Executive Summary / Key Takeaways

• The Pacific Premier acquisition accelerates Columbia's Southern California strategy by a decade, vaulting its deposit market share from 51st to 10th and creating a $68-70 billion asset franchise spanning eight Western states, while delivering tangible book dilution of just 1.7% versus the anticipated 7.6%.

• Management's deliberate balance sheet optimization—remixing approximately $8 billion in transactional loans (multifamily and residential) into relationship-based commercial and industrial lending—prioritizes profitability over growth, targeting higher-rate loans that bring deposits and fee income opportunities.

• A fortress balance sheet with CET1 ratio of 11.6% and $550 million in excess capital enabled the board to authorize a $700 million share repurchase program, signaling confidence in capital generation and positioning COLB as a capital return story in a sector starved for yield.

• Commercial real estate concentration remains the central risk at 59% of loans, though conservative underwriting (CRE non-accruals at just 0.19%) and a leverage-averse credit culture provide meaningful downside mitigation in a potential downturn.

• Technology investments and a relationship-driven "Business Bank of Choice" strategy create a durable competitive moat against both regional incumbents and fintech disruptors, with new capabilities in custodial trust, HOA banking, and data analytics driving 29% growth in core fee income.

Setting the Scene: The Making of a Western Banking Powerhouse

Columbia Banking System, founded in 1953 and headquartered in Tacoma, Washington, has spent the past three years executing one of the most ambitious regional banking transformations in recent memory. The 2023 merger with Umpqua Holdings (UMPQ), described by management as a "much heavier lift," created the foundation for a cohesive Western franchise. By summer 2024, integration challenges were largely behind the company, allowing management to focus on optimizing the expense base, fine-tuning pricing strategies, and making targeted franchise investments.

The real inflection point arrived on August 31, 2025, when Columbia closed its $2.4 billion all-stock acquisition of Pacific Premier Bancorp (PPBI). This transaction didn't merely add assets—it fundamentally rewrote the competitive map. Overnight, Columbia's Southern California deposit market share jumped from 51st to 10th on a pro forma basis, while adding powerful new revenue engines in custodial trust services, HOA banking, escrow, and 1031 exchange businesses. The combined entity now operates as a $68-70 billion asset franchise across eight Western states, creating what management calls "the missing piece of our franchise" and completing a footprint that stretches from Canada to Mexico.

This matters because regional banking is fundamentally a scale game. In an environment where deposit gathering costs are rising and technology investments are table stakes, Columbia's expanded footprint provides both deposit density and revenue diversification that smaller competitors cannot match. The acquisition also brings together two like-minded institutions with "very similar underwriting and credit philosophy" and a "leverage averse credit culture," minimizing integration risk while maximizing the potential for $127 million in targeted cost synergies.

Technology, Products, and Strategic Differentiation

Columbia's competitive moat extends beyond branch density into technology-enabled relationship banking. The 2024 launch of a streamlined business online banking platform represents more than a digital facelift—it is the infrastructure backbone for a relationship-centric model that distinguishes Columbia from transaction-oriented competitors. Management's planned 2025 investments in real-time payments, new digital solutions, and data analytics tools directly support the core thesis: driving sustainable fee income growth while deepening customer relationships.

The Pacific Premier acquisition supercharges this strategy. Pacific Premier's proprietary technology and custodial trust capabilities are "light years ahead" of Columbia's previous offerings, enabling immediate cross-selling opportunities. In the first week as a combined organization, nearly every former Pacific Premier branch made referrals to new products or services, demonstrating the power of complementary capabilities. The integration of HOA banking and escrow businesses creates sticky, low-cost deposit relationships that are far more valuable than brokered funding.

This technological edge manifests in tangible performance metrics. Columbia's predictive analytics program for treasury management achieves a 50% closure rate on next-best offers, while the company's de novo branch strategy contributed nearly $150 million to Q3 2025 deposit growth. These aren't vanity metrics—they represent a systematic ability to convert technology investments into customer acquisition and retention, a critical advantage as fintechs and national banks compete for the same deposits.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

Columbia's Q3 2025 results, which include one month of Pacific Premier operations, provide compelling evidence that the strategy is working. Net interest margin expanded 9 basis points to 3.84%, driven by a favorable shift into lower-cost funding sources that reduced deposit costs to 2.43%. Operating PPNR surged 12% quarter-over-quarter and 22% year-over-year, reflecting both the addition of Pacific Premier and underlying profitability improvements.

