For the quarter, income from mortgage banking operations, including loan servicing fees, was $1.8 million compared to $3.2 million for the second quarter of 2003. Total other operating income for the quarter was $4.1 million compared to $5.4 million for the same quarter last year, declining principally as a result of the decrease in mortgage banking operations.

Banner's net interest margin increased 8 basis points to 3.65% for the quarter ended June 30, 2004, compared to 3.57% in the second quarter of 2003, but declined by 5 basis points from the first quarter of 2004. For the first half of 2004, net interest margin increased 5 basis points to 3.67%, from 3.62% in the first half of 2003. "Our net interest margin came under pressure during the quarter as a result of slightly lower yields on both loans and investments and an apparent end to a long-term period of declining funding costs, reflecting recent changes in interest rate markets," said Jones. "We have been booking better quality loans at somewhat narrower spreads in a very competitive market. In addition, the rate floors supporting some of our loans have been pushed lower in the current low rate environment as the loans mature and renew."

Over the past year Banner has opened five branches and four lending centers. Hiring personnel to staff this expansion and increased occupancy costs have contributed to a higher level of non-interest (other) expense. Continued legal and collection costs associated with certain non-performing assets, and expenses related to compliance with the additional disclosure and attestation provisions of the Sarbanes-Oxley Act also added to operating expense in the current period. Other operating expense was $19.5 million for the quarter ended June 30, 2004, compared to $17.3 million in the second quarter of 2003. For the first half of the year, other operating expense was $38.4 million compared to $34.3 million for the first half of 2003.

Balance Sheet Review

Assets reached a record $2.8 billion at June 30, 2004, a 10% increase from $2.5 billion a year earlier. Deposits grew 8%, to $1.8 billion, compared to $1.7 billion at June 30, 2003. Book value per share increased to $18.08 at June 30, 2004, from $17.96 per share a year earlier. Tangible book value was $14.82 per share at June 30, 2004, compared to $14.59 a year earlier.

Net loans grew 15%, to $1.9 billion at June 30, 2004, from $1.7 billion a year ago. "We have seen excellent growth in the commercial and multifamily real estate area, construction and land loans, and agricultural business," said Jones. "Commercial and multifamily real estate and construction and land development loans have increased 21% from year ago levels and now represent 55% of the loan portfolio. Commercial business and agricultural lending has increased 14% over the past twelve months and now represents 26% of the total portfolio." Single family lending represents just 17% of Banner's loan portfolio.

Credit Quality

Non-performing assets were $28.9 million, or 1.05% of total assets, at June 30, 2004, a 22% reduction from $37.1 million, or 1.48% of total assets, at June 30, 2003. The loan loss provision for the second quarter was $1.5 million, which is level with the provision in the first quarter, and a 36% reduction from the $2.3 million provision for the second quarter a year ago. At June 30, 2004, the allowance for loan losses totaled $28.0 million, representing 1.47% of total loans outstanding. Net charged off loans for the first six months of 2004 were 5 basis points of average loans outstanding, a significant improvement from the first six months of the prior year when net charge-offs were 31 basis points.

Conference Call

The Company will host a conference call today, Wednesday, July 28, 2004, at 8:00 a.m. PDT, to discuss the second 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.banrbank.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 11003070# until Wednesday, August 4, 2004 or via the Internet at www.fulldisclosure.com.

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