UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 FOR THE TRANSITION PERIOD FROM

______

Commission File Number 0-26584

BANNER CORPORATION

(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction of incorporation or organization)

91-1691604
(I.R.S. EmployerIdentification Number)

10 South First Avenue, Walla Walla, Washington 99362

(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (509) 527-3636

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of class:
Common Stock, $.01 par value per share

As of April 30, 2004
11,597,200 shares*

* Includes 438,985 shares held by employee stock ownership plan (ESOP) that have not been released, committed to be released, or allocated to participant accounts.

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BANNER CORPORATION AND SUBSIDIARIES
Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements. The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:

	Consolidated Statements of Financial Condition as of March 31, 2004 and December 31, 2003	2

	Consolidated Statements of Income for the Quarters Ended March 31, 2004 and 2003	3

	Consolidated Statements of Comprehensive Income for the Quarters Ended March 31, 2004 and 2003	4

	Consolidated Statements of Changes in Stockholders' Equity for the Quarters Ended March 31, 2004 and 2003	5

	Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2004 and 2003	7

	Selected Notes to Consolidated Financial Statements	9

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation

	Special Note Regarding Forward-Looking Statements	13

	General	13

	Recent Developments and Significant Events	13

	Comparison of Financial Condition at March 31, 2004 and December 31, 2003	13

	Comparison of Results of Operations for the Quarters Ended March 31, 2004 and 2003	14

	Asset Quality	19

	Liquidity and Capital Resources	21

	Financial Instruments with Off-Balance Sheet Risk	22

	Capital Requirements	23

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

	Market Risk and Asset/Liability Management	24

	Sensitivity Analysis	24

Item 4 - Controls and Procedures		28

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings		29

Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		29

Item 3 - Defaults upon Senior Securities		29

Item 4 - Submission of Matters to a Vote of Stockholders		29

Item 5 - Other Information		29

Item 6 - Exhibits and Reports on Form 8-K		29

SIGNATURES		30

</PAGE>

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
March 31, 2004 (Unaudited) and December 31, 2003

		(Unaudited)
		March 31			December 31
ASSETS		2004			2003
Cash and due from banks	$	61,894		$	77,298
Securities available for sale, cost $683,931 and $670,033
Encumbered		51,133			55,228
Unencumbered		642,124			619,714
		693,257			674,942
Securities held to maturity, fair value $32,667 and $28,402
Encumbered		216			216
Unencumbered		31,282			27,016
		31,498			27,232

Federal Home Loan Bank stock		35,038			34,693
Loans receivable:
Held for sale, fair value $12,289 and $16,199		12,100			15,912
Held for portfolio		1,784,482			1,711,013
Allowance for loan losses		(26,885	)		(26,060	)
		1,769,697			1,700,865

Accrued interest receivable		13,889			13,410
Real estate owned, held for sale, net		2,077			2,967
Property and equipment, net		24,779			22,818
Goodwill and other intangibles, net		36,477			36,513
Deferred income tax asset, net		1,335			1,941
Bank-owned life insurance		34,143			33,669
Other assets		8,901			8,965
	$	2,712,985		$	2,635,313
LIABILITIES
Deposits:
Non-interest-bearing	$	203,695		$	205,656
Interest-bearing		1,546,195			1,465,284
		1,749,890			1,670,940

Advances from Federal Home Loan Bank		585,158			612,552
Junior subordinated debentures		72,168			56,703
Other borrowings		74,445			69,444
Accrued expenses and other liabilities		16,538			18,444
Deferred compensation		4,500			4,252
Income taxes payable		751			178
		2,503,450			2,432,513
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock - $0.01 par value per share, 27,500,000 shares authorized, 13,201,419 shares
issued: 11,578,934 shares and 11,473,311 shares outstanding at March 31, 2004 and
December 31, 2003, respectively.		124,730			123,375
Retained earnings		82,801			80,286
Accumulated other comprehensive income:
Unrealized gain on securities available for sale		6,062			3,191
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust:
438,985 and 434,299 restricted shares outstanding
at March 31, 2004 and December 31, 2003, respectively, at cost		(3,628	)		(3,589	)

Carrying value of shares held in trust for stock related compensation plans		(3,521	)		(3,554	)
Liability for common stock issued to deferred, stock related, compensation plans		3,091			3,091
		(430	)		(463	)
		209,535			202,800
	$	2,712,985		$	2,635,313

See notes to consolidated financial statements

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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
For the Quarters Ended March 31, 2004 and 2003

		2004			2003
INTEREST INCOME:
Loans receivable	$	29,019		$	28,844
Mortgage-backed securities		4,527			3,052
Securities and cash equivalents		3,081			2,822
		36,627			34,718
INTEREST EXPENSE:
Deposits		7,864			8,871
Federal Home Loan Bank advances		5,125			5,700
Junior subordinated debentures/Trust preferred securities		692			567
Other borrowings		237			172
		13,918			15,310

Net interest income before provision for loan losses		22,709			19,408

PROVISION FOR LOAN LOSSES		1,450			2,250
Net interest income		21,259			17,158

OTHER OPERATING INCOME:
Loan servicing fees		266			530
Other fees and service charges		1,843			1,658
Mortgage banking operations		1,252			2,062
Gain (loss) on sale of securities		11			3
Miscellaneous		444			565
Total other operating income		3,816			4,818

OTHER OPERATING EXPENSES:
Salary and employee benefits		12,103			11,211
Less capitalized loan origination costs		(1,487	)		(1,575	)
Occupancy and equipment		2,487			2,372
Information/computer data services		1,026			838
Professional services		915			430
Advertising		1,108			866
Miscellaneous		2,676			2,915

Total other operating expenses		18,828			17,057

Income before provision for income taxes		6,247			4,919

PROVISION FOR INCOME TAXES		1,884			1,490

NET INCOME	$	4,363		$	3,429

Earnings per common share: see Note 5
Basic	$	0.39		$	0.32
Diluted	$	0.38		$	0.31
Cumulative dividends declared per common share:	$	0.16		$	0.15

See notes to consolidated financial statements

</PAGE>

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands except for per share amounts)
For the Quarters Ended March 31, 2004 and 2003

		2004			2003
NET INCOME	$	4,363		$	3,429

OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized holding gain (loss) during the period, net of deferred income tax (benefit) of $1,550 and $48 respectively.		2,878			90
Less adjustment for (gains)/losses included in net income, net of income tax (benefit) of $4 and $1; respectively		(7	)		(2	)
Other comprehensive income (loss)		2,871			88

COMPREHENSIVE INCOME	$	7,234		$	3,517

See notes to consolidated financial statements

</PAGE>

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (In thousands, except per share amounts)
For the Quarters Ended March 31, 2004 and 2003

	Common Stock and Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Unearned Restricted ESOP Shares			Value, Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans				Stockholders' Equity
BALANCE, January 1, 2003	$	120,554		$	70,813		$	3,488	$	(4,262	)	$	(216		)	$	$190,377
Net income					3,429												3,429

Change in valuation of securities available for sale, net of income taxes								88									88

Cash dividend on common stock ($.15/share cumulative)					(1,697	)											(1,697	)

Proceeds from issuance of common stock for exercise of stock options		213															213

Net issuance of stock through employees' stock plans, including tax benefit		352								(2	)		(355		)		(5	)

Amortization of compensation related to Management Recognition Plan (MRP)													26				26

BALANCE, March 31, 2003	$	121,119		$	72,545		$	3,576	$	(4,264	)	$	(545		)	$	192,431


BALANCE, January 1, 2004	$	123,375		$	80,286		$	3,191	$	(3,589	)	$	(463	)		$	$202,800
Net income					4,363												4,363

Change in valuation of securities available for sale, net of income taxes								2,871									2,871

Cash dividend on common stock ($.16/share cumulative)					(1,848	)											(1,848	)

Purchase and/or retirement of common stock		(217	)														(217	)

Proceeds from issuance of common stock for exercise of stock options		1,627															1,627

Net issuance of stock through employees' stock plans, including tax benefit		(55	)							(39	)						(94	)

