Columbia Banking Systems Inc 2026 Q3 Earnings Call

You may begin. Thank you, Tawanda.

Good afternoon, everyone. Thank you for joining us as we review our third quarter results. The earnings release and corresponding presentation are available on our website at columbiabankingsystem.com. During today's call, we will make forward-looking statements which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliations provided in our earnings materials. I will now hand the call over to Columbia's Chairman, Chief Executive Officer, and President, Clint Stein.

Thank you, Jackie, and good afternoon, everyone. Our third quarter results demonstrate steady progress on the same core priorities we have outlined for the past several years. Delivering consistent, repeatable performance, continuing to reshape the balance sheet to support long-term profitability, and returning excess capital to shareholders. This quarter, we continued to grow relationship-based commercial loans and utilized funds from strong customer deposit growth to reduce our reliance on wholesale funding, enabling both sides of the balance sheet to contribute to net interest margin expansion. We also returned over $1 billion to our shareholders over the past year through dividends and share repurchases. The completion of our existing buyback authorization resulted in an 8% reduction in our common share count over the duration of the program.

Given our confidence in Columbia's long-term strategy and our outlook for continued excess capital generation, our board of directors has authorized a new $1.2 billion share repurchase program. Our results reflect the benefits of consistent execution, even as the operating environment continued to shift. Discipline is not always the easiest path, but it's one our teams have maintained quarter after quarter across loan and deposit pricing, credit, and expense management. That sustained consistency has driven improved profitability and a balance sheet increasingly built around full customer relationships. In August, we marked the one-year anniversary of closing our acquisition of Pacific Premier, which was the smoothest integration I've experienced in my 21 years with Columbia. Over that time, we have built a compelling footprint across the West, achieving scale and a competitive presence through the combination of organic growth and strategic acquisitions.

As I have repeatedly stated over the past 18 months, Pacific Premier was the missing piece to the franchise we envisioned. Our focus remains on fine-tuning our franchise and continued execution on our organic growth opportunities. Our Northwest roots support our 10% market share in Washington, Oregon, and Idaho. While our growing presence in other key Western markets provides us with significant opportunity to gain share and further enhance our market position. With the integration fully behind us, we are applying our operational discipline with even greater focus, looking across the company for additional opportunities to improve efficiency and profitability. Together with our continued balance sheet optimization and intentional approach to capital management, this work strengthens our ability to deliver sustainable long-term value for our shareholders. I'll now turn the call over to Ivan.

Thank you, Clint, and good afternoon, everyone. As Clint highlighted, our third quarter results reflect the progress we continue to make on our strategic priorities. Turning to slide 11, we reported EPS of $0.78 and operating EPS of $0.82 for the third quarter. On an operating basis, which excludes items detailed in our non-GAAP disclosure, third quarter pre-provision net revenue and operating net income increased 7% and 6%, respectively, compared to the second quarter of 2026, and 25% and 12%, respectively, compared to the third quarter of 2025. A more favorable mix of loans and funding, together with disciplined expense management, drove both the sequential and annual growth. The addition of Pacific Premier also benefited the year-on-year comparison. Turning to slide 12. Average earning assets were $59.8 billion during the third quarter, as balance sheet optimization and elevated CRE payoffs contributed to modest contraction compared to the prior quarter.

We actively managed our funding base using strong customer deposit growth to reduce wholesale funding, including public wholesale balances. Between June 30th and September 30th, we reduced wholesale funding by $1.5 billion, contributing favorably to net interest margin. Slide 13 outlines the contributors to sequential quarter change in net interest margin with NIM at 4.11% for the third quarter. Adjusting for the 3 basis point benefit from accelerated repayments this quarter and the 3 basis point impact of one-time credit-related interest reversals last quarter, our NIM expanded by 12 basis points sequentially. Our balance sheet optimization strategy drove meaningful NIM expansion, building on improvement throughout the past year.

