Earnings Call Transcript - COLB Q3 2025

Operator, Operator

Hello, and welcome to Columbia Banking Systems Third Quarter 2025 Earnings Conference Call. Please note that today's conference is being recorded. I would now like to hand the call over to Jacque Bohlen, Investor Relations Director, to get us started. You may proceed.

Jacquelynne Bohlen, Investor Relations Director

Thank you, Didi. 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. First, 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 President and CEO, Clint Stein.

Clint Stein, President and CEO

Thank you, Jacque. 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 on August 31. This milestone completes our 8-state Western footprint and bolsters our position as the preeminent regional bank in the Northwest with approximately $68 billion in assets. We hold nearly 10% deposit market share in the Northwest and an improved competitive position in other key Western markets. Pac Premier 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 Pac Premier. 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 have 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 Pac Premier branch made a referral to a product or service that was not offered before the acquisition. Our new team members hit the ground running, and we are 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 Pac Premier 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 PPNR 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 1 month with Pac Premier. 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, and 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 environment for 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 Pac Premier, 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 Pac Premier 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 Seda, 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 Union Bank 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. He'll be spending a lot of time with him in the quarters ahead. I'll now turn the call over to Ron.

Ron Farnsworth, CFO

All right. Thank you, Clint. We reported 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 PPNR increased 12% from the second quarter to $270 million. The main drivers of operating PPNR growth this quarter were the contribution of 1 month of Pacific Premier and favorable balance sheet remix trends, given 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 CECL 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 our 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 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 1 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 9 basis points to 3.84%. Funding remix I discussed drove the majority of the change with 3 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 3 basis points from the prior quarter end. Noninterest income was $77 million for the quarter. And on Page 23 of our earnings release, we detailed the nonoperating fair value changes. Excluding those items, our operating noninterest 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 1 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. And with that, I'll now hand the call over to Tory.

Torran Nixon, Executive

Thanks, Ron. Our teams had a tremendous quarter of business generation. New loan originations of $1.2 billion is up 36% 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, and we are already seeing revenue synergies from Pacific Premier. On an operating basis, noninterest income increased 9% due to 1 month's contribution from Pacific Premier, including a $3 million contribution from Custodial Trust Services. Not only will Pacific Premier'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 customers, and we are already introducing Pacific Premier branches to the CB Way, which offers needs-based sales solutions to our customers. This has contributed to strong referral activity from legacy Pac Premier branches. Since deal closing, referrals to Columbia business lines, including branches from our new Pac Premier associates have driven over 1,200 opportunities. Our Business Bank of Choice strategy, 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.

Clint Stein, President and CEO

Thanks, Tory. Our third quarter results wrap up 7 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 Pac Premier. And 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 Pac Premier acquisition was 1.7%. Our anticipated 3-year earnback at announcement is now expected to be less than 1 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, 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, well above the 8% target exclusive of AOCI marks we have consistently discussed since Q1 of 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 Pac Premier, 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. Didi, please open the call for Q&A.

Operator, Operator

Our first question comes from Chris McGratty of KBW.

Christopher McGratty, Analyst

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?

Clint Stein, President and CEO

Chris, so 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 is a great example. A couple of banks reported a credit issue, and our stock went down for no apparent reason. So things like that, we'll be opportunistic and strategically take down some shares in terms of a repurchase. But I'll step back and let Ivan kind of give you a little more details that might be able to help you figure out how to model that.

Ivan Seda, CFO

Yes, Chris, thank you for the question. As Clint mentioned, we are currently about $550 million above our target due to lower tangible book dilution and strong financial performance over the last few quarters. Looking ahead to Q4 2026, we expect to maintain strong profitability throughout the upcoming year. We have a $700 million authorization that will extend from the rest of this year into late 2026. Considering our current position, one month into the quarter, and the upcoming potential restriction dates, I expect that the pace of purchases for the remainder of this year will be slightly lower than the average quarter before we aim to increase it again in 2026, depending on market conditions and developments during the fourth quarter.

Christopher McGratty, Analyst

If I could just follow up, based on the excess capital of $500 million plus today and the expected return on equity generation over the next 12 months, it seems you could potentially use the entire $700 million by the time the authorization expires. Additionally, how should we consider net balance sheet growth, as that is clearly a relevant aspect as well?

Ivan Seda, CFO

Yes. 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 the $550 million surplus and then think about the profitability profile that we anticipate moving forward with. And I think we'll talk probably a little bit more on that second piece of it in terms of the pro forma outlook shortly. But the answer, I think, to the first one is yes. And I'll hand it over to Clint to talk a bit about kind of the balance sheet outlook from a loan perspective.

