Walla Walla, WA - January 24, 2007 - Banner Corporation (NASDAQ GMS: BANR), the parent company of Banner Bank, today reported that strong balance sheet growth and an improved net interest margin contributed to higher fourth quarter profits. Net income increased 42% to $8.0 million, or $0.65 per diluted share, compared to earnings from recurring operations, exclusive of the restructuring charges, of $5.6 million, or $0.47 per diluted share, in the fourth quarter a year ago (see footnote below and "Pro Forma Disclosures Excluding 2006 Insurance Recovery and 2005 Restructuring Charges on page 4). For the full year ended December 31, 2006, net income increased 53% to $32.2 million, or $2.63 per diluted share, compared to earnings from recurring operations, exclusive of the restructuring charges, of $21.0 million, or $1.76 per diluted share, in 2005.

"Our improved 2006 profits are a direct result of the sustained growth in our balance sheet and improved net interest margin. Our substantial loan and deposit growth has strengthened our revenue generating capacity and, combined with the balance sheet restructuring that took place at the end of 2005, contributed to this year's margin expansion," said D. Michael Jones, President and CEO. "Much of this growth can be attributed to our successful de novo franchise expansion. Most recently, we signed definitive merger agreements with F&M Bank of Spokane, Washington and San Juan Financial Holding Company of Friday Harbor, Washington. F&M Bank will significantly expand our presence in Spokane, the fourth largest metropolitan market in the Pacific Northwest, and San Juan Financial Holding Company will expand our presence in the North Puget Sound region of Washington State. We are well positioned to complete these mergers and look forward to integrating these new partner institutions. In addition, we are continuing to explore branch expansion opportunities in our primary markets and look forward to a number of new branch openings scheduled for 2007."

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. Including the effects of the restructuring charges, Banner reported a loss of $2.9 million, or $0.25 per diluted share, for the fourth quarter of 2005 and earnings of $12.4 million, or $1.04 per diluted share, for the year ended December 31, 2005.

In the second quarter of 2006, Banner announced that it had reached a $5.5 million insurance settlement relating to a loss incurred in 2001. The net amount of the settlement, after costs, resulted in a $5.4 million credit to other operating expense and contributed approximately $3.4 million, or $0.28 per share, to second quarter earnings.

2006 Highlights (compared to 2005)

• Signed definitive merger agreements with F&M Bank and San Juan Financial Holding Company.
• Total net income increased to $32.2 million and net income from recurring operations increased to $28.7 million.
• Net interest income before provision for loan losses grew 17% to $126.9 million.
• Total deposits increased 20% to $2.79 billion.
• Loans increased 22% to $2.93 billion.
• Net interest margin improved 29 basis points to 4.08%.
• Credit quality remains solid with non-performing assets representing 0.43% of total assets and net charge-offs declining to just 0.03% of average loans.

Income Statement Review

Banner's net interest margin was 4.01% for the fourth quarter of 2006, an improvement from 3.99% in the quarter ended September 30, 2006, and from 3.93% for the fourth quarter of 2005. For the full year, the net interest margin was 4.08%, a 29 basis point improvement from 3.79% in 2005.

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BANR-Fourth Quarter 2006 Results
January 24, 2007
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"We expanded our net interest margin in part as a result of the restructuring transactions that took place a year ago. The margin benefited from the strong loan and deposit growth we experienced throughout the year," said Jones. "However, we expect our net interest margin to experience pressure during the next few quarters as pricing remains very competitive, our funding needs continue to be significant and the interest rate environment remains challenging."

Funding costs increased 8 basis points compared to the previous quarter and increased 99 basis points from the fourth quarter a year earlier, while asset yields increased 9 basis points from the prior linked quarter and 102 basis points from a year ago.

Banner's net interest income before the provision for loan losses increased 15% to $33.1 million in the fourth quarter of 2006, compared to $28.8 million in the same quarter a year ago. Revenues (net interest income before the provision for loan losses plus other operating income) increased 17% to $38.8 million in the fourth quarter of 2006, compared to $33.0 million in the fourth quarter of 2005, excluding the net loss on the sale of securities relating to the balance-sheet restructuring in the fourth quarter of 2005.

"The increased earnings power in the balance sheet is a direct result of our continuing asset growth and changing asset mix," said Jones. "Our strong loan growth is producing greater interest income and solid deposit growth is meaningfully adding to our fee income, as well." Total other operating income for the fourth quarter increased 33% to $5.6 million compared to $4.3 million in fourth quarter last year, excluding the net loss on the sale of securities relating to the balance-sheet restructuring in the fourth quarter of 2005. Income from deposit fees and other service charges increased 19% to $3.0 million in the fourth quarter, reflecting increases in debit card use and merchant banking activity. Income from mortgage banking operations increased by 34% from the fourth quarter of 2005, despite the moderating housing market. During the fourth quarter of 2006 Banner recorded the sale of a branch facility in Walla Walla. Net proceeds before taxes for the sold branch produced a pre-tax gain of $670,000 ($429,000 after tax), and are included in miscellaneous income. The facility had been condemned for construction of a new road and will be replaced with a new facility on a nearby site which is scheduled to open in July 2007.

