Hello, and welcome to Columbia Banking System third quarter 2026 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask the question during the session, you will need to press star one one on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. At this time, I would like to introduce Jacque Bohlen, Director of Investor Relations, to begin the conference. You may begin.
Thank you, Tawanda. Good afternoon, everyone. Thank you for joining us as we review our third quarter results. The earnings release and corresponding presentation are available on our website at columbiabankingsystem.com. During today's call, we will make forward-looking statements which are subject to risks and uncertainties and are intended to be covered by the safe- harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliations provided in our earnings materials. I will now hand the call over to Columbia's Chairman, Chief Executive Officer, and President, Clint Stein.
Thank you, Jacque, and good afternoon, everyone. Our third quarter results demonstrate steady progress on the same core priorities we have outlined for the past several years. Delivering consistent, repeatable performance, continuing to reshape the balance sheet to support long-term profitability, and returning excess capital to shareholders. This quarter, we continued to grow relationship-based commercial loans and utilized funds from strong customer deposit growth to reduce our reliance on wholesale funding, enabling both sides of the balance sheet to contribute to net interest margin expansion. We also returned over $1 billion to our shareholders over the past year through dividends and share repurchases. The completion of our existing buyback authorization resulted in an 8% reduction in our common share count over the duration of the program.
Given our confidence in Columbia's long-term strategy and our outlook for continued excess capital generation, our Board of Directors has authorized a new $1.2 billion share repurchase program. Our results reflect the benefits of consistent execution, even as the operating environment continued to shift. Discipline is not always the easiest path, but it's one our teams have maintained quarter after quarter across loan and deposit pricing, credit, and expense management. That sustained consistency has driven improved profitability and a balance sheet increasingly built around full customer relationships. In August, we marked the one-year anniversary of closing our acquisition of Pacific Premier, which was the smoothest integration I've experienced in my 21 years with Columbia. Over that time, we have built a compelling footprint across the West, achieving scale and a competitive presence through the combination of organic growth and strategic acquisitions.
As I have repeatedly stated over the past 18 months, Pacific Premier was the missing piece to the franchise we envisioned. Our focus remains on fine-tuning our franchise and continued execution on our organic growth opportunities. Our Northwest roots support our 10% market share in Washington, Oregon, and Idaho. While our growing presence in other key Western markets provides us with significant opportunity to gain share and further enhance our market position. With the integration fully behind us, we are applying our operational discipline with even greater focus, looking across the company for additional opportunities to improve efficiency and profitability. Together with our continued balance sheet optimization and intentional approach to capital management, this work strengthens our ability to deliver sustainable long-term value for our shareholders. I'll now turn the call over to Ivan.
Thank you, Clint, and good afternoon, everyone. As Clint highlighted, our third quarter results reflect the progress we continue to make on our strategic priorities. Turning to slide 11, we reported EPS of $0.78 and operating EPS of $0.82 for the third quarter. On an operating basis, which excludes items detailed in our non-GAAP disclosure, third quarter pre-provision net revenue and operating net income increased 7% and 6%, respectively, compared to the second quarter of 2026, and 25% and 12%, respectively, compared to the third quarter of 2025. A more favorable mix of loans and funding, together with disciplined expense management, drove both the sequential and annual growth. The addition of Pacific Premier also benefited the year-on-year comparison. Turning to slide 12.
Average earning assets were $59.8 billion during the third quarter, as balance sheet optimization and elevated CRE payoffs contributed to modest contraction compared to the prior quarter. We actively managed our funding base using strong customer deposit growth to reduce wholesale funding, including public wholesale balances. Between June 30th and September 30th, we reduced wholesale funding by $1.5 billion, contributing favorably to net interest margin. Slide 13 outlines the contributors to sequential quarter change in net interest margin with NIM at 4.11% for the third quarter. Adjusting for the 3 basis point benefit from accelerated repayments this quarter and the 3 basis point impact of one-time credit-related interest reversals last quarter, our NIM expanded by 12 basis points sequentially. Our balance sheet optimization strategy drove meaningful NIM expansion, building on improvement throughout the past year.