Amortization of compensation related to MRP													33				33

BALANCE, March 31, 2004	$	124,730		$	82,801		$	6,062	$	(3,628	)	$	(430		)	$	209,535

See selected notes to consolidated financial statements

</PAGE>

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (continued) ( in thousands)
For the Quarters Ended March 31, 2004 and 2003

	2004		2003
COMMON STOCK, SHARES ISSUED:
Number of shares, beginning of period	13,201		13,201
Number of shares, end of period	13,201		13,201

LESS COMMON STOCK RETIRED:
Number of shares, beginning of period	(1,728	)	(1,894	)
Purchase and retirement of common stock	(7	)	--
Issuance of common stock to deferred compensation plan and/or exercised stock options	113		40
Number of shares retired, end of period	(1,622	)	(1,854	)

SHARES ISSUED AND OUTSTANDING, END OF PERIOD	11,579		11,347

UNEARNED, RESTRICTED ESOP SHARES:
Number of shares, beginning of period	(434	)	(516	)
Adjustment of earned shares	(5	)	--
Number of shares, end of period	(439	)	(516	)

See notes to consolidated financial statements

</PAGE>

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Quarters Ended March 31, 2004 and 2003

		2004			2003
OPERATING ACTIVITIES:
Net income	$	4,363		$	3,429
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,430			2,166
Loss (gain) on sale of securities		(11	)		(3	)
Increase in cash surrender value of bank-owned life insurance		(474	)		(451	)
Gain on sale of loans, excluding capitalized servicing rights		(1,210	)		(1,721	)
Loss (gain) on disposal of real estate held for sale and property and equipment		(91	)		17
Provision for losses on loans and real estate held for sale		1,450			2,531
Federal Home Loan Bank stock dividend		(345	)		(547	)
Net change in:
Loans held for sale		3,812			(7,847
Other assets		(1,531	)		1,591
Other liabilities		(1,082	)		(9,854	)
Net cash provided (used) by operating activities		6,311			(10,689	)

INVESTING ACTIVITIES:
Purchases of securities		(150,847	)		(249,529	)
Principal repayments and maturities of securities		113,136			93,928
Proceeds from sales of securities		19,435			10,039
Origination of loans, net of principal repayments		(141,733	)		(123,670	)
Purchases of loans and participating interest in loans		(2,670	)		(16,649	)
Proceeds from sales of loans and participating interest in loans		71,681			128,738
Purchases of property and equipment-net		(2,806	)		(731	)
Proceeds from sale of real estate held for sale-net		1,076			1,083
Investment in bank-owned life insurance		--			(26	)
Other		(28	)		--
Net cash used by investing activities		(92,756	)		(156,817	)

FINANCING ACTIVITIES:
Increase in deposits		78,950			116,569
Proceeds from FHLB advances		319,200			154,750
Repayment of FHLB advances		(346,594	)		(109,041	)
Proceeds from issuance of junior subordinated debentures		15,000			--
Proceeds from issuance of repurchase agreement borrowings		--			19,000
Repayment of repurchase agreement borrowings		(3,620	)		(16,756	)
Increase (decrease) in other borrowings, net		8,621			(2,046	)
Cash dividends paid		(1,832	)		(1,691	)
Repurchases of stock, net of forfeitures		(217	)		212
ESOP shares earned		(94	)		(5	)
Exercise of stock options		1,627			--
Net cash provided by financing activities		71,041			160,992

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		(15,404	)		(6,514	)

CASH AND DUE FROM BANKS, BEGINNING OF PERIOD		77,298			132,910
CASH AND DUE FROM BANKS, END OF PERIOD	$	61,894		$	126,396

(Continued on next page)

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BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Quarter Ended March 31, 2004 and 2003
(Continued from prior page)

		2004		2003

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash	$	14,783	$	14,777
Taxes paid in cash		2,250		--
Non-cash transactions:
Loans, net of discounts, specific loss allowances and unearned income, transferred to real estate owned and other repossessed assets		19		635
Net change in accrued dividends payable		16		(6)
Change in other assets/liabilities		475		--

See notes to consolidated financial statements

</PAGE>

BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation and Critical Accounting Policies

Banner Corporation (BANR or the Company) is a bank holding company incorporated in the State of Washington. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned subsidiary, Banner Bank (BB or the Bank). The Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington, and its 46 branch offices and 12 loan production offices located in 23 counties in Washington, Oregon and Idaho. The Company is subject to regulation by the Federal Reserve Board (FRB). The Bank is subject to regulation by the State of Washington Department of Financial Institutions Division of Banks and the Federal Deposit Insurance Corporation (FDIC).

In the opinion of management, the accompanying consolidated statements of financial condition and related interim consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows reflect all adjustments (which include reclassifications and normal recurring adjustments) that are necessary for a fair presentation in conformity with generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates and may have a material impact on the financial statements.

Various elements of the Company's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's financial statements. These policies relate to the methodology for the determination of the provision and allowance for loan and lease losses and the valuation of goodwill, mortgage servicing rights and real estate held for sale. These policies and the judgments, estimates and assumptions are described in greater detail in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 of the Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. Management believes that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's res ults of operations or financial condition.

Stock Compensation Plans: The Company measures its employee stock-based compensation arrangements under the provisions outlined in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been recognized for its stock option plans. If the compensation cost for the Company's compensation plans had been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company's net income available to common stockholders on a diluted basis and diluted earnings per common share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):

	Quarter Ended March 31
	Quarter Ended March 31

		2004		2003
Net income available to common stockholders:
Basic:
As reported	$	4,363	$	3,429
Pro forma		4,125		3,117
Diluted:
As reported	$	4,363	$	3,429
Pro forma		4,125		3,117
Net income per common share:
Basic:
As reported	$	0.39	$	0.32
Pro forma		0.37		0.29
Diluted:
As reported	$	0.38	$	0.31
Pro forma		0.35		0.28

The compensation expense included in the pro forma net income available to common stockholders on a diluted basis and diluted earnings per common share is not likely to be representative of the effect on reported net income for future years because options vest over several years and additional awards generally are made each year.

</PAGE>

The fair value of options granted under the Company's stock option plans (SOPs) is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants:

	2004		2003
Annual dividend yield	2.34 to 2.43	%	3.42 to 3.68	%
Expected volatility	31.7 to 32.1	%	42.3 to 49.6	%
Risk free interest rate	2.72 to 4.05	%	2.94 to 4.07	%
Expected lives	5 to 9	yrs	5 to 9	yrs

Certain reclassifications have been made to the 2003 financial statements and/or schedules to conform to the 2004 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of such reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.

The information included in this Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year.

Note 2: Recent Developments and Significant Events

In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 46, Consolidation of Certain Variable Interest Entities-An Interpretation of ARB No. 51, to clarify when an entity should consolidate another entity known as a variable interest entity (VIE), more commonly referred to as a special purpose entity or SPE. A VIE is an entity in which equity investors do not have characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties, and may include many types of SPEs. FIN 46 requires that an entity shall consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the VIE's expected losses if they occur, receive a majority of the VIE's expected residual returns if they occur, or both. FIN 46 is effective for newly created VIEs beginning February 1, 2003 and for existing VIEs as of the third quarter of 2003. Effective October 10, 2003, FASB deferred the effective date of FIN 46 from July 1, 2003, to the first interim period ending after December 15, 2003 (March 31, 2004) for VIEs originated prior to February 1, 2003. The Company elected to adopt FIN 46 early, which resulted in the deconsolidation of the special purpose business trusts effective December 31, 2003. This increased the Bank's held-to-maturity investments and related borrowings by $1.7 million as detailed below.

Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities: At December 31, 2003, three wholly-owned subsidiary grantor trusts, Banner Capital Trust I, II, and III (BCT I, II, and III or collectively, Trusts), established by the Company had issued $55 million of pooled trust preferred securities. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures. The Trusts used the net proceeds from the offerings to purchase a like amount of junior subordinated debentures (Debentures) of the Company. The Debentures are the sole assets of the Trusts. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.

