Columbia Banking System - Earnings Call - Q3 2025

Executive Summary

• Closed Pacific Premier acquisition on August 31; Q3 GAAP EPS was $0.40 while operating EPS was $0.85, driven by one month of combined company and core profitability despite merger-related costs.
• Net interest margin expanded to 3.84% (+9 bps QoQ), with management guiding to an approximately 3.90% NIM in Q4 2025 and a temporary ~$12M NII tailwind from CD premium accretion.
• Strong organic deposit growth (~$800M) reduced brokered funding; CET1 rose to 11.6% and Total RBC to 13.4%, above long-term targets.
• Board authorized a $700M share repurchase through Nov 30, 2026; management expects capacity to execute the full authorization as capital generation continues.
• CFO transition announced: Ron Farnsworth to step down on Dec 31; Ivan Seda appointed CFO, adding continuity to integration and cost-synergy execution.

What Went Well and What Went Wrong

What Went Well

• Net interest margin and net interest income improved: NIM 3.84% (+9 bps QoQ); NII $505M (+$59M QoQ) on funding mix improvements and one month with Pacific Premier.
• Operating profitability was robust: operating EPS $0.85 and operating PPNR $270M (+12% QoQ), reflecting core momentum and one month of acquired operations.
• Organic deposit growth (~$800M) and brokered reduction ($1.9B down) supported lower funding costs and capital build; CET1 11.6%, TRBC 13.4%.
• Quote: “Our third quarter performance reflects meaningful progress and growing momentum… [and] a $700 million share repurchase program” – Clint Stein, CEO.

What Went Wrong

• GAAP efficiency ratio deteriorated to 67.29% (vs 54.29% in Q2) on $87M merger and restructuring expense; non-interest expense rose to $393M (+$115M QoQ).
• GAAP provision increased to $70M on day-1 acquisition provisioning and model recalibration; ACL/loans declined to 1.01% from 1.17% QoQ.
• Reported GAAP EPS fell to $0.40 from $0.73 prior quarter due to acquisition-related items.

Transcript

Speaker 4

Hello, and welcome to Columbia Banking System's Third Quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jackie Bohlen, Investor Relations Director, to begin the call. You may begin.

Speaker 6

Thank you, Dee Dee. 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 Banking System's President and CEO, Clint Stein.

Speaker 1

Thank you, Jackie. Good afternoon, everyone. Our eventful third quarter is characterized by meaningful progress and growing momentum. First, we were excited to successfully close our strategic acquisition of Pacific Premier Bancorp on August 31. This milestone completes our eight-state Western footprint and bolsters our position as a preeminent regional bank in the Pacific Northwest with approximately $68 billion in assets. We hold nearly 10% deposit market share in the Pacific Northwest and an improved competitive position in other key Western markets. Pacific Premier Bancorp significantly enhances our scale and positions us to capitalize on our low-cost core deposit base across an expanded and highly attractive footprint, most notably in Southern California, one of the nation's most dynamic and densely populated markets. Over the last few years, we have created a cohesive regional powerhouse. Our Western franchise now spans the entire West Coast from Washington throughout California.

We are uniquely positioned in our region for organic growth opportunities in dynamic markets such as Arizona, Colorado, Nevada, and Utah. We are integrating new capabilities and deepening relationships with both new and existing customers while maintaining our commitment to consistent top quartile performance and sustainable relationship-driven growth focused on generating positive economic impact. We remain focused on optimization, generating new business, supporting the growing needs of existing customers, and delivering superior results for all of our shareholders, even as we look to complete the integration of Pacific Premier Bancorp. We have strengthened our company by gaining scale, broadening our product offerings, and adding to our best-in-class core deposit franchise driven by our business bank of choice strategy, all while delivering robust profitability and maintaining a conservative balance sheet.

The scale and breadth of the franchise we've built allows us to concentrate our focus on organic growth in our footprint, and our robust profitability will support our plans to deliver meaningful capital returns to all our shareholders. We believe this strategy will drive long-term shareholder value. Within our first week as a combined organization, nearly every former Pacific Premier Bancorp branch made a referral to a product or service that was not offered before the acquisition. Our new team members hit the ground sprinting, and we were thrilled by their continued enthusiasm. We see tremendous opportunities with our newly enhanced presence in Southern California and throughout our broader footprint. We have quickly begun to benefit from the capabilities Pacific Premier Bancorp brings to our organization, like custodial trust services, expertise in HOA banking, and proprietary technology that enhances the banker and customer experience.

Turning to the third quarter, Columbia's operating results were once again consistent and repeatable, underscoring our focus on operational enhancement and top quartile, and in some cases, top decile performance. Third quarter operating PP&R is up 12% from the second quarter and 22% from the year-ago quarter. The improvement reflects our focus on profitability and balance sheet optimization, as well as one month with Pacific Premier Bancorp. Our teams continue to cultivate new and existing relationships, driving strong customer deposit growth and meaningfully higher loan origination volume during the third quarter, which Tory will detail in a few minutes. The success of our bankers and the exceptional teams that support them enables us to organically remix both the left and right sides of our balance sheet, enhancing the quality of our earnings and driving strong internal capital generation. We continue to allow transactional portfolios to run down.

We transferred a small portfolio of residential mortgages to held for sale. These activities offset our relationship-driven growth in support of our portfolio remix efforts. We intend to organically manage down roughly $8 billion of inherited transactional loans. As I have stated many times before, absent a significant decline in rates, we will hold the majority of these loans until they mature or pay off. However, we will strategically prune the portfolio with sale opportunities where payback periods are short and align with value preservation and creation. As I've said before, we prioritize profitability over growth for the sake of growth. In keeping with that approach, we utilized excess cash from customer deposit growth and balance sheet optimization actions to repay higher-cost wholesale funding sources during the quarter. The result was a meaningful increase in our net interest margin.

