Banner Corporation Reports Net Income of $15.6 Million, or $0.79 Per Diluted Share, in Third Quarter; Net Income Highlighted by

  Banner Corporation Reports Net Income of $15.6 Million, or $0.79 Per Diluted
  Share, in Third Quarter; Net Income Highlighted by Strong Revenue Generation
  and Improved Credit Quality

Business Wire

WALLA WALLA, Wash. -- October 24, 2012

Banner Corporation (NASDAQ: BANR), the parent company of Banner Bank and
Islanders Bank, today reported net income of $15.6 million in the third
quarter of 2012, compared to $25.4 million in the preceding quarter and $6.0
million in the third quarter a year ago. For the first nine months of 2012,
Banner reported net income of $50.2 million, compared to $387,000 in the same
period a year ago. In the preceding quarter ended June 30, 2012, Banner’s
results included a $31.8 million tax benefit as a result of the reversal of
most 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 highlights for the third quarter included our continued improvement
in asset quality, additional customer account growth and record revenues from
core operations,” said Mark J. Grescovich, President and Chief Executive
Officer. “Similar to the second quarter, Banner’s third quarter 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) increased 8% when compared
to the third quarter a year ago. This marks the twelfth consecutive quarter
that we have realized a year-over-year increase in revenues from core
operations.* Our net interest margin expanded 12 basis points to 4.22% in the
third quarter compared to 4.10% in the third quarter a year ago. Also, our
deposit fees and other service charge income remained strong, increasing by
10% compared to the third quarter a year ago, and our revenues from mortgage
banking operations again increased and were more than two times higher than in
the third quarter of 2011. This progress, which is consistent with our results
for the first half of the year, further demonstrates our strategic plan and
initiatives are effective and are building shareholder value.”

During the third quarter, Banner repurchased approximately 40% of its senior
preferred stock in private transactions at an average price of $959 per share.
As a result, Banner realized gains of $2.1 million on the repurchases, which
was partially offset by accelerated amortization of a portion of the initial
discount recorded at the issuance of the preferred shares. In addition, the
accrual of the quarterly dividend was reduced by the retirement of the
repurchased shares. Including the preferred stock dividend, related accretion
and gains on repurchases, net income available to common shareholders was
$0.79 per diluted share for the third quarter of 2012, compared to net income
available to common shareholders of $1.27 per diluted share in the second
quarter of 2012 and $0.24 per diluted share for the third quarter a year ago.

Third Quarter 2012 Highlights (compared to third quarter 2011 except as noted)

  *Net income was $15.6 million, compared to $6.0 million in the third
    quarter a year ago.
  *Revenues from core operations* increased 8% to $54.3 million.
  *The net interest margin was 4.22%, compared to 4.26% in the preceding
    quarter and 4.10% in the third quarter of 2011.
  *Deposit fees and other service charges increased 10%.
  *Revenues from mortgage banking increased 142%.
  *Non-performing assets decreased to $59.1 million, or 1.38% of total
    assets, at September 30, 2012, a 19% decrease compared to three months
    earlier and a 61% decrease compared to a year earlier.
  *Non-performing loans decreased to $38.7 million at September 30, 2012, an
    18% decrease compared to three months earlier and a 53% decrease compared
    to a year earlier.
  *The ratio of tangible common equity to tangible assets increased to 11.47%
    at September 30, 2012.*
  *Banner repurchased 40% of its senior preferred stock at an average price
    of $959 per share.

*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) and the ratio of tangible
common equity (which excludes other intangible assets and preferred stock) to
tangible assets 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 Banner’s core operations reflected
in the current quarter’s results and facilitates the comparison of our
performance with the performance of our peers. Where applicable, comparable
earnings information using GAAP financial measures is also presented.

Income Statement Review

“The net interest margin expansion compared to a year ago reflects continuing
reductions in our funding costs, particularly deposit costs, and a significant
reduction in the adverse effect of non-performing assets,” said Grescovich.
“Further, similar to the immediately preceding quarter, the yield on loans and
net interest margin in the current quarter were again augmented by the
collection of some previously unrecognized interest on certain nonaccrual
loans.” Banner’s net interest margin was 4.22% in the third quarter of 2012,
compared to 4.26% in the preceding quarter and 4.10% in the third quarter a
year ago. In the first nine months of the year, the net interest margin was
4.20% compared to 4.04% in the first nine months of 2011.

Deposit costs decreased by seven basis points in the third quarter compared to
the preceding quarter and 29 basis points compared to the third quarter a year
earlier. Total funding costs for the third quarter of 2012 decreased seven
basis points compared to the previous quarter and 34 basis points from the
third quarter a year ago. Asset yields decreased 10 basis points compared to
the prior quarter and decreased 21 basis points from the third quarter a year
ago. Loan yields decreased three basis points compared to the preceding
quarter and decreased eight basis points from the third quarter a year ago.
Nonaccrual loans reduced the margin by approximately five basis points in the
third quarter of 2012 compared to approximately eight basis points in the
preceding quarter and approximately 21 basis points in the third quarter of
2011. The collection of previously unrecognized interest on certain nonaccrual
loans added nine basis points to the margin in the current quarter ended
September 30, 2012.

