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 bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by BANR’s highly experienced management team that executes a ‘higher touch’ commercially oriented banking model over a reasonably broad geographic footprint. In addition, the company’s solid track record of earnings is enhanced by its low cost, peer leading funding profile, which includes a core deposit base that reflects favorable characteristics in terms of cost, geographic diversification, and composition. BANR’s high quality deposit franchise is granular in nature with a significant retail orientation as well as noninterest bearing accounts (36% of total deposits) serviced through a relationship oriented branch base network. The favorable deposit mix contributes to a low-cost funding base represented by a cost of deposits of 1.37% as of 1Q24 versus 2.45% for KBRA rated peers. The company’s disciplined loan underwriting approach, that, in KBRA’s view, emanates from its strong credit culture established post-GFC, has contributed to sound credit performance further boosting ROA. Despite BANR’s concentration in CRE, NPAs and NCOs have consistently remained below peer levels reflected in five-year averages of 0.26% and 0.02%, respectively. While the allowance for credit losses at 1.39% and LLR/NPL coverage of 5.4x provide a significant cushion to absorb a period of unanticipated stress. BANR has managed core capital levels in a relatively conservative manner more recently with CET1 in the 11.5% - 12.0% range and KBRA expects that the company will continue to manage capital in this range over the medium term consistent with the overall risk profile of the bank. The ratings are somewhat constrained by the company’s above peer level concentration in investor owned commercial real estate (anchored around 240% of RBC) and construction and development (80% - 90% RBC), as well as below peer revenue diversification.

Rating Sensitivities

A rating upgrade is not expected in the near-term. However, improved profitability metrics, combined with the addition of revenue sources with non-spread derived counter cyclical revenue streams and further diversification of the loan portfolio while maintaining credit metrics consistent with the higher rated category could result in positive rating momentum over time. Conversely, a rating downgrade is unlikely in the near term, though a significant deterioration in asset quality performance leading to weakened earnings and core capital levels could pressure ratings.

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