Columbia Banking System, Inc. (COLB) September 2026 Conference Transcript

Thanks. Good morning, everybody. We're pleased to continue the morning with Columbia Banking Systems, Inc. We have Clint Stein, the Chairman, President, and CEO, and Ivan Seda, the CFO, joining us today.

So thanks a lot for coming all the way in from the West Coast. Thanks for having us.

Maybe starting off, we're now well into the third quarter. How would you characterize the operating environment today relative to where things stood at the end of July when you think about customer activity, pipelines, sentiment, competitive behavior, what's gotten better, what's gotten tougher, I guess what surprised you the most?

There's a lot of different aspects to that question. You know, I think from my perspective, not much has changed in terms of our pipelines are pretty much where they were in July. Um, customers are still, you know, moving forward, uh, with, uh, their, their, their projects and activities and investments. Um, competition is, is, um, you know, it, it, it started really picking up in the second quarter, um, you know, on, on, uh, on the deposit side. Uh, and then, you know, some, um, what I characterized in the second quarter as, as borderline irrational things on the loan side. So we still see that. There's still a big push for folks that are just trying to grow totals on their balance sheet. But so far, our bankers have done a great job of navigating that. And part of that is the markets that we're in are positioning within that market. So I guess if I just had to sum up the third quarter, I would say it's just been a continuation of the second quarter.

You know, you just described parts of the market as irrational and increasingly competitive. I guess where is that showing up in loans and deposits more specifically, and how are you deciding when to compete aggressively versus, you know, when to step away?

So we see it on the loan side. We see it in both pricing and structure. You know, and oftentimes we can, you know, compete on the pricing element. We're not going to relax our underwriting standards and give on structure. Our value proposition isn't to be the low-cost provider or a max proceeds lender. um it's it's uh we work really hard uh and have for for many years to be a trusted advisor and with that um we expect to get paid for that that comes with a with a premium price um so you know from from that perspective if we're going to compete um you know and and get a little more aggressive on pricing we really look at the entire relationship what's the profitability of it? What are the, you know, offsetting elements of it? You know, do they have significant non-interest bearing deposits with us? Do we have their treasury management, their corporate card? You know, do we have a wealth relationship with the owners or executives? So all of those things, and it's really kind of on a loan by loan, customer by customer basis, that we'll make that determination as to, you know, if we want to compete or if we want to walk away. For new relationships, it's a higher bar because you don't have, you know, you don't already have all of those things. And so that's typically where we'll just step back and say, you know, come see us when the market's more rational. The deposit side, it's more excess liquidity that people are, you know, chasing yield. And for that, You know, I mean, the way I look at it, and Ivan might feel differently, is it's, you know, what's our alternative? We're not going to pay more or risk cannibalizing the pricing of our entire deposit portfolio if we can just simply go and replace some of that funding at the Federal Home Loan Bank.

Yeah, I would agree with that. I think on the deposit side, the tide shifted in Q2 from my perspective, right, from an environment where I think if you go back six months, I think there was expectations that, you know, rates would continue to decline. That was what was originally within our plan at the beginning of the year. You go back to six months ago, I think it was kind of like a slack tide is what I would call it. And then you started to see, I think, in Q2, an expectation for, you know, we'll see what happens tomorrow, but rising interest rates. And that's put pressure on funding costs across the entirety of the industry. We see it in our marginal funding costs. And I think what that's required is for us to be very surgical in terms of how we decide to price deposits. And we price, you know, in particular, CDs, money market. The benefit that we have, I think, and what you saw from us in Q2 was continued decrease in the cost of interest-bearing deposits. I think we've signaled that will be hard to replicate. In Q3, I think that if anything, we'll probably be flat or potentially up a little bit because we've had to really be thoughtful around where you place deposit pricing so that our bankers are out there competing for deposits and we're not tying both hands behind their backs, but at the same time making sure that we're not making a rational pricing decisions that are going to be a drag on that margin. So it's required a really thoughtful, surgical approach to that.

You know, there's several transactions and leadership changes have occurred across California and other Western markets over the last year. How much opportunity do periods of disruption create for Columbia, and where are you seeing the greatest stability to win customers, recruit talent, or gain market share?