“We have produced a solid increase in our revenues from core operations*
compared to the third quarter a year ago by growing core deposits and reducing
the drag on earnings from non-performing assets,” said Grescovich. “We also
had another quarter of very strong results from our mortgage banking
operations.” Third quarter net interest income, before the provision for loan
losses, was $42.7 million, compared to $42.3 million in the preceding quarter
and $41.7 million in the third quarter a year ago. In the first nine months of
2012, net interest income, before the provision for loan losses, was $126.1
million compared to $123.0 million in the first nine months of 2011. Revenues
from core operations* were $54.3 million in the third quarter compared to
$52.3 million in the second quarter of 2012 and $50.1 million in the third
quarter a year ago. Year-to-date revenues from core operations* also increased
8% to $157.0 million compared to $145.7 million in the same period a year ago.

During the second quarter of 2012, Banner reversed most of its deferred tax
asset valuation allowance, reflecting Banner’s return to profitability and its
expectation of sustainable profitability in future periods. 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 were directly linked to the
improved performance and profitability of the Company. In the third quarter of
2012, Banner reversed an additional $4.0 million of the deferred tax valuation
allowance, which substantially reduced the provision for income tax expense
for the quarter, and the remaining $3.0 million balance will be recovered in
the fourth quarter.

Banner’s third quarter 2012 results included a $473,000 net gain for fair
value adjustments as a result of changes in the valuation of financial
instruments carried at fair value, which was largely offset by $409,000 of
OTTI charges related to certain equity securities issued by government
sponsored entities. In the preceding quarter, Banner recorded a net loss of
$19.1 million for fair value adjustments, which 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 increases in the
estimated value of similar trust preferred securities owned by the Company.
Banner’s year-to-date results included net charges of $16.9 million for fair
value adjustments compared to a net gain of $1.2 million for the same period a
year ago. For the nine months ended September 30, 2012, OTTI charges were
$409,000 compared to a recovery of $3.0 million for the nine months ended
September 30, 2011. The third quarter and year-to-date results included an
additional $2.5 million increase in the estimated fair value of the junior
subordinated debentures, which primarily reflects management’s judgment with
respect to further tightening in general market credit spreads. The impact of
this adjustment was partially offset by similar adjustments to the fair value
estimates for certain investment securities also carried at fair value.

Total other operating income (loss), which includes the changes in the
valuation of financial instruments, was a net gain of $11.7 million in the
third quarter of 2012 compared to a net loss of $9.1 million in the second
quarter of 2012 and a net gain of $10.3 million in the third quarter a year
ago. In the first nine months of 2012, total other operating income was a net
gain of $13.6 million compared to a net gain of $26.8 million in the first
nine months of 2011. Other operating income from core operations* (total other
operating income, excluding fair value and OTTI adjustments) for the current
quarter was $11.6 million, compared to $10.0 million for the preceding quarter
and $8.4 million for the third quarter a year ago, reflecting strong growth in
deposit fees and other service charges 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 $6.7 million in
the third quarter of 2012, compared to $6.3 million in the preceding quarter
and a 10% increase compared to $6.1 million in the third quarter a year ago.
Significant homeowner refinance activity contributed to strong revenues from
mortgage banking activities, which increased 19% to $3.4 million in the third
quarter of 2012, compared to $2.9 million in the immediately preceding
quarter. Income from mortgage banking operations was $1.4 million in the third
quarter a year ago.

“Operating expenses continued to decline in the third quarter compared to the
preceding quarter and the third quarter a year ago, largely due to lower costs
associated with loan collections and the real estate owned portfolio, with the
current quarter reflecting a net gain on the sale of real estate owned, and a
reduction in our deposit insurance premiums,” said Grescovich. “While we do
not anticipate regularly recurring net gains on the disposition of real estate
owned, we do believe credit costs will continue to decline as we resolve
remaining problem assets.”

Total other operating expenses (non-interest expenses) were $33.4 million in
the third quarter of 2012, compared to $35.7 million in the preceding quarter
and $41.0 million in the third quarter of 2011. In the first nine months of
2012, total other operating expenses were $106.9 million compared to $119.4
million in the first nine months of 2011. The decrease was largely a result of
decreased costs related to real estate owned and FDIC deposit insurance.

Credit Quality

“We made very good progress in continuing to reduce problem assets during the
third quarter and our credit costs continued to decline and were significantly
below those of a year ago. As a result of this progress, all of our key credit
quality metrics have further improved and Banner’s reserve levels remain
substantial,” said Grescovich.

Banner recorded a $3.0 million provision for loan losses in the third quarter
of 2012, compared to a $4.0 million provision in the preceding quarter and a
$5.0 million provision in the third quarter a year ago. The allowance for loan
losses at September 30, 2012 totaled $78.8 million, representing 2.45% of
total loans outstanding and 204% of non-performing loans. Non-performing loans
decreased 18% to $38.7 million at September 30, 2012, compared to $47.4
million three months earlier, and decreased 53% when compared to $83.1 million
a year earlier.

Banner’s real estate owned and repossessed assets decreased 21% to $20.4
million at September 30, 2012, compared to $25.8 million three months earlier,
and decreased 69% when compared to $66.5 million a year ago. Net charge-offs
in the third quarter of 2012 totaled $4.4 million, or 0.14% of average loans
outstanding, compared to $5.3 million, or 0.16% of average loans outstanding
for the second quarter of 2012 and $10.9 million, or 0.33% of average loans
outstanding for the third quarter a year ago.

At September 30, 2012, Banner’s non-performing assets were 1.38% of total
assets, compared to 1.73% at June 30, 2012 and 3.53% at September 30, 2011.
Non-performing assets decreased 19% to $59.1 million at September 30, 2012,
compared to $73.2 million three months earlier, and decreased 61% when
compared to $151.6 million a year ago.

