BANNER CORP (BANR) stock intrinsic value fair value estimate & owner earnings analysis

Banner Corporation owns Banner Bank, a regional commercial bank headquartered in Walla Walla, Washington, with about $18 billion of assets after its latest acquisition and branches across Washington, Oregon, Idaho and California. It takes deposits (89% of them checking, savings and money-market core deposits at June 30, 2026) and lends them out. At June 30, 2026 the $12.0 billion loan book was: commercial real estate $4.14 billion (owner-occupied $1.23 billion, investment property $1.74 billion, small-balance $1.17 billion), commercial and small-business loans $2.58 billion, construction and land $1.69 billion, residential mortgages $1.56 billion, consumer (mostly home-equity lines) $827 million, multifamily $856 million and agriculture $338 million. Profit comes from the gap between what loans and bonds earn and what deposits cost (a net interest margin of 4.13% in the second quarter of 2026), plus fees and mortgage banking. What changed since our last look, a few weeks ago. Little in the business. Banner closed its all-stock purchase of Pacific Financial Corporation (Bank of the Pacific: about $1.29 billion of assets, $771 million of loans, $1.14 billion of deposits, 15 branches in western Washington and Oregon) on September 1, 2026, at 0.2633 Banner shares per Pacific Financial share, or about 2.67 million new shares on Pacific Financial's 10.1 million diluted shares. Our earlier estimate already included this. Two corrections. First, we earlier put Pacific Financial's 2025 earnings to work alongside a later figure; we now use $11.6 million for 2025, and note that its 2026 earnings were running a little lower ($3.05 million in the first quarter and $2.9 million in the second, the second including about $0.7 million of merger costs). Second, our bear case now uses a deeper credit downturn, sized from Banner's own 2009-2010 losses (below). The base case is essentially unchanged at about $100; the bear case is lower, about $62 instead of $74; the bull case is a little lower at about $127. How we measure earnings. We start from net income, add back depreciation and the amortization of intangibles from past acquisitions, replace the accounting provision for loan losses with loans actually written off (net of recoveries), and subtract stock compensation and branch and equipment spending. The provision is an estimate that swings with the outlook (a large reserve build in 2020, a release in 2021); actual write-offs show what losses really cost. We do not use reported operating cash flow, which for a bank mixes in the sale of mortgage loans made for resale and never charges actual loan losses. On this basis, earnings per diluted share were $4.12 (2018), $4.12 (2019), $5.13 (2020), $4.86 (2021), $5.90 (2022), $5.49 (2023), $4.93 (2024) and $5.76 (2025). Our starting level is the median of 2020-2025, $5.31 per share. Those six years cover a full interest-rate cycle (near-zero rates, the 2022 surge, the 2023-2024 squeeze on deposit costs and the easing since) and the bank in roughly its present shape after the Skagit (2018) and AltaPacific (2019) acquisitions. What they do not contain is a real credit downturn: actual loan losses averaged only a few hundredths of a percent of loans a year, and in the first half of 2026 net write-offs were just $1.3 million. So that level is not a through-the-cycle figure; credit losses are carried in the bear case. Banner is currently earning more than $5.31: net income of $103.6 million in the first half of 2026 was up 14% from a year earlier, and on our measure 2025 earnings per share rose 17%. We start the base case below both, at $5.31 rather than 2025's $5.76, because today's near-zero loan losses are not a permanent condition, and nonperforming assets have been rising (from $49.8 million a year earlier to $60.5 million, 0.36% of assets, at June 30, 2026). Base case, about $99.72 per share (about $3.67 billion in total). Banner's own business earns $5.31 per pre-deal share (about $182 million). Pacific Financial adds its 2025 earnings of $11.6 million. Management targets cost savings of $16.4 million a year (40% of Pacific Financial's expenses); we credit half of that, phased in at 75% in the first year, because Banner has a record of absorbing in-market banks but has not yet delivered this one. Year one also bears the $25.5 million of one-time merger costs Banner disclosed (about $20 million after tax), leaving about $178 million, or $4.84 per share on about 36.8 million diluted shares. From year two, earnings grow 3% a year, in line with Banner's loan growth over the past year (3%). Growth for a bank is not free: each year it keeps back about 3% of its roughly $1.7 billion of tangible equity to support the larger loan book, and only the rest counts as cash to owners. By year ten earnings reach about $258 million, or $7.02 per share. After that we hold earnings flat and assume all of it is paid out: the deposit franchise, mostly ordinary checking and savings accounts