As previously articulated, NIM moved above 4%, and excluding unusual items, we expect it to remain above 4% for Q4. More specifically, we are guiding to a Q4 NIM of around 4.05%, which incorporates the impact of carrying excess subordinated debt throughout Q4 at a modestly negative carry. Our latest interest rate modeling continues to show that our balance sheet ratios remain largely neutrally positioned to rates, as slide 14 details, providing earnings insulation whether interest rates rise or fall. Non-interest income in the third quarter was $80 million on a GAAP basis and $87 million on an operating basis, as detailed on slide 15, at the high end of our guided range. Our results reflect continued momentum across products and businesses, and we expect non-interest revenue to remain in the mid-$80 million range for Q4.
Slide 16 outlines non-interest expense, which was $365 million on an operating basis, consistent with last quarter and reflecting disciplined expense management across our core franchise. Excluding CDI amortization, which will decline slightly each quarter, we expect fourth quarter non-interest expense to be in the $330 million-$335 million range as we continue to reinvest in our franchise. Moving on to slide 17, provision expense was $33 million for the third quarter, reflecting loan portfolio runoff, credit migration trends, and changes in the economic forecast used in our credit models. Credit metrics remained stable and healthy. Slide 18 details our allowance for credit losses by portfolio, with coverage of total loans at 1.02% at quarter end and 1.25% when credit discount on acquired loans is included. Turning to capital, slide 19 highlights our regulatory ratios at quarter end.
Our CET1 ratio declined slightly to 11.5% as our regular dividend and robust buyback activity modestly outpaced strong capital generation and the benefits of balance sheet optimization. During the third quarter, we repurchased 6.5 million common shares, returning approximately $200 million to our shareholders and completing our prior repurchase plan. Our total risk-based capital ratio increased to 13.8%, reflecting Columbia Bank's issuance of $250 million in aggregate principal amount of subordinated notes during the quarter. We expect to use these proceeds to redeem approximately $240 million in aggregate principal amount of junior subordinated debentures associated with certain trust preferred securities through early 2027, causing our total risk-based capital ratios to decline by approximately 50 basis points, all else equal. These actions advance our broader strategy to optimize both our balance sheet and our capital structure.
Tangible book value declined during the quarter to $18.10, due primarily to an increase in other comprehensive loss as interest rates moved notably higher during the third quarter. Looking forward, we expect share repurchases to remain in the $150 million-$200 million range for the fourth quarter under the new repurchase plan that Clint outlined. Overall, we're very pleased with the financial results for the quarter, generating an ROAA of 1.4% and an ROTCE of over 17%. Our focus remains on protecting the quality of earnings as we work to improve returns over time. With that, I will now hand the call over to Tory.
Thanks, Ivan. Our teams produced another quarter of solid relationship-driven results. Our loan portfolio continues to shift in the direction we want, with commercial loans inclusive of owner-occupied CRE comprising 43% of the total portfolio, compared to 42% at June 30th and 39% a year ago. Competitive pricing and structures that we are unwilling to match contributed to a decline in loans to $46.9 billion from $47.2 billion as of June 30th. Although the pace of decline slowed relative to last quarter. Loan origination volume was $1.2 billion during the third quarter, with nearly 70% attributable to commercial loans. Our focus remains on winning full commercial relationships rather than single product transactions. These broader relationships extend naturally into deposit and fee income opportunities, supporting stronger overall profitability.
Turning to deposits, strong growth in customer balances supported an increase in total deposits to $52.7 billion compared to $52.1 billion at June 30th. As we intentionally reduce public wholesale and brokered balances, customer deposits increased by nearly $1.2 billion during the third quarter due to seasonal balance growth and new customer activity. As Clint noted, our discipline extends to deposit pricing. The average cost of interest-bearing deposits declined 1 basis point to 1.95% for the third quarter. Our spot cost of deposits was largely stable at 1.96% as of September 30th, reflecting a measured response to the Fed's rate increase in September. Our relationship approach to banking is driving a greater contribution from fee income to total revenue. We are seeing momentum across core fee businesses, including treasury management, card-based fee income, and services such as international banking. Wealth management also is contributing to more non-interest income.
Consistent with our broader focus on improving profitability, we regularly evaluate our physical footprint to ensure it reflects how customers bank with us today and into the future. To that end, we closed four branches during the third quarter as we continually fine-tune our physical presence. We also opened a branch and a financial hub in Utah, adding locations to support our customers and bankers in our de novo markets. At the same time, we are bringing new talent to Columbia Bank and investing in the development of our existing teams, reinforcing our relationship banking approach and cultivating the next generation of leaders. I will now hand the call back to Clint.
