Walla Walla, WA - April 25, 2006 - Banner Corporation (Nasdaq: BANR), the parent company of Banner Bank, today reported improved net interest margin contributed to record first quarter earnings. In the first quarter of 2006, net income increased 44% to $6.8 million, or $0.56 per diluted share, compared to $4.7 million, or $0.39 per diluted share, in the first quarter a year ago.

"Dramatic improvement in our first quarter net interest margin was a result of our balance sheet restructuring completed at the end of 2005, changes in the mix of our loan portfolio and our growing ability to attract and retain core deposits. As planned, the restructuring transactions eliminated positions that had become a significant drag on earnings and now allow us to place less reliance on wholesale assets and liabilities," said D. Michael Jones, President and CEO. "In addition, the substantial growth in loans and deposits has strengthened our net interest income and contributed to the margin expansion. We have invested significant time and resources in expanding our branch network, adding twelve branches and relocating four others in the past 15 months. The 26% increase in non-interest bearing deposits this year over last is a direct result of franchise growth and our ongoing emphasis on building our deposit base system-wide."

In the fourth quarter of 2005, Banner sold $207 million of securities and prepaid $142 million of high-cost, fixed-term Federal Home Loan Bank (FHLB) borrowings. The remainder of the proceeds were applied to repay other relatively high-cost short-term borrowings from the FHLB.

First Quarter 2006 Highlights (compared to first quarter 2005)

• Net income increased 44% to $6.8 million.
• Net interest margin improved 53 basis points to 4.24%.
• Revenues advanced 18% to $34.4 million.
• Net interest income before provision for loan losses grew 19% to $29.9 million.
• Loans increased 19% to $2.54 billion.
• Non-interest bearing deposits increased 26% to $325.3 million and total deposits increased 21% to $2.42 billion.
• Credit quality continues to improve with non-performing assets down 54% and representing 0.28% of total assets.

Banner's net interest margin improved 31 basis points to 4.24% for the first quarter of 2006 from 3.93% in the previous quarter, and gained 53 basis points from 3.71% in the first quarter a year ago. "In addition to the benefits from the restructuring transactions, net interest margin also expanded as a result of our success in attracting higher earning loans and lower cost deposits. Further, the net interest margin has benefited modestly as rising interest rates have had a more immediate impact on floating rate loan yields than on the rates paid on most deposit products. We expect our net interest margin to further expand as we continue to replace high-cost funding with non-interest bearing and other transaction deposits," said Jones. Funding costs increased 22 basis points compared to the previous quarter and 72 basis points from the first quarter a year earlier. Asset yields, however, were also higher, increasing by 53 basis points from the prior linked quarter and 125 basis points from a year ago.

Revenues (net interest income before the provision for loan losses plus other operating income) grew 18% to $34.4 million in the first quarter compared to $29.2 million in the first quarter of 2005. For the first quarter of 2006, net interest income before the provision for loan losses increased 19% to $29.9 million compared to $25.2 million in the same quarter a year ago. Net interest income included approximately $400,000 of non-accrued delinquent interest collected in the first quarter. "Over the past few years, we have adopted a conservative approach to loan classification and accounting for problem loans. As the economic recovery in the Pacific Northwest accelerates, we believe there will be additional opportunities to recognize the collection of past-due interest and generate recoveries from previously charged-off loans in future periods," said Jones.

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BANR-First Quarter 2006 Results
April 25, 2006
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Total other operating income for the first quarter increased 13% to $4.5 million compared to $4.0 million in the same quarter last year. Income from deposit fees and other service charges increased 25% to $2.5 million in the first quarter, reflecting the strong growth in deposit accounts and balances. Income from mortgage banking operations increased slightly from the fourth quarter of 2005 and decreased only 6% from the first quarter of 2005, despite the effect of rising interest rates on demand for residential loans, particularly in the refinance sector.