Prior to adoption of FIN 46, BCT I, II and III were considered consolidated subsidiaries of the Company. At December 31, 2002, $40 million of trust preferred securities were included in the Company's consolidated balance sheet in the liabilities section, under the caption, "Trust preferred securities," and the $1.2 million common capital securities of the issuer retained by the Company were eliminated against the Company's investment in the Trusts. Distributions on these trust preferred securities were recorded as interest expense on the consolidated statements of income.

As a result of the adoption of FIN 46, the Company deconsolidated all three Trusts as of December 31, 2003. As a result, the Debentures issued by the Company to the Trusts, totaling $56.7 million, were reflected in the Company's consolidated balance sheet in the liabilities section at December 31, 2003 under the caption, "Junior subordinated debentures." Beginning January 1, 2004, the Company has recorded interest expense of the corresponding junior subordinated debentures in its consolidated statements of income. The Company recorded $1.7 million of the common capital securities issued by BCT I, II and III in the securities held-to-maturity in its consolidated balance sheet at December 31, 2003.

Sale of $15 Million of Trust Preferred Securities: In March 2004, the Company completed the issuance of $15.5 million of Debentures in connection with a private placement of pooled trust preferred securities called Banner Capital Trust IV (BCT IV). The trust preferred securities were issued by special purpose business trusts owned by the Company and sold to pooled investment vehicles sponsored and marketed by investment banking firms. The Debentures have been recorded as a liability on the statement of financial condition but, subject to limitations, under current Federal Reserve guidelines, qualify as Tier 1 capital for regulatory capital purposes. A portion of the proceeds from this offering are expected to be used primarily to fund growth, including acquisitions, by augmenting the Bank's regulatory capital. Remaining proceeds may also be used to fund the Company's stock repurchase program and for other general corporate purposes as necessary. Under the terms of the transaction, the trust preferred securities and Debentures have a maturity of 30 years and are redeemable after five years with certain exceptions. The holders of the trust preferred securities and Debentures are entitled to receive cumulative cash distributions at a variable annual rate. The recent issue, of $15.5 million, has a current interest rate of 3.95% which is reset quarterly to equal three-month LIBOR plus 2.85%.

</PAGE>

Note 3: Business Segments

The Company is managed by legal entity and not by lines of business. The Bank is a community oriented commercial bank chartered in the State of Washington. The Bank's primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its primary market area. The Bank offers a wide variety of deposit products to its consumer and commercial customers. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. The Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis. In addition to interest income on loans and investment securities, the Bank receives other income from deposit service charges, loan servicing fees and from the sale of loans and investments. The performance of the Bank is reviewed by the Company's executive management and Board of Directors on a monthly basis. All of the executive officers of the Company are members of the Bank's management team.

Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders. The Company has determined that its current business and operations consist of a single business segment.

</PAGE>

Note 4: Additional Information Regarding Interest-Bearing Deposits and Securities

Encumbered Securities: Securities labeled "Encumbered" are pledged securities that are subject to certain agreements which may allow the secured party to either sell and replace them with similar but not the exact same security or otherwise pledge the securities. In accordance with SFAS No. 140, the amounts have been separately identified in the Consolidated Statements of Financial Condition as "Encumbered."

The following table sets forth additional detail on the Company's interest-bearing deposits and securities at the dates indicated (at carrying value) (in thousands):

	March 31		December 31		March 31
	2004		2003		2003

Interest-bearing deposits included in cash and due from banks	$	6,584	$	2,644	$	52,117

Mortgage-backed securities		454,037		415,161		359,365
Other securities-taxable		223,102		243,088		193,503
Other securities-tax exempt		41,743		38,478		22,499
Equity securities with dividends		5,873		5,447		3,694
Total securities		724,755		702,174		579,061

Federal Home Loan Bank (FHLB) stock		35,038		34,693		33,378

	$	766,377	$	739,511	$	664,556

The following table provides additional detail on income from deposits and securities for the periods indicated (in thousands):

	Quarters Ended March 31
	Quarters Ended March 31
		2004		2003
Mortgage-backed securities interest	$	4,527	$	3,052

Taxable interest and dividends		2,315		1,969
Tax-exempt interest		421		307
FHLB stock dividends		345		546
		3,081		2,822

	$	7,608	$	5,874

Note 5: Calculation of Weighted Average Shares Outstanding for Earnings Per Share (EPS)

The following table reconciles total shares originally issued to weighted shares outstanding used to calculate earnings per share data (in thousands):

	Quarters Ended March 31
	Quarters Ended March 31
		2004		2003
Total shares originally issued		13,201		13,201
Less retired weighted average shares plus unvested weighted average shares allocated to MRP		(1,711	)	(1,899	)
Less unallocated shares held by the ESOP		(439	)	(516	)

Basic weighted average shares outstanding		11,051		10,786

Plus unvested MRP and stock option incremental shares considered outstanding for diluted EPS calculations		583		254
Diluted weighted average shares outstanding		11,634		11,040

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ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

Management's Discussion and Analysis (MD&A) and other portions of this report contain certain "forward-looking statements" concerning the future operations of the Company. Management desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward-looking statements" contained in this report and our Annual Report on Form 10-K. We have used "forward-looking statements" to describe future plans and strategies, including our expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. 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, 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 the Company's ability to successfully resolve the outstanding credit issues. Accordingly, these factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. The Company undertakes no responsibility to update or revise any "forward-looking statements."

General

Banner Corporation, a Washington corporation, is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned subsidiary, Banner Bank. The Bank is a Washington-chartered commercial bank the deposits of which are insured by the Federal Deposit Insurance Corporation (FDIC). The Bank is a regional bank which offers a wide variety of commercial banking services and financial products to both businesses and individuals in its primary market areas. The Bank conducts business from its main office in Walla Walla, Washington, and its 46 branch offices and 12 loan production offices located in 23 counties in Washington, Oregon and Idaho.

The operating results of the Company depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits and Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a function of the Company's interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets and interest-bearing liabilities. As more fully explained below, the Company's net interest income increased $3.3 million for the quarter ended March 31, 2004, compared to the same period a year earlier, as a result of an increase of 4 basis points in the interest rate spread and significant growth in interest-bearing assets and liabilities. The net interest margin also increased 4 basis points for the quarter ended March 31, 2004, compared to the same period one year ago.

The Company's net income also is affected by provisions for loan losses and the level of its other income, including deposit service charges, loan origination and servicing fees, and gains and losses on the sale of loans and securities, as well as its non-interest operating expenses and income tax provisions. Provision for loan losses decreased by $800,000 to $1.5 million for the quarter ended March 31, 2004, compared to $2.3 million for the quarter ended March 31, 2003. Other operating income decreased by $1.0 million for the quarter ended March 31, 2004, largely as a result of decreased mortgage banking activity and the resulting gain on the sale of loans. Other operating expenses increased $1.8 million for the quarter ended March 31, 2004, compared to the same period ended March 31, 2003, reflecting the continued growth of the Company as detailed below in the "Comparison of Financial Condition" and "Comparison of Results of Operations" sections of this report.

Management's discussion and analysis of results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to the Consolidated Financial Statements.

Recent Developments and Significant Events

See Note 2 to the Consolidated Financial Statements.

