Columbia Banking System Eyes Margin Gains as Loan Runoff Continues

Key Points

• Balance-sheet optimization is supporting margins: Columbia has replaced lower-yielding transactional loans with relationship lending yielding about 200 basis points more, adding roughly 25 basis points to net interest margin. The bank expects a near-term pause, including 3–4 basis points of pressure from refinancing costs.
• Loan balances may remain subdued: Columbia expects loans to be flat to slightly lower in the fourth quarter and likely for the next two quarters, with balances potentially bottoming in 2027. It also plans to reduce about $5 billion in higher-cost wholesale funding over several years.
• Management highlighted credit and customer relationships: Columbia said its commercial real estate concentration has declined, while multifamily delinquencies remain low. The bank aims to deepen customer relationships through services such as treasury management and merchant services rather than competing primarily on deposit rates.

Columbia Banking System NASDAQ: COLB expects continued balance-sheet optimization to support its net interest margin, even as its loan portfolio remains flat to slightly lower in the near term, executives said at a company news event.

Chief Financial Officer Ivan Seda said Columbia is replacing lower-yielding, transactional loans with relationship-based lending and reducing higher-cost funding. The bank’s third-quarter net interest margin was 4.11%, though Seda said part of that result was unlikely to recur in the fourth quarter.

Chairman, President and CEO Clint Stein described Columbia’s western footprint as a competitive advantage, saying its scale allows it to serve growing customers, spread technology costs across a larger base and attract banking talent. The company serves eight western states, according to Seda.

Margin gains and loan portfolio changes

Seda said Columbia had roughly $8 billion of transactional loans in its $48 billion portfolio when it incorporated Pacific Premier. Those loans, including legacy multifamily and mortgage assets, were long-duration, lower-yielding credits without broader customer relationships, he said. The company has been replacing them with relationship lending that carries a yield roughly 200 basis points higher and can bring deposits and fee income.

The CFO said the runoff had averaged about $250 million per quarter. He later put the remaining transactional loan balance at $7.1 billion, yielding a coupon of 4.25%, and said prepayments were likely to be slightly lower in the fourth quarter.

The portfolio changes have contributed approximately 25 basis points to Columbia’s net interest margin, Seda said. About 3 basis points of the third-quarter margin came from discount recognition on two loans that paid off early, which he does not expect to repeat in the fourth quarter.

Seda also expects about 3 to 4 basis points of fourth-quarter margin pressure from temporarily higher term-debt costs as Columbia refinances Tier 2 capital. He said the margin would likely pause within a few basis points of its adjusted third-quarter level before the benefits of balance-sheet optimization resume.

The bank still has approximately $5 billion in higher-cost wholesale funding that it intends to reduce over several years, Seda said. Loan balances are expected to be flat to slightly lower in the fourth quarter, with a similar outlook likely for the following two quarters. Seda said the company expects loan balances to reach a low point at some stage in 2027 before returning to growth.

Deposits and customer relationships

Stein said Columbia does not primarily compete on deposit rates, instead emphasizing its role as a trusted adviser to customers. Columbia Bank President Tory Nixon said the company prices relationships holistically, considering loans, deposits and fee-generating services together.

Nixon identified treasury management, commercial cards, merchant services and international banking as products that help deepen customer relationships beyond lending. Seda said Columbia does not have a commercial product gap that it needs to fill through acquisition or development, though it plans to make consumer onboarding easier in the first half of next year.

Asked whether artificial intelligence agents could move low-cost deposits into higher-yielding accounts, Stein said he did not expect Columbia’s customer base to adopt such tools quickly, while acknowledging the potential risk. He said the bank was monitoring developments in AI, stablecoins and tokenized deposits.

On deposit pricing, Seda said a roughly 50% deposit beta—a measure of how deposit costs respond to interest-rate changes—remained a reasonable expectation through the cycle. He added that Columbia could outperform that assumption in the fourth quarter.

Commercial real estate and capital

Seda said the bank expects commercial real estate to decline as a share of its loan portfolio over time. He put Columbia’s commercial real estate concentration ratio at approximately 295%, down from about 315% in the third quarter of the prior year, based on his recollection.

He said the multifamily portfolio had a delinquency level of about 6 basis points and debt-service coverage above 1.5 times. Nixon said apartment occupancy remained high across the bank’s western markets, although rent increases had stalled and concessions had risen slightly.

After an analyst noted that Fitch had Columbia on negative watch, Stein criticized the rating agency’s assessment and defended the bank’s credit metrics and underwriting standards. Seda said Columbia takes rating-agency feedback seriously and conducts quarterly capital stress tests as it balances shareholder repurchases with capital and liquidity needs.

About Columbia Banking System (NASDAQ:COLB)

Columbia Banking System, Inc is a bank holding company headquartered in Tacoma, Washington. It operates through Umpqua Bank, a full-service financial institution serving consumers, businesses, professionals and institutions.

Umpqua Bank provides deposit accounts, residential and commercial lending, business banking, treasury and cash-management services, mortgage banking, personal banking and wealth-management solutions. Its offerings include checking and savings accounts, commercial real estate and business loans, consumer credit, online and mobile banking, and investment and advisory services.

Columbia Banking System traces its roots to the formation of Columbia State Bank in Washington in 1993.

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