Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) of Columbia Banking System, Inc. (COLB) and its operating subsidiary, Umpqua Bank, at 'BBB+' and 'F2', respectively.

The Rating Outlook remains Stable. The Viability Ratings (VRs) of each were also affirmed at 'bbb+'.

Key Rating Drivers

Affirmation Reflects Company's Strengths: The affirmation reflects COLB's solid business profile driven by its customer-focused culture and consistent asset quality performance. Fitch also expects the strategic and financial benefits of the recent merger with Umpqua Holdings Corporation (UMPQ) to offset the risks associated with the transaction.

Enhanced Franchise; Integration Complete: COLB's solid business profile is driven by its customer-focused culture, diversified loan portfolio, and experienced management team. With the merger between Umpqua Holdings and COLB complete, the combined entity has begun expanding its footprint into other Western markets. COLB has benefited from its full suite of commercial products, new business opportunities, and the application of recent technology investments to a larger scale. Fitch views the execution of integration as effective, evidenced by the company surpassing its cost savings target by the end of 2023, as well as limited turnover at key management positions.

Risk Profile Supports Rating: COLB's credit culture remained sound as underwriting standards at both legacy banks were appropriate and proven through solid asset quality performance over time. Fitch anticipates this performance to continue as both have traditionally achieved superior credit performance compared to peers. Growth is expected to be manageable over the rating horizon.

Asset Quality Remains Sound: COLB's asset quality is expected to remain sound, both in terms of impaired loans to gross loans and net charge-offs (NCOs), illustrating a conservative approach to underwriting in the commercial loan book. While Fitch expects normalization in credit quality, given the current economic outlook, COLB has headroom with regards to its asset quality factor score.

Earnings Pressured by One-Time Charges: COLB's profitability remained supportive of the current 'bbb' factor score, despite pressure from merger related expenses and the one-time FDIC special assessment in 4Q23. While COLB experienced some net interest margin (NIM) compression throughout 2023, it was less than seen at peers, driven largely by the bank's ability to limit increases in funding costs. COLB is currently one of the most spread reliant banks among the mid-tier peer group, which serves as a ratings constraint.

Capital Levels Trending Towards Pre-Merger Levels: The closing of the merger between COLB and UMPQ required the company to take fair value marks driven by rapid rise in interest rates against Columbia Bank's securities portfolio, resulting in the bank realizing $1 billion in losses and decreasing the common equity Tier 1 ratio (CET1) to 8.9% at 1Q23. Over the course of the balance of 2023, COLB rebuilt CET1 to 9.6%. Fitch expects the capital impact to continue to reverse over time, flowing through earnings as the instruments mature.

Liquidity Tightens But Remains Supportive: Following some initial deposit runoff in the wake of the turmoil in the banking sector in 2023, COLB ended the year relatively flat on total deposits. The bank did experience a shift from noninterest bearing accounts into interest bearing accounts and CDs. While this did result in an increase in the bank's funding costs, COLB's solid core deposit base still affords it one of the lowest total cost of deposits among the mid-tier peers. Additionally, the bank has appropriate access to secondary and contingent liquidity through the Federal Home Loan Bank and the Federal Reserve Discount Window.

Holding Company Equalized: COLB's IDRs and VR are equalized with those of its operating company, Umpqua Bank, reflecting its role as the banking holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. The ratings are also equalized to reflect the very close correlation between holding company and subsidiary default probabilities.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Downward pressure could emerge if impaired loans to gross loans migrate above 3% and are expected to remain above that threshold for an extended period. A material increase in credit costs, out of line with peers, could also pressure the rating. Fitch expects COLB's CET1 ratio to build to over the next several quarters. Deterioration in COLB's CET1 could prompt negative rating action.

Additionally, deterioration in COLB's funding and liquidity profile, such as a large scale run up in the bank's loan to deposit ratio, a significant increase in reliance on wholesale funding or a material increase in the usage of brokered deposits, could drive negative rating momentum.

Fitch expects that COLB will continue to build liquidity at the holding company level over time. To the extent that holding company liquidity were stagnate at low levels or deteriorate from current levels, the ratings of COLB could be notched down from those of the Umpqua Bank.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

COLB's ratings are currently well situated, with upside potential limited over the rating horizon. Over the longer term, if the merger results in an enhanced company profile, as evidenced by a stronger franchise and improved market share, positive rating momentum could occur. This would also be predicated on improved and sustainable earnings performance while maintaining sound capital levels and credit metrics, in line with higher rated peers.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Trust Preferred Securities: COLB's trust preferred securities are notched four levels below its VR, twice for loss severity and twice for non-performance. These ratings are assigned in accordance with Fitch's criteria and assessment of the instrument's non-performance and loss severity risk profiles and their affirmation follows the affirmation of the VR.

Long- and Short-Term Deposit Ratings: Umpqua Bank's long-term uninsured deposits are rated one notch higher than the bank's IDR, as U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. Fitch rates Umpqua Bank's short-term uninsured deposits 'F2' in accordance with our Bank Rating Criteria based on the bank's long-term deposit rating and Fitch's assessment of its funding and liquidity profile.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Trust Preferred Securities: The ratings of COLB's trust preferred securities are sensitive to any negative change to the VR.

Long- and Short-Term Deposit Ratings: Umpqua Bank's long-term deposit rating is sensitive to any negative change to the bank's Long-Term IDR. Umpqua Bank's short-term deposit rating is sensitive to negative changes to the company's long-term deposit rating and Fitch's assessment of the bank's funding and liquidity profile.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Trust Preferred Securities: The ratings of COLB's trust preferred securities are sensitive to any positive change to the VR.

Long- and Short-Term Deposit Ratings: Umpqua Bank's long-term deposit rating is sensitive to any positive change to the bank's Long-Term IDR. Umpqua Bank's short-term deposit rating is sensitive to positive changes to the company's long-term deposit rating and Fitch's assessment of the bank's funding and liquidity profile.

VR ADJUSTMENTS

The VR has been assigned in line with the implied VR.

The Asset Quality factor score of 'bbb+' has been assigned lower than the implied score due to a negative adjustment for concentrations.

The Earnings & Profitability factor score of 'bbb' has been assigned lower than the implied score due to a negative adjustment for revenue diversity.

The Capitalization & Leverage factor score of 'bbb+' has been assigned lower than the implied score due to a negative adjustment for capital flexibility.

The Funding & Liquidity factor score of 'bbb+' has been assigned lower than the implied score due to a negative adjustment for contingent liquidity access.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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