Baker Boyer Bancorp 2011 Annual Report

Guiding You to a Brighter Financial Future.

I am delighted to report that we had a record year in 2011,

reaching a new high in earnings, and

improving our Return on Equity and

Return on Assets. We accomplished

this in what everyone agrees was a most

challenging economic climate. I see

increasing signs that the economy is

improving in Eastern Washington and

nationally, and believe that the strate-

gies that we have in place will give us a

strong base for success in 2012.

But first, a little more about 2011. Net

income reached $5.96 million, 10.6%

ahead of last year’s $5.39 million.

Return on Assets was 1.22% compared

to 1.14% last year, and Return on Equity

was 14. 5%, up from 13. 9%. Net Inter-

est Margin at 4.36% remained flat. With

the Federal Reserve’s announcement

to maintain low interest rates we expect

margins to decline in 2012. This will be

a real pressure point on all community

bank earnings which makes our diversi-

fied source of income from Wealth Man-

agement a very important advantage.

While the year had many highlights,

two stand out for me. They were our

selection as Washington’s “Best Mid-

Sized Company to Work For” by Seattle

Business Magazine, and our designa-

tion by U.S. Banker Magazine as the

23rd best performing community bank

in the nation based on financial results.

In a volatile time we want employees

who look forward to coming to work

every day, and we must maintain solid

financial performance in order to keep

our edge in offering personalized advice

and services.

I often remind myself that a key ingredi-

ent of our success is the fact that we

can focus on our clients and respond

to their changing needs because we

don’t have to put all of our energy

into digging out from loan problems

like many of our competitors. In 2010

we updated our strategic plan tactics

which we refresh every three years. Our

priorities for these three years include

improving our tools to measure client/

household profitability, improving

our processes to provide advice and

guidance to clients with sophisticated

financial planning needs, and tactics to

grow the number of sophisticated/high

profit clients.

We live in a turbulent and intercon-

nected world, and we are working to be

adaptable and flexible—prepared for

any shift in the year ahead. For commu-

nity banks, living in a low interest rate

environment will be a serious issue that

is likely to result in further industry con-

solidation and shrinkage in the US com-

munity banking system. This trend is a

troublesome sign for rural economies

dependent on banks like Baker Boyer.

You can get a picture of how we plan to

deal with this challenge by looking at

our 2011 results. Our ability to provide

solid investment and banking advice fu-

eled our growth and allowed us to add

new banking and wealth management

clients in all of our geographic markets.

Many existing clients also brought

more of their business relationships to

Baker Boyer Bank because they know

we understand and can meet their

needs. To see what a few of our clients

said about Baker Boyer Bank please

check out the “Client Video” at

bakerboyer.com/itjustmakessense.

Dear Baker Boyer Shareholder

After serving on the Board of Directors

of the Portland Federal Reserve the

past year, I have now been named to the

San Francisco Board. This position al-

lows me to represent the concerns and

needs of Eastern Washington and gives

me a great insight into how national and

international issues might impact us.

Today the media is reporting stabiliza-

tion in the Eurozone (of course their

story changes daily). However I am

less optimistic that Europe will be

able to keep their house in order. I am

seeing a growing sentiment that the

long awaited devaluation of the Euro

currency will occur. Although my col-

leagues and I have been expecting this

for many years, the European Union

has so far been successful at shielding

the Euro from devaluation by putting

band-aids on some very large structural

problems in both their countries as well

as their banking system.

Our experienced team of profession-

als is focusing on providing long-term

growth in this ever-evolving world

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“We live in a turbulent and interconnected world, and we are working to be adaptable and flexible—prepared for any shift in the year ahead.”

economy. We also are positioning client

portfolios to withstand short term fluc-

tuations in the market while providing

long term growth with an eye toward

risk management.

Our careful approach to banking, listen-

ing to customers and managing their

assets like we manage our own will not

change in 2012. At the same time we

will continue to develop and explore

new approaches and identify and use the

new communication channels emerging

to help us remain close to our customers

and engage with new ones. During 2011

we doubled the number of followers

on Facebook and our page is now filled

with photos, videos and posts.

