KBRA Affirms Ratings for Columbia Banking System, Inc. and Places the Ratings for Pacific Premier Bancorp, Inc. on Watch Upgrade Following Acquisition Announcement

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) following the recently announced merger agreement with Pacific Premier Bancorp, Inc. (NASDAQ: PPBI). 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 main subsidiary of COLB. The Outlook for all long-term ratings is Stable. KBRA also places on Watch Upgrade the senior unsecured debt rating of BBB+ and the subordinated debt rating of BBB, and affirms the short-term debt rating of K2 for Irvine, California based Pacific Premier Bancorp, Inc. In addition, KBRA places on Watch Upgrade 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 Pacific Premier Bank, the lead subsidiary.

Key Credit Considerations

On April 23, 2025, COLB and PPBI announced a definitive merger agreement, whereas PPBI and its banking subsidiary, Pacific Premier Bank, would merge with and into COLB and its banking subsidiary, Umpqua Bank. The merger is an all-stock transaction, with PPBI stockholders receiving 0.915 of a share of COLB shares for each share of PPBI common stock held, with the merger valued at approximately $2.0 billion (~1.0x PPBI's TBV). Proforma ownership of the combined company is estimated to be 70% COLB shareholders and 30% PPBI shareholders., with COLB adding three new members from PPBI's current board, including PPBI's current Chairman, President and CEO, Steven Gardner, who will be added as a non-executive director. COLB's executive leadership team is expected to remain intact with the combined organization operating under the unified brand of Columbia Bank (COLB intends to rebrand its banking subsidiary, Umpqua Bank to Columbia Bank). The transaction is anticipated to close during the second half of 2025.

Upon the completion of the proposed transaction, COLB would have proforma assets of $70 billion, loans of $51 billion, and deposits of $57 billion, with PPBI providing a meaningful presence within the Southern California region (the combined entity would have a top 10 market share within the region), while also moderately enhancing COLB's presence in the Northwest and the Phoenix/Tucson markets. Altogether, the combined company would have a material presence along the west coast.

KBRA considers PPBI to be additive to COLB's sound funding profile, with a proforma loan-to-deposit ratio of 87% and total cost of deposits at 1.70% for 1Q25, including 32% of total combined deposits in noninterest bearing accounts. COLB should benefit from the addition of PPBI's HOA banking business, which had $2.6 billion in lower-cost deposits at 1Q25. Furthermore, while both companies' revenues are primarily spread based (~85% of total revenues), PPBI does provide COLB a new avenue for fee income with its self-directed IRA trust business which had $18 billion in AUC at 1Q25, generating roughly $37 million in fee revenues in 2024 (this business also had $1.1 billion in deposits at 1Q25). PPBI has a long track record of strong credit performance with an NCO ratio below 20 bps dating back to the GFC – reflective of the company's rather conservative approach to lending. As such, the estimated credit mark was a modest $96 million, or 0.8% of PPBI's total loans (50% allocated to PCD loans). However, PPBI’s loan portfolio does include a concentration in multifamily loans (44% at 1Q25), which has become a drag to earnings due to its lower-yields (related to originations occurring during the low-rate environment immediately following the pandemic). PPBI’s average loan portfolio yield was 5.03% for 1Q25, giving COLB a proforma average loan portfolio yield of 5.72%. Interest rate marks are expected to be rather substantial, with an estimated $449 million, or 3.6% of PPBI’s loans, $327 million of HTM securities (19%), and $91 million of AFS securities (5%), all of which would accrete back into earnings over remaining life of loans and securities. COLB estimates proforma accretion income from interest rate marks of $184 million in 2026, with total estimated proforma net income of $961 million (or 1.37% of proforma assets). Despite the level of marks, COLB’s proforma CET1 ratio would increase over 1Q25 levels to ~11.0% (COLB reported a CET1 ratio of 10.6% at 1Q25) due to PPBI’s peer-leading capital position (CET1 ratio of 17.0% at 1Q25). PPBI intends to call all of its outstanding $275 million in subordinated debt prior to closing.

Rating Sensitivities

PPBI’s Watch Upgrade implies that the successful execution of the announced merger agreement would likely result in a rating upgrade (aligning PPBI’s ratings with COLB’s) and subsequent withdrawal of PPBI’s ratings. Conversely, if the transaction were to be terminated, PPBI’s ratings would likely be revisited. The affirmation of COLB’s ratings and Stable Outlook reflects KBRA’s view towards COLB; while we have a favorable view of this transaction for COLB, it does not materially change the credit profile for the company.

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