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 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. In addition, 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. Moreover, BANR’s high quality deposit franchise is granular in nature with a significant retail orientation as well as noninterest bearing accounts (34% of total deposits) serviced through a relationship oriented branch base network. The favorable mix contributes to a low-cost funding base represented by a cost of deposits as of 1Q25 of 1.47% versus 2.07% for publicly traded KBRA rated peers. The company’s disciplined loan underwriting approach, that, in KBRA’s view, emanates from its strong credit culture, has contributed to sound credit performance over time. Despite BANR’s concentration in CRE and C&D, NPAs and NCOs have consistently remained below peer levels reflected in five-year averages. With a 1Q25 LLR of 1.38% and LLR/NPL coverage of 4.1x, KBRA views the reserve as a significant cushion to absorb a period of unanticipated stress. BANR manages core capital levels in a relatively conservative manner, in KBRA’s view, with the CET1 ratio historically managed between 10.5% - 12.5% for the last several years, and we expect the company to continue to manage capital in this manner commensurate with the company’s overall risk profile. However, KBRA notes that the retirement of the $100 million of subordinated debt will reduce total risk based capital by ~70 bps while still maintaining a solid level of capital.

Rating Sensitivities

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

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