Last fall, our “It Just Makes Sense”

customer video was used in a “Let’s

Share” campaign, and almost half of our

employees shared the video on social

media sites, one of the key ways we got

the message out to the community.

You can see examples of what we are

doing on our website, bakerboyer.com,

including links to our Facebook ac-

count, Twitter feed and “It Just Makes

Sense” customer video.

As always, I want to tell you what an

honor it is to be President and CEO of

Baker Boyer Bank. I really have the best

job around. I welcome your comments

and questions and encourage you to

help us continue to grow by telling the

story of why it “Just Makes Sense” to

Bank with Baker Boyer.

Sincerely,

Megan F. ClubbPresident & CEO

2011...OUR FOCUS IN

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“All of a sudden the things that had been difficult to do ... they just disappear! And it was sort of like a great “ah ha” moment, like

“why haven’t I been here before?”—Lura Powell Former Director, PNNL Tri-Cities

It Just Makes Sense....never strayed from you.

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“With Baker Boyer you do get the personalized service of a small bank and the expertise of a big bank—well,

I think it’s even better than a big bank.

—Bruce Bacon President, Glacier Sales Yakima

To hear more comments from our clients, view the video at bakerboyer.com/itjustmakessense.

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Year-to-Date 12/31/11 12/31/10 % ChangeNet Income $ 5,962 $ 5,390 10.6Cash Dividends Paid 3,604 3,596 0.2Return on Avg. Assets 1.22 % 1.14 %Return on Avg. Shareholders’ Equity 14.45 % 13.92 %Average Number of Shares Outstanding 1,291,478 1,286,894

Per Share 12/31/11 12/31/10 % Change

Earnings * $ 4.62 $ 4.19 10.3Cash Dividends Paid 2.76 2.76 0.0Book Value 32.52 30.25 7.5

At December 31, 12/31/11 12/31/10 % Change

Total Assets $502,019 $466,011 7.7Total Loans 304,006 304,200 (0.1)Allowance for Loan Losses 6,265 5,820 7.6Total Investment Securities 110,537 96,035 15.1Total Deposits 437,078 406,921 7.4Total Shareholders’ Equity 42,482 39,407 7.8

Daily Average for the Year 12/31/11 12/31/10 % ChangeAssets $488,379 $471,013 3.7Loans - Net 299,628 298,804 0.3Investment Securities 111,968 81,277 37.8Deposits 422,661 407,003 3.8Shareholders’ Equity 41,255 38,716 6.6* Earnings per share are calculated on the weighted average number of shares outstanding.

Financial Highlights (Unaudited, Dollars in Thousands Except Per Share Amounts)

3.443.40 3.76 4.19 4.62

2007

$ Milli

ons

0

5

201020092008 2011

Earnings per Share

$59$62 $63

2007

$85 $70

Dolla

rs

$0

$100

201020092008 2011

Stock Trade Price

2007

$ Milli

ons

0

6

201020092008 2011

Net Income

5.96

4.38 4.4 4.85.4

2007

Dolla

rs

$3.00

$0.00201020092008 2011

Dividends per Share

$2.68 $2.86 $2.76 $2.76$2.76

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Per Share 2011 2010 2009 2008 2007 Earnings* 4.62 4.19 3.76 3.44 3.40 Cash dividends 2.76 2.76 2.76 2.86 2.68 Book value, year-end 32.52 30.25 28.84 27.50 26.83

For the Year (dollars in thousands) 2011 2010 2009 2008 2007 Net income $5,962 $5,390 $4,819 $4,407 $4,375 Cash dividends 3,604 3,596 3,586 3,709 3,477

Performance Measures 2011 2010 2009 2008 2007 Return on average assets 1.22 % 1.14 % 1.12 % 1.13 % 1.16 %Return on average equity 14.45 13.92 13.11 12.47 12.85 Yield on average earning assets - fully taxable equivalent 4.80 5.11 5.72 6.47 7.08 Average cost of interest bearing liabilities 0.58 0.94 1.34 2.30 3.17 Net interest margin - fully taxable equivalent 4.36 4.37 4.68 4.66 4.59 Average equity to average assets ratio 8.26 8.22 8.54 9.07 9.05 Dividend payout ratio 60.45 66.72 74.41 84.16 79.47 Net charge-offs to average loans 0.43 0.20 0.06 0.11 0.03 Year-end ratio of allowance for loan losses to total loans 2.06 1.91 1.74 1.43 1.27

Employment 2011 2010 2009 2008 2007 Number of Full-Time Equivalent Employees at Year-End 170 168 175 170 175

*Earnings per share are calculated on the weighted average number of shares outstanding, adjusted for stock dividends and stock splits. The weighted average number of shares outstanding was: 2011: 1,291,478; 2010: 1,286,894; 2009: 1,281,220; 2008: 1,282,586; 2007: 1,285,348.