Our disciplined approach to lending supports our strong credit profile as well as our profitability. Our adherence to prudent credit underwriting and proactive portfolio monitoring is reflected in our stable third-quarter portfolio metrics and a lower level of net charge-offs. It remains a busy and Columbia, and I want to thank all of our associates for their hard work and contribution to another period of solid performance with our third-quarter results. With the addition of Pacific Premier Bancorp, we are sharpening our focus on organic growth initiatives, amplified by the disciplined, cost-conscious culture that defines our operating model. This is the franchise we set out to build, one that is scalable, resilient, and positioned for continued long-term value creation that rewards shareholders with the return of capital. Now that we've outlined our third-quarter results, I want to take a moment to acknowledge our CFO, Ron Farnsworth.

This will be Ron's last earnings call with Columbia, as he is stepping down following a very successful tenure as our CFO, marked by many notable accomplishments. Ron has been a valuable member of our team and a partner to me over the last several years as we integrated our teams, optimized performance to drive profitability, completed our Western franchise with the acquisition of Pacific Premier Bancorp, and meaningfully expanded our opportunities to drive long-term shareholder value. The board, management team, and I want to thank Ron for his many contributions to Columbia and wish him the best in his future endeavors. Ivan Shetta, who has served as our Deputy CFO since last August, has been appointed Columbia's next CFO. Ivan is a proven financial leader with extensive financial services experience.

Having previously served as CFO of UnionBank and other executive roles, Ivan hit the ground running over the last several months, and we know he will be a great asset to Columbia as CFO. You'll be spending a lot of time with him in the quarters ahead. I'll now turn the call over to Ron.

Speaker 7

All right. Thank you, Clint. We reported a second-quarter EPS of $0.40 and operating EPS of $0.85. Operating excludes merger and restructuring expense, along with other fair value and hedging items detailed in our non-GAAP disclosures, which I encourage you to review. Our operating return on average tangible equity was 18.2%, while operating PP&R increased 12% from the second quarter to $270 million. The main drivers of operating PP&R growth this quarter were the contribution of one month of Pacific Premier and favorable balance sheet remix trends, giving customer deposit growth and transactional loan runoff. Operating earnings further benefited from no provision for credit losses due to the impact of improving economic scenarios on our CESO models and a decline in loan balances outside of the acquisition. Our GAAP provision expense of $70 million was due to purchase accounting stemming from the acquisition.

On the balance sheet, we strategically sold acquired investment securities that did not fit within our existing portfolio after deal closing and purchased new securities to maintain a relatively neutral position to interest rate changes, as detailed on slide 21. Cash from net security sales, Pacific Premier, and transactional loan portfolio runoff was used to reduce our reliance on wholesale funding sources as we continue to optimize our balance sheet. Strong customer deposit growth also contributed to a collective $1.9 billion reduction in broker deposits and term debt during the third quarter, driving net interest margin expansion. Our tangible book value per share increased slightly in the third quarter to $18.57, as internal capital generation and a favorable change in AOCI offset deal-related dilution. Notably, tangible book value has increased by 4% since Q1 when we announced the transaction.

Our acquisition of Pacific Premier resulted in tangible book dilution of 1.7%, well below the 7.6% we anticipated at deal announcement, due primarily to lower discount fair value marks as market yields are slightly lower than when we announced the deal. Our regulatory capital ratios expanded meaningfully, with our tier one common now at 11.6% and total risk-based capital ratio at 13.4%. Our excess capital positioned us to put a share repurchase authorization in place, which Clint will detail in a few minutes. As I mentioned earlier, our NIM expanded during the quarter, increasing nine basis points to 3.84%. The funding remix I discussed drove the majority of the change, with three basis points of the quarter's expansion attributable to purchase accounting on acquired CDs, as detailed in our earnings release. The amortization will continue during the fourth quarter, but we do not expect it to extend into 2026.

As I noted, our provision for credit loss was $70 million for the quarter, and our overall allowance for credit losses was 1.1% of total loans, down from 1.17% as of prior quarter end, due to portfolio composition shifts, model recalibration following the addition of the Pacific Premier portfolio. Inclusive of the credit discount, our allowance was 1.34% of total loans, up three basis points from the prior quarter end. Non-interest income was $77 million for the quarter. On page 23 of our earnings release, we detailed the non-operating fair value changes. Excluding those items, our operating non-interest income of $72 million for Q3 was up $6 million, reflecting the addition of Pacific Premier. Also noted on page 23, total GAAP expense for the quarter was $393 million, while operating expense was $307 million.

The increase from Q2 reflects one month operating as a combined company and other miscellaneous increases as we reinvest. Cost savings realized in 2024. We are already realizing savings associated with Pacific Premier with approximately $48 million of the targeted $127 million in expected annualized cost savings achieved as of September 30. Systems conversions are scheduled for Q1, and we expect a clean expense run rate in the third quarter of 2026. With that, I'll now hand the call over to Tory.

Speaker 2

Thanks, Ron. Our teams had a tremendous quarter of business generation. New loan originations of $1.2 billion is up 36% a quarter, while year-to-date volume is up 21% from last year. On an organic basis, Columbia's commercial portfolio, inclusive of owner-occupied real estate, increased by 5% on an annualized basis, contributing to our targeted loan portfolio remix as we allow transactional balances to decline. Slide 25 in our earnings presentation provides additional balance and repricing details related to transactions. We expect this portfolio to amortize down until loans reach their repricing date, at which point they will reprice higher or refinance elsewhere, improving our profitability in both scenarios. Turning to customer deposits, balances increased nearly $800 million organically during the quarter. While balances benefited from the seasonal balance lift we typically see during the third quarter, approximately 30% of the growth was attributable to new customers.

