Banner Corporation's Net Income Increases 8% for First Quarter; Net I

Banner Corporation's Net Income Increases 8% for First Quarter; Net Interest Income Climbs 11% as Loans Grow 20%

    Business Editors

    WALLA WALLA, Wash.--(BUSINESS WIRE)--April 28, 2005--Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank, today reported that continued strong growth in loans and core deposits contributed to an increase in profits for the first quarter ended March 31, 2005, compared to the first quarter a year ago. For the first quarter of 2005, the Company's net income increased 8% to $4.7 million, or $0.39 per diluted share, compared to $4.4 million, or $0.38 per diluted share, for the first quarter of 2004.
    "We have had a very busy first quarter with the grand opening of five new branches in western Washington," said D. Michael Jones, President and Chief Executive Officer. "We recently opened branch offices in Kent, Everett, Edmonds, Lynnwood and Mercer Island and we relocated branches in Lynden and Spokane. We are encouraged by the deposit growth and customer activity these new locations have experienced. We also saw significant progress on construction of new offices in Vancouver and Walla Walla, Washington and Boise, Idaho. In addition, we moved forward on the four other southwestern Idaho branch offices we expect to open later this year. Over time, this expansion should improve our cost of funds and build long-term franchise value. However, this branch expansion activity does not come without a cost. As we hire staff and incur operating expenses ahead of earnings, these new branches will initially reduce our profitability. As previously announced, during 2005 we expect to incur net after-tax costs of approximately $2.5 million from the opening of these facilities."
    "We also launched an international banking department earlier in the quarter. We previously outsourced these services to bigger banks but as customer requests for better international service increased we saw a new opportunity," said Jones. "The department will allow us to offer expanded letter of credit services and will soon offer trade financing, currency exchange and foreign wire transfers. There are an estimated 4,000 businesses in the Puget Sound region that now trade overseas."

    First Quarter 2005 Highlights (Compared to First Quarter 2004)

--	Loans increased 20% to $2.13 billion.
--	Non-interest bearing deposits increased 26% and total deposits grew 14% to $1.99 billion.
--	Non-performing assets declined by 36%.
--	Net interest income, after the provision for loan loss, increased 13% to $24.0 million.
--	Revenues increased 10% to $29.2 million.
--	Assets increased 10% to $2.97 billion.
--	Opened five new branches in the Puget Sound area.
--	Launched an international banking department.

    Income Statement Review

    Banner's net interest margin was 3.71% for the first quarter of 2005, compared to 3.70% in the first quarter a year ago. Banner's fourth quarter net interest margin was 3.72%. "Although we saw strong loan growth and increasing asset yields for the first quarter, our net interest margin remained steady as a result of higher funding costs," said Jones. Funding costs were up 16 basis points compared to the previous quarter and up 31 basis points from the first quarter a year earlier. Asset yields were also higher, increasing by 15 and 30 basis points, respectively, compared to the quarters ended December 31, 2004 and March 31, 2004.
    For the first quarter, net interest income before the provision for loan losses increased 11% to $25.2 million, compared to $22.7 million in the same quarter a year ago, reflecting strong loan growth and improved credit quality. Revenues (net interest income before the provision for loan losses plus other operating income) increased 10% to $29.2 million, compared to $26.5 million for the same quarter of 2004. Banner's net interest income, after the provision for loan losses, increased 13% for the first quarter of 2005 compared to the same period a year ago.
    Total other operating income for the first quarter increased 5% to $4.0 million, compared to $3.8 million for the same quarter last year. Income from deposit fees and other service charges increased to $2.0 million in the first quarter, compared to $1.8 million for the same period in 2004. Mortgage banking operations and loan servicing fees increased 10% to $1.7 million in the first quarter compared to $1.5 million for the first quarter a year ago.
    As a result of Banner's expansion strategy and its increased size, other operating expense was $21.3 million for the quarter ended March 31, 2005, compared to $18.8 million for the first quarter a year ago and $20.4 million for the fourth quarter of 2004. The ratio of other operating expense (expense ratio) to average assets was 2.95% for the first quarter, compared to 2.85% for the fourth quarter of 2004 and 2.88% for the first quarter of 2004.
    "We have added to our Puget Sound-area presence with new branches in Kent, Everett, Edmonds, Lynnwood and Mercer Island, Washington. These branches are in the heart of Puget Sound, a thriving business community with ties to aerospace, computer software, biomedical research, medical technology and international business. This franchise expansion has already added to our balance sheet, with new loans and deposits. While these new locations will increase our overhead expenses and temporarily decrease our short-term profitability, over time they should help reduce our dependence on borrowed funds and improve our net interest margin," said Jones.