Thanks, Tory. From the outside, it was a relatively uneventful quarter for Columbia, reflecting another period of consistent execution. Behind the scenes, we are very busy. We've delivered 11 consecutive quarters of predictable financial performance while continuing to reshape our balance sheet and strengthen the franchise we've built across the West. We embrace technology and automation to improve the customer experience and make our teams more effective, enabling our bankers to spend more time serving their customers. Technology enhances our relationship model. It does not replace it. We remain confident in our strategy because our customers are attached to relationships, not a robot. Our customers choose Columbia because of the bankers who know them and their businesses, and our branches remain an important part of how we build and retain these relationships.
I want to thank our teams for their disciplined execution and drive to get better each and every day. This concludes our prepared remarks. Chris, Tory, Ivan, and Frank are with me, and we are happy to take your questions now. Tawanda, please open the call for Q&A.
Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.
Hey, thanks. Good afternoon, everyone.
Hey, Jon.
Nice job here. There's a lot of places to go, but maybe Ivan, start with you on the margin. Thanks for the thoughts on the fourth quarter margin, but the 4.05% was a surprise to us, I mean. The 4.11% was a big surprise, but I say the items, the 4.05% was a surprise to us, and I guess I'm just curious how you feel about the momentum and the margin, where you think this could go over time. You mentioned things like sub-debt maybe suppressing it in the near term, but what do you think the trajectory of the margin could look like over time here?
Yeah. Thank you, Jon. I appreciate the question. A couple things I would say around that. First of all, just kind of unpacking Q4 in a little bit more depth, potentially. Recall that while our margin for Q2 reported was 3.93%, that had some negative impacts that we called out last quarter, including the one-time credit-related interest income reversals and some of the accounting yields associated with the investment portfolio. When you think about where we landed for Q3, there is really four factors in terms of how I have thought about the margin this quarter. First, obviously, we are benefiting from the absence of those headwinds that we called out 90 days ago, and you can see that pretty clearly on the walk on slide 13.
Second, as you get into the earnings release detail, you will see that our loan portfolio optimization, and what Tory articulated earlier out of lower rate transactional and into our core relationship commercial lending portfolios, continues to help support stronger returns. That is something that we do anticipate to continue as we look forward in this higher for longer rate environment. Third, we were, I think, very pleased with the results from a deposit generation perspective, without really seeing, at least quarter-on-quarter, a meaningful shift in the overall cost of the deposits. Like I mentioned earlier, that allowed us to continue to optimize the other side of our balance sheet, which has been a core focus of ours with about $1.5 billion of higher cost wholesale funding coming down.
Then we noted it earlier, but we did have about $5 million in interest income related to accelerated repayments. That part of it is more one- time in nature. The other factors are really aligned to the strategy that we are pursuing. I think if you look back at the net interest margin over the past four or five quarters, you can see the progress, and it is not always linear. But we anticipated, as we have talked about, I think, pretty openly, crossing over the 4%. As we look further on, we will continue to expect to be operating in that low 4% range for the next several quarters. Q4, a few things I would say around that 4.05%.
Number one, we will be holding some amount of excess debt as we work through the TruPS redemptions, and that is really just a function of kind of the timing associated with the sub-debt issuance versus going through the various redemption activities over the course of Q4 and Q1. We will work through the majority of that, but that will cause a couple of basis point headwind as we operate through that. Number two, we tend to see seasonal outflows in the second half of Q4, like many of our peers do. We factor that into our modeling as well for Q4.
If you would have asked me and if I would have been willing, which I wouldn't by the way, but if I would have been willing to give you a Q4 number 90 days ago, I would have said 4.05% at that point as well. We're definitely pacing towards where we expect to be. If we do outperform that, I think it'll be a function of what we've seen within rates and the rate impact on asset yields potentially impacting our margin more rapidly than the funding side. We'll see how that shakes out as we move through the course of this quarter.
Yep. Okay. Very helpful. It's a good performance. Maybe just to follow up on that, Tory, on the origination pace. You mentioned some irrational competition in spots. Can you touch on that a little bit? Then just also maybe comment on what you're seeing in the pipelines.
Sure. Yeah. So production was really strong and steady, pretty consistent quarter over quarter over quarter. So great to see that. As I look into Q4, it looks pretty comparable, and like the direction that the teams are going in. The irrational behavior at sometimes in some markets is a little bit silly, especially on the real estate front. You either see much too much leverage in a deal that we're just not interested in or without any real recourse, any guarantee, so a non-recourse structure that the income from the property really doesn't warrant it, or you're seeing rates that are crazy low. I've seen a bunch at SOFR + 100 basis points. I have yet to see one dip below 100 basis points, but I know it's coming. So we just kind of have a quick conversation with the teams and just pass on it because it's not something we want to do.