Our bankers continue to target full banking relationships when they bring new customers to Columbia, and our performance reflects their success. We are also seeing the benefit of our de novo branch strategy in our newer markets, which contributed nearly $150 million to the quarter's deposit growth. Core fee income increased from the second quarter's strong base. We continue to target a higher concentration from core fee income to overall revenue. We are already seeing revenue synergies from Pacific Premier Bancorp. On an operating basis, non-interest income increased 9% due to one month's contribution from Pacific Premier Bancorp, including a $3 million contribution from custodial trust services. Not only will Pacific Premier Bancorp's custodial trust business complement our existing wealth management platform, but their expertise in HOA banking and escrow and 1031 exchange businesses also offer revenue-generating opportunities.

We expect to see deeper customer relationships with legacy Pacific Premier Bancorp customers, and we are already introducing Pacific Premier Bancorp branches to the CB Way, which offers needs-based sales solutions to our customers. This has contributed to strong referral activity from legacy Pacific Premier Bancorp branches. Since deal closing, referrals to Columbia business lines, including branches from our new Pacific Premier Bancorp associates, have driven over 1,200 opportunities. Our business banker choice strategy, which is powered by our talented team of associates, is a key driver of our ongoing balance sheet optimization efforts, helping to further strengthen our profitability. Our pipelines are healthy, and we remain outwardly focused on generating business in a disciplined manner. I'll now hand the call back over to Clint.

Speaker 0

Thanks, Tory. Our third-quarter results wrap up seven consecutive stable quarters of operational performance and capital accumulation. Our ability to generate capital beyond what is required for prudent growth and our regular dividend is significantly enhanced by our acquisition of Pacific Premier Bancorp. Our balance sheet management activity during the quarter contributed to our expanding regulatory capital ratios. Ron mentioned the dilution to tangible book value from the Pacific Premier Bancorp acquisition was 1.7%. Our anticipated three-year earnback at announcement is now expected to be less than one year. Our CET1 and total capital ratios were 11.6% and 13.4% at quarter end, well above our long-term targets of 9% and 12%, respectively, and up notably from 10.8% and 13% as of June 30, 2024, despite closing a strategic value-enhancing acquisition. Let me repeat that.

Our CET1 and total capital ratios were 11.6% and 13.4% at quarter end, well above our long-term targets of 9% and 12%, respectively. Further, our TCE ratio was 8.5% as of September 30, 2024, well above the 8% target exclusive of AOCI marks we have consistently discussed since Q1 2024 as an indicator that we were able to evaluate share repurchases. Given our excess capital and strong forward outlook for continued net generation, especially in light of our progress integrating Pacific Premier Bancorp, I'm pleased to announce our Board of Directors authorized a $700 million share repurchase program, reflecting our confidence in the strength of Columbia's balance sheet. To put that in context, we have roughly 110 basis points or approximately $550 million of excess capital above our long-term target today. In addition, we expect to produce exceptional profitability, which will result in meaningful capital generation over the coming quarters.

We do not currently plan or have a need to do any securities restructurings. However, we are continuing to drive organic growth and evaluate balance sheet optimization opportunities in line with our commitment to enhancing long-term shareholder value. This concludes our prepared comments. Chris, Tory, Ron, Ivan, and Frank are with me, and we're happy to take your questions. DeeDee, please open the call for Q&A.

Speaker 4

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Chris McGrady of KBW. Your line is open.

Oh, great. Thank you. Clint, I mean, you're making a pretty big statement with the buyback, I think. I'm interested in kind of the balancing act between capitalizing on a cheap valuation and the balance sheet optimization strategies that you talked about. Maybe could you unpack the pace at which you'd expect the buyback to come out? Thank you.

Speaker 1

Yeah. Hi, Chris. The program is a 12-month program. It is a bit of a balancing act between where we're at, and there will be some things from time to time. We'll want to maintain flexibility for any uncertainty in the macro environment or volatility. A couple of weeks ago was a great example. A couple of banks reported a credit issue, and our stock went down for no apparent reason. Things like that will be opportunistic and strategically take down some shares in terms of a repurchase. I'll step back and let Ivan kind of give you a little more details that might be able to help you kind of figure out how to model that.

Speaker 0

Yeah. Hey, Chris. Thanks for the question. Like Clint mentioned, we're sitting today about $550 million above the target on the back of the lower tangible book dilution and the strong financial performance the last few quarters. As we look forward to Q4 in 2026, as Clint mentioned, strong expectation that will continue to show strong profitability as we go throughout the course of the next year. We've got a $700 million authorization, which spans the rest of this year through late 2026. Given where we are today, one month through the quarter, and thinking about some of the potential restriction dates coming up, I would anticipate that the pace of purchases the rest of this year will come in modestly lower than the average quarter before we look to ramp it back up into 2026, obviously subject to market conditions and how things progress throughout the fourth quarter here.

Okay. My follow-up would be it would feel based on the excess capital of $500 million-plus today and the ROE generation over the next 12 months. I mean, you could presumably do the whole $700 million by the time it expires. I guess part one of the follow-up and part two, how do we think about just net balance sheet growth? Because that's obviously a piece of that too. Thank you.

Yeah. On the first part, I think the answer is yes. It's presumable that we could go through the entire authorization over the course of the next 12 months when you, like you said, start with a $550 million surplus and then think about the profitability profile that we anticipate moving forward with. I think we'll talk probably a little bit more on that second piece of it in terms of the pro forma outlook shortly. The answer, I think, to the first one is yes. I'll hand it over to Clint to talk a bit about kind of the balance sheet outlook from a loan perspective.

Speaker 1

Yeah. We mentioned in our prepared remarks, and actually, I think, included a new slide in the earnings presentation this time around to kind of call out the remixing that we're doing. We had made some decent progress on that, and we have a couple of billion more of those same type of transactional multifamily loans that we want to remix off the balance sheet that came over from Pacific Premier Bancorp. The good news is those are at current rates, current market rates, and also have very short remaining lives. As you see, that number is now roughly $8 billion that we'll be remixing over the next several years. I think that that's going to mute bottom line loan growth.

