Executive Summary / Key Takeaways

• Columbia Banking System is executing a strategic transformation, leveraging its recent merger integration and operational efficiency gains to become a premier relationship-based business bank in the Western U.S.
• The announced acquisition of Pacific Premier Bancorp (PPBI) is a significant accelerant, expected to expand market density in Southern California and add complementary fee-income businesses, driving projected double-digit EPS accretion by 2026.
• Recent financial performance reflects disciplined deposit pricing and cost management, contributing to net interest margin stabilization and improved operating efficiency, despite non-recurring expenses in Q1 2025.
• Asset quality remains stable, with management focused on proactive portfolio monitoring and a leverage-averse underwriting culture, though specific segments like FinPac and residential mortgages are experiencing anticipated normalization trends.
• The company's strong capital position, exceeding regulatory targets, provides flexibility for future growth investments and potential capital returns, reinforcing the long-term shareholder value proposition.

Setting the Western Stage: Strategy, Footprint, and Competitive Dynamics

Columbia Banking System, Inc. ($COLB) is a regional financial holding company operating primarily through its wholly-owned subsidiary, Umpqua Bank, across an eight-state Western footprint encompassing Oregon, Washington, California, Idaho, Nevada, Arizona, Colorado, and Utah. The company is currently undergoing a significant strategic evolution, building upon the foundation laid by its 2023 merger with Umpqua Holdings Corporation (UMPQ). This combination created a larger, more diversified entity, positioning COLB as one of the largest banks headquartered in the Western U.S. The core strategy is centered on becoming the "Business Bank of Choice," emphasizing deep customer relationships and balanced growth across lending, deposits, and fee income services, while strategically shedding transactional, non-relationship-based assets and funding sources.

The competitive landscape in the Western U.S. banking market is dynamic, characterized by a mix of large national banks, other regional players, and increasingly, agile fintech firms. Key publicly traded competitors include regional banks like Banner Bank (BANR) and larger institutions with a Western presence such as KeyCorp (KEY). COLB's scale, particularly post-merger, provides certain advantages, including a broader branch network and enhanced resources compared to smaller regional peers like Banner Bank. However, it faces challenges from larger rivals like KeyCorp, which possess more extensive technological capabilities and greater economies of scale. Fintech firms and online banks also pose indirect competition by offering lower-cost or more streamlined digital services, potentially impacting COLB's market share in certain retail and small business segments.

COLB aims to differentiate itself through its relationship-centric banking model, leveraging its expanded physical footprint and experienced bankers to provide personalized service. This approach is complemented by strategic investments in technology designed to enhance both operational efficiency and the customer experience. While specific quantifiable metrics on the performance advantages of individual technology platforms were not detailed by management, management highlighted investments in areas like a new streamlined business online banking platform, expansion of real-time payments offerings, new digital solutions, and data analytic tools (such as Umpqua Smart Leads). The stated goal of these investments is to improve efficiency, enhance customer satisfaction, drive sustainable core fee income, and help bankers identify and capture additional business opportunities with existing customers. The Umpqua Smart Leads program, utilizing predictive analytics, has shown promising results, with a reported 22% increase in close rates between Q1 and Q2 2024, indicating the potential for technology to directly support relationship deepening and revenue generation.

Broad industry trends, including fluctuating interest rates, persistent inflation, and economic uncertainty, significantly influence the operating environment. The Federal Reserve's monetary policy, particularly changes in the federal funds rate, directly impacts COLB's net interest margin and the value of its assets and liabilities. While the federal funds rate remained unchanged in Q1 2025, management noted that prior rate reductions in late 2024 contributed to lower funding costs. Market volatility also affects investment security valuations and the fair value of certain financial instruments. Despite these macro factors, management commentary suggests that customer behavior, particularly deposit flows, is returning to more traditional seasonal patterns, providing a degree of predictability. The company's strategic focus on building a diverse and granular balance sheet is intended to enhance resilience through various economic cycles.

Performance and Operational Execution

COLB's recent financial performance reflects the ongoing execution of its strategic priorities, albeit with some impacts from non-recurring items. For the first quarter of 2025, the company reported net income of $86.6 million, or $0.41 per diluted common share. This represented a decrease compared to $143.3 million, or $0.68 per diluted share, in Q4 2024, and $124.1 million, or $0.59 per diluted share, in Q1 2024. The sequential decrease was primarily driven by a significant increase in non-interest expense and a modest decrease in net interest income, partially offset by higher non-interest income. The year-over-year decline in net income was mainly attributable to the increase in non-interest expense.