Other operating expenses were $23.2 million in the first quarter of 2006, up 9% from $21.3 million in the first quarter a year ago, and down 3% from operating expenses (excluding FHLB prepayment fees) in the fourth quarter of 2005. The ratio of other operating expense (expense ratio) to average assets was 3.09% in the first quarter of 2006, compared to 2.95% for the first quarter last year and 3.05% (excluding FHLB prepayment fees) for the fourth quarter of 2005.

"In the first quarter we opened a branch office in Meridian, Idaho and made progress on the construction of two additional southwestern Idaho branch offices, which we expect to open later this year. We continue to explore further branch expansion opportunities in our major markets: the Puget Sound area, the Portland, Oregon area and southwestern Idaho. Although expenses were down on a linked quarter basis, we expect to see higher operating expenses in future periods as a result of our expansion. However, over time these new branches should further improve our profitability by providing low-cost deposits and proportionately reducing our borrowings from the Federal Home Loan Bank, which were cut by more than half in the last year," said Jones.

Banner's return on equity (ROE) was 12.07% for the first quarter compared to 8.69% a year ago. The efficiency ratio was 67.42% in the quarter ended March 31, 2006, versus 72.89% a year earlier.

Net loans increased $407 million, or 19%, to $2.54 billion at March 31, 2006, compared to $2.13 billion a year earlier. "Loan production for the quarter was strong and the major components of the loan portfolio showed significant growth over the prior year's balances," said Jones. "Compared to a year ago, we increased commercial and multifamily real estate loans 6%, construction and land loans 43%, commercial and agricultural business loans 9% and consumer loans 21%. In addition, our credit quality continues to improve."

Total deposits increased $422 million, or 21%, to $2.42 billion at March 31, 2006, compared to $1.99 billion at the end of March 2005. Non-interest bearing deposits increased 26% at quarter-end compared to a year earlier. Total transaction and savings accounts increased 20% during the twelve months ending March 31, 2006, while certificates of deposit increased 22%. "We have seen a shift towards certificates of deposits as interest rates have risen to a level customers find attractive; however, we continue to have significant success in adding transaction and savings accounts as well," noted Jones. "As we continue to expand our delivery system, we are adding customers and account totals, as well as deposit balances, which should contribute to continued earnings growth in future periods."

Largely as a result of the restructuring transactions in the fourth quarter of 2005, but also reflecting maturities and principal prepayments, the securities portfolio declined by 49% to $299 million at March 31, 2006, from $591 million a year earlier. Similarly, FHLB borrowings declined by 55% to $269 million at March 31, 2006, from $595 million a year earlier and were nearly unchanged from the level at December 31, 2005.

Assets were $3.12 billion at March 31, 2006, a 5% increase from $2.97 billion a year earlier. Book value per share improved to $19.05 at March 31, 2006, from $18.55 a year earlier, and tangible book value per share was $15.99 at quarter-end, compared to $15.40 a year earlier.

Non-performing assets decreased 54% to $8.6 million, or 0.28% of total assets, at March 31, 2006, compared to $18.9 million, or 0.64% of total assets, a year ago, reflecting significant progress in reducing credit risk. Non-performing assets decreased 21% compared to the previous quarter. "We successfully resolved one of our largest problem credit issues during the quarter, which resulted in a substantial decrease in non-performing loans and the collection of more than $550,000 in delinquent interest and attorneys' fees," said Jones. The provision for loan losses for the first quarter was $1.2 million, relatively unchanged from the provision in the first quarter of 2005. Net loan charge-offs in the first quarter of 2006 were $204,000, or 0.01% of average loans outstanding, compared to $1.1 million, or 0.05% of average loans outstanding in the first quarter of 2005. At March 31, 2006, the allowance for loan losses totaled $31.9 million, representing 1.24% of total loans outstanding.

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BANR-First Quarter 2006 Results
April 25, 2006
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BANR-First Quarter 2006 Results
April 25, 2006
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