Balance Sheet Review

“Despite the continuing adverse impact of refinancing activity on residential
mortgage loan balances, total loans outstanding were essentially unchanged for
the quarter. Aside from seasonal increases in construction and agricultural
loans, net loan originations and credit line utilizations have remained
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. “However, we believe the
well-focused efforts of our bankers will allow us continued opportunity to
capture increased market share.”

Net loans were $3.13 billion at September 30, 2012, compared to $3.14 billion
a year ago, and unchanged compared to three months earlier. Commercial and
agricultural business loans were $822.7 million at September 30, 2012 compared
to $811.8 million at June 30, 2012 and $792.4 million at September 30, 2011.
Commercial real estate and multifamily real estate loans were $1.22 billion at
both September 30, 2012 and June 30, 2012 compared to $1.20 billion at
September 30, 2011.

The aggregate total of securities and interest-bearing deposits increased to
$764.4 million at September 30, 2012 compared to $729.3 million at June 30,
2012, but was slightly less than $783.2 million at September 30, 2011. 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. The average duration of Banner’s securities
portfolio at September 30, 2012 was 4.4 years.

Deposits totaled $3.49 billion at September 30, 2012, compared to $3.43
billion at June 30, 2012 and $3.54 million at September 30, 2011.
Non-interest-bearing account balances increased 14% to $919.0 million at
September30,2012, compared to $804.6 million at June 30, 2012, and increased
20% compared to $763.0 million at September 30, 2011. Interest-bearing
transaction and savings accounts were $1.48 billion at September 30, 2012,
compared to $1.45 billion at June 30, 2012 and $1.46 billion a year ago.

“The improvements in our deposit mix are reflective of further successful
execution of our super community bank strategy that is lowering our funding
costs by reducing our reliance on 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 seven basis points to 0.41% for the quarter ended
September 30, 2012 compared to 0.48% for the quarter ended June 30, 2012, and
declined 29 basis points from 0.70% for the quarter ended September 30, 2011.

Total assets were $4.27 billion at September 30, 2012, compared to $4.22
billion at the end of the preceding quarter and $4.29 billion a year ago. At
September 30, 2012, total stockholders’ equity was $566.1 million, including
$72.2 million attributable to preferred stock, and common stockholders’ equity
was $493.9 million, or $25.43 per share. Banner had 19.5 million shares of
common stock outstanding at September 30, 2012, compared to 17.0 million
shares of common stock outstanding a year ago. At September 30, 2012, tangible
common stockholders’ equity, which excludes other intangible assets and
preferred stock, was $489.1 million, or 11.47% of tangible assets, compared to
$460.3 million, or 10.92% of tangible assets, at June 30, 2012 and $394.3
million, or 9.20% 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 was 14.29% and its total
capital to risk-weighted assets ratio was 19.01% at September 30, 2012.

Conference Call

Banner will host a conference call on Thursday, October 25, 2012, at 8:00 a.m.
PDT, to discuss its third quarter results. The conference call can be accessed
live by telephone at (480) 629-9692 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 4565884.

About the Company

Banner Corporation is a $4.27 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 and require us to materially increase our reserves; 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, or impose additional requirements and restrictions on us, any of
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 including changes related to Basel III; the impact of
the Dodd-Frank Wall Street Reform and Consumer Protection Act and the
implementing regulations; 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.

RESULTS OF OPERATIONS       Quarters Ended                                         Nine Months Ended
(in thousands except
shares and per share           Sep 30, 2012     Jun 30, 2012     Sep 30, 2011       Sep 30, 2012   Sep 30, 2011
data)
 
                                                                                                           
INTEREST INCOME:
  Loans receivable           $ 43,953           $ 44,040           $ 45,641           $ 131,981          $ 139,242
  Mortgage-backed              1,089              995                799                3,011              2,533
  securities
  Securities and cash          2,132             2,230             3,121             6,645             7,337      
  equivalents
                               47,174             47,265             49,561             141,637            149,112
                                                                                                           
INTEREST EXPENSE:
  Deposits                     3,536              4,035              6,169              12,019             20,995
  Federal Home Loan            64                 64                 64                 191                306
  Bank advances
  Other borrowings             71                 74                 559                694                1,706
  Junior subordinated          805               802               1,041             2,619             3,120      
  debentures
                               4,476             4,975             7,833             15,523            26,127     
  Net interest income
  before provision for         42,698             42,290             41,728             126,114            122,985
  loan losses
                                                                                                           
PROVISION FOR LOAN             3,000             4,000             5,000             12,000            30,000     
LOSSES
  Net interest income          39,698             38,290             36,728             114,114            92,985
                                                                                                           
OTHER OPERATING
INCOME:
  Deposit fees and
  other service                6,681              6,283              6,096              18,833             17,068
  charges
  Mortgage banking             3,397              2,855              1,401              8,901              3,218
  operations
  Loan servicing fees          377                343                289                937                942
  Miscellaneous                1,146             485               586               2,182             1,448      
                               11,601             9,966              8,372              30,853             22,676
  Gain on sale of              19                 29                 - -                48                 - -
  securities
  Other-than-temporary
  impairment recovery          (409       )       - -                3,000              (409       )       3,000
  (loss)
  Net change in
  valuation of
  financial                    473               (19,059    )       (1,032     )       (16,901    )       1,163      
  instruments carried
  at fair value
                                                                                                           
  Total other
  operating income             11,684             (9,064     )       10,340             13,591             26,839
  (loss)
                                                                                                           
