KBRA affirms Banner Corporation ratings with stable outlook

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KBRA affirms Banner ratings

Highlights

KBRA affirms Banner Corporation's senior unsecured debt at BBB+, subordinated debt at BBB, and maintains a stable outlook across all long-term ratings.
Banner's funding advantage is reflected in a low cost of deposits at 1.32% versus peers, with noninterest-bearing accounts making up 33% of total deposits.
KBRA views the proposed all-stock acquisition of Pacific Financial Corporation favorably due to an added low-cost deposit base and enhanced geographic footprint.

Rating action and key credit factors

As reported by Kroll Bond Rating Agency, KBRA affirms Banner Corporation's senior unsecured debt rating of BBB+, subordinated debt rating of BBB, and short-term debt rating of K2, while affirming Banner Bank's deposit and senior unsecured debt ratings of A-, subordinated debt rating of BBB+, and short-term deposit and debt ratings of K2. The outlook for all long-term ratings remains stable.

KBRA says the ratings are supported by the Walla Walla, Washington-based company's solid earnings track record, driven by a low-cost funding base, limited credit costs, and an experienced management team. The agency also points to Banner's core deposit franchise, citing its cost profile, geographic diversification, and deposit mix as key strengths.

Banner's funding profile remains a central factor in the rating decision. KBRA notes that noninterest-bearing accounts make up 33% of total deposits, helping keep the cost of deposits at 1.32%, nearly 50 basis points below rating category peers.

Acquisition plan and rating outlook

KBRA views Banner's proposed all-stock acquisition of Pacific Financial Corporation, the parent of Bank of the Pacific, favorably. The agency says the deal is expected to add a low-cost deposit base with an approximately 1% cost of deposits and strengthen Banner's footprint in Western Washington and Western Oregon.

The rating agency also highlights Banner's credit quality performance despite concentrations in commercial real estate and construction and development lending. It says nonperforming assets and net charge-offs have consistently remained below peer levels on five-year averages, while a loan loss reserve of 1.4% and loan loss reserve to nonperforming loan coverage of 3.7 times provide a cushion against unexpected stress.

KBRA does not expect a rating upgrade in the near term, but says stronger contributions from non-spread and counter-cyclical revenue streams, along with further loan portfolio diversification, could support positive rating momentum over time. At the same time, poorly executed mergers and acquisitions or a significant deterioration in credit quality that weakens earnings and core capital levels could pressure the ratings.

In our earlier coverage of KBRA’s affirmation of the MTA Hudson Rail Yards Trust Obligations, we noted that the A- long-term rating was maintained with a Stable Outlook as the financing structure continued to be evaluated against property value and construction risks tied to the Hudson Rail Yards development. The agency pointed to low loan-to-value metrics under stress scenarios, a flexible amortization schedule, and the requirement to replenish the Interest Reserve Fund, while flagging tenant ground rent payment risk and property market volatility as key constraints.

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