Walla Walla, WA - October 25, 2006 - Banner Corporation (NASDAQ GMS: BANR), the parent company of Banner Bank, today reported that strong loan and deposit growth, reduced credit costs and controlled expense growth contributed to record third quarter profits. Net income increased 41% to $8.0 million, or $0.65 per diluted share, compared to $5.7 million, or $0.47 per diluted share, in the third quarter a year ago. For the first nine months of 2006, net income increased 57% to $24.2 million, or $1.98 per diluted share, compared to $15.4 million, or $1.29 per diluted share, in the first nine months of 2005.

"Our third quarter and year-to-date profits are a direct result of the sustained growth in our balance sheet. Substantial growth in loans and deposits has strengthened our revenue generating capacity and contributed to year-over-year margin expansion," said D. Michael Jones, President and CEO. "Much of this growth can be attributed to our successful franchise expansion. Most recently, in September we celebrated the grand opening of our downtown branch office in Boise, Idaho, in the environmentally award-winning Banner Bank Building. We are continuing to explore branch expansion opportunities in our primary markets and look forward to a number of new branch openings already scheduled for later this year and throughout 2007. Two new branches could open in December of this year, one in Boise, Idaho and one in Portland, Oregon."

In June 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 financial results in the second quarter ended June 30, 2006 and for the nine months ended September 30, 2006.

Third Quarter 2006 Highlights (compared to third quarter 2005)

• Net income increased 41% to $8.0 million.
• Revenues advanced 15% to $38.1 million.
• Net interest income before provision for loan losses grew 16% to $32.7 million.
• Total deposits increased 21% to $2.74 billion.
• Loans increased 23% to $2.87 billion.
• Net interest margin improved 22 basis points to 3.99%.
• Credit quality remains solid with non-performing assets representing 0.35% of total assets.

Third quarter revenues (net interest income before the provision for loan losses plus other operating income) grew 15% to $38.1 million, compared to $33.1 million in the third quarter last year. Revenues increased 16% to $108.7 million in the first nine months of 2006, compared to $93.6 million in the same period a year ago. For the third quarter, net interest income before the provision for loan losses increased 16% to $32.7 million, compared to $28.1 million in the same quarter a year ago. Year-to-date, net interest income before the provision for loan losses increased 17% to $93.8 million, compared to $80.0 million in the same period a year ago.

"The increased earnings power in the balance sheet is a direct result of our continuing asset growth," 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 third quarter increased 9% to $5.4 million, compared to $5.0 million for the same quarter last year. Year-to-date, total other operating income increased 10% to $14.9 million, compared to $13.6 million in the first nine months of 2005. Income from deposit fees and other service charges increased 19% to $3.0 million in the third quarter, compared to $2.5 million for the same period in 2005.

Banner's net interest margin improved 22 basis points to 3.99% for the third quarter, compared to 3.77% in the third quarter a year ago. However, the margin declined from 4.11% in the second quarter of 2006. Year-to-date, net interest margin improved 36 basis points to 4.11%, compared to 3.75% in the same period a year ago.

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BANR-Third Quarter 2006 Results
October 25, 2006
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"Our net interest margin came under pressure again this quarter as deposit costs increased faster than loan yields and changes occurred in our liability mix, both as a result of changes in customer behavior and the funding requirements driven by our loan growth," said Jones. "We expect our net interest margin to experience continued pressure during the next few quarters as pricing remains competitive, the yield curve remains very flat and our funding needs continue to be significant." Funding costs increased 31 basis points compared to the previous quarter and increased 104 basis points from the third quarter a year earlier, while asset yields increased 16 basis points from the prior linked quarter and 121 basis points from a year ago.

Other operating expenses were $25.3 million in the third quarter of 2006, compared to $25.4 million (excluding the insurance recovery) in the immediately preceding quarter and $23.6 million in the third quarter a year ago. For the first nine months of 2006, other operating expenses were $68.5 million ($73.9 million excluding the insurance recovery), compared to $67.7 million in the first nine months of 2005. The increase is largely due to the branch expansion strategy and the exceptional loan origination activity in 2006.

"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 deposits. While our expenses were well-behaved in the third quarter, these new branches initially put pressure on our expense ratios; however, over time they will 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 2.92% in the third quarter of 2006, compared to 2.98% for the third quarter last year. Without the insurance recovery, the ratio for the second quarter of 2006 would have been 3.14%.

Banner's return on equity (ROE) was 13.23% for the third quarter compared to 10.03% a year ago. Year-to-date, ROE was 13.81% compared to 9.30% in the nine month period a year ago. The efficiency ratio was 66.50% in the quarter ended September 30, 2006, versus 71.26% a year earlier. For the first nine months of 2006, the efficiency ratio was 63.04%, compared to 72.27% in the first nine months of 2005. Excluding the insurance recovery, the efficiency ratio was 67.96% for the nine months ended September 30, 2006.

Total deposits increased 21% to $2.74 billion at September 30, 2006, compared to $2.28 billion at the end of September 2005. Total transaction and savings accounts increased 4% during the twelve months ending September 30, 2006, and certificates of deposit increased 37%. "In the quarter ended September 30, 2006, we experienced a further shift towards higher-yielding interest-bearing deposit accounts; however, we continue to have success in adding non-interest-bearing deposit accounts as well," said Jones. "While higher rates have motivated customers to more efficiently manage their transaction account balances, as evidenced by the slower rate of growth in non-interest-bearing deposits and the more rapid increase in certificates of deposits, we are still pleased by our growing number of new customer transaction accounts."

Net loans increased 23% to $2.87 billion at September 30, 2006, compared to $2.33 billion a year earlier. Year-to-date, loans have increased 19%. "Our lending team is doing an outstanding job of adding excellent new loans to the portfolio while maintaining a high level of credit quality. 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 29%, commercial and multifamily real estate loans 7% and commercial and agricultural business loans 9%."

Assets increased 8% to $3.45 billion at September 30, 2006, compared to $3.19 billion a year earlier. Book value per share increased to $20.15 at September 30, 2006, from $19.01 a year earlier, and tangible book value per share was $17.12 at quarter-end, compared to $15.89 a year earlier.

Largely as a result of the restructuring transactions in the fourth quarter of 2005, but also reflecting maturities and principal prepayments, the securities portfolio declined by 46% to $290.5 million at September 30, 2006, from $535.2 million a year earlier. FHLB borrowings declined 56% to $213.9 million at September 30, 2006, from $484.9 million a year earlier, as a result of the restructuring transactions and strong deposit growth, particularly in the quarter ended September 30, 2006.

"Loan growth during the first half of the year exceeded our expectations and our budgeted amounts, prompting a significant increase in our loan loss provision during the second quarter of 2006. Fortunately, continued favorable asset quality trends and a significant recovery on a previously charged off loan allowed us to reduce the loan loss provision for the third quarter," noted Jones. The provision for loan losses for the third quarter was $1.0 million, compared to $1.3 million in the same quarter of 2005 and $2.3 million for the second quarter of 2006. Non-performing assets were $12.1 million, or 0.35% of total assets, at September 30, 2006, compared to $13.9 million, or 0.44% of total assets, at September 30, 2005. At June 30, 2006, Banner's non-performing assets totaled $11.0 million or 0.32% of total assets. Banner's net recoveries in the third quarter totaled $542,000, and the allowance for loan losses at quarter-end totaled $35.2 million, representing 1.21% of total loans outstanding.

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October 25, 2006
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