Clint Stein, President and CEO

We discussed in our prepared remarks and added a new slide in the earnings presentation to highlight the remixing we are undertaking. We’ve made significant progress and have a couple of billion more of those transactional multifamily loans to remix off the balance sheet that came from Pac Premier. The positive aspect is that these loans are at current market rates and have very short remaining lives. Currently, we expect to remix about $8 billion over the next several years. While this may suppress bottom line loan growth, as we have mentioned previously, converting these into relationship-based loans associated with deposits and fee income opportunities should lead to revenue growth, even if net assets remain flat.

Operator, Operator

Our next question comes from David Feaster of Raymond James.

David Feaster, Analyst

Maybe first off, I was hoping we could maybe 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, but 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.

Clint Stein, President and CEO

Yes. Yes. Well, I'll start by saying we're obviously aware of the presentation. And 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. But because those are typically private conversations. And so 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. And 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. So meaningful buybacks are certainly a part of that, and we're very excited today that our Board approved the buyback yesterday. And then kind of 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 Northwest, that's given us another physical location in Nevada and then the different lines of businesses, it truly was the missing piece to our franchise. And that's why I've been saying we are laser-focused on the integration. And as a result, I have zero interest in M&A for the foreseeable future. And 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. So 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. So our work over the past 3 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. So 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. So again, David, thank you for the question.

David Feaster, Analyst

That's great. That's extremely helpful color. 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, but 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?

Torran Nixon, Executive

David, this is Tory. I'll start and then let Chris join in. It was a great quarter, with about $800 million in organic growth coming from various parts of the bank. A significant portion came from our commercial customers and bankers, as well as from retail throughout the company. We also attracted a substantial number of new customers, approximately 30% of the growth was from new clients. We have seen growth in our newly opened branches. It was widespread across the company, and I’m very proud of the team's efforts in engaging with our existing customers, gaining market share, and attracting new clients. Everything we've discussed for a long time is gaining momentum and yielding excellent results. Chris, would you like to discuss the small business deposits?

Christopher Merrywell, Executive

Thanks, and thanks, David. 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 and the latest campaigns brought in to date, just a little under $180 million in new customer deposits, new customer names. And then as Tory mentioned, the de novo markets during the quarter accounted for about $150 million. So the momentum is tremendous out there, and the bankers continue to build upon that. It's very exciting.

David Feaster, Analyst

That's great. And then, Clint, I wanted to follow up on your response to one of Chris' 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. But one of the biggest pushbacks 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. But 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?

Clint Stein, President and CEO

Yes, we listen to our shareholders and research analysts, taking their feedback to enhance our disclosure quality. This is why we included a new slide in our presentation showing our transactional portfolios and their weighted average coupon or yield, which I believe is around 4.1%. While there are loans with both higher and lower rates, the overall portfolio stands at 4.1%. It's primarily funded by the wholesale funding on our balance sheet, which has been a challenge since the Umpqua acquisition. However, with rates decreasing by about 150 basis points over the last 13 months, this challenge has been diminishing. Following yesterday's changes, we anticipate this will no longer negatively impact our earnings and should become neutral. Moreover, we lack other revenue streams such as deposits, treasury management, foreign exchange fees, purchase card activities, or wealth management services that could contribute to fee income. By transitioning a loan with a 4.1% coupon to a good commercial and industrial loan today at approximately 8%, we not only capture fee income opportunities but also potentially self-fund some operating deposits that have no interest. The customers using these services are likely to generate more revenue compared to those in the previous scenario. This is a business strategy where our bankers are succeeding. I don’t want to steal Tory's thunder because he's eager to share more about their efforts, but this remixing strategy is why we believe we can keep growing revenue without necessarily increasing earning assets. We’re focusing on providing better and more comprehensive products for the bank and our customers.

Operator, Operator

Our next question comes from Jeff Rulis of D.A. Davidson.

Jeff Rulis, Analyst

Great Slide 25, I appreciate it, whoever pulled that together, kudos to them. I guess, really good outlook extending out 3 years, if we could narrow that into maybe '26, 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 the year?