Yeah, specific to California, that was one of the appealing things for us. I mean, one of many appealing things for us with the PAC Premier acquisition was what it did for us in Southern California and the fact that that market is fragmented. You know, there's not a clear dominant bank in there. You know, we've seen opportunities from some of the acquisitions that have happened over the past, you know, call it three to five years, attracted some great talent in that market that, you know, has really built some nice portfolios on both sides of the balance sheet. We see it really throughout our entire footprint in terms of our ability to just be in a space that's different. We're kind of in a sweet spot when you just think about our market position. And the money center banks don't always want to come down to the level that our business customers are at. The smaller banks, they don't have the balance sheet or the products or both to serve those customers. And there's only four of us west of the Rockies that are between that $50 and $100 billion mark. And two of them have very different business models from us. So that's appealing to customers. It's appealing to, when I think about our expansion markets of Colorado, Utah, Arizona, and the folks that have joined us in those markets are phenomenal. Our legacy markets in the Northwest, likewise, we've attracted talent from, you know, you can pretty much name, you know, any top ten bank. and we've hired great performers that do really well in our system. So I'm super excited about what we're seeing on the talent front. We don't take it for granted. You know, I've said before that we used to – our people used to always get recruited by smaller banks. Now we see some of our junior bankers and others that are getting, you know, recruited by the large banks as well. So part of that's our market position. Part of it's the kind of people that we have. But we haven't lost any of what I consider, you know, our top talent to, you know, anybody either upstream or downstream. So that's been helpful. and it's also opened up doors in terms of bringing new customers into the bank.

With that backdrop, does that help accelerate that relationship, full relationship banking model? Are you seeing sort of a better uptick in some of those new expansion markets that you've talked about or when you're bringing in a new experienced banker?

Oh, absolutely, yeah, especially the ones that are coming from the bigger banks because they're used to having a lot of different products and services and bringing the full assortment of those to the customer and really kind of wrapping their arms around that relationship and they're not shy about asking for it. So that's where we've seen them be really successful and we're not lacking for any products. You know, technology, we're never going to be on the cutting edge, but all of our tech platforms are contemporary. So the bankers know they can go in and compete, and they do with anybody. And so that's helped in terms of kind of upskilling even some of our folks that have been with us for a long time. And now they see new people come in, a different way of doing it. and, you know, it causes everybody to just kind of, you know, step up their game.

Great.

You know, over the last year, you've made a conscious decision to shrink lower return assets while improving profitability. Where would you say Columbia is today in that balance sheet optimization process and how much of the benefit is still ahead of you?

I'll start and then I'll step back and Ivan can give you some details on the numbers. But I think what we're proving out, and we'll continue to do that over the next year, is that we can have a smaller balance sheet, be more profitable, and have less risk on that balance sheet. And that's why we've been remixing it and why we're committed to continuing to do so. But you want to talk about kind of what that looks like in the coming year?

Yeah, and maybe what I'll do is I'll start kind of look backward for a minute and then talk about kind of what that looks like going forward because I think it's insightful to kind of think about the journey we've been on. And so for those in the room that maybe are not as familiar with our story, I think the question is largely in relation to a component, about 15% of our loan portfolio that we deem to be transactional in nature. These are credit relationships that are on our balance sheet from legacy, either UMKWA or PPBI lending, where there's really no other relationship that we have. And like I said, that represents about $7 billion. The total loan is about 15%. And that's been declining at a pace of about $1 billion, just over $1 billion per year in terms of volume. If you look back about a year ago, what that's allowed us to do is a handful of things. In the last year, we've added 20 basis points to net interest margin. We've continued to see that step by step, continue to increase over time. We've taken the component of our funding that's reliant upon wholesale down by over 20% at the same period of time. We've added about 10 basis points from Q2 to Q2 in terms of the return profile on an ROAA basis. And we've actually, despite putting up a very substantial share buyback program here in the last year, we've actually seen our total capital levels increase a little bit from summer of last year to summer of this year. And so I think that optimization has been a really positive factor in terms of the return profile of the bank. You're absolutely right. What it's done is slightly deleveraged the bank. And so we've taken loans down slightly, and we've signaled for this quarter that we'll likely be flat to slightly down. And as you look forward, I think the pace of continued runoff of that portfolio has been measured, which selfishly, from my perspective, in terms of managing that balance sheet, I like. We've fielded questions over the last year around, hey, why don't you sell a component of it now, reposition your balance sheet. For us, that doesn't make financial sense for our shareholders. Instead, what we're able to do is see that continue to measure down. And over the next year, we've got a significant portion of that $7 billion portfolio that will either reprice or mature. And so when these largely ARM products hit their repricing date, They kind of jump back to either market rate loans and are no longer a financial drag to us, or they reprice elsewhere. Either way, and we can leverage that kind of freed up capital to reinvest. So I think it's been a positive effect in terms of optimizing the earning asset side of our balance sheet, and we expect that to continue. At some point, that pace will slow down, likely kind of in Q2 of next year. we'll see the pace of kind of the repricing behaviors begin to slow down in that portfolio, and there will be a longer tail to it over several years. But at that point, it'll be a smaller portion of our balance sheet and likely will become less of a headwind from a growth perspective. But like I said, in the meantime, we'll continue that optimization journey we've been on and expect that we'll continue to have favorable financial effects for us.