I've been looking a lot at it to see geographically or product type or kind of where it's coming from. But it's not a ton of it, and it's broad based, so it's not in one geography or one asset class. It's kind of spread out a bit and it's not all the time, but it's enough to kind of make you shake your head for sure.
All right. Thank you very much.
Thank you. Our next question comes from the line of Chris McGratty with KBW. Your line is open.
Oh, great. Thank you. Clint, for you, when you announced last year's buyback, which was about a year ago to the day, I think I asked you intent to use, and you said, "We're going to do it," and you did. So when you gave the guide for the Q4 of the $150 million- $200 million, how do we think about the pace of the $1 billion too? I guess it's a lot in there between the trough and the balance sheet. You're making a ton of money. You're redoing a capital stack a bit. But it feels like that $150 million- $200 million pace could move higher over the next few quarters. But just opportunity to agree or disagree.
Yeah, I think we're comfortable with the pace that we've been at, that $150 million- $200 million per quarter. We did the authorization that we just completed. Had a duration of 12 months. We didn't put a 12-month cap on this one. I guess you could do the math and think about at our run rate that we've been doing the last several quarters if we just roll that forward. There's a little more time for that to run past, say, the next 12 months. Again, though, all things being consistent, the economy still being resilient, and things of that nature, our intent is to fully utilize it. We didn't throw a number out there that we don't intend to utilize. But the pacing of it will be pretty consistent, I believe, with what you've seen over the past year.
Unless we see some sort of major pullback in the stock, and then again, we'd have the flexibility to do a little more at that point in time if conditions warranted.
Okay, great. Maybe for you and Ivan, just the triangulation between the capital targets, your risk base, I think has always been your kind of binder, but CET1 and TCE. Any more comfort giving us kind of a bogey that you're targeting over the medium term?
Well, I think we've been pretty consistent for 15+ years in terms of where we want to be on the target level. We've also had a hard time getting our capital down to those target levels. I think, and Ivan can speak more to, I don't know if he will share with you, but all the modeling that he's done and stress scenarios and how not only the newly authorized repurchase plan, but also our regular dividend. We feel really comfortable with those stressed results and our ability to continue to return capital to shareholders. The one area that we've talked about in the past is the TCE ratio. Just kind of naturally over time in a stable operating environment 12% total risk-based capital, 12.5%, somewhere in there equates to roughly 8% TCE.
And at least on our balance sheet, that's been the historical alignment. I exclude the AOCI to a certain extent when I'm thinking about TCE just like as we were building from below 7% to well above 8% over the past couple of years. I excluded it at that time as well because we have a phenomenal deposit base. We have great liquidity, and we have the ability to hold those securities that are driving those AOCI marks to their maturity or until the rate environment changes course a little bit. I think also back to the modeling that Ivan and his team do. They also model additional rate shocks and what that impact is on our tangible ratio, and we have a lot of comfort around it. I don't know, Ivan, if you want to add any detail.
Not a ton to add there. Like Clint indicated, every single quarter as we go through this, we model out what we expect from a capital generation, capital needs, payback period associated with the repurchase program. We're also keenly aware and monitor closely capital ratios on the mark-to-market basis, including TCE to TA. Like everyone else, we're also keeping an eye to the future with regard to monitoring the potential regulatory capital effects of Basel III proposed rulemaking, and we have a sense for what that could offer, but we're not explicitly counting on that sort of capital relief at this point in time. So long-winded way of saying that it all goes into the mix. We keep track of all of it and we're comfortable with our current levels, confident in terms of the capital generation that we're going to create here in Q4 and into 2027.
And that all goes into the equation as we balance out the capital impacts. I guess the last thing I would say, and you didn't explicitly ask about it, but we're also kind of in the midst of our Tier 2 capital remix strategy as you know, Chris, with the bond issuance that we completed in Q3 and then the associated redemptions that we're working through now. So that's an active part of our capital management that we're in the midst of as well.
Great. Thank you.
Thank you. Our next question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open.