Ivan Seda, CFO

Yes, Jeff, it's Ivan here, and 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. And so I'm going to put it in the context of kind of near-term NII and NIM perspectives, and then we can kind of maybe talk about how that translates as we go throughout the course of '26. I think we heard Ron mentioned earlier in his comments that we saw 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. And as we look forward into Q4 and a little bit further into Q1, if you put those 2 numbers together, that provides what we think is a pretty good proxy for what we would project, I'm just saying 2 quarters out at this point with a few caveats. Caveat 1 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. So that's one transactional item that will pop up in Q4. Caveat 2, we may see some earning asset declines or modest declines in the short term due to the balance sheet optimization actions we've discussed. But 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 2 quarters from that jump-off point that I just talked about. And then 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. So you could see a little bit of weakness in Q1 relative to where we land in Q4, especially with that $12 million NII pop. So 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. And I'm going to hand it over to Tory to talk more about kind of how we think about the net loan growth outlook.

Torran Nixon, Executive

Jeff, this is Tory. Looking at the quarter, we experienced a couple of hundred million in commercial and industrial loan growth. This represented approximately 5% annualized growth, although we did see a bit of slippage from some loans transitioning from late Q3 into early Q4. However, we are off to a promising start in Q4, with significant growth in our pipelines. The commercial and industrial pipeline increased by about $700 million over the quarter, in addition to the $200 million growth. Production was strong at around $1.2 billion this quarter. The momentum and growth in the commercial and industrial sector look very encouraging, and there's a positive outlook for the company. Regarding the integration of the Pacific Premier team, the customer base they bring, along with their enthusiasm, combined with our balance sheet capabilities, is contributing significantly to our current momentum. I feel very optimistic about the near future regarding customer growth, particularly in C&I, as well as in core deposit growth, fee income growth, and C&I loan growth.

Jeff Rulis, Analyst

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?

Torran Nixon, Executive

Yes, I think that's very fair. Yes, that's definitely our target.

Jeff Rulis, Analyst

Perfect. And then just checking in on expenses. I think you mentioned you've got about $80 million to go on cost saves. So similar question, I guess, thinking about kind of a core growth rate in '26, 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 would be helpful.

Ivan Seda, CFO

Yes, I'll take that. This is Ivan again. We had one month of PPBI reflected in our numbers, which amounted to $307 million. For a full quarter of PPBI, our operating expenses would have been around $375 million this quarter. Looking ahead, we expect to continue seeing cost synergies increase through the first half of next year, some of which will follow the system integration activities taking place in the first quarter. Therefore, we won’t see the complete post-synergy run rate until the second half of next year. In the meantime, we anticipate expenses, excluding CDI amortization, to be approximately in the range of $330 million to $340 million per quarter for the next several quarters, before we start to reduce to lower levels towards the end of next year. CDI amortization is expected to operate at about $40 million each quarter for the next few quarters, if you're looking to estimate a complete operational expense outlook.

Operator, Operator

Our next question comes from Matthew Clark of Piper Sandler.

Matthew Clark, Analyst

Just back to the margin here in the fourth quarter, the full quarter impact of PPBI, the premium coming through in the fourth quarter, kind of a temporary bump up. But 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.

Ivan Seda, CFO

Yes. So like Ron mentioned, in Q3, we put up 3.84% on total. If we were to roll forward that $12 million of that $8 million, that puts you up to 3.90% temporarily adjusted in Q4 or just north of 3.90%, that's a fair proxy for where we think the fourth quarter is likely going to land. So modest upside on net interest margin quarter-over-quarter, but fairly stable relative to the one that we just finalized and then a fairly similar range for Q1 2026. And then 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, but that's probably what I would share at this point.

Clint Stein, President and CEO

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

Matthew Clark, Analyst

I would have thought there would be some additional accretion from PPBI since there was only one month this quarter and we are expecting an additional two months beyond that, totaling $12 million. Is that not the case?

Clint Stein, President and CEO

Well, yes, you'd have the full quarter, yes, versus just 1/3 of it or 1 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.

Matthew Clark, Analyst

And then just on credit, just the uptick in nonperformers on a dollar basis, any of that acquired kind of PCD loans?

Christopher Merrywell, Executive

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

Matthew Clark, Analyst

$20 million of it was not PPBI related?

Christopher Merrywell, Executive

About $16 million of it, I would say, is not PPBI related.

Matthew Clark, Analyst

It seems that delinquencies at FinPac have decreased, which I believe is a positive indicator for charge-offs in the upcoming period. The bank reported significantly lower charge-offs this quarter. Do you have any insight into the expected range of net charge-offs in the near term?

Christopher Merrywell, Executive

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

Operator, Operator

And our next question comes from Jared Shaw of Barclays.

