649		855		5,504		1,817
	Loan servicing fees			343		217		397		560		653
	Miscellaneous			485		551		369		1,036		862
				9,966		9,286		7,314		19,252		14,304
	Gain (loss) on sale of securities			29		- -		- -		29		- -
	Net change in valuation of financial instruments carried at fair value			(19,059	)	1,685		1,939		(17,374	)	2,195
	Total other operating income (loss)			(9,064	)	10,971		9,253		1,907		16,499

OTHER OPERATING EXPENSE:
	Salary and employee benefits			19,390		19,510		18,288		38,900		35,543
	Less capitalized loan origination costs			(2,747	)	(2,250	)	(1,948	)	(4,997	)	(3,668	)
	Occupancy and equipment			5,204		5,477		5,436		10,681		10,830
	Information / computer data services			1,746		1,515		1,521		3,261		3,088
	Payment and card processing services			2,116		1,890		1,939		4,006		3,586
	Professional services			1,224		1,344		1,185		2,568		2,857
	Advertising and marketing			1,650		2,066		1,903		3,716		3,643
	Deposit insurance			816		1,363		1,389		2,179		3,358
	State/municipal business and use taxes			565		568		544		1,133		1,038
	Real estate operations			1,969		2,598		6,568		4,567		11,199
	Amortization of core deposit intangibles			523		552		570		1,075		1,167
	Miscellaneous			3,210		3,280		2,860		6,490		5,758
	Total other operating expense			35,666		37,913		40,255		73,579		78,399
	Income (loss) before provision for (benefit from) income taxes			(6,440	)	9,184		2,199		2,744		(5,643	)

PROVISION FOR (BENEFIT FROM ) INCOME TAXES				(31,830	)	- -		- -		(31,830	)	- -
NET INCOME (LOSS)				25,390		9,184		2,199		34,574		(5,643	)

PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION:
	Preferred stock dividend			1,550		1,550		1,550		3,100		3,100
	Preferred stock discount accretion			454		454		425		908		851
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS			$	23,386	$	7,180	$	224	$	30,566	$	(9,594	)

Earnings (loss) per share available to common shareholder
		Basic	$	1.27	$	0.40	$	0.01	$	1.69	$	(0.58	)
		Diluted	$	1.27	$	0.40	$	0.01	$	1.69	$	(0.58	)

Cumulative dividends declared per common share			$	0.01	$	0.01	$	0.01	$	0.02	$	0.08

Weighted average common shares outstanding
		Basic		18,404,680		17,761,667		16,535,082		18,051,636		16,404,079
		Diluted		18,444,276		17,790,402		16,535,082		18,085,801		16,404,079

Common shares issued in connection with exercise of stock options or DRIP				777,051		474,296		227,534		1,251,347		506,474

BANR - Second Quarter 2012 Results

July 25, 2012

Page 6

FINANCIAL CONDITION
(in thousands except shares and per share data)		Jun 30, 2012			Mar 31, 2012			Jun 30, 2011			Dec 31, 2011


ASSETS
Cash and due from banks		$	56,640		$	55,723		$	48,246		$	62,678
Federal funds and interest-bearing deposits			132,536			143,885			168,198			69,758
Securities - at fair value			77,368			77,706			89,374			80,727
Securities - available for sale			436,130			386,716			287,255			465,795
Securities - held to maturity			83,312			76,853			76,596			75,438
Federal Home Loan Bank stock			37,371			37,371			37,371			37,371

Loans receivable:
	Held for sale		6,752			4,623			1,907			3,007
	Held for portfolio		3,205,505			3,225,039			3,304,760			3,293,331
	Allowance for loan losses		(80,221	)		(81,544	)		(92,000	)		(82,912	)

			3,132,036			3,148,118			3,214,667			3,213,426

Accrued interest receivable			14,656			16,047			15,907			15,570
Real estate owned held for sale, net			25,816			27,723			71,205			42,965
Property and equipment, net			90,228			90,106			93,532			91,435
Other intangibles, net			5,252			5,777			7,442			6,331
Bank-owned life insurance			59,800			59,056			57,578			58,563
Other assets			70,282			35,683			38,696			37,255
		$	4,221,427		$	4,160,764		$	4,206,067		$	4,257,312

