KBRA Affirms Ratings for Columbia Banking System, Inc.

KBRA affirms the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, and the short-term debt rating of K2 for Tacoma, Washington-based Columbia Banking System, Inc. (NASDAQ: COLB) ("the company"). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of A, the subordinated debt rating of A-, and the short-term deposit and debt ratings of K1 for Umpqua Bank. The outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are underpinned by a robust deposit funding base, which is anchored by a large proportion of NIB deposits, resulting in total deposit costs that continued to track well below most similarly-rated peers throughout 2023. An attractive Northwestern operating footprint in economically diverse and vibrant states contributes to COLB’s enviable deposit base, and, in KBRA’s assessment, provides broad support to the ratings. Among regionally based institutions, the company effectively holds top deposit market shares in the home markets of OR and WA, further reinforcing deposit depth and durability. We also view the contingent liquidity backstop as sufficient, including solid on-balance sheet capacity.

COLB’s meaningful operating and geographic scale, both for lending opportunities and for cultivating deposit relationships, provides a solid platform for long term earnings performance, especially in a normalized interest rate environment. However, more recently, competitive pressures combined with downward shift in the NIB deposit mix, although reflecting a robust 34% of deposits at YE23, have led to the company leveraging comparatively higher levels of wholesale funds (i.e., brokered deposits and FHLB borrowings) relative to many similarly-rated peers. With the more price sensitive noncore funding representing close to 20% of the funding mix at YE23, coupled with muted loan growth expectations, NIM compression is unlikely to abate in the near term in the context of the current interest rate environment. While NIM (~3.80% in 4Q23) has continued to track better than most peers, contributing to generally peer-like overall core earnings performance (adjusted ROA of ~1.00% in 2023), it included moderate uplift from purchase accounting accretion income, which we recognize has been consistent during 2023, although can be subject to variability or less predictability over time. Additionally, given the rate and volume challenges within the mortgage market, the company has become more spread reliant, placing greater pressure on net interest income.

The lower-cost deposit base moderates the need to take outsized loan credit risks, which, in KBRA’s view, translates to a conservative credit profile, which has been demonstrated through better than peer asset quality through recent years. COLB’s investor office exposures are manageable at ~5% of total loans, about 80% of which are partly protected by personal guarantees. We also recognize the portfolio’s solid reported LTV (56%) and DSCR (1.72x) buffers, modest downtown exposures, and limited scheduled maturities in the coming years.

Capital protection as measured by the CET1 ratio (9.6% at 4Q23) has exhibited respectable growth (+70 bps) since the closing of the merger in 1Q23 between Umpqua Holdings Corporation and COLB, owing to disciplined loan growth, earnings retention that offset relatively high dividend payouts, and pause in share buybacks. However, the ratio remains well below the average of the rating category. KBRA’s expectation is that the CET1 ratio will be rebuilt over time to a level more commensurate with that of similarly rated peers, which both predecessor companies have managed to historically.

Rating Sensitivities

Positive rating momentum is unlikely in the intermediate term. In the context of heightened macroeconomic uncertainties, the ratings would most likely be re-evaluated if loan quality deteriorates significantly, resulting in persistently weakened earnings or regression in regulatory capital, particularly the CET1 ratio. Additionally, comparatively more aggressive capital management leading to an inability to demonstrate rebuild of the CET1 ratio to levels more commensurate with the rated peer group prospectively could pressure the rating.

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