As we've talked in the past, as we remix those into relationship-based loans that come with deposits, come with fee income opportunities, and generally loans that are at a higher rate, it should result in revenue growth despite maybe bottom line net assets being flat.

All right. Thanks, Paul. I appreciate it.

Speaker 4

Thank you. Our next question comes from David Feaster of Raymond James. The line is open.

Hey, good afternoon, everybody.

Hey, David.

Maybe first off, I was hoping we could just address the elephant in the room to some degree with just the recent activist investor piece that we had. I'm sure you saw the deck. I was hoping we could just maybe get your thoughts on that, some reactions to it, to the extent that you can even comment on it.

Yeah. I'll start by saying we're obviously aware of the presentation. As you know, we regularly speak with shareholders, gather their perspectives, and share our perspectives as well. With that said, we don't talk about the specific conversations that we have with individual shareholders because those are typically private conversations. In this situation, David, I really appreciate you asking this question. I want to thank you for that. I wanted somebody to ask this. I was hoping somebody would ask this because anybody who has spoken with us over the past year should know what we have been focused on. Just to remove any doubt and for clarity, our priorities, in no particular order, are consistent, repeatable, top-tier quarterly performance. You've heard us say it. We call it wash, rinse, and repeat, and we just completed our seventh consecutive quarter of doing this.

Also, we've been focused on and preparing for additional capital returns. We have stated over the last several years this is a capital return story, and that's in addition to covering our peer-leading dividend. Meaningful buybacks are certainly a part of that, and we're very excited today that our board approved the buyback yesterday. The last item, I'd say Pac Premier, and I've described it as the missing piece of our franchise. You look at what it's done for us in Southern California and other markets. It's increased our density in our de novo market of Arizona. It's added to what we have in the Pacific Northwest. It's given us another physical location in Nevada. The different lines of businesses, it truly was the missing piece to our franchise. That's why I've been saying we are laser-focused on the integration.

As a result, I have zero interest in M&A for the foreseeable future. Some of you, yourself included, David, I believe, have previously documented this in your research reports. I mean, even my wife, who I rarely see because I'm working on delivering top-tier results and activities to enhance long-term shareholder value, knows the priorities and supports my pursuit of them. We've been deliberately executing a strategy to build a leading, highly profitable Western U.S. franchise, and we're pleased to have realized that goal with the closing of Pac Premier. Our work over the past three years is what has allowed us to announce the share repurchase, deliver the results we're delivering today, and place us as one of the top franchises in the Western U.S. As I look ahead, I'm confident we have the right team.

We definitely have the right strategy in place to continue to deliver a high teens return on tangible equity and drive value for all our shareholders. Again, David, thank you for the question.

That's great. That's extremely helpful, Clint. Maybe I wanted to touch on the deposit side. I believe $800 million in organic customer deposit growth in the quarter. I mean, really strong growth. I was hoping you could maybe give us some insights into the drivers behind that. Obviously, there's some seasonality. How much of that is client acquisition, just given your blocking and tackling, go-to-market strategy, as well as the recent campaigns versus deepening relationships with existing customers versus kind of that seasonality?

Speaker 0

Hey, David, this is Tory. I'll start and then let Chris kind of chime in a bit. It was a great quarter, roughly $800 million in organic growth. It came from all different parts of the bank, a big chunk from our commercial customers and commercial bankers, a big chunk from retail, just kind of throughout the company. I think we had a significant amount that was new customers to the bank. I think we said roughly 30% was new to the bank. We've had growth in our de novo offices. It was spread throughout the company. I'm very, very proud of the team and the work that they're doing in interacting with our existing customer base, taking market share, bringing new names into the company. Just all the things we've been talking about for a long time really continue to pick up momentum and show some great results.

Chris, you want to talk a little about the small campaigns maybe? Yeah. Thanks. And thanks, David. Tory mentioned it in his prepared remarks. About 30% of the growth came from new customers. We've talked about deposit campaigns in retail throughout the last year and into this year. The latest campaigns brought in to date just a little under $180 million in new customer deposits, new customer names. As Tory mentioned, the de novo markets during the quarter accounted for about $150 million. The momentum is tremendous out there, and the bankers continue to build upon that. It's very exciting.

That's great. Clint, I wanted to follow up on your response to one of Chris's last questions. There's obviously a lot of balance sheet optimization ongoing, remixing away from transactional assets to core assets, not going to have a ton of balance sheet growth. One of the biggest pushbacks that I hear these days is basically, how can you still drive earnings growth exclusive of balance sheet growth? You touched on a couple of things, could you maybe just elaborate that and help us think through and understand where you're able to drive that earnings growth from, even with the stable balance sheet?

Yeah. That's part of why, David. We listen to our shareholders and our research analysts and take their feedback and try to improve the quality of our disclosure. That's why we added that new slide in the deck that shows those transactional portfolios and what the weighted average coupon or yield is on those. I believe that it's about 4.1%. If you just think of it in terms of, there's obviously loans that have a higher rate and loans that are a lower rate, but the portfolio in general is 4.1%. It's been funded largely by the level of wholesale funding that we have on our balance sheet. Obviously, that's been an earnings headwind since we closed the acquisition. As rates have come down now, I think 150 basis points over the past 13 months, that earnings headwind has gotten smaller and smaller.

With yesterday's move going forward, we would expect it to no longer be an earnings headwind and just kind of be net neutral. There's no other relationship. There's no deposits, I mean, effectively. A few of them have some small deposit accounts. There's not treasury management. There's not foreign exchange fees. There's no purchase card activity, any of the other ancillary products and services. They're not using our wealth management platform where we can drive fee income. If we remixed, just figure out on a loan, one that's got a coupon of 4.10% into a good C&I loan today that is, call it 8%, comes with fee income opportunities, is to a certain degree self-funding, and some of that operating deposits that are non-interest-bearing, and then they're going to use all those services that the other person, the other scenario isn't. That's where you can get the revenue generation.