Thanks. Good afternoon. If I could swing back into the margin for a minute. Ivan, I wanted to make sure I get the headwind in Q4, but it sounds as if you're alluding to that flips as you get those TruPS redemptions. Does that ultimately turn into a tailwind? I just want to understand that piece first, I suppose.
Yep. I won't go over all the details of the specifics of the sub-debt issuance. We completed that ten non-call five transaction in mid-September. When we think about Q3 and the funding profile of the bank, that really was only in effect for two weeks out of the full quarter. The TruPS activities, we're working through the redemptions that we've identified as potential. In totality, there's about $240 million worth of Tier 2 capital in the form of trust-preferred securities that will be redeemed. About 80% of that pool, 75%-80% of that pool will be redeemed between now and the end of this year. Then we'll have kind of a hanging chad that we'll clean up in Q1 of next year.
Really what that does is it means that we've got somewhere in the ballpark of $200 million of excess Tier 2 capital. That is our most expensive form of capital, whether it's the legacy TruPS or the sub-debt. We'll have a slightly higher reliance upon that in Q4 relative to Q3 and relative, as you said, in terms of potential future 90 days from now, as we talk about outlook for Q1, likely talking about that as a modest benefit going into next year. The other dynamic is more just the seasonal flows associated with our deposit portfolio. Q3 is seasonally strong for us, and that wasn't the entirety of the strength that Tory talked about earlier.
I am sure we will talk more about it here in a bit, but that was a factor in Q3, and we tend to see a little bit of an outflow in the second half of Q4 from a core deposit perspective, typically. That is worth a few basis points as well. Those are the two things that we are looking at in terms of that guiding to that 4.05% relative to that pro forma adjusted 4.08% for this quarter, excluding the one-time accelerated prepayment.
Right. Sorry, I was kind of alluding to 2027. If you just think about the major pieces of if you enter the year with maybe the seasonal deposit outflows are a headwind in the first half, but the TruPS redemption, the flip of what is happening in Q4 is maybe a net positive. Then you layer on the favorable back book repricing potentially in 2027. I just want to net that out. It still looks like a 4.05% starting. If you are going into the year, it is still a net maybe positive upward trajectory. Is that fair to say on the margin for 2027?
I think that is fair. Although, Jeff, it almost sounds like you are trying to tease out a 2027 guide, but I know you are not. What I would say, we are still going through our planning on 2027, but there are a few things I think that we could expect, at least as we turn the corner into the first half of the year. I think on the balance sheet, you can largely expect more of the same over Q4 and Q1 as we continue to optimize the mix of loans out of transactional and into core relationship-based commercial lending. As you have seen throughout the course of this year, mutes the actual balance sheet growth but does provide what you are alluding to, which is positive revenue momentum in the form of margin expansion.
We will continue to maintain what I would call an intense focus on driving core sticky client deposits and leveraging that funding to continue to optimize our wholesale sources. I think when we have connected with you in the past, you will note that that is not linear, right? There are seasonal flows associated with that optimization, but that will continue as well. I think the resulting NIM kind of in that low four range to start the year but continuing to expand is a reasonable expectation when you put those puzzle pieces together.
Yep. Just trying to get to the drivers. Appreciate it. Maybe hopping over just one other question on the provisioning and the reserve levels. You had net loan runoff this quarter and NPAs down. I guess theoretically, you have a more relationship-heavy model, so de-risking in some ways. I just want to get some understanding of the reserve build with some of these other factors would suggest maybe lightening up. I appreciate it.
Yeah. You are spot on. I guess one of the things I would say is I would categorize. I am not sure I would note this being a material shift, right? Going from, it is basically a 1 basis point movement in our overall allowance for loan losses. The economic backdrop that we put into the model this quarter versus 90 days ago was pretty darn similar. I think the one difference being the rate environment and not just where we are at today, but what the model expects going into next year, where I think most folks are modeling a further increase later on this year, and then anywhere from one to three increases over the course of the first half of 2027. Whether or not that translates into more pressure for certain borrowers in real estate and other verticals or not is probably beyond my crystal ball to read.
But I think that is probably what the model is catching up on is just that factor. So it is really more the economic backdrop that I think the model was picking up versus anything idiosyncratic in our portfolio. Look to Frank if he wants to add anything to my comments here. But generally, in terms of what we are seeing in our book, it has been very positive.
No, I think you said it really well. I do not have anything else to add.
Appreciate it. Thank you.
Thank you. Our next question comes from the line of David Feaster with Raymond James. Your line is open.