OTHER OPERATING
EXPENSE:
  Salary and employee          19,614             19,390             18,226             58,514             53,769
  benefits
  Less capitalized
  loan origination             (2,655     )       (2,747     )       (1,929     )       (7,652     )       (5,597     )
  costs
  Occupancy and                5,811              5,204              5,352              16,492             16,182
  equipment
  Information /
  computer data                1,807              1,746              1,547              5,068              4,635
  services
  Payment and card             2,335              2,116              2,132              6,341              5,718
  processing services
  Professional                 993                1,224              1,950              3,561              4,807
  services
  Advertising and              1,897              1,650              1,602              5,613              5,245
  marketing
  Deposit insurance            791                816                1,299              2,970              4,657
  State/municipal
  business and use             582                565                553                1,715              1,591
  taxes
  Real estate                  (1,304     )       1,969              6,698              3,263              17,897
  operations
  Amortization of core         508                523                554                1,583              1,721
  deposit intangibles
  Miscellaneous                2,976             3,210             3,054             9,466             8,812      
  Total other                  33,355            35,666            41,038            106,934           119,437    
  operating expense
  Income (loss) before
  provision for                18,027             (6,440     )       6,030              20,771             387
  (benefit from)
  income taxes
                                                                                                                      
PROVISION FOR (BENEFIT         2,407             (31,830    )       - -               (29,423    )       - -        
FROM ) INCOME TAXES
NET INCOME                     15,620            25,390            6,030             50,194            387        
                                                                                                           
PREFERRED STOCK
DIVIDEND AND
ADJUSTMENTS:
  Preferred stock              1,227              1,550              1,550              4,327              4,650
  dividend
  Preferred stock              1,216              454                425                2,124              1,276
  discount accretion
  Gain on repurchase
  and retirement of            (2,070     )       - -               - -               (2,070     )       - -        
  preferred stock
NET INCOME (LOSS)
AVAILABLE TO COMMON          $ 15,247          $ 23,386          $ 4,055           $ 45,813          $ (5,539     )
SHAREHOLDERS
                                                                                                                      
Earnings (loss) per
share available to
common shareholder
          Basic              $ 0.80             $ 1.27             $ 0.24             $ 2.49             $ (0.33      )
          Diluted            $ 0.79             $ 1.27             $ 0.24             $ 2.48             $ (0.33      )
Cumulative dividends
declared per common          $ 0.01             $ 0.01             $ 0.01             $ 0.03             $ 0.09
share
                                                                                                           
Weighted average
common shares
outstanding
          Basic                19,172,296         18,404,680         16,808,589         18,427,916         16,540,398
          Diluted              19,285,373         18,444,276         16,837,324         18,488,577         16,569,133
                                                                                                           
Common shares issued
via restricted stock           650,060            777,051            362,555            1,901,407          866,468
grants, DRIP and stock
purchases (net)
                                                                                                           

FINANCIAL CONDITION                                                           
(in thousands except
shares and per share             Sep 30, 2012       Jun 30, 2012       Sep 30, 2011       Dec 31, 2011
data)
                                                                                          
                                                                                          
ASSETS
Cash and due from banks        $ 60,505           $ 56,640           $ 53,503           $ 62,678
Federal funds and
interest-bearing                 143,251            132,536            234,824            69,758
deposits
Securities - at fair             72,593             77,368             85,419             80,727
value
Securities - available           459,958            436,130            383,670            465,795
for sale
Securities - held to             88,626             83,312             79,289             75,438
maturity
Federal Home Loan Bank           37,038             37,371             37,371             37,371
stock
Loans receivable:
    Held for sale                6,898              6,752              2,003              3,007
    Held for portfolio           3,206,625          3,205,505          3,223,243          3,293,331
    Allowance for loan           (78,783    )       (80,221    )       (86,128    )       (82,912    )
    losses
                                 3,134,740          3,132,036          3,139,118          3,213,426
                                                                                                     
Accrued interest                 16,118             14,656             16,101             15,570
receivable
Real estate owned held           20,356             25,816             66,459             42,965
for sale, net
Property and equipment,          89,202             90,228             92,454             91,435
net
Other intangibles, net           4,740              5,252              6,887              6,331
Bank-owned life                  60,395             59,800             58,058             58,563
insurance
Other assets                     81,142            70,282            38,611            37,255     
                               $ 4,268,664       $ 4,221,427       $ 4,291,764       $ 4,257,312  
                                                                                          
LIABILITIES
Deposits:
    Non-interest-bearing       $ 918,962          $ 804,562          $ 763,008          $ 777,563
    Interest-bearing
    transaction and              1,480,234          1,449,890          1,461,383          1,447,594
    savings accounts
    Interest-bearing             1,087,176         1,171,297         1,313,043         1,250,497  
    certificates
                                 3,486,372          3,425,749          3,537,434          3,475,654
                                                                                          
Advances from Federal
Home Loan Bank at fair           10,367             10,423             10,572             10,533
value
Customer repurchase
agreements and other             82,275             90,030             139,704            152,128
borrowings
Junior subordinated              73,071             70,553             48,770             49,988
debentures at fair value
                                                                                          
Accrued expenses and             36,109             23,564             19,593             23,253
other liabilities
Deferred compensation            14,375            13,916            14,200            13,306     
                                 3,702,569          3,634,235          3,770,273          3,724,862
                                                                                          
STOCKHOLDERS' EQUITY
Preferred stock - Series         72,242             121,610            120,276            120,702
A
Common stock                     567,659            554,866            523,284            531,149
Retained earnings                (74,212    )       (89,266    )       (122,384   )       (119,465   )
(accumulated deficit)
Other components of              406               (18        )       315               64         
stockholders' equity
                                 566,095           587,192           521,491           532,450    
                               $ 4,268,664       $ 4,221,427       $ 4,291,764       $ 4,257,312  
                                                                                          