That's the stuff that we're winning. That's the business that we're out there. Our bankers are winning. I don't want to preempt Tory because he's really excited about what they're doing. That's that remix. That's why we can, we're confident we can continue to grow revenue without necessarily having earning assets grow because it's remixing into a better, more complete, comprehensive product for the bank and for our customers.

That's great. Thanks, everybody.

Speaker 4

Thank you. Our next question comes from Jeff Rulas of D.A. Davidson. Your line is open.

Thanks. Good afternoon. Great slide 25. I appreciate it. Whoever pulled that together, kudos to them. I guess really good outlook of extending out three years. If we could narrow that into maybe 2026, right? I guess it's kind of mid-$3 billion potentially. Transactionally, repricing or running off. Could you stack that against expectations on loan growth, organic production, and hazard a guess for loan portfolio size end of year?

Speaker 1

Yeah. Hey, Jeff. It's Ivan here. Thanks for the question. I did want an opportunity to provide some comments on our near-term balance sheet outlook given what's obviously a bit of a noisy quarter with the PPBI close mid-quarter. I'm going to put it in the context of kind of near-term NII and NIM perspectives. Then we can maybe talk about how that translates as we go throughout the course of 2026. I think we heard Ron mention earlier in his comments that we saw a net interest margin expand this quarter to a full quarter outlook of 3.84%. For those of you doing the math on the release, we have just under $62 billion in total earning assets as of quarter end.

As we look forward into Q4 and a little bit further into Q1, if you put those two numbers together, that provides what we think is a pretty good proxy for what we would project, I'm just saying, two quarters out at this point with a few caveats. Caveat one being, again, as Ron mentioned, we do expect a near-term pop in Q4 net interest income of around $12 million or 8 basis points of NIM associated with the accretion of the CD premium associated with the close. That's one transactional item that'll pop up in Q4. Caveat two, we may see some earning asset declines or modest declines in the short term due to the balance sheet optimization actions we've discussed.

With those actions that we've talked about and what you just heard from Clint, we should still expect to see modest increases in net interest margin to offset that and support what we view as stable to growing NII over the next two quarters from that jump-off point that I just talked about. The third caveat I would get is, historically, our weakest quarter is Q1 just from a seasonality and a flows perspective on the deposit portfolio. You could see a little bit of weakness in Q1 relative to where we land in Q4, especially with that $12 million NII pop. Just a bit of color commentary, less around kind of the long-term loan growth outlook, but in terms of how we might think about earning assets and the NII and NIM projections.

I'm going to hand it over to Tory to talk more about kind of how we think about the net loan growth outlook.

Speaker 0

Hey there, Jeff. This is Tory. If we kind of take a look at the quarter itself, we had a couple hundred million in C&I loan growth for the quarter, which is about 5% annualized. We had a little bit of slippage on some loans from late Q3 into early Q4. We're off to, I think, a really good start in Q4. Pipelines grew quite significantly. C&I pipeline grew about $700 million over the course of the quarter in addition to the $200 million in growth. Production was strong at about $1 billion too this quarter. The momentum and growth for the C&I space, the outlook is really getting pretty strong and feels really good in the company.

I think to Clint's points earlier on, the integration of the Pacific Premier folks, the customer base that they have, the enthusiasm, the excitement, the capabilities that we have as a balance sheet is all adding a ton of momentum to our company today and feel really pretty good about the foreseeable future on customer growth, C&I customer growth, and with that kind of core deposit growth, fee income growth, and then certainly C&I loan growth.

Tory, could I simplify it and just say you're capable of generating, call it, 5% annual loan growth, and then we could just back against the transactional that's coming out. Is that fair?

Yeah, I think that's very fair.

Okay. Great.

Yeah, that's definitely our target.

Perfect. Just checking in on expenses. I think you mentioned you've got about $80 million to go on cost saves. Similar question, I guess, thinking about kind of a core growth rate in 2026, either blended or a rate that's core and we could take out $80 million over the course of the year. I think Ron said clean by Q3, but any way to quantify the expense run rate, that'd be helpful.

Speaker 1

Yeah. I'll take down this, Ivan, again. Yeah. We had one month of PPBI in our numbers, and that landed at $307 million. Our pro forma for a full quarter of PPBI, our operating expenses would have been around $375 million this quarter. As we look forward, and as you noted, we'll continue to see the cost synergies ramp up through the first half of next year. Some of that will be subsequent to some of the system integration activity, which is happening in the first quarter. We won't see the full post-synergy run rate until the second half of next year. In the meantime, we'd anticipate expenses, excluding CDI amortization, to be approximately in the $330 million to $340 million range per quarter for the next several quarters before we start to drop back to lower levels in the tail end of next year.

CDI amortization is going to be operating at around a $40 million clip per quarter for the next few quarters if you're looking to back into kind of a full operational expense outlook there.

That's great. Thank you, Ivan. Appreciate it.

Speaker 4

Thank you. Our next question comes from Matthew Clark of Piper Sandler. Your line is open.

Speaker 0

Hey, good afternoon, everyone.

I'm Matt.

Just back to the margin here in the fourth quarter. The full quarter impact of PPBI, the premium coming in through in the fourth quarter, kind of a temporary bump up. Any appetite to maybe provide a range of NIM expectations for the upcoming quarter, just to level set, just to make sure we're all on the same page.

Speaker 1

Yeah. Like Ron mentioned, in Q3, we put up $384 million total. If we were to roll forward that $12 million or that $8 million, that puts you up to $390 million. Temporarily adjusted in Q4 or just north of $390 million. That's a fair proxy for where we think the fourth quarter's likely going to land. Modest upside on net interest margin quarter over quarter, but fairly stable relative to the one that we just finalized. A fairly similar range for Q1 2026. I think as we look out beyond there, we'll provide, I think, a more holistic perspective as we get into a 2026 dialogue kind of 90 days from now. That's probably what I would share at this point.