For the year ended December 31, 2006, net interest income before the provision for loan losses increased 17% to $126.9 million, compared to $108.8 million a year ago. Revenues increased 16% to $147.5 million for the year, compared to $126.6 million a year ago, excluding the net loss on sale of securities. Total other operating income, excluding the net gain on the sale of the branch facility, increased 11% to $19.8 million for the year ended December 31, 2006, compared to $17.8 million in 2005.

Other operating expenses increased to $25.8 million in the fourth quarter of 2006, compared to $25.3 million in the third quarter of 2006 and $23.8 million in the fourth quarter of 2005, excluding the FHLB prepayment penalties relating to the balance-sheet restructuring. For all of 2006, recurring other operating expenses, excluding the insurance recovery, were $99.7 million, a 9% increase compared to $91.5 million in the prior year, exclusive of the FHLB prepayment penalties. The increase is largely due to continued branch expansion activities.

"During the last two years we have opened twelve new branches and relocated six other branches. Generally, these new branches are proving to be very successful in helping us to reach new customers and grow low cost deposits to fund our loan growth. Although these new branches initially put pressure on our expense ratios, over time they should add to our profitability by providing low cost core deposits and additional fee income opportunities," said Jones. The ratio of other operating expense (expense ratio) to average assets was 2.95% for the fourth quarter of 2006, compared to 2.92% for the third quarter of 2006 and 3.05% for the fourth quarter a year ago exclusive of the FHLB prepayment penalties. The ratio of recurring other operating expense to average assets was 3.02% for the year ended December 31, 2006, compared to 3.00% for the year ended December 31, 2005, again excluding the FHLB prepayment penalties in the fourth quarter of 2005 and the insurance recovery in the second quarter of 2006.

Banner's return on equity (ROE) was 12.77% for the fourth quarter compared to 10.04% a year ago, excluding the restructuring charges. For 2006, ROE was 13.54% (12.10% excluding the insurance recovery) compared to 9.49% a year ago, excluding the restructuring charges. The efficiency ratio was 66.67% in the quarter ended December 31, 2006, versus 72.12% a year earlier, excluding the restructuring charges. For all of 2006, the efficiency ratio was 64.00% (67.62% excluding the insurance recovery), compared to 72.23% in 2005, excluding the restructuring charges.

Total deposits increased 20% to $2.79 billion at December 31, 2006, compared to $2.32 billion at the end of December 2005. While non-interest-bearing accounts only increased 1%, total transaction and savings accounts increased 10% during the twelve months ending December 31, 2006, and certificates of deposit increased 29%. "Throughout the year ended December 31, 2006, we experienced a shift towards higher-yielding interest-bearing deposit accounts; however, even though growth in non-interest-bearing account balances was disappointing, we continued to have success in adding to the number of transaction accounts," said Jones. "The 10% increase in transaction and savings deposits this year over last is a direct result of franchise growth and our ongoing emphasis on building our deposit base system-wide."

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BANR-Fourth Quarter 2006 Results
January 24, 2007
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Net loans increased 22% to $2.93 billion at December 31, 2006, compared to $2.41 billion a year earlier. "While construction and development lending clearly led the way, the major components of the loan portfolio are all showing significant growth over the prior year's balances," said Jones. "Compared to a year ago, we increased construction and land loans 61%, consumer loans 28%, commercial and multifamily real estate loans 6% and commercial and agricultural business loans 7%."

Assets increased 15% to $3.50 billion at December 31, 2006, compared to $3.04 billion a year earlier. Book value per share increased to $20.72 at December 31, 2006, from $18.81 a year earlier, and tangible book value per share was $17.72 at quarter-end, compared to $15.73 a year earlier.

FHLB borrowings declined 33% to $177.4 million at December 31, 2006, from $265.0 million a year earlier, as a result of strong deposit growth and declining securities balances. The securities portfolio declined by 12% to $274.0 million at December 31, 2006, from $311.2 million a year earlier primarily as a result of maturities and principal prepayments.

The provision for loan losses for the fourth quarter was $1.0 million, compared to $1.1 million in the same quarter of 2005 and $1.0 million for the third quarter of 2006. For the year 2006, the provision for loan losses was $5.5 million, compared to $4.9 million in 2005. Non-performing assets were $15.0 million, or 0.43% of total assets, at December 31, 2006, compared to $11.0 million, or 0.36% of total assets, at December 31, 2005. At September 30, 2006, Banner's non-performing assets totaled $12.4 million or 0.36% of total assets. Banner's net charge-offs in the fourth quarter totaled $625,000, and the allowance for loan losses at quarter-end totaled $35.5 million, representing 1.20% of total loans outstanding.

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BANR-Fourth Quarter 2006 Results
January 24, 2007
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January 24, 2007
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