Comparison of Financial Condition at March 31, 2004 and December 31, 2003

General: Total assets increased $77.7 million, or 2.9%, from $2.635 billion at December 31, 2003, to $2.713 billion at March 31, 2004. The increase largely resulted from growth in the loan portfolio and was funded primarily by deposit growth. Net loans receivable (gross loans less loans in process, deferred fees and discounts, and allowance for loan losses) increased $68.8 million, or 4.0%, from $1.701 billion at December 31, 2003, to $1.770 billion at March 31, 2004. Loan portfolio growth included an increase of $32.2 million in mortgages secured by commercial real estate loans, an increase of $3.6 million in multifamily real estate loans, an increase of $8.6 million in construction and land loans and an increase of $19.9 million in non-mortgage commercial and agricultural loans. These increases reflect the Company's continuing effort to increase the portion of its loans invested in commercial, construction, and land development real estate loans and non-mortgage commercial business and agricultural loans. While these loans are inherently of higher risk than residential mortgages, management believes they can produce higher credit-adjusted returns to the Company and provide better opportunities to develop comprehensive banking relationships with borrowers than most residential mortgages. The Company also had an increase of $5.6 million in one- to four-family residential real estate loans, while other consumer loans were nearly unchanged. Securities available for sale and held to maturity increased $22.6 million, or 3.2%, from $702.2 million at December 31, 2003, to $724.8 million at March 31, 2004, as a result of additional investing. FHLB stock increased

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$345,000 as a result of dividends paid by the FHLB in the form of additional shares of stock. The Company also had an increase of $474,000 in bank-owned life insurance from the growth of cash surrender values on existing policies. The majority of the increase in assets was funded by a growth in deposits. Asset growth was also funded by additional borrowings, primarily the issuance of junior subordinated debentures, and net income from operations. Deposits grew $79.0 million, or 4.7%, from $1.671 billion at December 31, 2003, to $1.750 billion at March 31, 2004. Although non-interest-bearing deposits decreased $2.0 million, or 1.0%, interest-bearing deposits increased significantly, growing by $80.9 million, or 5.5%, from the December 31, 2003 amounts. While FHLB advances decreased $27.4 million from $612.6 million at December 31, 2003, to $585.2 million at March 31, 2004, junior subordinated debentures issued in connection with trust preferred securities increased $15.5 million to $72.2 million and other borrowings increased $5.0 million to $74.4 million at March 31, 2004.

Comparison of Results of Operations for the Quarters Ended March 31, 2004 and 2003

General. For the quarter ended March 31, 2004, the Company had net income of $4.4 million, or $.38 per share (diluted), compared to net income of $3.4 million, or $.31 per share (diluted), for the quarter ended March 31, 2003, an increase of $934,000. The Company's improved operating results reflect significant growth of assets and liabilities, combined with a modest increase in the net interest margin and a substantially lower provision for loan losses. The Company's operating results also reflect a significant decreases in other operating income, primarily mortgage banking revenues, combined with substantial increases in other operating expenses, particularly compensation, professional services and advertising. Compared to levels a year ago, total assets increased 12.2%, to $2.713 billion at March 31, 2004, net loans increased 13.1%, to $1.770 billion, deposits grew 8.4%, to $1.750 billion, and borrowings, including junior subordinated debentures, increased 23.4%, to $731.8 million. Average interest earning assets were $2.467 billion for the quarter ended March 31, 2004, an increase of $319.4 million, or 14.9%, compared to the same period a year earlier. Average equity was 7.90% of average assets for the quarter ended March 31, 2004, compared to 8.37% of average assets for the quarter ended March 31, 2003, reflecting increased balance sheet leverage.

Net Interest Income. Net interest income before provision for loan losses increased to $22.7 million for the quarter ended March 31, 2004, compared to $19.4 million for the quarter ended March 31, 2003, largely as a result of the growth in average interest earning assets noted above. In addition, net interest margin increased 4 basis points for the quarter, reflecting a similar 4 basis point increase in net interest rate spread and a modest increase in the ratio of interest-bearing assets relative to interest-earning liabilities. The changes in net interest spread and net interest margin reflect the impact of the current very low level of market interest rates as well the effects of changes in the asset and liability mix.

Interest Income. Interest income for the quarter ended March 31, 2004 was $36.6 million, compared to $34.7 million for the quarter ended March 31, 2003, an increase of $1.9 million, or 5.5%. The increase in interest income occurred despite a 59 basis point decrease in the average yield on earning assets, reflecting significant growth in those assets. The yield on average interest-earning assets decreased to 5.97% for the quarter ended March 31, 2004, compared to 6.56% for the same period a year earlier. Average loans receivable for the quarter ended March 31, 2004 increased by $168.8 million, or 10.7%, when compared to the quarter ended March 31, 2003. However, interest income on loans for the quarter only increased by $175,000, or 0.6%, compared to the prior year, as the impact of the increase in average loan balances was reduced by a 72 basis point decrease in the average yield. The decrease in average loan yield reflects the decline in the level of market interest rates compared to prior year levels, particularly the prime rate which affects a large portion of construction, commercial and agricultural loans, and declines which occurred during the prior year which led to a significant amount of prepayments of higher-rate real estate and other fixed-rate, fixed-term loans. The loan mix continued to change during the quarter as the portion of the portfolio invested in construction, land development and commercial loans increased compared to the prior year. Loans yielded 6.67% for the quarter ended March 31, 2004, compared to 7.39% for the quarter ended March 31, 2003. While the level of market interest rates was lower than a year earlier, loan yields w ere supported to a degree by certain loans with rate floors and by changes in the portfolio mix. The combined average balance of mortgage-backed securities, investment securities, daily interest-bearing deposits and FHLB stock increased by $150.6 million for the quarter ended March 31, 2004, and the interest and dividend income from those investments increased $1.7 million compared to the quarter ended March 31, 2003. The average yield on mortgage-backed securities increased to 4.43% for the quarter ended March 31, 2004, from 3.90% for the comparable period in 2003, reflecting reduced amortization of purchase premiums on certain portions of the portfolio as well as a reduction in the adverse effects of delayed receipt of principal payments on mortgage-backed securities as a result of slower prepayments. Both premium amortization and principal prepayments were significantly elevated in the year earlier period. The average yield on other investment securities and cash equivalents decreased to 4.08% for the quarter ended March 31, 2004, from 4.30% for the comparable quarter in 2003 reflecting lower market rates. Earnings on FHLB stock decreased by $201,000, to $345,000, in the quarter ended March 31, 2004, from $546,000 in the comparable quarter in 2003, despite a $1.9 million increase in the average balance held, as a result of a 274 basis point decrease in the yield received. The dividend yield on FHLB stock was 4.00% for the quarter ended March 31, 2004, compared to 6.74% for the quarter ended March 31, 2003. Dividends on FHLB stock are established on a quarterly basis by vote of the Directors of the FHLB.

Interest Expense. Interest expense for the quarter ended March 31, 2004 was $13.9 million, compared to $15.3 million for the comparable period in 2003, a decrease of $1.4 million, or 9.1%. The decrease in interest expense was the result of a significant decrease in the average cost of all interest-bearing liabilities to 2.33% from 2.96%, primarily reflecting the lower levels of market interest rates and the maturity of certain higher-costing certificates of deposit and fixed-rate borrowings. Deposit interest expense decreased $1.0 million for the quarter ended March 31, 2004, compared to the same quarter a year ago, despite the strong deposit growth throughout the Company over the past twelve months, as a result of a continuing decline in the cost of deposits. Average deposit balances increased $164.1 million, or 10.9%, to $1.671 billion for the quarter ended March 31, 2004, from $1.506 billion for the quarter ended March 31, 2003, while, at the same time, the average rate paid on deposit balances decreased 50 basis points. Average FHLB advances totaled $603.8 million during the quarter ended March 31, 2004, compared to $504.8 million during the quarter ended March 31, 2003, an increase of $99.0 million that, combined with a 117 basis point decrease in the average cost of advances, resulted in a $575,000 decrease in related interest expense. The average rate paid on those advances decreased to 3.41% for the quarter ended March 31, 2004, from 4.58% for the quarter ended March 31, 2003. FHLB advances are generally fixed-rate, fixed-term borrowings with rates on many of those advances established in periods when market rates were considerably higher. In

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addition to reflecting the maturity and repricing of certain of those fixed-rate, fixed-term advances, the lower cost in the current quarter reflects growth using new advances priced at current market rates. Funding was also provided in the first quarter of 2004 by junior subordinated debentures which were issued in connection with trust preferred securities and had an average balance of $57.9 million and an average cost of 4.81% (including amortization of prepaid underwriting costs) for the quarter ended March 31, 2004. Trust preferred securities outstanding in the first quarter of the prior year had an average balance of $40.0 million and an average rate of 5.75%. (See Note 2, Recent Developments and Significant Events, for a detailed discussion of the accounting for junior subordinated debentures and trust preferred securities.) Other borrowings consist of retail repurchase agreements with customers and reverse repurchase agreements with investment banking firms secured by certain investment securities. The average balance for other borrowings increased $27.3 million, to $71.1 million for the quarter ended March 31, 2004, from $43.8 million for the same period in 2003, while the related interest expense increased $65,000, to $237,000, from $172,000 for the respective periods. The average rate paid on other borrowings was 1.34% in the quarter ended March 31, 2004, compared to 1.59% for the same quarter in 2003. The Company's other borrowings generally have relatively short terms and therefore reprice to current market levels more quickly than FHLB advances, which generally lag current market rates.