LIABILITIES

Deposits:
	Non-interest-bearing	$	804,562		$	771,812		$	645,778		$	777,563
	Interest-bearing transaction and savings accounts		1,449,890			1,457,030			1,422,290			1,447,594
	Interest-bearing certificates		1,171,297			1,197,328			1,398,332			1,250,497
			3,425,749			3,426,170			3,466,400			3,475,654

Advances from Federal Home Loan Bank at fair value			10,423			10,467			10,572			10,533
Customer repurchase agreements and other borrowings			90,030			91,253			136,285			152,128
Junior subordinated debentures at fair value			70,553			49,368			47,986			49,988

Accrued expenses and other liabilities			23,564			21,136			19,115			23,253
Deferred compensation			13,916			13,580			14,683			13,306
			3,634,235			3,611,974			3,695,041			3,724,862

STOCKHOLDERS' EQUITY

Preferred stock - Series A			121,610			121,156			119,851			120,702
Common stock			554,866			540,068			517,782			531,149
Retained earnings (accumulated deficit)			(89,266	)		(112,465	)		(126,268	)		(119,465	)
Other components of stockholders' equity			(18	)		31			(339	)		64
			587,192			548,790			511,026			532,450
		$	4,221,427		$	4,160,764		$	4,206,067		$	4,257,312

Common Shares Issued:
Shares outstanding at end of period			18,804,819			18,027,768			16,668,694			17,553,472
	Less unearned ESOP shares at end of period		34,340			34,340			34,340			34,340
Shares outstanding at end of period excluding unearned ESOP shares			18,770,479			17,993,428			16,634,354			17,519,132

Common stockholders' equity per share (1)		$	24.80		$	23.77		$	23.52		$	23.50
Common stockholders' tangible equity per share (1) (2)		$	24.52		$	23.45		$	23.07		$	23.14

Common stockholders' tangible equity to tangible assets (2)			10.92	%		10.15	%		9.14	%		9.54	%
Consolidated Tier 1 leverage capital ratio			15.07	%		14.00	%		12.90	%		13.44	%

(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 - Second Quarter 2012 Results

July 25, 2012

Page 7

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
	Jun 30, 2012			Mar 31, 2012			Jun 30, 2011			Dec 31, 2011
LOANS (including loans held for sale):
Commercial real estate
Owner occupied	$	477,621		$	468,318		$	507,751		$	469,806
Investment properties		613,965			612,617			582,569			621,622
Multifamily real estate		130,319			132,306			147,951			139,710
Commercial construction		23,808			40,276			35,790			42,391
Multifamily construction		18,132			20,654			20,552			19,436
One- to four-family construction		157,301			148,717			140,669			144,177
Land and land development
Residential		83,185			89,329			128,920			97,491
Commercial		11,451			12,044			29,347			15,197
Commercial business		600,046			609,497			566,243			601,440
Agricultural business including secured by farmland		211,705			188,955			208,485			218,171
One- to four-family real estate		607,489			619,511			658,216			642,501
Consumer		103,504			106,978			97,396			103,347
Consumer secured by one- to four-family real estate		173,731			180,460			182,778			181,049

Total loans outstanding	$	3,212,257		$	3,229,662		$	3,306,667		$	3,296,338

Restructured loans performing under their restructured terms	$	58,010		$	53,391		$	55,652		$	54,533

Loans 30 - 89 days past due and on accrual	$	5,504		$	14,336		$	11,560		$	9,962

Total delinquent loans (including loans on non-accrual)	$	52,866		$	79,249		$	126,805		$	85,274

Total delinquent loans / Total loans outstanding		1.65	%		2.45	%		3.83	%		2.59	%

GEOGRAPHIC CONCENTRATION OF LOANS AT
June 30, 2012	Washington			Oregon			Idaho			Other			Total