Common Shares Issued:
Shares outstanding at            19,454,879         18,804,819         17,031,249         17,553,472
end of period
    Less unearned ESOP
    shares at end of             34,340            34,340            34,340            34,340     
    period
                                                                                          
Shares outstanding at
end of period excluding          19,420,539        18,770,479        16,996,909        17,519,132 
unearned ESOP shares
                                                                                          
Common stockholders'           $ 25.43            $ 24.80            $ 23.61            $ 23.50
equity per share (1)
Common stockholders'
tangible equity per            $ 25.19            $ 24.52            $ 23.20            $ 23.14
share (1) (2)
Common stockholders'
tangible equity to               11.47      %       10.92      %       9.20       %       9.54       %
tangible assets (2)
Consolidated Tier 1              14.29      %       15.07      %       13.19      %       13.44      %
leverage capital ratio
                                                                                          
(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.
    - Common stockholders' tangible equity excludes preferred stock, core deposit and other
(2) intangibles. Tangible assets excludes other intangible assets. These ratios represent non-GAAP
    financial measures.
    

ADDITIONAL
FINANCIAL                                                                         
INFORMATION
(dollars in
thousands)
 
                        Sep 30,           Jun 30,           Sep 30,           Dec 31,
                        2012              2012              2011              2011
LOANS
(including
loans held for
sale):
Commercial real
estate
  Owner               $ 477,871         $ 477,621         $ 474,863         $ 469,806
  occupied
  Investment            604,265           613,965           586,652           621,622
  properties
Multifamily             138,716           130,319           134,146           139,710
real estate
Commercial              28,598            23,808            38,124            42,391
construction
Multifamily             14,502            18,132            16,335            19,436
construction
One- to
four-family             163,521           157,301           145,776           144,177
construction
Land and land
development
  Residential           79,932            83,185            96,875            97,491
  Commercial            14,242            11,451            19,173            15,197
Commercial              603,606           600,046           580,876           601,440
business
Agricultural
business
including               219,084           211,705           211,571           218,171
secured by
farmland
One- to
four-family             594,413           607,489           639,909           642,501
real estate
Consumer                103,393           103,504           98,794            103,347
Consumer
secured by one-         171,380          173,731          182,152          181,049   
to four-family
real estate
                                                                                                
    Total loans       $ 3,213,523      $ 3,212,257      $ 3,225,246      $ 3,296,338 
    outstanding
                                                                                                
Restructured
loans
performing            $ 62,438         $ 58,010         $ 51,990         $ 54,533    
under their
restructured
terms
                                                                                                
Loans 30 - 89
days past due         $ 7,739          $ 5,504          $ 7,895          $ 9,962     
and on accrual
                                                                                                
Total
delinquent
loans                 $ 46,450         $ 52,866         $ 91,044         $ 85,274    
(including
loans on
non-accrual)
                                                                                                
Total
delinquent
loans / Total           1.45      %       1.65      %       2.82      %       2.59      %
loans
outstanding
                                                                                                
                                                                                                
GEOGRAPHIC
CONCENTRATION
OF LOANS AT
  September           Washington        Oregon            Idaho             Other             Total
    30, 2012
                                                                                                
Commercial real
estate
  Owner               $ 360,406         $ 53,929          $ 58,799          $ 4,737           $ 477,871
  occupied
  Investment            471,723           81,874            44,187            6,481             604,265
  properties
Multifamily             117,769           13,190            7,436             321               138,716
real estate
Commercial              20,030            4,998             2,159             1,411             28,598
construction
Multifamily             9,498             5,004             - -               - -               14,502
construction
One- to
four-family             88,350            73,375            1,796             - -               163,521
construction
Land and land
development
  Residential           39,181            38,781            1,970             - -               79,932
  Commercial            9,205             3,107             1,930             - -               14,242
Commercial              387,598           75,609            59,461            80,938            603,606
business
Agricultural
business
including               109,099           45,418            64,567            - -               219,084
secured by
farmland
One- to
four-family             365,510           201,898           24,542            2,463             594,413
real estate
Consumer                66,837            31,154            5,402             - -               103,393
Consumer
secured by one-         116,127          43,054           11,668           531              171,380   
to four-family
real estate
                                                                                                
    Total loans       $ 2,161,333      $ 671,391        $ 283,917        $ 96,882         $ 3,213,523 
    outstanding
                                                                                                
    Percent of          67.3      %       20.9      %       8.8       %       3.0       %       100.0     %
    total loans
                                                                                                
                                                                                                
DETAIL OF LAND
AND LAND
DEVELOPMENT
LOANS AT
  September           Washington        Oregon            Idaho             Other             Total
    30, 2012
                                                                                                
Residential
  Acquisition &       $ 6,229           $ 15,820          $ 1,710           $ - -             $ 23,759
  development
  Improved lots         22,727            20,273            260               - -               43,260
  Unimproved            10,225           2,688            - -              - -              12,913    
  land
                                                                                                
    Total
    residential       $ 39,181         $ 38,781         $ 1,970          $ - -            $ 79,932    
    land and
    development
                                                                                                          
Commercial &
industrial
  Acquisition &       $ 1,370           $ - -             $ 484             $ - -             $ 1,854
  development
  Improved land         3,470             138               558               - -               4,166
  Unimproved            4,365            2,969            888              - -              8,222     
  land
                                                                                                