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The following tables provide additional comparative data on the Company's operating performance:

	Quarters Ended
	March 31
Average Balances
(in thousands)		2004			2003
Investment securities and cash equivalents	$	269,939		$	214,798
Mortgage-backed obligations		411,410			317,765
Loans		1,750,998			1,582,231
FHLB stock		34,697			32,837
Total average interest-earning assets		2,467,044			2,147,631

Non-interest-earning assets		163,435			157,412
Total average assets	$	2,630,479		$	2,305,043

Deposits	$	1,670,509			1,506,427
Advances from FHLB		603,816			504,751
Junior subordinated debentures/Trust preferred securities		57,893			40,000
Other borrowings		71,080			43,766
Total average interest-bearing liabilities		2,403,298			2,094,944

Non-interest-bearing liabilities		19,467			17,120
Total average liabilities		2,422,765			2,112,064

Equity		207,714			192,979
Total average liabilities and equity	$	2,630,479		$	2,305,043

Interest Rate Yield/Expense (rates are annualized)
Interest Rate Yield:
Investment securities and cash equivalents		4.08	%		4.30	%
Mortgage-backed obligations		4.43	%		3.90	%
Loans		6.67	%		7.39	%
FHLB stock		4.00	%		6.74	%
Total interest rate yield on interest-earning assets		5.97	%		6.56	%

Interest Rate Expense:
Deposits		1.89	%		2.39	%
Advances from FHLB		3.41	%		4.58	%
Junior subordinated debentures/Trust preferred securities		4.81	%		5.75	%
Other borrowings		1.34	%		1.59	%
Total interest rate expense on interest-bearing liabilities		2.33	%		2.96	%

Interest spread		3.64	%		3.60	%

Net interest margin on interest earning assets		3.70	%		3.66	%

Additional Key Financial Ratios (ratios are annualized)
Return on average assets		.67	%		0.60	%
Return on average equity		8.45	%		7.21	%
Average equity / average assets		7.90	%		8.37	%
Average interest-earning assets / interest-bearing liabilities		102.65	%		102.51	%
Non-interest (other operating) expenses/average assets		2.88	%		3.00	%
Efficiency ratio [non-interest (other operating) expenses / revenues]		70.98	%		70.41	%

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Provision and Allowance for Loan Losses. During the quarter ended March 31, 2004, the provision for loan losses was $1.5 million, compared to $2.3 million for the quarter ended March 31, 2003, a decrease of $800,000. As noted in Note 1 to the Consolidated Financial Statements, the provision and allowance for loan losses is one of the most critical accounting estimates included in the Company's financial statements. The decrease in the provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriate level based upon management's evaluation of the adequacy of general and specific loss reserves as more fully explained below.

The significantly lower provision in the current quarter reflects lower levels of non-performing loans and net charge-offs, improvement in the current economic environment and strengthening in the prospects for collection on previously identified non-performing loans, as well as the recognition of problem loans through provision for losses recorded in previous periods. Non-performing loans decreased $9.7 million to $27.4 million at March 31, 2004, compared to $37.1 million at March 31, 2003, and decreased $1.0 million compared to $28.4 million at December 31, 2003. Net charge-offs were $625,000 for the current quarter, compared to $3.2 million for the same quarter a year earlier. In recent years, non-performing loans have been primarily concentrated in the Puget Sound region where continued economic weakness has diminished certain borrowers' ability to meet obligations. However, during the past year, the Bank had a significant increase in non-performing agricultural loans and agricultural-related business loans due from borrowers located in northeastern Oregon. Generally these problem loans reflect unique operating difficulties for the individual borrower rather than a weakness in the overall economy of the area. A comparison of the allowance for loan losses at March 31, 2004 and 2003, shows an increase of $1.3 million, to $26.9 million at March 31, 2004, from $25.6 million at March 31, 2003. The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for losses) was 1.50% and 1.61% at March 31, 2004 and March 31, 2003, respectively.

In originating loans, the Company recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the credit worthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. As a result, the Company maintains an allowance for loan losses consistent with the GAAP guidelines outlined in SFAS No. 5, Accounting for Contingencies. The Company has established systematic methodologies for the determination of the adequacy of its allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans. The Company increases its allowance for loan losses by charging provisions for probable loan losses against the Company's income and values impaired loans consistent with t he guidelines in SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure.

The allowance for losses on loans is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited to the allowance. The reserve is based upon factors and trends identified by management at the time financial statements are p repared. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. These agencies may require changes to the allowance based upon judgments different from those of management. Although management uses the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control. The adequacy of general and specific reserves is based on management's continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience and current economic conditions, as well as individual review of certain large balance loans. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for impairment include residential real estate and consumer loans. Smaller balance non-homogeneous loans also may be evaluated collectively for impairment. Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment. Loans are considered impaired when, based on current information and events, management determines that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, value of the underlying collateral and current status of the economy. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. As of March 31, 2004, the Company had identified $27. 3 million of impaired loans as defined by SFAS No. 114 and had established $5.4 million of specific loss allowances for these loans.

The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, an allocated formula allowance, and an unallocated allowance. Losses on specific loans are provided for when the losses are probable and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of general reserves is based on analysis of potential exposures existing in the Bank's loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by management at the time the financial statements are prepared. The formula allowance is calculated by applying loss factors to outstanding loans, excluding loans with specific allowances. Loss factors are based on the Company's historical loss experience adjusted for significant factors including the experience of other banking organizations that, in management's ju dgment, affect the collectibility of the portfolio as of the evaluation date. The unallocated allowance is based upon management's evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This methodology may result in losses or recoveries differing significantly from those provided in the financial statements.

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The following tables are provided to disclose additional detail on the Company's loans and allowance for loan losses (in thousands):

	March 31		December 31			March 31
Loan Portfolio:	2004		2003			2003
Loans (including loans held for sale):
Secured by real estate:
One- to four-family	$	279,497	$	275,197		$	323,495
Consumer secured by one- to four-family		32,600		31,277			25,004
Total one- to four-family		312,097		306,474			348,499

Commercial		488,137		455,964			384,589
Multifamily		92,687		89,072			68,494
Construction and land		407,561		398,954			347,956
Commercial business		321,979		321,671			301,418
Agricultural business, including secured by farmland		138,501		118,903			102,737
Consumer		35,620		35,887			36,845
Total loans outstanding		1,796,582		1,726,925			1,590,538

Less allowance for loan losses		26,885		26,060			25,551

Total net loans outstanding at end of period	$	1,769,697	$	1,700,865		$	1,564,987

			Quarters Ended
			March 31
Allowance for Loan Losses:				2004			2003
Balance, beginning of the period			$	26,060		$	26,539


Provision for loan losses				1,450			2,250

Recoveries of loans previously charged off:
Secured by real estate:
One- to four-family				--			--
Commercial				--			--
Multifamily				--			--
Construction and land				--			--
Commercial business				139			95
Agricultural business, including secured by farmland				3			1
Consumer				9			14
				151			110
Loans charged off:
Secured by real estate:
One- to four-family				(24	)		--
Commercial				(245	)		(1,188	)
Multifamily				--			--
Construction and land				(100	)		(29	)
Commercial business				(339	)		(1,938	)
Agricultural business, including secured by farmland				(68	)		--
Consumer				--			(193	)
				(776	)		(3,348	)
Net charge-offs				(625	)		(3,238	)

