KBRA Affirms Ratings for Banner Corporation

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Walla Walla, Washington-based Banner Corporation (NASDAQ: BANR or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the company's principal subsidiary, Banner Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by BANR's solid earnings track record, which reflects a robust low-cost funding base, minimal credit costs, and highly experienced management team. The earnings profile benefits from a core deposit franchise that contains favorable characteristics in terms of cost, geographic diversification, and composition. KBRA views the proposed all-stock acquisition of Pacific Financial Corporation (parent of Bank of the Pacific) favorably as it will further enhance BANR's strong deposit franchise, while adding a low-cost deposit base (approximately 1% cost of deposits) and densifying its footprint in Western Washington and Western Oregon. Additionally, BANR's strong credit quality track record has contributed to an enhanced earnings profile from lower credit costs, reflected by 6 bps of provision expense to average assets over the last three years. The company's high quality deposit franchise remains granular in nature, with a significant retail orientation as well as noninterest bearing accounts (33% of total deposits) serviced through a relationship-oriented branch network. As a result, this mix contributes to a low-cost funding base including a cost of deposits of 1.32%, nearly 50 bps below rating category peers. BANR also possesses a strong credit culture, including a disciplined underwriting approach that, in KBRA's view, has contributed to sound credit performance over time. Despite the company's concentration in CRE and C&D, NPAs and NCOs have consistently remained below peer levels as reflected in five-year averages. With a LLR of 1.4% and LLR/NPL coverage of 3.7x, the company possesses a significant cushion to absorb a period of unanticipated stress. Capital management has historically been conducted in a conservative manner, with the company maintaining CET1 in the 10.5% - 13% area which supported organic growth, dividends, buybacks, and selective M&A. Finally, the ratings are supported by BANR's highly experienced management team that has successfully executed the company's 'higher touch' commercially oriented banking model over a reasonably broad geographic footprint.

Rating Sensitivities

A rating upgrade is not expected in the near-term. However, greater contributions from non-spread, counter-cyclical revenue streams and further loan portfolio diversification while maintaining profitability and credit metrics consistent with the higher rating category, could result in positive rating momentum over time. Furthermore, while a rating downgrade is unlikely in the near-term, poorly executed M&A as well as significant deterioration in credit quality performance leading to weakened earnings and core capital levels could pressure the ratings.

To access ratings and relevant documents, click here.

Methodology