    Balance Sheet Review

    "Our loan portfolio continued to grow at double-digit rates," said Jones. "Our lending personnel have generated steady growth in commercial and multifamily real estate loans, construction and land loans, and commercial and agricultural business loans, which combined now account for 82% of the loan portfolio." Net loans increased 20%, to $2.13 billion at March 31, 2005, from $1.77 billion a year ago. Assets reached a record $2.97 billion, a 10% increase from $2.71 billion a year earlier."
    "Our deposit growth was solid this quarter, in part reflecting some of our new locations, but also resulting from continued success at many of our existing branches," added Jones. Total deposits grew 14%, to $1.99 billion, compared to $1.75 billion at March 31, 2004. Non-interest bearing deposits increased 26% at March 31, 2005 compared to March 31, 2004, and increased 10% compared to the quarter ended December 31, 2004. Transaction and savings accounts grew 28% during the twelve months ending March 31, 2005, while certificates of deposit increased only 4% as Banner continues to change its funding mix. Book value per share was $18.55 at March 31, 2005, compared to $18.81 a year earlier. Tangible book value per share was $15.40 at March 31, 2005, compared to $15.53 a year earlier.

    Credit Quality

    "Compared to a year earlier, our key credit quality ratios improved as a result of a 36% reduction in non-performing assets," said Jones. Non-performing assets were $18.9 million, or 0.64% of total assets, at March 31, 2005, compared to $29.6 million, or 1.09% of total assets, at March 31, 2004. The provision for loan losses for the first quarter was $1.2 million, compared to $1.5 million in the same quarter of 2004. Net loan charge-offs in the first quarter of 2005 were 0.05% of average loans outstanding. At March 31, 2005, the allowance for loan losses totaled $29.7 million, representing 1.38% of total loans outstanding.

    Conference Call

    The Company will host a conference call today, Thursday, April 28, 2005, at 8:00 a.m. PDT, to discuss first quarter results. The conference call can be accessed live by telephone at 303-262-2211. To listen to the call online, go to the Company's website at www.bannerbank.com or to www.fulldisclosure.com. Institutional investors may access the call via the subscriber-only site, www.streetevents.com. An archived recording of the call can be accessed by dialing 303-590-3000, passcode 11027824# until Thursday, May 5, 2005 or via the Internet at www.fulldisclosure.com.

    About the Company

    Banner Corporation is the parent company of Banner Bank, a commercial bank, which operates a total of 51 branch offices and 13 loan offices in 23 counties in Washington, Oregon and Idaho. Banner Bank 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.

    Statements concerning future performance, developments or events, expectations for earnings, growth and market forecasts, and any other guidance on future periods, constitute forward-looking statements, which are subject to a number of risks and uncertainties that are beyond Banner's control and might cause actual results to differ materially from the expectations and stated objectives. Factors which could cause actual results to differ materially include, but are not limited to, regional and general economic conditions, management's ability to generate continued improvement in asset quality and profitability, changes in interest rates, deposit flows, demand for mortgages and other loans, real estate values, competition, loan delinquency rates, the successful operation of the newly-opened branches and loan offices, changes in accounting principles, practices, policies or guidelines, changes in legislation or regulation, other economic, competitive, governmental, regulatory and technological factors affecting operations, pricing, products and services and Banner's ability to successfully resolve the outstanding credit issues and/or recover check kiting losses. Accordingly, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Banner undertakes no responsibility to update or revise any forward-looking statements.

RESULTS OF OPERATIONS (In thousands except share and per share data)

Quarters Ended ------------------------------- Mar 31, Dec 31, Mar 31, 2005 2004 2004 ----------- ----------- ----------- INTEREST INCOME: Loans receivable $ 36,137 $ 34,624 $ 29,019 Mortgage-backed securities 3,673 3,806 4,527 Securities and cash equivalents 2,849 2,941 3,081 ----------- ----------- ----------- 42,659 41,371 36,627

INTEREST EXPENSE: Deposits 10,414 9,725 7,864 Federal Home Loan Bank advances 5,617 5,191 5,125 Junior subordinated debentures 1,067 1,015 692 Other borrowings 332 334 237 ----------- ----------- ----------- 17,430 16,265 13,918 ----------- ----------- ----------- Net interest income before provision for loan losses 25,229 25,106 22,709

PROVISION FOR LOAN LOSSES 1,203 1,300 1,450 ----------- ----------- -----------

Net interest income 24,026 23,806 21,259

OTHER OPERATING INCOME: Deposit fees and other service charges 2,004 2,084 1,843 Mortgage banking operations 1,231 1,435 1,252 Loan servicing fees 439 417 266 Gain on sale of securities -- 1 11 Miscellaneous 323 340 444 ----------- ----------- -----------