Net interest income for Q1 2025 was $425.0 million, a decrease of $12.4 million from Q4 2024, but an increase of $1.6 million from Q1 2024. The sequential decrease was due to lower interest income, only partially offset by lower funding costs, influenced by federal funds rate reductions in late 2024 and lower accretion income from investment securities. The year-over-year increase in NII was primarily due to lower funding costs, partially offset by lower earning asset yields. The net interest margin (on a tax-equivalent basis) was 3.60% in Q1 2025, a slight contraction from 3.64% in Q4 2024, but an expansion from 3.52% in Q1 2024. The year-over-year NIM improvement was attributed to a favorable balance sheet mix shift towards lower-cost customer deposits and proactive deposit pricing strategies, which resulted in the cost of interest-bearing deposits declining to 2.52% in Q1 2025 from 2.66% in Q4 2024 and 2.88% in Q1 2024.

Non-interest income totaled $66.4 million in Q1 2025, an increase from $49.7 million in Q4 2024 and $50.4 million in Q1 2024. The increase was largely driven by fluctuations in fair value adjustments on certain loans held for sale and MSR hedging activities, which resulted in a net fair value gain of $9.5 million in Q1 2025, compared to a net loss in prior periods. Core fee income categories, such as Treasury Management and Commercial Card services, continued to show positive trends, contributing to revenue diversification.

Non-interest expense was $340.1 million in Q1 2025, significantly higher than $266.6 million in Q4 2024 and $287.5 million in Q1 2024. This increase was primarily due to non-recurring items, including a $55.0 million accrual for a legal settlement and $14.6 million in severance expense recorded within merger and restructuring expense. Excluding these items, operating expenses reflected the benefits of operational efficiency activities undertaken in 2024, which led to a decrease in salaries and employee benefits compared to Q1 2024. Management expects the normalized operating expense run rate (excluding CDI amortization) to be in the $1.0 billion to $1.01 billion range for 2025, incorporating planned reinvestments and expected inflation.

Asset quality remains a key focus. The allowance for credit losses (ACL) stood at $438.9 million as of March 31, 2025, a slight decrease from $440.8 million at December 31, 2024. The ACL represented 1.17% of total loans and leases. The provision for credit losses was $27.4 million in Q1 2025, compared to $28.2 million in Q4 2024 and $17.1 million in Q1 2024. The sequential decrease reflected credit migration trends and changes in economic assumptions used in CECL models, while the year-over-year increase was mainly due to these same factors. Net charge-offs were $29.3 million in Q1 2025, or an annualized 0.32% of average outstanding loans and leases. This was an increase from $25.7 million (0.27%) in Q4 2024, but a decrease from $44.0 million (0.47%) in Q1 2024. Net charge-offs in the FinPac leasing portfolio showed continued improvement, declining to $16.8 million in Q1 2025 from $19.2 million in Q4 2024 and $23.8 million in Q1 2024, reflecting improvements in the transportation sector. Non-performing assets increased modestly to $178.0 million (0.35% of total assets) at March 31, 2025, from $169.6 million (0.33%) at December 31, 2024, which management attributed to a move toward a more normalized credit environment. Proactive monitoring and a leverage-averse credit culture are emphasized as key risk management tools.

Total deposits increased by $497.0 million in Q1 2025, primarily due to customer deposit growth from targeted campaigns, which also enabled the repayment of $590.0 million in wholesale funding.

Liquidity remains robust, with total cash and cash equivalents increasing to $2.1 billion at March 31, 2025, driven by deposit growth. Total available liquidity, including secured off-balance sheet lines of credit, was $19.0 billion, representing 131% of estimated uninsured deposits. The company's strong capital position continues to strengthen, with a CET1 ratio of 10.6% and a total risk-based capital ratio of 12.9% at March 31, 2025, both exceeding regulatory well-capitalized requirements and management's long-term targets.

Strategic Outlook and Future Growth Drivers

The strategic outlook for COLB is significantly shaped by the recently announced acquisition of Pacific Premier Bancorp. This all-stock transaction, expected to close in the second half of 2025, is a pivotal move designed to accelerate COLB's expansion in the high-density Southern California market, a key strategic priority. Management views this as accelerating their presence in the region by a decade or more, leveraging Pacific Premier's established footprint and infrastructure. The combined entity is projected to have approximately $70 billion in assets, solidifying its position as a market leader in the Western U.S.