    Total
    commercial        $ 9,205          $ 3,107          $ 1,930          $ - -            $ 14,242    
    land and
    development
                                                                                                

ADDITIONAL
FINANCIAL                                                                
INFORMATION
(dollars in
thousands)
 
                         Quarters Ended                                Nine Months Ended
CHANGE IN THE            Sep 30,        Jun 30,        Sep 30,         Sep 30,         Sep 30,
                         2012           2012           2011            2012            2011
ALLOWANCE FOR
LOAN LOSSES
                                                                                       
Balance,
beginning of           $ 80,221       $ 81,544       $ 92,000        $ 82,912        $ 97,401
period
                                                                                       
Provision                3,000          4,000          5,000           12,000          30,000
                                                                                       
Recoveries of
loans previously
charged off:
    Commercial           130            18             1               762             16
    real estate
    Multifamily          - -            - -            - -             - -             - -
    real estate
    Construction         35             1,050          89              1,455           840
    and land
    One- to
    four-family          34             374            34              412             115
    real estate
    Commercial           154            639            414             1,030           571
    business
    Agricultural
    business,
    including            30             15             10              45              15
    secured by
    farmland
    Consumer             91            195           69             422            231     
                         474            2,291          617             4,126           1,788
Loans charged
off:
    Commercial           (924   )       (1,259 )       (1,644  )       (3,507  )       (4,504  )
    real estate
    Multifamily          - -            - -            - -             - -             (671    )
    real estate
    Construction         (617   )       (1,703 )       (6,445  )       (5,244  )       (23,059 )
    and land
    One- to
    four-family          (709   )       (1,906 )       (2,483  )       (3,580  )       (6,586  )
    real estate
    Commercial           (1,687 )       (2,297 )       (863    )       (5,391  )       (7,224  )
    business
    Agricultural
    business,
    including            (26    )       - -            - -             (301    )       (289    )
    secured by
    farmland
    Consumer             (949   )       (449   )       (54     )       (2,232  )       (728    )
                         (4,912 )       (7,614 )       (11,489 )       (20,255 )       (43,061 )
    Net                  (4,438 )       (5,323 )       (10,872 )       (16,129 )       (41,273 )
    charge-offs
                                                                                       
Balance, end of        $ 78,783      $ 80,221      $ 86,128       $ 78,783       $ 86,128  
period
                                                                                       
Net charge-offs
/ Average loans          0.14   %       0.16   %       0.33    %       0.50    %       1.24    %
outstanding
                                                                                       
                                                                                       
ALLOCATION OF
ALLOWANCE FOR            Sep 30,        Jun 30,        Sep 30,         Dec 31,
LOAN LOSSES              2012           2012           2011            2011
Specific or
allocated loss
allowance
  Commercial           $ 15,777       $ 16,834       $ 14,217          16,457
  real estate
  Multifamily            4,741          5,108          2,958           3,952
  real estate
  Construction           15,764         16,974         22,683          18,184
  and land
  One- to
  four-family            16,152         14,213         11,249          12,299
  real estate
  Commercial             10,701         12,352         16,894          15,159
  business
  Agricultural
  business,
  including              2,342          1,294          1,257           1,548
  secured by
  farmland
  Consumer               1,321         1,365         1,277          1,253   
                                                                                       
    Total                66,798         68,140         70,535          68,852
    allocated
                                                                                       
  Estimated
  allowance for          932            639            508             678
  undisbursed
  commitments
  Unallocated            11,053        11,442        15,085         13,382  
                                                                                       
    Total
    allowance          $ 78,783      $ 80,221      $ 86,128         82,912  
    for loan
    losses
                                                                                       
Allowance for
loan losses /            2.45   %       2.50   %       2.67    %       2.52    %
Total loans
outstanding
                                                                                       
Allowance for
loan losses /            204    %       169    %       104     %       110     %
Non-performing
loans
                                                                                       

ADDITIONAL FINANCIAL                                             
INFORMATION
(dollars in
thousands)
  
                             Sep 30,          Jun 30,        Sep 30,         Dec 31,
                             2012             2012           2011            2011
                                                                             
NON-PERFORMING
ASSETS
                                                                             
Loans on non-accrual
status
  Secured by real
  estate:
      Commercial           $ 5,574          $ 7,580        $ 8,908         $ 9,226
      Multifamily            - -              - -            - -             362
      Construction           7,450            8,939          35,841          27,731
      and land
      One- to                14,234           16,170         15,274          17,408
      four-family
  Commercial                 6,159            8,600          15,754          13,460
  business
  Agricultural
  business,                  645              1,010          1,301           1,896
  including secured
  by farmland
  Consumer                   2,571           2,882         4,232          2,905   
                             36,633           45,181         81,310          72,988
                                                                             
Loans more than 90
days delinquent,
still on accrual
  Secured by real
  estate:
      Commercial             - -              - -            - -             - -
      Multifamily            - -              - -            - -             - -
      Construction           - -              - -            - -             - -
      and land
      One- to                2,037            2,142          1,111           2,147
      four-family
  Commercial                 15               - -            687             4
  business
  Agricultural
  business,                  - -              - -            - -             - -
  including secured
  by farmland
  Consumer                   26              39            41             173     
                             2,078           2,181         1,839          2,324   
Total non-performing         38,711           47,362         83,149          75,312
loans
Securities on                - -              - -            1,942           500
non-accrual
Real estate owned
(REO) and                    20,356          25,830        66,538         43,039  
repossessed assets
                                                                             
      Total
      non-performing       $ 59,067        $ 73,192      $ 151,629      $ 118,851 
      assets
                                                                             