Total other operating income 3,997 4,277 3,816

OTHER OPERATING EXPENSE: Salary and employee benefits 13,793 13,485 12,103 Less capitalized loan origination costs (2,041) (1,824) (1,487) Occupancy and equipment 3,227 3,177 2,487 Information / computer data services 1,117 1,063 1,026 Professional services 801 807 915 Advertising 1,351 1,348 1,108 Miscellaneous 3,055 2,372 2,676 ----------- ----------- -----------

Total other operating expense 21,303 20,428 18,828 ----------- ----------- -----------

Income before provision for income taxes 6,720 7,655 6,247

PROVISION FOR INCOME TAXES 2,013 2,388 1,884 ----------- ----------- -----------

NET INCOME $ 4,707 $ 5,267 $ 4,363 =========== =========== ===========

Earnings per share Basic $ 0.41 $ 0.47 $ 0.39 Diluted $ 0.39 $ 0.45 $ 0.38

Cumulative dividends declared per common share $ 0.17 $ 0.17 $ 0.16

Weighted average shares outstanding Basic 11,470,028 11,207,582 11,051,187 Diluted 11,920,812 11,828,644 11,634,105

Shares repurchased during the period 8,028 114,477 7,729

FINANCIAL CONDITION (In thousands except share and per share data)

Mar 31, Dec 31, Mar 31, 2005 2004 2004 ----------- ----------- -----------

ASSETS ------ Cash and due from banks $ 57,994 $ 51,767 $ 61,894 Securities available for sale 540,706 547,835 693,257 Securities held to maturity 50,515 49,914 31,498

Federal Home Loan Bank stock 35,844 35,698 35,038

Loans receivable: Held for sale 3,217 2,145 12,100 Held for portfolio 2,158,620 2,090,703 1,784,482 Allowance for loan losses (29,736) (29,610) (26,885) ----------- ----------- ----------- 2,132,101 2,063,238 1,769,697

Accrued interest receivable 15,982 15,097 13,889 Real estate owned held for sale, net 1,034 1,485 2,077 Property and equipment, net 42,261 39,315 24,779 Goodwill and other intangibles, net 36,347 36,369 36,477 Deferred income tax asset, net 7,964 5,888 1,335 Bank-owned life insurance 35,773 35,371 34,143 Other assets 16,261 15,090 8,901 ----------- ----------- ----------- $ 2,972,782 $ 2,897,067 $ 2,712,985 =========== =========== ===========

LIABILITIES -----------

Deposits: Non-interest- bearing $ 257,437 $ 234,761 $ 203,695 Interest-bearing 1,737,093 1,691,148 1,546,195 ----------- ----------- ----------- 1,994,530 1,925,909 1,749,890 Borrowings: Advances from Federal Home Loan Bank 594,958 583,558 585,158 Junior subordinated debentures 72,168 72,168 72,168 Other borrowings 63,263 68,116 74,445 ----------- ----------- ----------- 730,389 723,842 731,771

Accrued expenses and other liabilities 25,294 25,027 16,538 Deferred compensation 5,531 5,208 4,500 Income taxes payable 3,375 1,861 751 ----------- ----------- ----------- 2,759,119 2,681,847 2,503,450

STOCKHOLDERS' EQUITY --------------------

Common stock 127,829 127,460 124,730 Retained earnings 95,082 92,327 82,801 Accumulated other comprehensive income (loss) (5,613) (888) 6,062 Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust: at cost (3,096) (3,096) (3,628) Net carrying value of stock related deferred compensation plans (539) (583) (430) ----------- ----------- ----------- 213,663 215,220 209,535 ----------- ----------- ----------- $ 2,972,782 $ 2,897,067 $ 2,712,985 =========== =========== ===========

Shares Issued: Shares outstanding at end of period 11,890,541 11,856,889 11,578,934 Less unearned ESOP shares at end of period 374,595 374,595 438,985 ----------- ----------- -----------

Shares outstanding at end of period excluding unearned ESOP shares 11,515,946 11,482,294 11,139,949 =========== =========== ===========

Book value per share (1) $ 18.55 $ 18.74 $ 18.81 Tangible book value per share (1) $ 15.40 $ 15.58 $ 15.53

Consolidated Tier 1 leverage capital ratio 8.80% 8.93% 9.07%

(1) Calculation is based on number of shares outstanding at the end of the period rather than weighted average shares outstanding and excludes unallocated shares in the employee stock ownership plan (ESOP).