Hey, good afternoon, everybody.
David.
I wanted to dig a bit into the deposit growth. Really strong. Obviously, there's some seasonal dynamics. Nice tailwinds from the small business campaigns. Could you just touch on some of the drivers that you're seeing on this outside of maybe those two dynamics? How much is commercial versus retail? New account growth versus deeper relationship? And if there's any markets or segments where you're seeing more opportunity for growth. Just kind of curious what you're seeing there.
Yeah, David. I will kick it off, and then I am sure Chris and Tory will fill in the details on that. But I think it comes back to what we have been saying really for the last three and a half, coming up on four years is, post the Umpqua acquisition, we have been running the legacy Columbia model. A little bit of that has been tempered optically by the balance sheet repositioning and things. But each quarter we have talked about the activities of our bankers, and that is what we really focus on. I know a lot of folks run their models off of just earning asset growth. But I really look at it from the standpoint of, are our bankers doing the right activities?
You can see that as time progresses, both the consistency and stability of our earnings, the growth in fee income, which is a byproduct of what we are doing on the commercial C&I side. The small business activity that we are driving out of there. We had another great year in terms of the SBA rankings. That has been a big focus of ours, and making sure that we are serving the smallest of businesses as well as all the way up through the upper middle market. I think that what you saw in addition to third quarters always are seasonally strongest from a deposit standpoint. But I will point you back to it is our business model, and it is the ongoing activity of our bankers that are committed to that model. I will step back and see if Chris is anxiously waiting to add his commentary here, David.
Anxious. Very anxious.
Thanks for the question, David. Yeah. Small business campaigns, they extend across quarters. So I want to be pretty upfront that that is not driving all of this growth. There is no special products. There is no special pricings. It just allows our branches to have a common purpose and actually have some fun. I think, though, most of all, we are proud of the focus of our bankers that they have on relationship selling to not only new customers but to deepening existing customer relationships. There is lots of opportunities there, too, with deposits that are held elsewhere. I would also kind of pile on to that of campaigns are just a piece of what we do. The third quarter deposit growth is truly a team effort across our franchise, and it touched every single business line.
As was previously stated earlier in the call, the deposit growth is driven in a disciplined model towards pricing. I mean, holding our cost of funds steady while we continue to remix from higher priced CDs into core deposits is actually fantastic. Simply put, and I will turn it over to Tory, I would say this is how we do business.
Well, between Chris and Clint, they probably stole all the thunder, but I got a couple of things I want to add because I was very proud of the commercial folks this quarter. They had nearly $1 billion in customer deposit growth, and it's a combination of new customers, new relationships, and new money to the bank with just growth in existing accounts.
Confidently going back to our customer base and really having that confidence to have conversations to bring any balances they have other places into the company. I give a special shout-out to those folks and our treasury management folks for the work that they did. Clint talked a lot about activities and behaviors, and we have over the last year or so really instituted some accountability around working capital assessments and relationship reviews. It's producing some really nice results for us, not only on the deposit side but on the fee income side. Just to give you a couple stats that are, I think, very relevant to it on the fee income side, our treasury management business is up 7% year-over-year. Our international banking business is up 19% year-over-year.
Our commercial card business is up 23% year-over-year, and our merchant card business is up 11% year-over-year. All of that is a result of some real core behaviors and activities. I think the teams are doing great. Lastly, Clint talked about the integration with Pacific Premier. When you look at the deposit growth for commercial, nearly half of that came out of legacy PPBI Southern California folks and really shows that they have fully integrated into the company, and they're making some real progress in their existing customers, but getting out in the markets and taking advantage of who we are there to grow our customer base in Southern California.
Okay. That was super helpful. Maybe just touch it on the expense side. Look, you've always been cost-conscious, and we've talked about this previously as a part of your DNA. How do you think about the expense front? Where are you finding these savings and improving efficiency to fund the investments that you're making? Just what are some of the key investments that you're focused on as it relates to tech or hiring and even some of the branch expansion that you highlighted in the release?
Well, David, you as always tend to pack a lot into a single question. As a group, we'll try to do our best to touch on all those points. I'll just start off by saying that we've put three large organizations together, and anytime you do that, there's processes and things that maybe worked for one organization but are not as efficient as what they can be for an organization with our size and scale now. Then you add into that the speed to which we can automate things. Again, I'll go back to my prepared comments about we have a lot of technology. I think our platforms are contemporary. We don't shy away from that. But it's a tool. It's a tool that helps remove friction, increase our speed to market, take care of our customers, and create a better employee experience.
