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. The company’s near-peer leading funding profile includes a core deposit base that reflects favorable characteristics in terms of cost, geographic diversification, and composition. BANR’s granular deposit base is comprised of an average account balance of $28,000 with significant retail orientation as well as noninterest bearing accounts (44% of total deposits) served through a relationship oriented branch base network. The favorable mix leads to a low cost funding base well below peer averages with cost of deposits at 1Q23 of 0.28%. 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. Despite BANR’s concentration in CRE, NPAs and NCOs have consistently remained below peer levels reflected in five year averages of 0.27% and 0.03%, respectively. The allowance for credit losses at 1.39% and LLR/NPL coverage of 5.3x provides a significant cushion to absorb losses in a period of unanticipated stress. BANR manages core capital levels in a relatively conservative manner, in KBRA’s view, with CET1 historically managed between 10.5% - 12% for the last several years, and we expect the company to continue to manage capital in this manner commensurate with the bank’s overall risk profile. The ratings are constrained by the company’s above peer level concentration in investor owned commercial real estate (anchored around 250% - 300% RBC) and construction and development (80%-90% RBC), and below peer revenue diversification.

Rating Sensitivities

A rating upgrade is not expected in the near-term. However, improved profitability metrics, the addition of revenue sources with non-spread type counter cyclical 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 time. 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 the ratings.

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Methodologies

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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