Commercial real estate
Owner occupied	$	367,377		$	50,164		$	57,022		$	3,058		$	477,621
Investment properties		469,363			94,893			42,657			7,052			613,965
Multifamily real estate		110,342			12,889			6,738			350			130,319
Commercial construction		15,767			5,415			2,626			- -			23,808
Multifamily construction		16,930			1,202			- -			- -			18,132
One- to four-family construction		86,186			69,101			2,014			- -			157,301
Land and land development
Residential		40,903			40,184			2,098			- -			83,185
Commercial		8,770			885			1,796			- -			11,451
Commercial business		383,040			75,556			60,592			80,858			600,046
Agricultural business including secured by farmland		110,608			38,650			62,447			- -			211,705
One- to four-family real estate		371,458			208,490			25,360			2,181			607,489
Consumer		69,701			28,566			5,236			1			103,504
Consumer secured by one- to four-family real estate		117,685			43,867			11,645			534			173,731
Total loans outstanding	$	2,168,130		$	669,862		$	280,231		$	94,034		$	3,212,257

Percent of total loans		67.5	%		20.9	%		8.7	%		2.9	%		100.0	%

DETAIL OF LAND AND LAND DEVELOPMENT LOANS AT
June 30, 2012	Washington			Oregon			Idaho			Other			Total

Residential
Acquisition & development	$	7,071		$	15,975		$	1,738		$	- -		$	24,784
Improved lots		21,980			21,542			279			- -			43,801
Unimproved land		11,852			2,667			81			- -			14,600
Total residential land and development	$	40,903		$	40,184		$	2,098		$	- -		$	83,185
Commercial & industrial
Acquisition & development	$	1,464		$	- -		$	481		$	- -		$	1,945
Improved land		3,269			- -			570			- -			3,839
Unimproved land		4,037			885			745			- -			5,667
Total commercial land and development	$	8,770		$	885		$	1,796		$	- -		$	11,451

BANR - Second Quarter 2012 Results

July 25, 2012

Page 8

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

				Quarters Ended						Six Months Ended
CHANGE IN THE				Jun 30, 2012		Mar 31, 2012		Jun 30, 2011		Jun 30, 2012		Jun 30, 2011
ALLOWANCE FOR LOAN LOSSES

Balance, beginning of period			$	81,544	$	82,912	$	97,632	$	82,912	$	97,401

Provision				4,000		5,000		8,000		9,000		25,000

Recoveries of loans previously charged off:
		Commercial real estate		18		614		15		632		15
		Multifamily real estate		- -		- -		- -		- -		- -
		Construction and land		1,050		370		716		1,420		751
		One- to four-family real estate		374		5		29		379		81
		Commercial business		639		236		76		875		157
		Agricultural business, including secured by farmland		15		- -		5		15		5
		Consumer		195		136		84		331		162
				2,291		1,361		925		3,652		1,171
Loans charged off:
		Commercial real estate		(1,259)		(1,323)		(1,871)		(2,582)		(2,860)
		Multifamily real estate		- -		- -		(244)		- -		(671)
		Construction and land		(1,703)		(2,924)		(6,077)		(4,627)		(16,614)
		One- to four-family real estate		(1,906)		(966)		(1,894)		(2,872)		(4,103)
		Commercial business		(2,297)		(1,407)		(3,993)		(3,704)		(6,361)
		Agricultural business, including secured by farmland		- -		(275)		(166)		(275)		(289)
		Consumer		(449)		(834)		(312)		(1,283)		(674)
				(7,614)		(7,729)		(14,557)		(15,343)		(31,572)
		Net charge-offs		(5,323)		(6,368)		(13,632)		(11,691)		(30,401)
Balance, end of period			$	80,221	$	81,544	$	92,000	$	80,221	$	92,000