Five Year Highlights (Unaudited)

12.4713.1112.85

13.92

14.45

200611%

15%

200920082007 2010

Return on Equity2007

1.3%

1%201020092008 2011

Return on Assets

1.161.13 1.12 1.14

1.22

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Average Daily Balance Sheets (Unaudited. Dollars in Thousands)

Assets2011 2010

Cash and amounts due from banks $ 3,517 $ 3,703Interest-bearing deposits at other financial institutions 52,300 66,034Federal funds sold 0 113Securities available for sale, at fair value 103,978 68,208Securities held to maturity, at cost 6,099 11,177Other investments, at cost 1,891 1,892

Loans 305,566 304,208Allowance for credit losses (5,938) (5,404)Net Loans 299,628 298,804

Premises and equipment, net 14,776 15,227Accrued interest receivable 2,699 2,636Other assets 3,491 3,219

Total Assets $ 488,379 $ 471,013

Liabilities and Shareholders’ EquityDepositsDemand, non-interest-bearing $ 94,871 $ 81,330Savings and interest-bearing demand 229,909 219,175Time 97,881 106,498Total Deposits 422,661 407,003

Federal funds purchased and security repurchase agreements 20,709 20,031Other borrowed funds 3,107 4,115Accrued interest payable 177 283Other liabilities 470 865

Total Liabilities 447,124 432,297

Shareholders’ EquityCommon Stock (no par value, stated value $3.125 per share) 4,080 4,063Additional paid-in capital 1,109 877Retained earnings 35,307 32,911Accumulated other comprehensive income (loss) 759 865Total Shareholders’ Equity 41,255 38,716

Total Liabilities and Shareholders’ Equity $ 488,379 $ 471,013

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President, CEO and Chairman of the BoardBaker Boyer Bancorp Member FDIC

Auditor & Stock InformationIndependent Public Accountants and AuditorsMoss Adams, llp - 601 West Riverside, Suite 1800, Spokane, WA 99201-0663 (509) 747-2600

Market Makers for Baker Boyer Bancorp StockJeffries Group, Inc - 520 Madison Avenue, New York, NY 10022 (212) 284-2300 Knight Equity Markets, lp - 545 Washington Blvd., Jersey City, NJ 07310 (800) 544-7508Monroe Securities, Inc. - 100 N. Riverside Plaza, Suite 1620, Chicago, IL 60606 (312) 327-2530Pershing Trading Co., lp - 1 Pershing Plaza, Jersey City, NJ 07399 (800) 459-1893Ryan, Beck & Co. - 220 S. Orange Avenue, Livingston, NJ 07039-5817 (800) 342-2325UBS Capital Markets, lp - 111 Pavonia Avenue East, Jersey City, NJ 07310 (800) 631-3094Wedbush Morgan Securities - 4949 SW Meadows Road, Suite 100, Lake Oswego, OR 97035 (503) 675-3100

Direct Contacts for Stock RepurchasesMark Hess, Executive Vice President/Chief Operating Officer (509) 526-1315Megan F. Clubb, President/Chief Executive Officer/Chairman of the Board (509) 526-1318

Corporate and Investor InformationBaker Boyer Bancorp is a Washington corporation registered under the Bank Holding Company Act of 1956 as a bank holding company. The Company’s shares are not registered under the Securities Exchange Act of 1934. As of April 1994, the Company’s shares were listed on the Over-The-Counter (OTC) Bulletin Board under the symbol BBBK. As of December 31, 2011, there were 1,306,370 shares of common stock issued and outstanding. General shareholder account inquiries should be directed to the Company’s Chief Operating Officer at the following address and telephone number:

Mark Hess, Executive Vice President/Chief Operating Officer 7 West Main Street, PO Box 2175, Walla Walla, WA 99362 (509) 525-2000 • (800) 234-7923

Annual Meeting of ShareholdersThe Annual Meeting of Shareholders will be held at 3:30 P.M. on Thursday, April 26, 2012, at the Marcus Whitman Hotel & Conference Center, Renaissance Room, 6 West Rose, Walla Walla, Washington.