ADDITIONAL FINANCIAL INFORMATION (Dollars in thousands)

LOANS (including loans held for sale):

Mar 31, Dec 31, Mar 31, 2005 2004 2004 ---------- ---------- ----------

Commercial real estate $ 559,195 $ 547,574 $ 488,137 Multifamily real estate 113,205 107,745 92,687 Construction and land 554,560 506,137 407,561 Commercial business 406,948 395,249 321,979 Agricultural business including secured by farmland 130,776 148,343 138,501 One- to four-family real estate 316,345 307,986 279,497 Consumer 80,808 79,814 68,220 ---------- ---------- ---------- Total loans outstanding $2,161,837 $2,092,848 $1,796,582 ========== ========== ==========

NON-PERFORMING ASSETS: Mar 31, Dec 31, Mar 31, --------------------- 2005 2004 2004 ---------- ---------- ---------- Loans on non-accrual status $ 17,718 $ 15,416 $ 26,686 Loans more than 90 days delinquent, still on accrual 108 472 766 ---------- ---------- ----------

Total non-performing loans 17,826 15,888 27,452 Real estate owned (REO) / Repossessed assets 1,072 1,559 2,166 ---------- ---------- ----------

Total non-performing assets $ 18,898 $ 17,447 $ 29,618 ========== ========== ==========

Total non-performing assets / Total assets 0.64% 0.60% 1.09%

Quarters Ended -------------------------------- Mar 31, Dec 31, Mar 31, 2005 2004 2004 ---------- ---------- ---------- CHANGE IN THE ALLOWANCE FOR LOAN LOSSES: ---------------------------------------

Balance, beginning of period $ 29,610 $ 29,407 $ 26,060

Provision 1,203 1,300 1,450

Recoveries of loans previously charged off 373 176 151 Loans charged-off (1,450) (1,273) (776) ---------- ---------- ----------

Net (charge-offs) recoveries (1,077) (1,097) (625) ---------- ---------- ---------- ---------- ---------- ----------

Balance, end of period $ 29,736 $ 29,610 $ 26,885 ========== ========== ==========

Net charge-offs / Average loans outstanding 0.05% 0.05% 0.04% Allowance for loan losses / Total loans outstanding 1.38% 1.41% 1.50%

ADDITIONAL FINANCIAL INFORMATION (Dollars in thousands) (Rates/Ratios Annualized)

Quarters Ended -------------------------------- OPERATING Mar 31, Dec 31, Mar 31, PERFORMANCE: 2005 2004 2004 ----------- ---------- ---------- ----------

Average loans $2,125,833 $2,031,006 $1,750,998 Average securities and deposits 633,420 656,762 716,046 Average non-interest- earning assets 169,633 166,997 163,435 ---------- ---------- ---------- Total average assets $2,928,886 $2,854,765 $2,630,479 ========== ========== ==========

Average deposits $1,960,545 $1,928,851 $1,670,509 Average borrowings 719,544 684,303 732,789 Average non-interest- earning liabilities 29,163 26,458 19,467 ---------- ---------- ---------- Total average liabilities 2,709,252 2,639,612 2,422,765

Total average stockholders' equity 219,634 215,153 207,714 ---------- ---------- ---------- ` Total average liabilities and equity $2,928,886 $2,854,765 $2,630,479 ========== ========== ==========

Interest rate yield on loans 6.89% 6.78% 6.67% Interest rate yield on securities and deposits 4.18% 4.09% 4.27% ---------- ---------- ----------

Interest rate yield on interest-earning assets 6.27% 6.12% 5.97% ---------- ---------- ----------

Interest rate expense on deposits 2.15% 2.01% 1.89% Interest rate expense on borrowings 3.95% 3.80% 3.32% ---------- ---------- ----------

Interest rate expense on interest-bearing liabilities 2.64% 2.48% 2.33% ---------- ---------- ----------

Interest rate spread 3.63% 3.64% 3.64% ========== ========== ==========

Net interest margin 3.71% 3.72% 3.70% ========== ========== ==========

Other operating income / Average assets 0.55% 0.60% 0.58%

Other operating expense / Average assets 2.95% 2.85% 2.88%

Efficiency ratio (other operating expense / revenue) 72.89% 69.52% 70.98%

Return on average assets 0.65% 0.73% 0.67%

Return on average equity 8.69% 9.74% 8.45%

Average equity / Average assets 7.50% 7.54% 7.90%

--30--KS/se*

CONTACT: Banner Corporation D. Michael Jones, President and CEO or Lloyd W. Baker, CFO 509-527-3636

KEYWORD: WASHINGTON INDUSTRY KEYWORD: BANKING EARNINGS CONFERENCE CALLS SOURCE: Banner Corporation

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