Net charge-offs / Average loans outstanding				0.16%		0.20%		0.41%		0.36%		0.91%


ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES				Jun 30, 2012		Mar 31, 2012		Jun 30, 2011		Dec 31, 2011
Specific or allocated loss allowance
	Commercial real estate		$	16,834	$	17,083	$	13,087	$	16,457
	Multifamily real estate			5,108		3,261		5,404		3,952
	Construction and land			16,974		15,871		25,976		18,184
	One- to four-family real estate			14,213		12,869		8,254		12,299
	Commercial business			12,352		13,123		19,912		15,159
	Agricultural business, including secured by farmland			1,294		1,887		1,409		1,548
	Consumer			1,365		1,274		1,445		1,253
		Total allocated		68,140		65,368		75,487		68,852

	Estimated allowance for undisbursed commitments			639		651		1,001		678
	Unallocated			11,442		15,525		15,512		13,382
		Total allowance for loan losses	$	80,221	$	81,544	$	92,000	$	82,912

Allowance for loan losses / Total loans outstanding				2.50%		2.52%		2.78%		2.52%

Allowance for loan losses / Non-performing loans				169%		126%		80%		110%

BANR - Second Quarter 2012 Results

July 25, 2012

Page 9

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
					Jun 30, 2012		Mar 31, 2012		Jun 30, 2011		Dec 31, 2011

NON-PERFORMING ASSETS

Loans on non-accrual status
	Secured by real estate:
			Commercial	$	7,580	$	10,541	$	22,421	$	9,226
			Multifamily		- -		- -		1,560		362
			Construction and land		8,939		18,601		53,529		27,731
			One- to four-family		16,170		19,384		15,435		17,408
	Commercial business				8,600		10,121		15,264		13,460
	Agricultural business, including secured by farmland				1,010		1,481		1,342		1,896
	Consumer				2,882		2,572		4,400		2,905
					45,181		62,700		113,951		72,988

Loans more than 90 days delinquent, still on accrual
	Secured by real estate:
			Commercial		- -		- -		- -		- -
			Multifamily		- -		- -		- -		- -
			Construction and land		- -		- -		- -		- -
			One- to four-family		2,142		2,129		622		2,147
	Commercial business				- -		- -		1		4
	Agricultural business, including secured by farmland				- -		- -		545		- -
	Consumer				39		84		126		173
					2,181		2,213		1,294		2,324
Total non-performing loans					47,362		64,913		115,245		75,312
Securities on non-accrual					- -		500		1,896		500
Real estate owned (REO) and repossessed assets					25,830		27,731		71,265		43,039
			Total non-performing assets	$	73,192	$	93,144	$	188,406	$	118,851

Total non-performing assets / Total assets					1.73%		2.24%		4.48%		2.79%

DETAIL & GEOGRAPHIC CONCENTRATION OF
	NON-PERFORMING ASSETS AT
			June 30, 2012		Washington		Oregon		Idaho		Total
Secured by real estate:
	Commercial			$	7,445	$	- -	$	135	$	7,580
	Multifamily				- -		- -		- -		- -
	Construction and land
		One- to four-family construction			1,516		2,046		243		3,805
		Residential land acquisition & development			244		1,835		- -		2,079
		Residential land improved lots			115		1,764		- -		1,879
		Residential land unimproved			47		666		80		793
		Commercial land improved			294		- -		- -		294
		Commercial land unimproved			89		- -		- -		89
			Total construction and land		2,305		6,311		323		8,939
	One- to four-family				13,465		3,481		1,366		18,312
Commercial business					8,185		146		269		8,600
Agricultural business, including secured by farmland					875		- -		135		1,010
Consumer					2,338		11		572		2,921
Total non-performing loans					34,613		9,949		2,800		47,362
Securities on non-accrual					- -		- -		- -		- -
Real estate owned (REO) and repossessed assets					12,117		10,384		3,329		25,830
			Total non-performing assets at end of the period	$	46,730	$	20,333	$	6,129	$	73,192