Balance, end of the period			$	26,885		$	25,551

Net charge-offs as a percentage of average net book value of loans outstanding for the period				0.04	%		0.20	%

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The following is a schedule of the Company's allocation of the allowance for loan losses:

	March 31			December 31			March 31
	2004			2003			2003
Specific or allocated loss allowances:
Secured by real estate:
One- to four-family	$	710		$	749		$	873
Commercial		5,562			5,058			4,844
Multifamily		464			445			362
Construction and land		5,091			5,207			6,602
Commercial business		8,521			8,161			8,406
Agricultural business, including secured by farmland		3,515			3,194			2,286
Consumer		482			482			574
Total allocated		24,345			23,296			23,947

Estimated allowance for undisbursed commitments		365			242			178
Unallocated		2,175			2,522			1,426
Total allowance for loan losses	$	26,885		$	26,060		$	25,551

Allowance for loan losses as a percentage of total loans outstanding (loans receivable excluding allowance for losses)		1.50	%		1.51	%		1.61	%

Other Operating Income. Other operating income was $3.8 million for the quarter ended March 31, 2004, a decrease of $1.0 million from the quarter ended March 31, 2003. This primarily reflected an $810,000 decrease in the gain on sale of loans for the current quarter as increased interest rates led to decreased mortgage banking activity. It also included a $264,000 decline in loan servicing fees which were higher in the year earlier quarter largely as a result of the collection of prepayment penalties on certain fixed-rate mortgage loans that repaid during that period. Loan sales for the quarter ended March 31, 2004 totaled $70.5 million, compared to $127.0 million for the quarter ended March 31, 2003. Gain on sale of loans for the Company included $158,000 of fees on $13.6 million of loans which were brokered and are not reflected in the volume of loans sold. Other fee and service charge income increased by $185,000, to $1.8 million for the quarter ended March 31, 2004, compared to $1.7 million for the quarter ended March 31, 2003, primarily reflecting growth in customer transaction accounts, although increased fees also reflect changes in the Company's overdraft protection program that were implemented during the first quarter of 2003.

Other Operating Expenses. Other operating expenses increased $1.8 million, to $18.8 million for the quarter ended March 31, 2004, from $17.1 million for the quarter ended March 31, 2003. Other operating expenses reflect the overall growth in assets and liabilities, customer relationships and complexity of operations as the Company continues to expand. The higher level of operating expenses in the current quarter includes significant increases in compensation for additional branch and commercial loan production staff hired to position the Company for future growth. In addition, compensation was higher as a result of general wage and salary increases, as well as increased costs associated with employee benefit programs and employer-paid taxes. These increases were mitigated to a degree by lower commission expenses related to mortgage banking operations. The Company also significantly increased its commitment to advertising and marketing expenditures which were $242,000 greater in the quarter ended March 31, 2004 than in the same period in the prior year. The increase in expenses includes operating costs associated with opening new branch offices in Seattle, Yakima and Walla Walla, Washington, Hillsboro, Oregon and Boise and Twin Falls, Idaho and new commercial lending centers in Seattle, Spokane, Federal Way, Burlington and Moses Lake, Washington. The Company also had significantly higher expenses for professional services in the current quarter, in part as a result of services related to compliance with certain provisions of the Sarbanes-Oxley Act of 2002, but primarily as a result of increased legal fees associated with loan collection efforts. Offsetting to a degree these increased legal expenses was improved results with respect to the disposition of repossessed real estate which is reflected in the miscellaneous expense line in the income statement. Higher operating expenses, as well as a reduction in mortgage banking revenue, caused the Company's efficiency ratio to increase to 70.98% for the quarter ended March 31, 2004, from 70.41% for the comparable period ended March 31, 2003. On the other hand, other operating expenses as a percentage of average assets decreased slightly to 2.88% for the quarter ended March 31, 2004, compared to 3.00% for the quarter ended March 31, 2003, reflecting the significant growth in average assets.

Income Taxes. Income tax expense was $1.9 million for the quarter ended March 31, 2004, compared to $1.5 million for the comparable period in 2003. The Company's effective tax rates for the quarters ended March 31, 2004 and 2003 were 30.2% and 30.3%, respectively. The slightly lower effective tax rate in the quarter ended March 31, 2004 is primarily a result of recording tax credits related to certain Community Reinvestment Act investments and occurred despite an increase in the relative amount of taxable income versus tax-exempt income compared to the quarter ended March 31, 2003.

Asset Quality

Classified Assets: State and federal regulations require that the Bank review and classify its problem assets on a regular basis. In addition, in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if appropriate, require them to be classified. The Bank's Credit Policy Division reviews detailed information with respect to the composition and performance of the loan portfolio, including information on risk concentrations, delinquencies and classified assets. The Credit Policy Division approves all recommendations for new classified assets or changes in classifications, and develops and monitors action plans to resolve the problems associated with the assets. The Credit Policy Division also approves recommendations for establishing the appropriate level of the allowance for loan losses.

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Significant problem loans are transferred to the Bank's Special Assets Department for resolution or collection activities. The Board of Directors is given a detailed report on classified assets and asset quality at least quarterly.

Allowance for Loan Losses: In originating loans, the Company recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the credit worthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. As a result, the Company maintains an allowance for loan losses consistent with the GAAP guidelines. The Company increases its allowance for loan losses by charging provisions for probable loan losses against the Company's income. The allowance for losses on loans is maintained at a level which, in management's judgment, is sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon continuing analysis of the factors underlying the quality of the loan portfolio.

At March 31, 2004, the Company had an allowance for loan losses of $26.9 million, which represented 1.50% of total loans and 98% of non-performing loans, compared to 1.51% and 92%, respectively, at December 31, 2003.

During the years ended December 31, 2001 and 2002, the Bank experienced deterioration in asset quality, which had a significant adverse effect on operating results, primarily through increased loan loss provisioning and increased loan collection costs. Collection costs remained high in 2003; however, during the twelve months ended December 31, 2003, the Bank achieved meaningful improvement in asset quality. The Company's asset quality indicators continued to improve in the quarter ended March 31, 2004, resulting in a significant decrease in loan loss provisioning compared to the same period a year earlier. Non-performing assets decreased 30% to $29.6 million or 1.09% of total assets, at March 31, 2004, compared to $42.4 million, or 1.76% of total assets, at March 31, 2003. Problem loans have been primarily due from borrowers located in the Puget Sound region and are the result of poor risk assessment at the time they were originated, coupled with weakened economic conditions in that area. However, during the year ended December 31, 2003, the Bank had a significant increase in non-performing agricultural loans and agricultural related business loans due from borrowers located in northeastern Oregon. Generally these problem loans reflect unique operating difficulties for individual borrowers rather than weakness in the overall agricultural economy of the area.

For the quarter ended March 31, 2004, non-performing loans decreased by $979,000 while real estate owned and other repossessed asset decreased by $966,000. At March 31, 2004, the Bank's largest non-performing loan exposure was for loans totaling $5.7 million to a diversified farming operation in northeastern Oregon which were secured by land, crops, receivables and equipment. The Company's next largest non-performing loan exposure encompasses loans totaling $3.9 million to an agricultural-related business operating in northeastern Oregon which are primarily secured by non-farm real estate and processing equipment. Balances for these loans are reflected in the non-accrual loan totals for commercial real estate and commercial business loans at March 31, 2004, in the table on the following page of this report. The Company had four additional non-performing credit relationships with balances in excess of $1.0 million, the largest of which had an aggregate carrying value of $1.6 millio n at March 31, 2004, and two of which were also agricultural loans. While meaningful progress was made in the past year, reducing non-performing loans and improving asset quality will be important activities to enhance the Bank's operating performance in future periods.