I, the undersigned, hereby attest to the correctness of information contained in the Annual Report of Baker Boyer Bancorp and its wholly-owned subsidiary, Baker Boyer National Bank. This Annual Report is also furnished to customers of Bancorp pursuant to the requirements of the Federal Deposit Insurance Corporation (FDIC) to provide an annual disclosure state-ment. This Annual Report has not been reviewed for accuracy or relevance by the FDIC.

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The Board of Directors

1

3

Lynne E. BushCommunity Volunteer Leader, Seattle, WAMember of Executive Compensation Committee

5

5

Fred J. KimballPresident, K-Farms, Inc., Walla Walla, WAMember of the Executive Compensation Committee

11

Peter Allen(not pictured)Vice President & Senior Trust & Financial Advisor, Baker Boyer National Bank

12

11

Jon S. BrenSecretary, Executive Vice President, Baker Boyer Bancorp, Executive Vice President,Baker Boyer National Bank

10

10

Dorsey F. BakerRetired General Service Manager, Holt California, Inc., Lodi, CAChairman of the Audit Committee

9

9

David B. GordonGeneral Manager, Northwest Grain Growers, Walla Walla, WAMember of the Audit Committee

8

8

Susan C. PrattAttorney; Retired Assistant Attorney General, State of Washington, Tacoma, WA,Member of the Executive Compensation Committee

7

7

4

Stephen G. KimballChairman Emeritus and retired President & CEO, Baker Boyer Bancorp, Chairman Emeritus and retired President and CEO, Baker Boyer National Bank, Member of the Audit Committee

6

6

Megan F. ClubbChairman, President and Chief Executive Officer, Baker Boyer Bancorp; Chairman, Presidentand Chief Executive Officer, Baker Boyer National Bank

1

Charles H. EglinBuilding Contractor,Owner Tri-Ply ConstructionYakima, WAMember of the Audit Committee

3

David B. CampbellFarming, Construction and Energy Systems, Retired, Walla Walla, WAChairman of the Executive Compensation Committee

4

John R. ValaasInvestor, retired President & CEO First Mutual Bank, Bellevue, WA, Member of the Executive Compensation Committee

2

2

To contact the board of directors, please email info@bakerboyer.com.

The Executive Committee

Mark A. HessExecutive Vice President,Chief Operating Officerhessm@bakerboyer.com

Teresa L. LarsonVP & Strategic Plan Coordinator, Secretary of Executive Committeelarsont@bakerboyer.com

Mark H. Kajita, CPASenior VP & Senior Fiduciary Officer/Portfolio Managerkajitam@bakerboyer.com

Lyle W. HansenExecutive Vice President, Banking Division Managerhansenl@bakerboyer.com

Jon S. BrenExecutive Vice President, Wealth Management Division Managerbrenj@bakerboyer.com

Megan F. ClubbChair of the Executive Committee, President, CEO, Chairman of the Boardclubbm@bakerboyer.com

Eastgate Branch1931 E. Isaacs

Walla Walla, WA 99362

Wheatland Village Branch1500 S. Catherine StreetWalla Walla, WA 99362

Kennewick OfficeWealth Management & Business Banking

1149 N. Edison Street, Suite AKennewick, WA 99336

College Place Branch603 S. College AvenueCollege Place, WA 99324

Main Office7 W Main Street

Walla Walla, WA 99362

Milton-Freewater Branch320 N. ColumbiaMilton-Freewater, OR 97862

Plaza Branch1530 Plaza WayWalla Walla, WA 99362

Yakima OfficeWealth Management & Business Banking

909 Triple Crown Way, Suite 101Yakima, WA 98908

www.bakerboyer.com | (509) 525-2000 | (800) 234-7923 | info@bakerboyer.com

Our Locations