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 bank"). The outlook for all long-term ratings is Stable.

Key Credit Considerations

The bank’s robust deposit base, including sizeable NIB deposits, underpins the ratings and reflects the favorable dynamics of the underlying economies in OR and WA. NIB deposits approximate one-third of total deposits. In addition, the gradual, yet steady, improvement in bank regulatory capital ratios, which declined at the merger close, due primarily to FMV marks, also benefits the ratings. Bank level regulatory capital improvement has been driven by a modest decline in RWA since the merger, in addition to earnings retention. The bank pays regular dividends, which are used to service parent company indebtedness and pay its quarterly common dividend.

The combined bank's (Umpqua and Columbia Bank) earnings power has emerged since the combination and appears on the path to achieving bottom line profitability metrics consistent with pre-merger operating results, with upside potential available from targeted loan portfolio shifts and operating efficiency investments made from the company’s enterprise-wide cost savings program that will also reduce annualized operating expense by $70 million (equivalent to about 0.14% of 2024 average assets). The focused re-mix of the loan portfolio, connected to certain multi-family and residential loans, will also likely benefit deposit funding costs as these loans have been funded mostly with higher-cost deposits and borrowings, which will naturally decline as these loans are repaid.

The decline in NIM in 2024 was primarily related to the increase in the cost of IBD (generally consistent with bank sector trends). According to regulatory disclosures, the cost of IBD increased on the year by about one percentage point to a still favorable 2.90%, with mix in NIB essentially unchanged on the year. However, with Fed monetary policy actions in the 2H24, funding costs have begun to abate, with the NIM reflecting 4Q24 sequential improvement tied to sharply lower overall funding costs, including IBD.

Anchored by the core deposit base, the bank is moderately reliant upon potentially volatile sources of funds. Borrowings, primarily FHLB advances, are used to fund wholesale or transactional-based loans and managed seasonal deposit flows. Uninsured deposits totaled $14 billion at YE24, with brokered deposits representing about $3 billion. Asset liquidity, in the form of short-term investments and the AFS investment portfolio, comprised about 20% of total assets or 23% of total deposits at 4Q24. Unencumbered investments, coupled with available borrowing capacity, principally at the FHLB and Federal Reserve, offset 128% of total uninsured deposits. Assets pledged to secure on-balance-sheet funding and potential funding needs constituted about 50% of total assets.

Rating Sensitivities

Positive rating momentum is unlikely in the intermediate term, given the bank’s relatively high ratings within the KBRA rated bank universe. Ratings pressure would most likely emanate from a significant deterioration in loan quality, such that sustained earnings pressure or volatility was likely to ensue, especially since capital levels continue to trail rated peers. Relatedly, ratings pressure could develop if the gap between the bank’s regulatory capital ratios and those of its rated peers were likely to widen and KBRA also concluded that the ability to rebuild these capital ratios was either uncertain or limited.

To access ratings and relevant documents, click here.

Methodologies