I think associated with that, investors to become increasingly focused on the path to a sustainable 4 plus percent margin. As you think about the next several quarters, what are the biggest drivers of that margin expansion, and what could cause that timeline to change?

Yeah, so this is the quarter where we've signaled we'll achieve that number and likely surpass it, and so we feel good about that. The first part of that really is what we just talked about, the continued remixing of our loan portfolio. and we just talked about it but essentially that book is sitting at about 4.14% coupon today and so as those loans reprice that's a powerful factor for us and we're seeing like I mentioned earlier some of that reprice and stay on the balance sheet some of that prepay and go off our balance sheet go elsewhere and at the same time we're replacing that with core relationship based lending which in addition to having a higher coupon higher total return profile also allows us to bring in deposits It's bringing the ancillary fee income, which has been growing really nicely from that perspective. The other side of it is just the funding side. And we're not a bank that is going to put up a 10% growth in core deposits. It really is, from my perspective, core commercial banking up and down every single market that we're in, from small business to medium-sized businesses to increasingly larger commercial enterprises. And so, you know, when that's humming, I think that's kind of a, you know, 2%, 3%, 4% total deposit growth rate, which, you know, some folks might not get excited about. I do because I can see how that compounds over time, and we can see the effects. And it's hard to measure in any particular quarter, especially because, you know, as you think about the various businesses that we serve, there's seasonality factors for many of the businesses, ebbs and flows in certain, you know, business lines that we support. And so it's hard to measure progress in any given month or any given quarter. But when you look back and you see the progress that you've made in terms of the ability to continue to optimize your funding stack, that's where, you know, from my seat, it gets really exciting to see that continue to grow over time. And so those are the two factors that really I think we look to. I think the business model at its core is we achieve the target balance sheet mix that we want should be operating kind of in that 4-plus percent range. And that's kind of what our projections are telling us. and that's what we're seeing in the business as well.

Great.

You know, on the loan growth side, clearly you're being impacted by the runoff of the loans that you talked about. When you look at where you're actually seeing production, what are some of the dynamics for new loan production and new loan pipelines? Where are you seeing the most attractive opportunities for growth today, sort of across the franchise?

Well, certainly we're seeing it in some of our specialty verticals, you know, things like our tribal banking group, our franchise finance, some of those areas continue to be very strong. But broadly, it's across all of our markets and, you know, all of our different verticals, you know. And I was in Boise Market last week and talking with the team there, and, you know, they've got so many deals in the works. It was, you know, shocking to me the number of things that they have going and the variety of them. So it's not any one thing, and I'll go back to I think it's our position in the market where we're just able to do things quicker, differently, or better, depending on if it's an upstream or downstream competitor. You know, and the other side of it is, and this is something that we work really hard to achieve and we don't take it for granted, is we have customers that refer their vendors and their business partners to us. And so that also is additive. You know, so I'll just give you an example. in Oregon, we have a customer that just completed a new manufacturing facility, and they're obviously very pleased with our team and the service that we've given them, and they referred the contractor that built their facility to them, and it's a nice couple hundred million dollar revenue company that was with a top ten bank and was just not satisfied. So it's not any one thing, and I'll go back to we always talk about what are the activities that we're doing. And I've said this for many, many years, even, you know, clear back to when I was in Ivan's seat as the CFO. You know, we have periods of time where the types of businesses that we bank, they sell, they go through generational transitions and things of that nature. So the totals can ebb and flow, but I always say, what are our activities? Are bankers doing the right things? And we've been running the Columbia model ever since the UNPWA acquisition. It wasn't necessarily readily apparent, I don't think, in the first year or year and a half. But if you look back now, it's been three and a half years, a little over three and a half years. If you look back at where we've had growth in the balance sheet, it's been in those core commercial-type products. The totals are starting to show up, and you see it translate into the increases that we've had in fee income growth and things of that nature. So I can't just pinpoint it to, you know, any particular area, any particular geography, you know. And I know when you look at us from the outside and you look at pure banks, you know, some of them that have put up, you know, larger growth numbers have gone all in on, you know, one sector, one vertical. And then if it's disclosable, you can see that. For us, it's just a continuation of doing the thing, serving the market, whatever that market is. If it's a no-stoplight town in eastern Oregon or if it's downtown L.A., they have very different opportunities, and we want to make sure that we're capturing whatever that market provides for an opportunity.