Jared David Shaw, Analyst

Maybe sticking just with credit, as we see that portfolio run down on Slide 25 and then get backfilled 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 like the 112% level over time, given a stable economic backdrop?

Christopher Merrywell, Executive

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

Jared David Shaw, Analyst

And then 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 costs may be a little bit higher?

Ron Farnsworth, CFO

We'll have additional merger expense in the next couple of quarters as we get through the system conversions in Q1, probably a little bit of a tail there. So lower amounts, obviously, in Q4 and Q1, and very little amounts thereafter.

Jared David Shaw, Analyst

In terms of whether the initial expectations are still being met.

Ron Farnsworth, CFO

Yes.

Clint Stein, President and CEO

Yes. And 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 Pac Premier and our current thinking, and you'll see that our cost synergies and total deal costs are unchanged.

Operator, Operator

Our next question comes from Timur Braziler of Wells Fargo.

Timur Braziler, Analyst

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.

Clint Stein, President and CEO

We sold a significant part of our securities portfolio and then repurchased some of what we sold that aligns well with our existing portfolio, positioning us for a continued decline in rates. Earlier in the year, we also applied some leverage to provide slight protection against rate changes while awaiting approval and closing. From this perspective, we did not fully reinvest; we used some of the funds to reduce wholesale funding. Additionally, we closed the deal sooner than anticipated, which could be influencing the situation. I'll pause now to see if Ron or Ivan would like to provide further insights.

Ivan Seda, CFO

Yes, regarding the transactions announced in April, there is a pro forma expectation. If you refer back to the documents from when the deal was announced, the loans held for investment at that time were at 12.0%. The actual balance when we closed came in slightly below that. Additionally, we provided our marks, which are fully disclosed in the packet today. When you factor in the rate and credit marks on the acquired loan portfolio, it is a bit below the $12 billion figure, but still in a solid position.

Timur Braziler, Analyst

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

Christopher Merrywell, Executive

So this is Chris. I'll take the first stab at it, and then Ivan and Ron can jump in. Yes, 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. And 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 and trying to separate seasonality away from what is indeed new customer acquisition. And Ron, Ivan, I don't know if you want to add anything on the wholesale part of it.

Ron Farnsworth, CFO

There will be fluctuations in wholesale, which depend on the flows within the loan and deposit portfolios. Additionally, we will have cash flows from the bond portfolio to support some of that funding. I believe what Ivan mentioned earlier regarding the average earning assets and the NIM expectation over the next couple of quarters remains within the expected volatility from those wholesale flows. We plan to maintain spring cash targets of approximately $1.7 billion to $1.9 billion during that period.

Timur Braziler, Analyst

Great. And then just last for me, just 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 3Q.

Ron Farnsworth, CFO

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

Timur Braziler, Analyst

So in terms of accelerated kind of credit accretion on the loan book, there wasn't abnormal....

Ron Farnsworth, CFO

Very minimal credit discount.

Operator, Operator

And our next question comes from Andrew Terrell of Stephens.

Andrew Terrell, Analyst

If I could just start just 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 reflected or 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?

Ivan Seda, CFO

Yes. 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. And then you also had the late quarter FOMC. And so not the entirety of that is fit into the end of the quarter. But as we've continued to monitor the portfolio through October, continue to see betas kind of in that 50% range. And I think Tory is going to provide some other comments on deposits here.

Torran Nixon, Executive

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. And I think we've done that every single time, and we're ready for this most recent move and are implementing that in the bank today, and we will continue to do that going forward and feel very confident in our ability to lower rates as the Fed moves rates down.

Andrew Terrell, Analyst

Thank you for all the color. And then on the buyback, if I can go back to that. Just you guys have an earn-back tolerance on tangible book when you think about deploying capital into the buyback versus other means, I mean, I understand at the current multiple, it probably makes a lot of sense. But is there any sensitivity from a tangible earn-back standpoint?

Ron Farnsworth, CFO

Yes, this is Ron. This earn-back plan we've got looking out over the year with some sensitivity around the price is under 3 years. I think the bigger issue is we're pretty discounted against peers. And so this is a great buy.

Clint Stein, President and CEO

Yes. And 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.

Operator, Operator

And our next question comes from Jon Arfstrom of RBC.

Jon Arfstrom, Analyst

Maybe, Tory or 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?