We're always looking at how do we get better every day. The team, and you've probably heard this over the years, whenever they come forward with an investment opportunity, it's usually do you have an offset? There's got to be an inefficiency somewhere in your vertical. Go find it and use that to offset it. In the rare occasion that we can't find an offset, then we let the revenue projections speak to themselves, and we'll make the investment that way. That's kind of similar on our de novo branching activity is we determine if there's an underserved market, if there's a gap in continuity of our existing footprint, things of that nature. Most importantly, do our commercial bankers in those markets, are they pushing for and requesting and stating the need for a branch location?
Because once they do that, then we know the whole market is committed to making that a success. That's been the model we had, I don't know, six, seven years ago when we put our first branch in downtown Boise, and that's the same model we've utilized as we've expanded to Utah, Arizona, and Colorado, as well as within existing markets. We just opened a branch last quarter in Las Vegas, and that's one that, again, the teams were saying, "We need some infrastructure. We can leverage that. We can bring in more commercial customers." I'm sure I've only touched on a fraction of the points that you had, so I'll step back and see if Ivan, Chris, or Tory want to add anything.
Not much to add from my perspective other than, David, I know we've talked about this when we've been together here over the course of the year that we flagged from the very beginning that we thought we had a unique story to tell for 2026 embedded within positive operating leverage. With revenues coming up as we continue to optimize our business, continue to drive the core fee income that Tory talked about with a lot of singles and doubles. Then on the expense side, a scenario where we had an opportunity to, as revenue goes up from H1 to H2, an opportunity to take expenses down. I think we've been extremely disciplined in execution of PPBI. I think we celebrated outperforming our original goals and targets with regard to identification of cost savings, predominantly in vendor-based spend and contract spend, which is great.
That's allowed us the, frankly, the luxury from my perspective of continuing to reinvest while still staying within the guardrails that we've established for ourselves in funding.
Again, this quarter, being able to redeploy some of that capital into future growth in the form of expanded physical presence in markets that we are really excited about. I think as you look out into next year, that discipline will continue, as will the reinvestment. I think it's a pretty good mix with regard to that.
The only thing I would add to the story would be some of the people side of it, where to Clint's point, we find an offset and we've invested some on the commercial banking side in Utah and Arizona, our Native American banking business, and then our fast food franchise business. Those are four or so areas where we really look to increase the number of folks. But the talent, we're bringing in some incredibly talented bankers into many parts of the company, but specifically those areas.
Yeah, David, what I'd add on that is we're doing the same thing in the wealth management space. Pretty excited about some of the talent we're currently talking to. When you look at the addition of the private trust business, joined us a year ago from Pacific Premier. Wealth management continues to become a bigger presence, bigger part of that non-interest income. Last quarter was actually our second-largest source of it. So, we're expecting great things out of that and continued growth as well.
And maybe just kind of a follow-up on some of those to some degree. Clint, the way you started out the call was talking about the consistency of your performance and what you guys have done. We spent a lot of time talking to investors, talking about the durability of earnings. What gives you confidence? A lot of that that we've talked about has been a decent amount of self-help in balance sheet optimization. There's still some tailwinds there. But we had tailwinds from the synergies from the deal. Again, a lot of the repricing and shrinking of net negative-yielding assets. What gives you confidence that's sustainable going forward? Just as rates are rising and competition's intensifying, and there's potential for weaker macro trends. Just kind of curious, what gives you confidence that that's sustainable going forward?
Well, David, what we can't control is the macro environment. There's a little bit in as our industry, as the macro environment changes, our industry either gets headwinds or tailwinds, and we face those same headwinds and tailwinds. But we do focus on what we can control, and we can control our expense discipline, our pricing discipline, the quality of our fortress balance sheet, the granularity and diversification that's on both sides of the balance sheet, whether it's the loan portfolio, the quality of our investment portfolio or our core deposit base. That has given us a very resilient, stable-performing company that really throughout the 33-year history of our company and various business cycles. I'll use the GFC as an example.