I guess California feels like it's one of the most attractive long-term opportunities for Columbia. As you look at that market today, do you feel you have the positioning you need there to gain market share while maintaining that discipline you've talked about?

I feel like we have the infrastructure now. That was the thing that we lacked. You know, our team prior to PAC Premier punched way above its weight in the Southern California market. When we think about California in its entirety, we have roughly the same number of offices there as we do in Oregon and as we do in Washington, so about 330 offices between those three states. We look at what we have on, you know, in terms of deposits and loans. Southern California is our biggest market now, and we've just scratched the surface. So I still remain very optimistic, especially now that we just had the one-year anniversary of closing the PAC Premier Deal. Those bankers that joined us through that continue to impress me with how they've embraced having a bigger balance sheet, more products, more services. Their cross-business line referral numbers are outstanding. and, again, it's such a deep market that we've just scratched the surface.

One thing that keeps coming up is your ability to attract experienced bankers. What are those people seeing at Columbia today that makes them want to join wherever they're coming from?

I think it's a combination of our culture. You know, they know or maybe in previous employers have worked with some of our folks that have joined us and are very successful. So we have a flat org structure, access to executive management. I have an open door policy. I'm sure we hired a new employee yesterday. It was Monday. That person can call, email, come into my office if I'm there, ask me anything they want. And I think that's refreshing is that, you know, we all show up, we roll up our sleeves, and, you know, we're working managers and colleagues. And so that seems to resonate. And then our ability to execute. High performers, what they care about is if they've achieved that trusted advisor status with their customers, they care about being able to execute and deliver on that. And in our model, we've got a track record of people being able to do that.

We spoke about long growth and margin, but fee income businesses have become an increasingly larger contributor. Howard Treasury Management, CARDS, Wealth Management, and other fee businesses, changing the economics of a customer relationship.

Yeah, I'm happy to start. And you're spot on, right? I think Clint talked about it earlier, but one of the things that we've seen in the data is that we continue to deepen customer relationships, in particular as you see some of these non-core kind of transactional borrowers continue to migrate off of our balance sheet. We continue to deepen in those areas, right? Treasury management services, card services, merchant, swap syndications, wealth management. And right now, you know, one of the things that we focus a lot on is continued growth in some of those metrics. The one that I like to focus on is non-interest revenue as a percentage of total average assets, because it's been pointed out to us before that, boy, of the total revenue pie, you know, fee income is a relatively small portion. And I always say, well, yeah, but that's because our net interest margin is so strong, right? If I wanted to grow that size of the pie, the best thing I could do is drop down to a 370 margin, but I don't think that's a good outcome for us. The way that I like to measure it is a function of kind of the business model. And as we continue to transition the balance sheet from where it's been to where I think we've articulated it's going, which is more CNI-centric, more commercial-centric, that measure will continue to increase. And we've also seen that. If you go back to Q2 of last year, we had about 45 basis points of average assets in terms of fee-based revenues. Right now, we're up to about 55 basis points, so it continues to deepen and grow. It's very, very difficult when you look at a pricing model, and whether it's at – I don't care whose model you use. It doesn't really matter if it's on a red cap basis, if you allocate 10% or 12%. If you don't get any other services, if it is purely a lending relationship with no deposits and no ancillary fee services, it's very difficult to get to a 10%, 12%, 15% return on relationship. You really do need to have that full relationship in order to kind of make the math work from that perspective, and so that's what we look to. We don't always get every single piece of the business, nor do we necessarily expect to, but over time, that's the goal, right, is to continue to get your foot in the door with some of these commercial relationships, bring in those deposits, show that you can execute to the comments Clint made earlier, and then as you do that, more often than not, we see kind of these wins come to the table, and that's been fun, and that's exciting to see. And I'm just the finance guy, so I'm rooting from the sidelines sometimes. But I always like to help participate in celebration when they do kind of bring those full relationships in because it really makes my job easier as those are the relationships that drive a strong return profile.