Yeah. Matt, the only thing I would add is Q4, especially October, we have real estate tax and income tax payments and things like that. We typically see a little volatility in deposits. Obviously, first quarter is our seasonally weakest where we typically experience outflows. Any variability in our assumptions could obviously have an impact on the number and the range that Ivan provided you. Just wanted you to keep that in mind.

Speaker 0

I would have thought there's some additional accretion coming from Pacific Premier Bancorp with only one month this quarter and getting an additional two months above and beyond that $12 million you talked about. Is that not the case?

You'd have the full quarter, yeah, versus just a third of it or one month's worth on the asset side. There is the deposit side that Ivan mentioned that does run out at the end of the fourth quarter, but we'll have it for the full quarter in the fourth quarter anyway.

Okay. Just on credit, just the uptick in non-performers on a dollar basis, any of that acquired kind of PCD loans?

A portion of it. Another part of it is just in a very small commercial real estate facility, which we expect to be gone next quarter. That's essentially it. It's about $20 million.

Okay. $20 million of it was not PPBI related?

$16 million of it, I would say, is not Pacific Premier Bancorp related.

Okay. It looked like delinquencies were down at FinPak, which I think is a good proxy for charge-offs going forward. You had the bank had much lower charge-offs this quarter. I guess, any line of sight on kind of a range of net charge-offs in the near term?

With regard to FinPak, we're kind of at normalized levels now and bouncing along the bottom. I'm pretty pleased with that. As far as a normalized run rate for charge-offs, I think for the bank, I'm very happy with this quarter's numbers, and I think somewhere around there would be a proxy for going forward.

Okay, thanks again.

Speaker 4

Thank you. Our next question comes from Jared Shaw of Barclays. Your line is open.

Hey, good afternoon. Thanks. Maybe sticking just with credit, as we see that portfolio run down on slide 25 and then get back filled with new C&I production, how should we think about the allowance level growing from here? I guess, as you pay down or get paid off on loans that have a specific mark, should we be thinking that that gets back to the 1.12% level over time, given a stable economic backdrop?

I think that's an accurate assessment, just kind of a slow, kind of upward migration.

Okay. Just for me on the merger charges this quarter, is that just a pull forward of some charges, or should we expect that the total merger cost may be a little bit higher?

Speaker 0

will have additional merger expense for the next couple of quarters as we get through the system conversions in Q1. There will probably be a little bit of a tail there, with lower amounts obviously in Q4 and Q1, and very little amounts thereafter.

In terms of the initial expectations, still holding?

Yes.

Yeah. Jared, I know that we just put the release out a short while before the call, but we also included a new slide in there that compares our assumptions at announcement for Pacific Premier Bancorp and our current thinking. You'll see that our cost synergies and total deal costs are unchanged. Great, thanks.

Speaker 4

Thank you. Our next question comes from Timur Braziler of Wells Fargo. Your line is open.

Speaker 0

Hi, good afternoon.

Good afternoon. It looks like the PPBI contribution to the balance sheet was maybe a little bit smaller than their last reported asset size, loan size. I guess, did you use the opportunity at close to maybe accelerate some of the outflows on the lending side or maybe just give us a little bit of color as to the size of that balance sheet that was brought over? Yeah. We did sell a substantial portion of their securities portfolio and repurchased a portion of what we sold in securities that fit neatly with what we have in our existing portfolio and also positioned us for our bias towards continued decline in rates. Also, we had some leverage that we put on early in the year just to take advantage of, to insulate us to a small degree of rate changes while we were waiting for the approval and close.

From that perspective, we didn't fully reinvest. We paid down some wholesale funding. The other side of it is the timing. We closed it sooner than what we expected. That might be part of what you're looking at. I'll step back and see if Ron or Ivan want to add any context.

Speaker 1

Yeah. Just in terms of how these transactions work. You announced in April, you've got a pro forma expectation. I think if you were to go back to the PAC that was issued back when the deal was announced in April, loans HFI at that point was $12.0 billion. Came in a little bit shy of that just in terms of where the balance landed on the day of close. Obviously, we go through and provide our marks, which are all disclosed within the packet today. Once you kind of overlay the rate and credit marks on top of that acquired loan portfolio, it's a little shy of that $12 billion number, but still in a good spot there.

Okay. Thanks for that. Maybe switching to deposits, you had brought up the typical seasonality that you see in 4Q, 1Q. I'm just thinking, as some of those balances flow out, how should we think about either replacing that with wholesale funds, using the bond book? What's the balance sheet reaction to some of this expected seasonality that we're going to see on the deposit base?

Chris, I'll take the first stab at it, and then Ivan and Ron can jump in. Yeah, there's seasonality in that piece, but as Tory and I mentioned, we've got strong momentum of new customer acquisition, and I expect that to offset some of that outflow. As you saw in the earnings commentary, we'll start disclosing a bit more of that so you can see the components and the levers that go into it, trying to separate seasonality away from what is indeed new customer acquisition. Ron, Ivan, I don't know if you want to add anything on the wholesale part of it.

Speaker 0

I mean, there will be some fluctuations in wholesale depending, it just depends on the amount of flows, right, within the loan and deposit portfolios. We'll also have cash flows coming off the bond portfolio to help support some of that funding. I think what Ivan mentioned earlier, just in terms of the average earning assets with the NIM expectation in the next couple of quarters, is still within range of the volatility you could see based on just those wholesale flows. We'll be maintaining in spring cash targets of around $1.7 to $1.9 billion or whatever that time period.

Okay. Thank you. Great. Just last for me, maybe the contribution of accretion income in the third quarter and more specifically, if any of that was accelerated accretion from maybe some of the elevated payoff activity that we experienced here in three years.