As previously articulated, NIM moved above 4%, and excluding unusual items, we expect it to remain above 4% for Q4. More specifically, we are guiding to a Q4 NIM of around 4.05%, which incorporates the impact of carrying excess subordinated debt throughout Q4 at a modestly negative carry. Our latest interest rate modeling continues to show that our balance sheet ratios remain largely neutrally positioned to rates, as slide 14 details, providing earnings insulation whether interest rates rise or fall. Non-interest income in the third quarter was $80 million on a GAAP basis and $87 million on an operating basis, as detailed on slide 15, at the high end of our guided range. Our results reflect continued momentum across products and businesses, and we expect non-interest revenue to remain in the mid-$80 million range for Q4.

Slide 16 outlines non-interest expense, which was $365 million on an operating basis, consistent with last quarter and reflecting disciplined expense management across our core franchise. Excluding CDI amortization, which will decline slightly each quarter, we expect fourth quarter non-interest expense to be in the $330 million-$335 million range as we continue to reinvest in our franchise. Moving on to slide 17, provision expense was $33 million for the third quarter, reflecting loan portfolio runoff, credit migration trends, and changes in the economic forecast used in our credit models. Credit metrics remained stable and healthy. Slide 18 details our allowance for credit losses by portfolio, with coverage of total loans at 1.02% at quarter end and 1.25% when credit discount on acquired loans is included. Turning to capital, slide 19 highlights our regulatory ratios at quarter end.

Our CET1 ratio declined slightly to 11.5% as our regular dividend and robust buyback activity modestly outpaced strong capital generation and the benefits of balance sheet optimization. During the third quarter, we repurchased 6.5 million common shares, returning approximately $200 million to our shareholders and completing our prior repurchase plan. Our total risk-based capital ratio increased to 13.8%, reflecting Columbia Bank's issuance of $250 million in aggregate principal amount of subordinated notes during the quarter. We expect to use these proceeds to redeem approximately $240 million in aggregate principal amount of junior subordinated debentures associated with certain trust preferred securities through early 2027, causing our total risk-based capital ratios to decline by approximately 50 basis points, all else equal. These actions advance our broader strategy to optimize both our balance sheet and our capital structure.

Tangible book value declined during the quarter to $18.10, due primarily to an increase in other comprehensive loss as interest rates moved notably higher during the third quarter. Looking forward, we expect share repurchases to remain in the $150 million-$200 million range for the fourth quarter under the new repurchase plan that Clint outlined. Overall, we're very pleased with the financial results for the quarter, generating an ROAA of 1.4% and an ROTCE of over 17%. Our focus remains on protecting the quality of earnings as we work to improve returns over time. With that, I will now hand the call over to Tory.

Thanks, Ivan. Our teams produced another quarter of solid relationship-driven results. Our loan portfolio continues to shift in the direction we want, with commercial loans inclusive of owner-occupied CRE comprising 43% of the total portfolio, compared to 42% at June 30 and 39% a year ago. Competitive pricing and structures that we are unwilling to match contributed to a decline in loans to $46.9 billion from $47.2 billion as of June 30. Although the pace of decline slowed relative to last quarter. Loan origination volume was $1.2 billion during the third quarter, with nearly 70% attributable to commercial loans. Our focus remains on winning full commercial relationships rather than single product transactions. These broader relationships extend naturally into deposit and fee income opportunities, supporting stronger overall profitability.

Turning to deposits, strong growth in customer balances supported an increase in total deposits to $52.7 billion compared to $52.1 billion at June 30. As we intentionally reduce public wholesale and brokered balances, customer deposits increased by nearly $1.2 billion during the third quarter due to seasonal balance growth and new customer activity. As Clint noted, our discipline extends to deposit pricing. The average cost of interest-bearing deposits declined one basis point to 1.95% for the third quarter. Our spot cost of deposits was largely stable at 1.96% as of September 30, reflecting a measured response to the Fed's rate increase in September. Our relationship approach to banking is driving a greater contribution from fee income to total revenue. We are seeing momentum across core fee businesses, including treasury management, card-based fee income, and services such as international banking. Wealth management also is contributing to more non-interest income.