</PAGE>

The following table sets forth information with respect to the Bank's non-performing assets and restructured loans within the meaning of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring, at the dates indicated (dollars in thousands):

	March 31			December 31			March 31
	2004			2003			2003
Non-performing assets at end of the period:
Nonaccrual Loans:
Secured by real estate:
One- to four-family	$	894		$	1,048		$	1,205
Commercial		6,175			6,624			5,385
Multifamily		--			--			--
Construction and land		2,794			5,741			14,606
Commercial business		6,805			7,232			14,036
Agricultural business, including secured by farmland		9,941			7,320			1,385
Consumer		77			45			217
		26,686			28,010			36,834
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
One- to four-family		82			109			--
Commercial		--			--			--
Multifamily		--			--			--
Construction and land		656			288			--
Commercial business		--			--			266
Agricultural business, including secured by farmland		--			--			24
Consumer		28			24			--
		766			421			290
Total non-performing loans		27,452			28,431			37,124

Real estate owned, held for sale, and other repossessed assets, net		2,166			3,132			5,319

Total non-performing assets at the end of the period	$	29,618		$	31,563		$	42,443
Non-performing loans as a percentage of total net loans before allowance for loan losses at end of the period		1.53	%		1.65	%		2.33	%
Non-performing assets as a percentage of total assets at end of the period		1.09	%		1.20	%		1.76	%
Troubled debt restructuring (TDRs) at end of the period	$	--		$	656		$	517

Liquidity and Capital Resources

The Company's primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled repayments of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition.

The primary investing activity of the Company, through its subsidiaries, is the origination and purchase of loans and purchase of investment securities. During the quarter ended March 31, 2004, the Company purchased loans in the amount of $2.7 million, while loan originations, net of principal repayments, totaled $141.7 million. For the quarter ended March 31, 2004, securities purchases net of principal repayments totaled $37.8 million. This activity was funded primarily by principal repayments on loans and securities, sales of loans, deposit growth and borrowings. During the quarter ended March 31, 2004, the Company sold $71.7 million of loans, net deposit growth was $79.0 million, FHLB advances decreased $27.4 million and other borrowings increased $20.5 million.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the quarter ended March 31, 2004, the Bank used its sources of funds primarily to fund loan commitments, to purchase securities, to repay FHLB advances and other borrowings, and to pay maturing savings certificates and deposit withdrawals. At March 31, 2004, the Bank had outstanding loan commitments totaling $685.4 million, including undisbursed loans in process totaling $637.4 million. The Bank generally maintains sufficient cash and readily marketable securities to meet short-term liquidity needs. The Bank maintains a credit facility with the FHLB-Seattle, which provides for advances which, in aggregate, may equal the lesser of 35% of the Bank's assets or unencumbered qualifying collateral, up to a total possible credit line of $685.4 mi llion. Advances under this credit facility totaled $585.2 million, or 22% of the Bank's assets, at March 31, 2004.

At March 31, 2004, certificates of deposit amounted to $1.017 billion, or 58% of the Bank's total deposits, including $661.9 million which were scheduled to mature within one year. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Management believes it has adequate resources to fund all loan commitments from customer deposits, FHLB-Seattle advances, other borrowings, principal and interest payments and sale of mortgage loans and that it can adjust the offering rates for savings certificates to retain deposits in changing interest rate environments.

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Financial Instruments with Off-Balance-Sheet Risk

The Bank has financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets.

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. As of March 31, 2004, outstanding commitments consist of the following:

	Contract or Notional Amount (in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Real estate secured for commercial, construction or land development	$	282,559
Revolving open-end lines secured by 1-4 family residential properties		20,875
Other, primarily business and agricultural loans		376,949
Standby letters of credit and financial guarantees		5,020

Total	$	685,403

Commitments to sell loans secured by 1-4 family residential properties	$	34,920

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.

Standby letters of credit are conditional commitments issued to guarantee a customer's performance or payment to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customers during the application stage for periods ranging from 15 to 45 days, the most typical period being 30 days. Typically, pricing for the sale of these loans is locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the customer. The Bank makes every effort to deliver these loans before their rate locks expire. This arrangement generally requires the Bank to deliver the loans prior to the expiration of the rate lock. Delays in funding the loans can require a lock extension. The cost of a lock extension at times is borne by the customer and at times by the Bank. These lock extension costs paid by the Bank are not expected to have a material impact to operations. This activity is managed daily. Changes in the value of rate lock commitments are recorded in other assets and liabilities as "Derivative Instruments."

</PAGE>

Capital Requirements

The Company is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as a state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by regulation that require the Company and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires the Company to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum ratios of Tier 1 total capital to risk-weighed assets as well as Tier 1 leverage capital to average assets. At March 31, 2004 and December 31, 2003, the Company and the Bank exceeded all current regulatory capital requirements. (See Item 1, "Business-Regulation," and Note 18 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission for additional information regarding the Company's and the Bank's regulatory capital requirements.)

The actual regulatory capital ratios calculated for the Company and the Bank as of March 31, 2004, along with the minimum capital amounts and ratios, were as follows (dollars in thousands):

	Actual					Minimum for capital adequacy purposes					Minimum to be categorized as "well-capitalized" under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

(dollars in thousands)
March 31, 2004:
The Company-consolidated
Total capital to risk-weighted assets	$	260,199		13.12	%	$	158,658		8.00	%		N/A		N/A
Tier 1 capital to risk-weighted assets		234,631		11.83			79,329		4.00			N/A		N/A
Tier 1 leverage capital to average assets		234,631		9.07			103,510		4.00			N/A		N/A

The Bank
Total capital to risk-weighted assets		225,654		11.40			158,408		8.00		$	198,010		10.00	%
Tier 1 capital to risk-weighted assets		200,124		10.11			79,204		4.00			118,806		6.00
Tier 1 leverage capital to average assets		200,124		7.74			103,358		4.00			129,198		5.00

</PAGE>

ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management

The financial condition and operation of the Company are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. The Company's profitability is dependent to a large extent on its net interest income, which is the difference between the interest received from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities.

The activities of the Company, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution's earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution's assets, liabilities, and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting the Company's financial performance.

The greatest source of interest rate risk to the Company results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities and off-balance-sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets. Additional interest rate risk results from mismatched repricing indices and formulae (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to customers than to the Company. An additional exception to these generalizations in the current market environment has been the beneficial effect of interest rate floors on many of the Company's floating rate loans which have helped maintain higher loan yields despite declining levels of market interest rates. However, in the current low interest rate envir onment, management anticipates that these rate floors will decline over time. Further, because these rate floors exceed what would otherwise be the note rate on certain variable or floating rate loans, those loans will be less responsive to increasing market rates than has historically been the case, injecting an additional element of interest rate risk into the Company's operations.

The principal objectives of asset/liability management are to evaluate the interest-rate risk exposure of the Company; to determine the level of risk appropriate given the Company's operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage the Company's interest rate risk consistent with regulatory guidelines and approved policies of the Board of Directors. Through such management, the Company seeks to reduce the vulnerability of its earnings and capital position to changes in the level of interest rates. The Company's actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of the Company's senior management. The committee closely monitors the Company's interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions, and a ttempts to structure the loan and investment portfolios and funding sources of the Company to maximize earnings within acceptable risk tolerances.

Sensitivity Analysis

The Company's primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk. The Company also utilizes market value analysis, which addresses changes in estimated net market value of equity arising from changes in the level of interest rates. The net market value of equity is estimated by separately valuing the Company's assets and liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net equity value to changes in interest rat es and provides an additional measure of interest rate risk.

The interest rate sensitivity analysis performed by the Company incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability computer simulation model. The Company updates and prepares simulation modeling at least quarterly for review by senior management and the Board of Directors. The Company believes the data and assumptions are realistic representations of its portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of the Company's net interest income and net market value of equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used.

</PAGE>

The table of Interest Rate Risk Indicators sets forth, as of March 31, 2004, the estimated changes in the Company's net interest income over a one-year time horizon and the estimated changes in market value of equity based on the indicated interest rate environments.