Total non-performing
assets / Total               1.38    %        1.73   %       3.53    %       2.79    %
assets
                                                                             
DETAIL & GEOGRAPHIC
CONCENTRATION OF
  NON-PERFORMING
  ASSETS AT
   September 30,          Washington       Oregon         Idaho           Total
      2012
Secured by real
estate:
  Commercial               $ 5,514          $ - -          $ 60            $ 5,574
  Construction and
  land
    One- to
    four-family              3,028            - -            242             3,270
    construction
    Residential land
    acquisition &            - -              1,452          - -             1,452
    development
    Residential land         292              1,361          - -             1,653
    improved lots
    Residential land         47               688            - -             735
    unimproved
    Commercial land          294              - -            - -             294
    improved
    Commercial land          46              - -           - -            46      
    unimproved
      Total
      construction           3,707            3,501          242             7,450
      and land
                                                                                     
  One- to                    12,397           2,157          1,717           16,271
  four-family
Commercial business          6,070            104            - -             6,174
Agricultural
business, including          510              - -            135             645
secured by farmland
Consumer                     2,074           43            480            2,597   
Total non-performing         30,272           5,805          2,634           38,711
loans
Real estate owned
(REO) and                    11,279          8,426         651            20,356  
repossessed assets
                                                                             
      Total
      non-performing       $ 41,551        $ 14,231      $ 3,285        $ 59,067  
      assets at end
      of the period
                                                                             

ADDITIONAL
FINANCIAL                                                                 
INFORMATION
(dollars in
thousands)

                       Quarters Ended                   Nine Months Ended
                                                                                        
REAL ESTATE            Sep 30,          Sep 30,         Sep 30,         Sep 30,
OWNED                  2012             2011            2012            2011
                                                                                        
Balance,
beginning of         $ 25,816         $ 71,205        $ 42,965        $ 100,872
period
  Additions
  from loan            3,111            18,881          11,598          45,715
  foreclosures
  Additions
  from                 97               1,107           231             4,254
  capitalized
  costs
  Proceeds
  from                 (10,368  )       (19,440 )       (33,608 )       (70,771 )
  dispositions
  of REO
  Gain (loss)
  on sale of           2,955            (725    )       3,621           (1,204  )
  REO
  Valuation
  adjustments          (1,255   )       (4,569  )      (4,451  )       (12,407 )
  in the
  period
                                                                                        
Balance, end         $ 20,356        $ 66,459       $ 20,356       $ 66,459  
of period
                                                                                        
                       Quarters Ended
                                                                                        
REAL ESTATE
OWNED- FIVE            Sep 30,          Jun 30,         Mar 31,         Dec 31,         Sep 30,
COMPARATIVE            2012             2012            2012            2011            2011
QUARTERS
                                                                                        
Balance,
beginning of         $ 25,816         $ 27,723        $ 42,965        $ 66,459        $ 71,205
period
  Additions
  from loan            3,111            6,886           1,601           7,482           18,881
  foreclosures
  Additions
  from                 97               7               127             150             1,107
  capitalized
  costs
  Proceeds
  from                 (10,368  )       (7,799  )       (15,441 )       (28,299 )       (19,440 )
  dispositions
  of REO
  Gain (loss)
  on sale of           2,955            566             100             (170    )       (725    )
  REO
  Valuation
  adjustments          (1,255   )       (1,567  )       (1,629  )       (2,657  )       (4,569  )
  in the
  period
                                                                                        
Balance, end         $ 20,356        $ 25,816       $ 27,723       $ 42,965       $ 66,459  
of period
                                                                                        
REAL ESTATE
OWNED- BY TYPE         Washington       Oregon          Idaho           Total
AND STATE
                                                                                        
Commercial           $ 948            $ - -           $ 198           $ 1,146
real estate
One- to
four-family            90               - -             - -             90
construction
Land
development-           2,219            - -             195             2,414
commercial
Land
development-           3,629            6,038           257             9,924
residential
One- to
four-family            4,394           2,388          - -            6,782   
real estate
                                                                                        
Total                $ 11,280        $ 8,426        $ 650          $ 20,356  
                                                                                        

ADDITIONAL FINANCIAL                                                    
INFORMATION
(dollars in thousands)
  
                                                                                    
DEPOSITS & OTHER
BORROWINGS
                                 Sep 30,          Jun 30,           Sep 30,         Dec 31,
                                 2012             2012              2011            2011
   DEPOSIT COMPOSITION
                                                                                    
   Non-interest-bearing        $ 918,962        $ 804,562        $ 763,008       $ 777,563   
                                                                                    
   Interest-bearing              379,650          379,742           362,090         362,542
   checking
   Regular savings               689,322          664,736           670,210         669,596
   accounts
   Money market accounts         411,262          405,412          429,083         415,456   
                                                                                    
       Interest-bearing
       transaction &             1,480,234        1,449,890        1,461,383       1,447,594 
       savings accounts
                                                                                    
   Interest-bearing              1,087,176        1,171,297        1,313,043       1,250,497 
   certificates
                                                                                    
       Total deposits          $ 3,486,372      $ 3,425,749      $ 3,537,434     $ 3,475,654 
                                                                                    
                                                                                    
   INCLUDED IN TOTAL
   DEPOSITS
                                                                                    
   Public transaction          $ 72,407         $ 73,507          $ 67,753        $ 72,064
   accounts
   Public
   interest-bearing              61,628           62,743           69,321          67,112    
   certificates
                                                                                    