A couple of quarters back, we stopped providing the accretion specific detail, and I'll give you a great case in point. As Clint mentioned earlier, we put on some leverage back in April and restructured the bond portfolio acquired from Pacific Premier Bancorp here in September, the first month post-close. With that, we bought bonds at $0.85 on the dollar, right, straight up. Great bonds yielding upper 4% range. That is discount accretion. You buy them at $0.85 on the dollar, but it's yield. It's government yield in most cases. I think we should just look at the face of the financials and look at those levels over time.

Okay. In terms of accelerated kind of credit accretion on the loan book, there wasn't abnormal Q.

Very minimal. Very minimal credit discount. Minimal to minimum.

Okay. Great. Thank you.

Yep.

Speaker 4

Thank you. Our next question comes from Andrew Terrell of Stephens. Your line is open.

Speaker 0

Hey, good afternoon.

Hey, Andrew.

Hey, if I could just start on the interest-bearing deposit beta, it looks like in the footnotes on the sensitivity, that moved down from, I think, 55% last quarter to 49% beta assumed this quarter. I'm assuming that's mostly reflective of lower brokered deposits. Is that the case, or has anything changed in terms of your kind of customer deposit repricing expectations for Fed cuts?

Speaker 1

Yeah. Thanks for the question. This is Ivan. No, nothing's changed in short. We'd expect interest-bearing deposit beta, roughly 50%. Obviously, it's a little bit of a unique quarter for us because you have the combination of the PPBI book, which when you squint at it, looks remarkably similar to the legacy deposit book that was in existence beforehand. You also had the late quarter FOMC, and not the entirety of that is fit into the end of the quarter. As we've continued to monitor the portfolio through October, continue to see betas kind of in that 50% range. I think Tory is going to provide some other comments on deposits, yeah.

Yeah. Thanks, Ivan. Andrew, I would just say that kind of pre any Fed move, Chris and I have structured the various business lines for reductions to be very quick and responsive, proactive with the customer base, moving rates down as much as possible and as fast as possible. I think we've done that every single time, and we're ready for this most recent move and implementing that in the bank today. We will continue to do that going forward and feel very confident in our ability to lower rates as the Fed moves rates down.

Speaker 0

Got it. Thank you for all the color. On the buyback, if I could go back to that, do you have an earnback tolerance on tangible book when you think about deploying capital into the buyback versus other means? I mean, I understand the current multiple. It probably makes a lot of sense, but is there any sensitivity from a tangible earnback standpoint?

Speaker 6

Yeah. This is Ron. This earnback plan we've got looking out over the year with some sensitivity around the price is under three years. I think the bigger issue here is we're pretty discounted against peers, and so this is a great buy.

The thing I'd add to that is, as we scan the horizon and look at things, our view is the greatest investment we can make is in our own stock, our own company.

Speaker 0

Great. Thanks for the questions. Ron, it's been great working with you.

Hey, thank you very much.

Speaker 4

Thank you. Our next question comes from John Arstrom of RBC. Your line is open.

Hey, thank you. Good afternoon.

Hey, John.

Same sentiment there, Ron. Thanks for everything.

Speaker 0

Thank you.

Yep. Tory, or Clint, maybe, or Chris, back to you guys on the lending environment. How would you characterize the pipelines right now? Are they better, same, lower? Just what are you hearing from your borrowers?

It's interesting. If you kind of look back to the beginning of the year, all the conversations around what rates were going to do, the tariff kind of messed. It put people in a holding pattern. For Q1 and Q2, there was just a lot of just doing nothing in a pretty stagnant environment. Interestingly, a lot of that is that rates have come down a little bit. The tariff noise is less noise, and you're starting to see some increase in activity on M&A activity, customers buying other businesses, some real interest in investment into their companies, in the acquisition of pieces of equipment, etc. You're starting to see some good net loan opportunities for our bankers. Interestingly, we looked at production, the biggest producing parts of the company today, and it's been the Pacific Northwest and Southern California for us this past quarter.

Growth in pipelines has been across the entire franchise. When I look at the different pipelines and the different geographies, they're kind of mixed, and they're everywhere in the footprint, which is great to see. That, to me, shows that this idea of increased activity is kind of throughout at least the western part of the U.S., not in one particular industry or a couple or in one geography. I think, as I said earlier, the C&I pipeline is up $700 million quarter over quarter. The real estate pipeline's flat. It's been declining over the last several quarters, but it's flat quarter over quarter this time. Things are looking up, which is great to see. Hey, John, this is Chris. I'd add to that. Part of that number Tory mentions is our investment in new bankers this year, and that's throughout the markets.

A couple of them specifically, our new healthcare folks have a really good pipeline and have started booking business. Native American banking, the same. There are several other C&I lenders, bankers that have come on, that are doing the same thing and starting to hit their stride. I think that's all positive momentum going forward as well.

Okay. Good. That's helpful. Maybe, Clint, just for you, you guys have provided a lot of numbers, which I think are helpful, but curious how you think about a sustainable return on tangible for the company. Obviously, a good number this quarter, but do you feel like you can continue to crank out high teens, return on tangible the way the model is today?

Yeah, absolutely. Absent something breaking in the macroeconomic environment, we would expect to be where we're at or even a little bit higher and deeper into the high teens. Very optimistic about our level of performance. We track it, and in many cases, have been at the top quartile. We think with the addition of Pacific Premier Bancorp and the momentum that we have, we can move into the top decile. Obviously, at 18+% ROTCE, we're already well above our peer group, and we feel very bullish about that.

Okay. All right, thank you.

Thanks, John.

Yep.

Speaker 4

Thank you. Our next question comes from Anthony Ilian of J.P. Morgan. Your line is open.

Speaker 0

Hi everyone. Ivan, just to put a finer point on your near-term NIM comments, for 4Q, do you expect for 4Q, you expect just north of 3.90%, but the similar range you said for 1Q, is that relative to 3.90% or to the 3.84% you just printed?