Interest Rate Risk Indicators

	Estimated Change in
Change (in Basis Points) in Interest Rates (1)	Net Interest Income Next 12 Months					Net Market Value
	(dollars in thousands)
+300		(1,686	)	(1.8	%)		(78,006	)	(36.5	%)
+200		(1,865	)	(2.0	%)		(46,284	)	(21.7	%)
+100		(2,302	)	(2.5	%)		(18,415	)	(8.6	%)
0		0		0			0		0	%)
-50		(901	)	(1.0	%)		(5,555	)	(2.6	%)
-100		(3,734	)	(4.0	%)		(15,932	)	(7.5	%)

_________
(1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities.

Another, although less reliable, monitoring tool for assessing interest rate risk is "gap analysis." The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest sensitive" and by monitoring an institution's interest sensitivity "gap." An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest sensitive assets exceeds the amount of interest sensitive liabilities. A gap is considered negative when the amount o f interest sensitive liabilities exceeds the amount of interest sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.

Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe interest rate increase.

The table of Interest Sensitivity Gap presents the Company's interest sensitivity gap between interest-earning assets and interest-bearing liabilities at March 31, 2004. The table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future periods shown. At March 31, 2004, total interest-bearing assets maturing or repricing within one year was less than total interest-earning liabilities maturing or repricing in the same time period by ($61.8) million, representing a one-year gap to total assets ratio of (2.28%).

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Table 16: Interest Sensitivity Gap as of March 31, 2004	Within 6 Months			After 6 Months Within 1 Year			After 1 Year Within 3 Years			After 3 Years Within 5 Years			After 5 Years Within 10 Years			Over 10 Years			Total
	Within 6 Months			After 6 Months Within 1 Year			After 1 Year Within 3 Years			After 3 Years Within 5 Years			After 5 Years Within 10 Years			Over 10 Years			Total
	(dollars in thousands)
Interest-earning assets: (1)
Construction loans	$	271,706		$	4,031		$	7,009		$	40		$	--		$	--		$	282,786
Fixed-rate mortgage loans		72,333			45,794			127,627			100,369			118,435			29,010			493,568
Adjustable-rate mortgage loans		254,898			55,469			124,902			96,605			3,615			--			535,489
Fixed-rate mortgage-backed securities		41,872			29,070			92,380			63,428			90,604			49,757			367,111
Adjustable-rate mortgage-backed securities		86,957			--			--			--			--			--			86,957
Fixed-rate commercial/agricultural loans		47,350			18,654			35,624			20,199			6,924			38			128,789
Adjustable-rate commercial/agricultural loans		284,894			7,415			5,551			5,969			171			--			304,000
Consumer and other loans		35,100			5,785			12,090			3,745			1,959			306			58,985
Investment securities and interest-earning deposits		42,848			5,685			22,955			141,680			13,757			85,415			312,340

Total rate sensitive assets		1,137,958			171,903			428,138			432,035			235,465			164,526			2,570,025

Interest-bearing liabilities: (2)
Regular savings and NOW accounts		48,686			48,687			113,602			113,602			--			--			324,577
Money market deposit accounts		102,130			61,278			40,852			--			--			--			204,260
Certificates of deposit		475,493			185,746			255,178			85,594			15,296			49			1,017,356
FHLB advances		241,500			62,200			125,600			60,930			94,928			--			585,158
Other borrowings		48,427			--			--			--			--			--			48,427
Trust preferred securities (new)		72,168			--			--			--			--			--			72,168
Retail repurchase agreements		25,256			104			175			--			484			--			26,019

Total rate sensitive liabilities		1,013,660			358,015			535,407			260,126			110,708			49			2,277,965

Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities	$	124,298		$	(186,112	)	$	(107,269	)	$	171,909		$	124,757		$	164,477		$	292,060
Cumulative excess (deficiency) of interest-sensitive assets	$	124,298		$	(61,814	)	$	(169,083	)	$	2,826		$	127,583		$	292,060		$	292,060

Cumulative ratio of interest-earning assets to interest-bearing liabilities		112.26	%		95.49	%		91.13	%		100.13	%		105.60	%		112.82	%		112.82	%
Interest sensitivity gap to total assets		4.58	%		(6.86	)%		(3.95	)%		6.34	%		4.60	%		6.06	%		10.77	%
Ratio of cumulative gap to total assets		4.58	%		(2.28	)%		(6.23	)%		0.10	%		4.70	%		10.77	%		10.77	%

(footnotes on following page)

</PAGE>

Footnotes for Table of Interest Sensitivity Gap

(1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the periods in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for allowances for loan losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans, and investment securities are not adjusted for deferred fees and unamortized acquisition premiums and discounts.

(2) Adjustable- and variable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature. Although the Bank's regular savings, NOW, and money market deposit accounts are subject to immediate withdrawal, management considers a substantial amount of such accounts to be core deposits having significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities. If all of these accounts had been assumed to be short-term, the one year cumulative gap of interest-sensitive assets would have been negative $329.9 million, or (12.2%) of total assets. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits which are included in the average balance calculations in the table included in the Comparison of Results of Operations section of this document.

</PAGE>

ITEM 4 - Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of Company disclosure controls and procedures (as defined in Section 13(a)-15(e) of the Securities Exchange Act of 1934 (the Act)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

(b) Changes in Internal Controls: In the quarter ended March 31, 2004, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

</PAGE>

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, the Company and the Bank have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which the Bank holds a security interest. The Company and the Bank are not a party to any pending legal proceedings that management believes would have a material adverse effect on the financial condition or operations of the Company.

Item 2.    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Issuer Purchases of Equity Securities

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plan

Maximum
Number of
Shares that May
yet be
Purchased Under the Plan

January 1, 2004 to January 31, 2004

--

$     --

--

February 1, 2004 to February 29, 2004

--

     --

--

March 1, 2004 to March 31, 2004

--

--

--

Total

--

$     --

--

100,000

(1)

(1)
On July 24, 2003 the Company's Board of Directors authorized the repurchase of up to 100,000 shares of the Company's outstanding common stock over the next twelve months. As of March 31, 2004 no shares have been repurchased under this program.

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Submission of Matters to a Vote of Stockholders

None

Item 5. Other Information

Not Applicable

Item 6. Exhibits and Reports on Form 8K

(a) Exhibits

	31.1	Certificates of Chief Executive Officer and Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-15(e)
	31.2	and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 dated May 10, 2004.

	32	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2003 dated May 10, 2004.

(b) Report(s) on Form 8-K filed during the quarter ended March 31, 2004, are as follows:

Date Filed	Purpose

January 27, 2004	Announce Banner Corporation financial results for the quarter and fiscal year ended December 31, 2003.

March 4, 2004	Announce that Banner Bank is entering the southwestern Idaho market, including Boise and Twin Falls.

</PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Banner Corporation



May 10, 2004	/s/D. Michael Jones
	D. Michael Jones
	President and Chief Executive Officer
	(Principal Executive Officer)





May 10, 2004	/s/Lloyd W. Baker
	Lloyd W. Baker
	Treasurer and Chief Financial Officer
	(Principal Financial and Accounting Officer)

</PAGE>

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934

I, D. Michael Jones, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Banner Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-145(e) and 15d-145(e)) for the registrant and we have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



May 10, 2004			/s/D. Michael Jones
		D. Michael Jones
		Chief Executive Officer

</PAGE>

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-14(a) AND 15d -14(a) UNDER THE SECURITIES ACT OF 1934

I, Lloyd W. Baker, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Banner Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-145(e) and 15d-145(e)) for the registrant and we have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



May 10, 2004			/s/Lloyd W. Baker
		Lloyd W. Baker
		Chief Financial Officer

</PAGE>

EXHIBIT 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF BANNER CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that:

	-	the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and

	-	the information contained in the report fairly presents, in all material respects, the Company's financial condition and results of operations.

May 10, 2004	/s/D. Michael Jones
	D. Michael Jones
	Chief Executive Officer






May 10, 2004	/s/Lloyd W. Baker
	Lloyd W. Baker
	Chief Financial Officer

</PAGE>

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares that May yet be Purchased Under the Plan
January 1, 2004 to January 31, 2004	--	$ --	--
February 1, 2004 to February 29, 2004	--	--	--
March 1, 2004 to March 31, 2004	--	--	--

Total	--	$ --	--	100,000	(1)