       Total public            $ 134,035        $ 136,250        $ 137,074       $ 139,176   
       deposits
                                                                                    
                                                                                    
   Total brokered              $ 21,403         $ 23,521         $ 59,576        $ 49,194    
   deposits
                                                                                    
                                                                                    
                                                                                    
   OTHER BORROWINGS
   Customer repurchase
   agreements / "Sweep         $ 82,275         $ 90,030          $ 89,633        $ 102,131
   accounts"
   Temporary liquidity           - -              - -               49,995          49,997
   guarantee notes
   Other                         - -              - -              76              - -       
   Total other                 $ 82,275         $ 90,030         $ 139,704         152,128   
   borrowings
                                                                                    
                                                                                    
   GEOGRAPHIC
   CONCENTRATION OF
   DEPOSITS AT
      September 30,             Washington       Oregon            Idaho           Total
       2012
                                                                                    
                               $ 2,660,783      $ 597,826        $ 227,763       $ 3,486,372 
                                                                                    
                                                                                    
                                                                    Minimum for Capital
                                                                    Adequacy
REGULATORY CAPITAL               Actual                             or "Well Capitalized"
RATIOS AT
     September 30,             Amount           Ratio             Amount          Ratio
       2012
                                                                                    
Banner
Corporation-consolidated
       Total capital to
       risk-weighted             643,074          19.01     %     $ 270,597         8.00      %
       assets
       Tier 1 capital to
       risk-weighted             600,343          17.75     %       135,298         4.00      %
       assets
       Tier 1 leverage
       capital to                600,343          14.29     %       168,063         4.00      %
       average assets
                                                                                    
Banner Bank
       Total capital to
       risk-weighted             503,685          15.72     %       320,497         10.00     %
       assets
       Tier 1 capital to
       risk-weighted             463,180          14.45     %       192,298         6.00      %
       assets
       Tier 1 leverage
       capital to                463,180          11.67     %       198,492         5.00      %
       average assets
                                                                                    
Islanders Bank
       Total capital to
       risk-weighted             31,768           17.13     %       18,544          10.00     %
       assets
       Tier 1 capital to
       risk-weighted             29,443           15.88     %       11,127          6.00      %
       assets
       Tier 1 leverage
       capital to                29,443           12.60     %       11,683          5.00      %
       average assets
                                                                                    

*Story too large*
ADDITIONAL FINANCIAL                                                                    
INFORMATION
(dollars in
thousands)
(rates / ratios
annualized)
                             Quarters Ended                                         Nine Months Ended
                                                                                                      
OPERATING                    Sep 30,           Jun 30, 2012       Sep 30,           Sep 30,           Sep 30,
PERFORMANCE                  2012                                 2011              2012              2011
                                                                                                      
                                                                                                      
Average loans              $ 3,211,133       $ 3,232,204        $ 3,271,728       $ 3,231,294       $ 3,317,986
Average securities           673,156           636,097            544,468           656,691           507,210
Average interest             142,437           122,846            224,993           125,668           242,937
earning cash
Average
non-interest-earning         210,660          174,566           206,420          189,992          218,338   
assets
                                                                                                      
   Total average           $ 4,237,386      $ 4,165,713       $ 4,247,609      $ 4,203,645      $ 4,286,471 
   assets
                                                                                                      
Average deposits           $ 3,452,393       $ 3,410,249        $ 3,498,594       $ 3,427,995       $ 3,521,272
Average borrowings           219,687           230,517            270,648           243,460           291,840
Average
non-interest-bearing         (14,710   )       (37,694   )        (41,337   )       (29,691   )       (40,792   )
other liabilities
                                                                                                      
   Total average             3,657,370         3,603,072          3,727,905         3,641,764         3,772,320
   liabilities
                                                                                                      
Total average                580,016          562,641           519,704          561,881          514,151   
stockholders' equity
                             `
   Total average
   liabilities and         $ 4,237,386      $ 4,165,713       $ 4,247,609      $ 4,203,645      $ 4,286,471 
   equity
                                                                                                      
Interest rate yield          5.45      %       5.48      %        5.53      %       5.46      %       5.61      %
on loans
Interest rate yield          1.85      %       1.99      %        2.75      %       1.92      %       2.49      %
on securities
Interest rate yield          0.23      %       0.25      %        0.26      %       0.24      %       0.23      %
on cash
                                                                                                      
   Interest rate
   yield on                  4.66      %       4.76      %        4.87      %       4.71      %       4.90      %
   interest-earning
   assets
                                                                                                      
Interest rate                0.41      %       0.48      %        0.70      %       0.47      %       0.80      %
expense on deposits
Interest rate
expense on                   1.70      %       1.64      %        2.44      %       1.92      %       2.35      %
borrowings
                                                                                                      
   Interest rate
   expense on                0.48      %       0.55      %        0.82      %       0.56      %       0.92      %
   interest-bearing
   liabilities
                                                                                                      
Interest rate spread         4.18      %       4.21      %        4.05      %       4.15      %       3.98      %
                                                                                                      
Net interest margin          4.22      %       4.26      %        4.10      %       4.20      %       4.04      %
                                                                                                      
Other operating
income / Average             1.10      %       (0.88     %)       0.97      %       0.43      %       0.84      %
assets
                                                                                                      
Other operating
income EXCLUDING
fair value                   1.09      %       0.97      %        0.78      %       0.98      %       0.71      %
adjustments /
Average assets (1)
                                                                                                      
Other operating
expense / Average            3.13      %       3.44      %        3.83      %       3.40      %       3.73      %
assets

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