BANR - Second Quarter 2012 Results

July 25, 2012

Page 10

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

			Quarters Ended				Six Months Ended

REAL ESTATE OWNED			Jun 30, 2012		Jun 30, 2011		Jun 30, 2012		Jun 30, 2011

Balance, beginning of period		$	27,723	$	94,945	$	42,965	$	100,872
	Additions from loan foreclosures		6,886		11,918		8,487		26,834
	Additions from capitalized costs		7		1,532		134		3,147
	Dispositions of REO		(7,799	)	(32,437	)	(23,240	)	(51,331	)
	Gain (loss) on sale of REO		566		58		666		(479	)
	Valuation adjustments in the period		(1,567	)	(4,811	)	(3,196	)	(7,838	)
Balance, end of period		$	25,816	$	71,205	$	25,816	$	71,205

			Quarters Ended

REAL ESTATE OWNED- FIVE COMPARATIVE QUARTERS			Jun 30, 2012		March 31, 2012		Dec 31, 2011		Sep 30, 2011		Jun 30, 2011

Balance, beginning of period		$	27,723	$	42,965	$	66,459	$	71,205	$	94,945
	Additions from loan foreclosures		6,886		1,601		7,482		18,881		11,918
	Additions from capitalized costs		7		127		150		1,107		1,532
	Dispositions of REO		(7,799	)	(15,441	)	(28,299	)	(19,440	)	(32,437	)
	Gain (loss) on sale of REO		566		100		(170	)	(725	)	58
	Valuation adjustments in the period		(1,567	)	(1,629	)	(2,657	)	(4,569	)	(4,811	)
Balance, end of period		$	25,816	$	27,723	$	42,965	$	66,459	$	71,205

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

Commercial real estate		$	340	$	301	$	2,089	$	2,730
One- to four-family construction			405		389		- -		794
Land development- commercial			3,225		37		195		3,457
Land development- residential			4,120		6,871		187		11,178
One- to four-family real estate			4,013		2,786		858		7,657
Total		$	12,103	$	10,384	$	3,329	$	25,816

BANR - Second Quarter 2012 Results

July 25, 2012

Page 11

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

DEPOSITS & OTHER BORROWINGS
	Jun 30, 2012		Mar 31, 2012			Jun 30, 2011		Dec 31, 2011
DEPOSIT COMPOSITION

Non-interest-bearing	$	804,562	$	771,812		$	645,778	$	777,563
Interest-bearing checking		379,742		368,810			356,321		362,542
Regular savings accounts		664,736		673,704			631,688		669,596
Money market accounts		405,412		414,516			434,281		415,456
Interest-bearing transaction & savings accounts		1,449,890		1,457,030			1,422,290		1,447,594
Interest-bearing certificates		1,171,297		1,197,328			1,398,332		1,250,497
Total deposits	$	3,425,749	$	3,426,170		$	3,466,400	$	3,475,654


INCLUDED IN TOTAL DEPOSITS

Public transaction accounts	$	73,507	$	68,590		$	72,181	$	72,064
Public interest-bearing certificates		62,743		69,856			69,219		67,112
Total public deposits	$	136,250	$	138,446		$	141,400	$	139,176


Total brokered deposits	$	23,521	$	30,978		$	73,161	$	49,194



OTHER BORROWINGS
Customer repurchase agreements / "Sweep accounts"	$	90,030	$	91,253		$	85,822	$	102,131
Temporary liquidity guarantee notes		- -		- -			49,993		49,997
Other		- -		- -			470		- -
Total other borrowings	$	90,030	$	91,253		$	136,285		152,128



GEOGRAPHIC CONCENTRATION OF DEPOSITS AT
June 30, 2012	Washington		Oregon			Idaho		Total

	$	2,600,221	$	600,748		$	224,780	$	3,425,749




						Minimum for Capital Adequacy
REGULATORY CAPITAL RATIOS AT		Actual				or "Well Capitalized"
June 30, 2012	Amount		Ratio			Amount		Ratio

Banner Corporation-consolidated
Total capital to risk-weighted assets	$	665,551		19.76	%	$	269,458		8.00	%
Tier 1 capital to risk-weighted assets		622,978		18.50	%		134,729		4.00	%
Tier 1 leverage capital to average assets		622,978		15.07	%		165,339		4.00	%