The loan portfolio composition tells the story of deliberate remixing. Commercial real estate remains the largest segment at $28.6 billion (59% of loans), but management is actively managing down transactional exposures. The multifamily portfolio, while performing well with solid credit quality, represents the type of "transactional multifamily" lending that Clint Stein wants to reduce. Office exposure is contained at 8% of total loans, with non-accruals across the entire CRE portfolio at just 0.19%—a testament to conservative underwriting through the cycle.

Commercial and industrial lending is the growth engine. On an organic basis, Columbia's commercial portfolio increased 5% annualized in Q3 2025, with new loan originations up 36% quarter-over-quarter. New originations priced between 6.5% and 8% (weighted average in the low 7s) compare favorably to the existing portfolio, supporting NIM expansion. The strategy is clear: prioritize relationship-driven C&I lending that brings deposits and fee income over transactional real estate lending that doesn't deepen customer relationships.

Deposit gathering validates the franchise strength. Organic customer deposit growth of nearly $800 million in Q3 2025 included approximately 30% from new customers, while the de novo branch strategy contributed $150 million. Small business campaigns generated $700 million in new balances in 2024, demonstrating the effectiveness of targeted relationship acquisition. The core deposit ratio of 92% (excluding brokered deposits) provides a stable, low-cost funding base that supports NIM in a rising rate environment.

Credit quality remains the bedrock of the thesis. Net charge-offs stood at an annualized 27 basis points in Q4 2024, with the bank contributing just 7 basis points and FinPac (the equipment leasing subsidiary) contributing 20 basis points. The ACL increased to $492 million, reflecting both Pacific Premier acquisition accounting and conservative CECL modeling using Moody's August 2025 consensus forecast. Management's "leverage averse credit culture" and proactive portfolio monitoring have resulted in no systemic issues across industries, sectors, or geographic regions.

Non-interest income growth of 29% year-to-date demonstrates the success of the fee income strategy. Service charges, financial services and trust revenue, and other income all posted double-digit gains, while the Pacific Premier acquisition added $3 million from custodial trust services in just one month. This diversification reduces reliance on spread income and provides a more stable earnings stream through rate cycles.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames Columbia as a capital return story with a clear path to enhanced profitability. The Pacific Premier acquisition is projected to deliver 14% EPS accretion in 2026 and 15% in 2027, with cost synergies of $127 million targeted and $48 million already achieved as of September 30, 2025. Systems conversions scheduled for Q1 2026 should produce a clean expense run rate by Q3 2026, with operating expenses (excluding CDI amortization) expected in the $330-340 million range per quarter before dropping to lower levels in late 2026.

The balance sheet remixing strategy will take several years but should drive meaningful improvement in revenue quality. Management intends to hold the majority of the $8 billion in transactional loans until maturity or payoff, strategically pruning only where payback periods are short and align with value preservation. This approach avoids the "rip the Band-Aid" sale that would create a long earn-back period. Instead, Columbia will remix into relationship-based loans that come with deposits, fee income opportunities, and generally higher rates, resulting in revenue growth even if net earning assets are flat.

Deposit seasonality will create near-term headwinds, with Q1 2026 expected to show customer account contraction due to normal business trends and seasonality. However, management anticipates this will be offset by continued commercial loan growth and proactive pricing actions. The interest-bearing deposit beta is expected to be roughly 50% on the way down, similar to the 55% experienced on the way up, providing NIM stability as the Fed cuts rates.

Capital generation will be exceptional, supporting the newly authorized $700 million share repurchase program. With $550 million in excess capital above long-term targets and a TCE ratio of 8.5%, Columbia has the flexibility to return capital while maintaining a strong buffer. The earn-back period for the Pacific Premier acquisition has been reduced from an anticipated three years to less than one year due to lower-than-expected tangible book dilution, reflecting both conservative acquisition accounting and strong underlying performance.

Risks and Asymmetries: What Could Break the Thesis

The most material risk remains CRE concentration. At 59% of loans, Columbia is exposed to a sector facing structural headwinds, particularly office properties with vacancy pressures. While multifamily properties "continue to perform well due to demand for rental properties in the geographic footprint," a severe economic downturn could stress even well-underwritten loans. Management's conservative approach—tracking owner-occupied versus non-owner-occupied, requiring collateral values exceeding loan amounts, and underwriting to projected cash flow—provides mitigation, but cannot eliminate cyclical risk.