Beyond geographic expansion, the Pacific Premier acquisition is expected to enhance COLB's service offerings by integrating complementary businesses, including custodial trust, HOA banking, escrow, and 1031 exchange services. These additions are anticipated to diversify the revenue stream and contribute to core fee income growth, aligning with COLB's strategy to achieve balanced growth. The transaction is projected to be financially attractive, with expected EPS accretion of 14% in 2026 and 15% in 2027, based on consensus estimates. While the deal is expected to result in 7.6% tangible book value dilution, management anticipates a relatively short three-year earn-back period. A key assumption supporting the closing timeline is the expectation of a more efficient regulatory approval process compared to the prior Umpqua merger, partly due to not anticipating a lengthy DOJ review.

Organically, COLB remains focused on driving relationship-driven growth. Targeted small business deposit campaigns are expected to continue, building on past success in attracting new accounts and balances without relying on promotional pricing. Loan growth is targeted at a low single-digit pace in the current environment, with a strategic emphasis on commercial and owner-occupied real estate lending, while allowing transactional real estate portfolios (estimated at around $3.7 billion in transactional multifamily) to run off or amortize over time. Management believes the best long-term economic outcome for these transactional portfolios, given current market conditions, is to hold them rather than hard-coding losses through immediate sale, although they will reassess if rates decline meaningfully. Growth in core fee income from existing services like treasury management and commercial card is also expected to continue, supported by ongoing investments in technology and sales efforts.

The company's strong capital generation capabilities are expected to be enhanced by the Pacific Premier acquisition, providing increased flexibility. While the acquisition is likely to push out the timing of potential share buybacks, management remains confident in their ability to generate capital well above the needs for prudent organic growth and the regular cash dividend, which was $0.36 per common share in Q1 2025. The increasing capital ratios position the company favorably for future strategic investments and potential capital returns.

Risks and Challenges

Despite the positive strategic momentum, COLB faces several risks and challenges. The successful integration of Pacific Premier Bancorp is paramount. While management expresses confidence based on prior M&A experience and cultural alignment, integration efforts inherently carry risks of business disruption, loss of key employees or customers, and higher-than-anticipated costs, which could impact the realization of expected synergies and financial benefits. Regulatory approvals for the merger are also a condition to closing and could be subject to unexpected delays or conditions that adversely affect the combined company.

Credit risk remains a significant area of focus, particularly given the concentration in real estate-related loans (approximately 75% of the portfolio). Although management highlights the strong performance of segments like multifamily and owner-occupied CRE, a substantial decline in the economy, material increases in interest rates, or changes in real estate values in their primary markets could adversely impact repayment ability. Specific portfolio segments, such as the FinPac leasing portfolio and residential mortgages, are undergoing a normalization phase with anticipated charge-offs and delinquencies, although management believes these trends are manageable and within expectations. Collateral-dependent loans and modified loans to borrowers experiencing financial difficulty also warrant close monitoring. The CECL models used for the ACL are sensitive to changes in economic variables, which could lead to volatility in the provision for credit losses if conditions deteriorate beyond current forecasts.

Interest rate risk continues to influence the balance sheet. While the company has taken steps to manage deposit costs and is positioned as slightly liability-sensitive, significant or rapid changes in market rates could impact net interest income and asset/liability valuations. Liquidity management, while currently strong, could face challenges if deposit balances are not maintained due to pricing pressure or customer behavior, potentially increasing reliance on more costly wholesale funding sources. Legal proceedings, including ongoing class action litigation, represent potential financial liabilities, although management believes the eventual outcome will not have a material adverse effect on the consolidated financial statements based on current information and reserves.

Conclusion

Columbia Banking System is actively shaping its future through strategic consolidation, operational efficiency, and a focused relationship banking model. The successful integration of the Umpqua merger has paved the way for the transformative acquisition of Pacific Premier Bancorp, a move expected to significantly enhance COLB's market position in Southern California and diversify its revenue streams through complementary businesses. While recent financial results reflect the impact of non-recurring expenses, underlying trends in deposit pricing, operating efficiency, and asset quality demonstrate solid execution on core strategic initiatives.

The investment thesis for COLB hinges on the successful integration of Pacific Premier and the realization of anticipated synergies and growth opportunities in key Western markets. Management's guidance for EPS accretion and capital build, coupled with a commitment to disciplined growth and expense management, provides a clear roadmap for long-term value creation. Investors should closely monitor the progress of the Pacific Premier integration, the company's ability to execute on its organic growth initiatives in target markets, and the trajectory of credit quality metrics, particularly within real estate and FinPac portfolios, as these factors will be critical determinants of future performance and the achievement of COLB's goal to be a top-quartile bank.