Speaker 1

For one Q. From an NII perspective, normalized, we'd be in a similar spot. I think that the NIM will be probably 3.90% range, maybe a tad higher. We project earning assets just a touch lower with a couple of items going on there. From an NII perspective, fairly stable with the exception of that $12 million deposit premium accretion that we've talked about a couple of times already.

Speaker 0

Okay. My follow-up, slide 25 on the optimization, the $8 billion of transactional loans, is that all we should think about for our optimization for now, or could there be other loans, deposits, anything on the funding side from Pacific Premier Bancorp that could run off or exit to further optimize the balance sheet?

No, we wanted to make sure that we captured fully so that as we go forward, there's integrity in that number. As you see us walk that down, you'll be able to see the remix happen on a quarterly basis. Our intent is that this is the bucket, and as the bucket empties, we will not refill it. We're very satisfied with virtually everything else that's on our balance sheet.

Great. Thank you, Ron, for everything. I'm looking forward to working with you, Ivan.

Speaker 4

Thank you.

Sounds good.

Speaker 0

Our next question comes from Janet Lee of TD Cowen. Your line is open.

Speaker 4

Hello.

Hey, Janet.

If I were to look at page 13, if I do the delta between the new originations and payoffs and prepayments combined, it's about a $500 million delta there. In the coming quarters, should I expect that to accelerate in terms of more prepays versus new originations, or should that narrow?

Yeah. This is Tory. That's hard to answer kind of because things happen in the quarter that you're not fully anticipating. We did have some loans that we transferred into held for sale. I think that's in that number there, which won't happen again for Q4. If you look at over the course of a year, you can get a fairly good view of just net paydowns, prepayments, and payoffs relative to originations. The goal here for us is that, as Clint and everybody else has mentioned, we're driving core relationship growth for the company. The idea is to take market share, add new names to the company, and grow the company with new customers that would be deposits, core fee income, and C&I loans.

Okay. Just to make sure that I understand your comment correctly on balance sheet optimization, is it fair to assume that the biggest impact to loan growth total should be in 2026, and maybe in 2027 and beyond it gets lessened if I were to just look at your schedule, or is it more of a consistent multi-year plan?

Speaker 1

Yeah. I think when you look at the repricing and maturity schedule that we put into the material this quarter, the majority of the portfolio that we're looking at, we would anticipate working through over the next eight quarters to two years. Of course, interest rate movements could change that dynamic. If we see a steeper decline in terms of the interest rate environment than what's currently anticipated, some of this stuff could come into the money more rapidly. Given the facts and circumstances we're looking at today, I'd say it's going to be a story we'll be talking about and a process we'll be working through for the next two years for the most part.

Speaker 4

Got it. Thank you. Our next question comes from David Tyaverin of Jefferies. Your line is open.

Speaker 0

Hi. Thanks for taking the question. I was curious about loan pricing. I think you mentioned 8% earlier in the call on C&I. I was curious, is 8% good?

Speaker 4

Number to think about for the $700 million loan pipeline, and could you also talk about the competitive environment for loan pricing?

Speaker 6

Sure. Hey, David, this is Tory. New originations on the lending side are roughly between 6.5% and 8%. I think probably a weighted average this past quarter was in the low 7s. That's a fairly good indicator, I think, of the future for the most part. I think that the competitive environment shifts pretty quickly. There are a lot of banks trying to generate asset growth, and you see some pretty tight margins on some deals. We're going to hold steady to what we think the value of our company is for a customer, and we're not going to chase price. We will be competitive, but we look at pricing very holistically.

We look at the cost of deposits, we look at core fee income generated, and then obviously we look at loan pricing all collectively to decide how we're going to approach either a current customer or a prospect to bring into the bank. The environment changes overnight, and it's always competitive. The idea is to drive value in something other than we do well every single day with the way we operate our company.

Speaker 1

Hey, David, this is Clint. I'm glad you asked your question because I was using that as an illustrative just for math purposes of the difference between something that's at a weighted coupon of 4.10% and rotating into something that's more of a traditional C&I or other relationships. We'll continue to do CRE, and those are at a lower rate, so depending on what it remixes into. Glad you asked the question so we could clarify that.

Speaker 4

Understood. Thank you.

Speaker 7

Thank you. Our next question is a follow-up from Chris McGrady of KBW. Your line is open.

Speaker 1

Great. Thank you. I want to make sure it is to get the NII right. The $390, I hear you on $390, Ivan. That includes the $12 million of NII. I guess, can you just give me all the moving pieces one more time? The earning assets for the fourth quarter and the expected fully loaded NII, and then we can make the adjustments for Q1. I just want to make sure we get it buttoned up. Perfect.

Speaker 2

We are wrapping up this quarter with total earning assets just a hair below $62 billion. It's a 3.84% margin for the full quarter. As we look forward to next quarter, we'd anticipate a similar level of earning assets, maybe a hair lower, and landing at about a 3.90%, just a hair above 3.90% from a net interest margin perspective in Q4.

Speaker 1

Okay. The only adjustment for Q1 would be to pull out the $12 million that you talked about. Factor in, I guess, our assumptions on balance sheet. Absent the $12 million, roughly NII should be stable in Q1? I'm just trying to make sure I get the first couple of quarters right.

Speaker 2

Yep, yep. That's absolutely right.

Speaker 1

Perfect. Thank you. Got it. Thanks.

Speaker 6

Thanks, Chris.

Speaker 0

Thank you.

Speaker 7

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Jackie Bohlen for closing remarks.

Speaker 4

Thank you, DeeDee. Thank you for joining this afternoon's call. Please contact me if you have any questions or would like to schedule a follow-up discussion with members of management. Have a good rest of the day.

Speaker 7

This concludes today's conference call. Thank you for participating, and you may now disconnect.