Integration risk from Pacific Premier, while well-managed so far, could surface in unexpected ways. The acquisition adds $11.4 billion in loans and $16.7 billion in assets, requiring significant operational and cultural integration. While management notes that "approximately 100 or roughly 2% of Columbia's 4,700 associates are focused on integration activities" and credits Pacific Premier with a "very similar underwriting and credit philosophy," unforeseen credit issues or systems integration problems could emerge.

Deposit competition represents a persistent threat. While Columbia's core deposit base is strong, fintechs and online banks offering higher yields could pressure funding costs. The 9 basis point decline in deposit costs to 2.43% in Q3 2025 reflects proactive management, but this trend may not continue if rate cuts slow or competition intensifies. The company's reliance on non-interest-bearing deposits (32% of total) provides a buffer, but these balances can be volatile.

Legal and regulatory risks linger. The $55 million legal settlement related to a Ponzi scheme was funded in October 2025, and lawsuits related to the MOVEit data security incident affecting 429,252 customers remain outstanding. While management believes these will not have a material adverse effect, unfavorable resolutions could impact results in any particular reporting period.

The asymmetry lies in the potential for faster-than-expected remixing and capital deployment. If Columbia can accelerate the runoff of transactional loans and deploy capital into higher-yielding relationship loans, NIM could expand beyond guidance. Similarly, if the Pacific Premier integration delivers synergies faster than the $127 million target, expense leverage could drive operating margins higher. The $700 million buyback authorization, if executed aggressively, could provide meaningful EPS accretion beyond current projections.

Valuation Context

Trading at $28.18 per share, Columbia Banking System trades at 12.75 times trailing earnings and 1.08 times book value, a discount to many regional bank peers despite superior growth prospects. The dividend yield of 5.25% provides immediate income while investors wait for the Pacific Premier synergies to materialize. Price-to-operating cash flow of 11.70 and price-to-free cash flow of 12.49 reflect strong cash generation that supports both the dividend and share repurchases.

Comparing to direct competitors, Columbia's valuation appears conservative. Banner Corporation (BANR) trades at 11.76 times earnings with lower growth, while KeyCorp (KEY) trades at 23.78 times earnings despite integration challenges and lower ROE. Glacier Bancorp (GBCI) commands a price-to-book of 1.39 versus Columbia's 1.08, despite slower growth. This valuation gap suggests the market has not fully recognized the earnings power of the combined franchise or the capital return potential.

The company's strong capital position—CET1 ratio of 11.6% versus a 9% target, and TCE ratio of 8.5% versus an 8% target—provides both safety and flexibility. With $550 million in excess capital and the authorization to repurchase $700 million in shares, Columbia can return significant capital while maintaining a buffer for growth. This combination of income, capital return, and earnings growth potential creates a compelling risk/reward profile.

Conclusion

Columbia Banking System has executed a strategic transformation that positions it as the preeminent regional bank in the Western United States. The Pacific Premier acquisition accelerates Southern California market presence by a decade while adding high-margin fee businesses and low-cost deposits. More importantly, management's disciplined approach to remixing the balance sheet—shifting $8 billion from transactional real estate into relationship-driven commercial lending—prioritizes profitability over growth, creating a more resilient and valuable franchise.

The immediate authorization of a $700 million share repurchase program reflects both exceptional capital generation and management's confidence in the combined entity's earnings power. With tangible book dilution of just 1.7% and an earn-back period of less than one year, the acquisition math works even under conservative assumptions. While CRE concentration remains a key risk, conservative underwriting and a leverage-averse culture provide meaningful downside protection.

For investors, the thesis hinges on two factors: successful integration of Pacific Premier's systems by Q1 2026, and disciplined execution of the balance sheet remixing strategy. If management delivers on the $127 million cost synergy target while maintaining credit quality, the combination of earnings accretion, capital return, and dividend income should drive meaningful shareholder value. The market's current valuation appears to underappreciate both the strategic value of the Pacific Premier acquisition and the earnings power of a relationship-driven banking model operating at scale across the dynamic Western markets.