Wealth management is an area we've heard a lot of banks talking about emphasizing and growing and trying to tap the existing customer base. What's driven your success there and how much opportunity remains within the existing commercial customer base to expand?

Yeah, you know, our model is actually pretty simple. You know, I'd say we're a main street commercial bank, so we lead with commercial products. We've always had a private bank wealth management division because we want to bank the owners and executives of those companies that we have the commercial relationship with. And then our retail network is largely there to support the needs of those businesses, those owners and executives. And then, you know, hopefully the employees of those companies will choose to bank with us. You know, so it's not a wide, you know, cast a wide net consumer type model that we run. So, you know, for the 33 years that the company's been in existence, that's always been our approach. I think we can get better. I'm never satisfied. I look at the progress that we're making, but I think that we could do more across our existing customer base. I think where you're seeing the growth in that area is a result of the growth of the company in some of these other markets, the talent that we've been able to attract. And we talked about it on the commercial side. It holds true on the wealth side. And then just in some of those markets like Southern California, there's just an enormous amount of wealth. And as we've, you know, leaned into that market, we're seeing the results, and that's where you're seeing some of that growth come from.

Maybe shifting over to credit, credit remains remarkably stable despite a period of elevated rates. Where are you spending the most time today, and where have your concerns, you know, changed over the past few quarters?

Yeah, credit remains really, really good and strong. You know, Frank, our chief credit officer, is still very relaxed. You know, where he has spent and his team, where they've spent the bulk of their time this year, is just, you know, really analyzing our ag portfolio. I think ag gets a lot of publicity because, you know, it's cyclical. Ours is very diversified. You know, there's, you know, it's anything from, you know, cattle to row crops to nuts to nursery stock to grass seed. I mean, it really runs whatever can be grown in our footprint is, makes up the portfolio, you know. And even at that, you know, they're navigating things pretty well, and some are doing exceptionally well. I was speaking with a cattle rancher a few weeks ago, and he was excited and in disbelief at how much he just sold his steers for. um you know and and so um where we do have um uh an issue i think we're i think ag our non-performing ag loans are about 3.8 percent um you know 1.8 is the one uh uh pop deal that we previously disclosed in uh um earlier this year so all in all it still remains very strong and um and and we do some things to minimize the risk in that book. We participate in former MAC programs and USDA programs that help to de-risk that as well.

Maybe looking at AI, which is a theme we're talking about clearly this year, you've discussed AI-enabled relationship management tools, customer analytics, operating efficiency initiatives, and productivity improvements. Where are you seeing the most tangible benefits today? Which applications have the the most potential to create shareholder value over the next few years.

Yeah, you know, Ivan and I are sitting up here, and we're going to not do the answer near the justice that Drew Anderson, our chief administrative officer, who's with us and absolutely lives this stuff each and every day. So we're going to put him on the spot and ask him to come up. You'll get a much more robust, detailed answer. Thanks, Drew.

Thanks, Jared. So AI at Columbia Banking System is really kind of broken out into a couple of categories. One that we've really found a lot of success in is in our call center. So we put about three different AI applications in front of our call center agents and our customers. And what we've seen over the last year is we've actually flipped. So when a client sends a message, now it's seven to one agent response versus human response. And the reason we're seeing that change is the agent's getting a lot better. So certain things like what's your routing number? Where's your closest branch? What's your hours of the branching operations? The agent just takes care of that. And then the super complicated, hey, I have fraud on my account. What do I do? That's where the human steps in. So we've seen a tremendous productivity increase in our call center. And the point I would point you to, Jared, is we added 30% more customers with the PAC Premier acquisition, but our call center staff stayed flat and that's a lot of this AI work the other thing we're seeing a lot of success in is our fraud capabilities so we have some really nice fraud tools we layer on our own internal kind of AI models self-developed internally on top of those and now we're catching more fraud that would have you know bypassed those those models so between our call center between our fraud those are the early wins I think what we're going to see here in the next couple quarters is some work on the commercial lending process and speeding that up. Like Clint said, we try to be very, very quick in our markets, and we feel like there's a tremendous opportunity to leverage AI in the process, not to decide the credit, yes or no, but just speed up the analytics, the reporting, the decision-making. Great.