gathered over more than a century, keeps earning, but we assume no growth we cannot point to. Bear case, about $61.79 per share (about $2.27 billion). A real Pacific Northwest and California property downturn of the kind Banner itself went through in 2009-2010, when it charged off $88.9 million (2.28% of average loans) in 2009 and $67.9 million (1.88%) in 2010, mostly on construction and land loans, and ran net losses in both years. Construction and land loans are 14% of the book today, similar to the 13.8% in 2009. We apply write-offs of 0.25% of the combined $12.8 billion of loans in year one, then 2.3%, 1.9% and 0.75% in years two through four, about $664 million before tax in total, and keep deposit costs sticky at $15 million a year of lost earnings. No merger savings arrive. The bank loses about $51 million in year two and about $11 million in year three, and earns about $104 million in year four. It needs no new capital: it starts with about $1.7 billion of tangible equity and a common equity Tier 1 ratio of 12.8%, so the roughly $520 million of after-tax losses come out of a cushion built for exactly this. It then recovers to a permanently lower level, 10% below today's run rate after the deposit-cost drag, about $159 million ($4.32 per share), growing 1% a year to about $4.54 by year ten, held flat after that. This bear value is above tangible book value of $47.82 per share at June 30, 2026. That is because the business keeps its deposit franchise through a downturn: 89% core deposits that cost far less than market rates, and a margin above 4%, which a liquidation value would not capture. We do not model a deposit run: Banner came through the March 2023 regional-bank failures without one. Its bond portfolio carries unrealized losses of about $209 million after tax at June 30, 2026 from the 2022-2023 rise in rates; the bonds repay at face value as they mature, but they limit how much cash Banner could raise by selling them in a crisis. Bull case, about $127.46 per share (about $4.69 billion). Credit stays as benign as 2022-2025 and Banner's own earnings start at about $6.09 per pre-deal share, roughly the pace of the first half of 2026. The full $16.4 million of cost savings arrive (75% in year one), Pacific Financial contributes its $11.6 million, and earnings grow 5% a year, the pace of Banner's stronger organic years, with 5% of tangible equity retained each year to fund that growth. Year one is about $5.70 per share after merger costs; year ten is about $9.62. Debt. For a bank, deposits and borrowings are the raw material of the business, and their interest cost is already deducted in the earnings we value, so no further debt is subtracted: each case's business value is also its value to shareholders. At June 30, 2026 borrowings were modest: $320 million of Federal Home Loan Bank advances, $114 million of other borrowings (mostly customer repurchase agreements) and about $80 million (fair value) of trust-preferred junior subordinated debentures. The holding company repaid its last subordinated notes in 2025. Leverage of roughly ten dollars of assets per dollar of tangible equity is charged through the credit losses in the bear case. What would make this wrong. A property downturn deeper or longer than 2009-2010, especially in construction and land lending, or one that forced Banner to raise equity at low prices, which our bear case does not need. A long period of deposit costs rising faster than loan yields. Pacific Financial cost savings falling well short of even the half we credit. On the other side, if near-zero loan losses persist for many more years, the base case is too low. The margin-of-safety price. We are fairly sure of the earnings level: Banner has earned between $4.86 and $5.90 a share on our measure in every year since 2020, and its funding is mostly sticky core deposits. What we are least sure of is credit. The worst plausible outcome is a repeat of 2009-2010, which we model; it costs about two years of earnings but leaves the bank solvent without new capital, because it starts with a large equity cushion, has no holding-company notes due, and spreads its loans across many borrowers and property types. If we are wrong on the two things most likely to go wrong (credit costs at the bear-case level and no merger savings), the shares are worth about $62. If only growth disappoints (1.5% a year instead of 3%), they are worth about $95. Banner pays a dividend of $0.52 a quarter, about $2.08 a year, during the holding period. The margin-of-safety price is about $60. From that price, if the base case plays out, the business would be worth about $105 a share in three years, which together with three years of dividends implies about 23% a year. If the bear case arrives instead, $60 is roughly what the shares are worth today in that case, so the bear case implies little permanent loss from that price even though it would not reach a 20% return; that trade-off is acceptable because we judge the bear case a one-in-ten outcome and because the bank survives it intact.