Banner Bank
Total capital to risk-weighted assets		542,314		16.97	%		255,652		10.00	%
Tier 1 capital to risk-weighted assets		501,906		15.71	%		127,826		6.00	%
Tier 1 leverage capital to average assets		501,906		12.84	%		156,349		5.00	%

Islanders Bank
Total capital to risk-weighted assets		31,364		16.79	%		14,944		10.00	%
Tier 1 capital to risk-weighted assets		29,023		15.54	%		7,472		6.00	%
Tier 1 leverage capital to average assets		29,023		12.70	%		9,143		5.00	%

BANR - Second Quarter 2012 Results

July 25, 2012

Page 12

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
		Quarters Ended									Six Months Ended

OPERATING PERFORMANCE		Jun 30, 2012			Mar 31, 2012			Jun 30, 2011			Jun 30, 2012			Jun 30, 2011


Average loans		$	3,232,204		$	3,250,767		$	3,333,102		$	3,241,485		$	3,341,487
Average securities			636,097			660,638			511,273			648,368			488,233
Average interest earning cash			122,846			111,536			196,211			117,191			252,094
Average non-interest-earning assets			174,566			185,035			215,494			179,613			224,414
	Total average assets	$	4,165,713		$	4,207,976		$	4,256,080		$	4,186,657		$	4,306,228

Average deposits		$	3,410,249		$	3,421,448		$	3,504,884		$	3,415,661		$	3,532,796
Average borrowings			230,517			280,439			283,178			255,478			302,612
Average non-interest-bearing other liabilities			(37,694	)		(36,699	)		(41,253	)		(37,196	)		(40,508	)
	Total average liabilities		3,603,072			3,665,188			3,746,809			3,633,943			3,794,900

Total average stockholders' equity			562,641			542,788			509,271			552,714			511,328
	Total average liabilities and equity	$	4,165,713		$	4,207,976		$	4,256,080		$	4,186,657		$	4,306,228

Interest rate yield on loans			5.48	%		5.44	%		5.64	%		5.46	%		5.65	%
Interest rate yield on securities			1.99	%		1.92	%		2.31	%		1.95	%		2.34	%
Interest rate yield on cash			0.25	%		0.23	%		0.20	%		0.24	%		0.22	%
	Interest rate yield on interest-earning assets		4.76	%		4.72	%		4.95	%		4.74	%		4.92	%

Interest rate expense on deposits			0.48	%		0.52	%		0.80	%		0.50	%		0.85	%
Interest rate expense on borrowings			1.64	%		2.33	%		2.37	%		2.02	%		2.31	%
	Interest rate expense on interest-bearing liabilities		0.55	%		0.66	%		0.92	%		0.61	%		0.96	%

Interest rate spread			4.21	%		4.06	%		4.03	%		4.13	%		3.96	%

Net interest margin			4.26	%		4.11	%		4.09	%		4.19	%		4.01	%

Other operating income / Average assets			(0.88	%)		1.05	%		0.87	%		0.09	%		0.77	%

Other operating income EXCLUDING fair value
	adjustments / Average assets (1)		0.97	%		0.89	%		0.69	%		0.93	%		0.67	%

Other operating expense / Average assets			3.44	%		3.62	%		3.79	%		3.53	%		3.67	%

Efficiency ratio (other operating expense / revenue)			107.34	%		72.77	%		79.79	%		86.24	%		80.20	%

Efficiency ratio EXCLUDING fair value adjustments / Average assets (1)			68.21	%		75.21	%		82.97	%		71.65	%		82.04	%

Return (Loss) on average assets			2.45	%		0.88	%		0.21	%		1.66	%		(0.26	%)

Return (Loss) on average equity			18.15	%		6.81	%		1.73	%		12.58	%		(2.23	%)

Return (Loss) on average tangible equity (2)			18.33	%		6.88	%		1.76	%		12.71	%		(2.26	%)

Average equity / Average assets			13.51	%		12.90	%		11.97	%		13.20	%		11.87	%

(1)	- Earnings information excluding fair value 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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