Clint Stein, President and CEO

Yes, 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. So very optimistic about our level of performance. We track it and in many cases have been at the top quartile. And we think with the addition of Pac Premier and the momentum that we have that we can move into the top decile. And obviously, at 18-plus ROTCE, we're already well above our peer group, and we feel very bullish about that.

Operator, Operator

And our next question comes from Anthony Elian of JPMorgan.

Anthony Elian, Analyst

Ivan, to clarify your comments about near-term NIM, for the fourth quarter, do you anticipate just above 3.90%, and for the first quarter, is your expectation relative to 3.90% or to the 3.84% you recently reported?

Ivan Seda, CFO

For 1Q, from an NII perspective, normalized, we'd be in a similar spot. I think that the NIM will be probably 3.90%-ish range, maybe a tad higher, but we project earning assets just a touch lower with a couple of items going on there. So 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.

Clint Stein, President and CEO

Yes. And Anthony, the only thing I would add is Q4, especially October, we have real estate tax and income tax payments and things like that. So we typically see a little volatility in deposits. And then obviously, first quarter is our seasonally weakest where we typically experience outflows. So any variability in our assumptions could obviously have an impact on the number in the range that Ivan provided you. But I just wanted you to keep that in mind.

Anthony Elian, Analyst

And then my follow-up, Slide 25 on the optimization. The $8 billion of transactional loans, is that all we should think about for optimization for now? Or could there be other loans, deposits, anything on the funding side from Pac Premier that could run off or exit to further optimize the balance sheet?

Clint Stein, President and CEO

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

Operator, Operator

And our next question comes from Janet Lee of TD Cowen.

Janet Lee, Analyst

If I look at Page 13, the difference between new originations and the combined payoffs and prepayments is about $500 million. In the coming quarters, should I expect that to accelerate in terms of more prepayments compared to new originations, or should that difference narrow?

Torran Nixon, Executive

Yes, this is Tory. It's a bit challenging to respond because some unexpected events occurred during the quarter. We did transfer some loans into held for sale, which influenced those numbers and won't happen again in Q4. However, if you examine the year as a whole, you can get a clear picture of net paydowns, prepayments, and payoffs in relation to originations. Our goal, as Clint and others have highlighted, is to drive core relationship growth for the company. We aim to gain market share, bring in new clients, and expand our business with new customers contributing to deposits, core fee income, and C&I loans.

Janet Lee, Analyst

And just to make sure that I understand your comment correctly on balance sheet optimization, is it fair to assume that like the biggest impact to loan growth total should be in 2026 and maybe in '27 and beyond, like it gets lessen if I were to just look at your schedule? Or is it more of a consistent multiyear plan?

Ivan Seda, CFO

Yes, if you examine the repricing and maturity schedule we've presented this quarter, we expect to address the majority of the portfolio over the next two years. However, shifts in interest rates could alter this scenario; a significant drop in rates might expedite some elements. As it stands now, I believe this will be a topic we'll be engaging with over the next two years.

Operator, Operator

And our next question comes from David Chiaverini of Jefferies.

David Chiaverini, Analyst

I was curious about loan pricing. I think you mentioned 8% earlier in the call on C&I. I was curious, is 8% a good number to think about for the $700 million loan pipeline? And could you also talk about the competitive environment for loan pricing?

Torran Nixon, Executive

Sure. David, this is Tory. New loan 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. So 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 so you see some pretty tight margins on some deals. And we're going to hold steady to what we think the value of our company 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. So the environment, it 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.

Clint Stein, President and CEO

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 4.1% and rotating into something that's more of a traditional C&I or other relationships. And we'll continue to do CRE. And so those at a lower rate. And so depending on what it remixes into. But glad you asked the question so we could clarify that.

Operator, Operator

And our next question is a follow-up from Chris McGratty of KBW.

Christopher McGratty, Analyst

And don't kill me for the follow-up. I want to make sure as we get the NII, right. The 3.90%, I hear you on 3.90%, Ivan, and that includes the $12 million of NII. But I guess, can you just give me 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.

Ivan Seda, CFO

Yes. So we are wrapping up this quarter with total earning assets just a hair below $62 billion, so 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 3.90%, just a hair above 3.90% from a net interest margin perspective in Q4.

Christopher McGratty, Analyst

And then 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. But absent the $12 million, roughly NII should be stable in Q1? I'm just trying to make sure I get the calculation right.

Ivan Seda, CFO

Yes, that's right.

Operator, Operator

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

Jacquelynne Bohlen, Investor Relations Director

Thank you, Didi. 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.

Operator, Operator

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