I guess maybe at the last few minutes here, talk a little bit about capital and M&A. you're continuing to generate excess capital while keeping that loan growth intentionally flat as we discussed. How are you thinking about the dynamics of buybacks and capital targets and then as you mentioned it's been a year since the close of PPBI how are you thinking about M&A going forward from here as well?

I'll tackle the M&A question, and then Ivan can speak to what we're doing on the capital front. I can't help myself. I have to say one thing on capital. Last year when we announced the $700 million buyback program, the first question we got was, what do you plan to use at all? And it's like, well, yeah, that's why we announced it. And so as that's winding down, Ivan can update where we're at. From an M&A perspective, Steve, you know, there was something last week or the week before in S&P on M&A, and it was a little bit out of context. So at a forum a few weeks ago, I was asked a hypothetical question about M&A. Like, if you ever did M&A again, what would be the smallest thing you'd look at? And then what on the top end? And so I said, geez, I can't imagine anything under $3 billion that would really move the needle or do anything. And then just looking at our marketplace and where we're interested, I don't really see anything that's a fit for us over $10 billion if we're ever to do M&A again. Well, I think it kind of got printed as that's our range, that's what we're seeking out. The phone still rings. I think we're still viewed as a great strategic partner option. So there's nothing that's been announced in our marketplace that we didn't know was coming, that we didn't have an opportunity to say, not a good fit for us. You know, and so it's not a priority. You know, I think that some of the things we're working on internally are making us better and will continue to allow us to take market share organically. And that work's not done. So that's where our focus is. You know, if we ever do reenter the M&A space, it will be something that has to absolutely be additive to our core deposit base. We're not going to do anything that doesn't, that weakens that core deposit base. You know, and then we'd have to look from there as to, okay, what's the additional strategic rationale? and we've worked hard these last five years integrating and transforming our company. Our bankers are having fun, we're having fun, and we can still get better. We don't need to do anything from an M&A front.

On the capital front, it's a great question. So in the last, it was 11 months ago, we announced the $700 million share authorization and signaled that that is our intent, right, is to leverage that authorization to kind of return capital to shareholders. You know, over the course of a year, with that in place, in addition to a very healthy dividend level, we'll have opportunity to return over $1.1 billion of total capital to shareholders. And what we've essentially seen is that our capital levels, from a risk-based capital perspective, have barely moved, right? If you go back to the last three, four quarters, they've been right at that kind of 13.5% level, which frankly speaks to the power of the earnings profile of the company, that you're able to do that. We repurchased 100 million shares in Q4 of last year after announcing the program, 200 million volume in Q1 and Q2, and would expect a similar level here in Q3 as we wrap up this year. And then we'll come back to the market here with an update as part of our October earnings call with regard to the continuation of the program and the size and scale of that. The other thing that we've been looking at and actively taking action on is the mix of our capital. So we've talked about an opportunity to look at not just kind of the share repurchase program, but also our tier two capital base, which is historically, and as you can see in our financials, been trust-preferred securities. And those are expensive, they're inefficient, and they'll begin to lose their capital treatment here in the next, starting later this year. And so we're working through a program to essentially replace that with a sub-debt offering that we disclosed yesterday morning. So we're excited about that. That will be kind of a more stable, more efficient, and more cost-effective way of providing that Tier 2 capital base. And so that's something that we've been working through this quarter and excited to get that done. And you won't see a significant movement in our total capital levels with regard to that. but we're excited to have that be something that we're able to execute on here in the third quarter as well. And that sub-debt offering, just to be clear, is intended to essentially upstream capital to CBSI level and redeem some of the trust-preferred securities. So we'll be doing that here for the next handful of weeks and months.

Well, with that, thank you very much for joining. Thank you.