We took our lumps just like everybody else, but we came through it, bought five failed banks from the FDIC, and built the company that we have today. So it wasn't fun, but it was an opportunity for us to really to thrive coming out of it. A lot of our customers, we view the same way. They're good operators. Whenever their industry goes through any type of pullback or downturn, they usually come out stronger because it's the weaker operators that go away or retrench. We're no different in terms of how we think about our business. So I always look at on a relative basis, how are we doing? We've stated that our objective is to always be top quartile. If we're not, then we're working hard to figure out how to get there.
It's just I've seen it play out over the last 21 years. When I say we're running the historical Columbia business model, you can see that in terms of what's coming on the balance sheet, what we're flushing off the balance sheet. Then we have these headwinds or these tailwinds that you mentioned, mixing out of lower-yielding assets, mixing into more of our traditional assets that are coming on at 200+ basis points higher than the stuff that's rolling off. Then I know we still have pockets of inefficiency within our company that either exist as a byproduct of the bringing Umpqua and Pacific Premier under our umbrella or just with the advancement in technology and our ability to do things quicker and better. It's not any one single thing. It's really just being focused on every little detail.
I think I probably drive the team nuts sometimes with some of the details that I come back and ask them with. You are pretty busy right now. You have got a baseball team to root for in the World Series. Mariners didn't make the playoffs. So October, I spent a lot of time digging into the weeds instead of watching baseball. That is why I am pretty confident that we still have some things we can do. Are any of them going to move us from say a 1.40% ROAA to a 1.60%? No. But what they will do is enable us to maintain our level of performance, maintain that top quartile and top decile returns
And continue to make these investments in our company, whether it be platforms or some of the investments in people that Tory spoke of. So yeah, a lot of optimism.
That is terrific. Thanks, everybody.
Thank you. Please stand by for our next question. Our next question comes from the line of Bernard von-Gizycki with Deutsche Bank. Your line is open.
Hey, guys. Good afternoon. Just on the geographic optimization. You opened up the two locations in Utah while closing the four branches elsewhere. Are there any particular states where you have more optimization remaining, i.e., branch closures than others? I would just like to hear some color on the effort. Tory, I believe you said it is more just fine-tuning, so maybe there is not a lot to go?
Well, I think Chris and Tory can add their thoughts. When we look at where we have a lot of density, and the way that the company was built over time and some of the markets that we are in, they are stable markets. They are not high growth markets. We have great market share and plan to stay in each community that we are in. Let us use the Phoenix market as an example. I think we have five offices there now. We probably, over time, maybe need two or three more, and we will have the entire metro area covered in terms of how we think about folks. My view is folks will drive 30 minutes if they have a problem that they need to solve, or they really want to strategize and meet with somebody in person.
In our metro areas, 30 minutes is kind of what everybody's commute is anyway. In a market like Phoenix where traffic moves and everything, we can do it with a very branch-wide approach. The problem that we were trying to solve, and we spent a couple of years trying to solve it, but Pacific Premier solved it for us, was how do we build that kind of density in Southern California? One, it is an immense market. Two, 30 minutes with L.A. traffic, you might go 2.5 mi or 3 mi. It is really market by market. Then I look at things like Washington. In Washington, we have our highest branch count. It is a few more than what we have in Oregon and a few more than what we have in California.
There is an underserved market that we are looking at right now, and we believe that that branch would be profitable very quickly. It is just sometimes being opportunistic. Sometimes it is satisfying the request from customers who are saying there is an unmet need here, and then assessing it and determining the type of value and business volume we can drive from it. Where we look at it, we probably need some more infrastructure in Colorado to properly serve the Denver market. What we did in Utah was we had some money pigeonholed for Southern California that we were able to divert and reinvest in the Salt Lake area. I feel like that strategically where those offices are placed we pretty much have coverage that we need in that market. We will shift our attention to some of the other locations. Chris, you want to add anything?
Yeah. The only thing I'd really say is that fine-tuning is always going on. What Clint describes is almost a daily process. We're always looking at branch profitability, coverage, where customers are going. I'd kind of just say it is demand drives some of those new opportunities, and customers certainly do. Beyond that, what you won't see is a mass announcement of closures or something of that nature, and we're going to be pretty strategic on any new locations. But yeah, expect to see probably some down the road.
Okay. Just as a follow-up, just to clarify on the $1.2 billion buyback authorization. Was it contemplated the potential capital relief from Basel III in that, or is that still just additive? Just kind of curious on that one.
No, that would be additive. Like Clint indicated earlier, unlike what we talked about 12 months ago, almost to the day, this one does not have a time-bound nature to it. So we do have flexibility to look beyond a one-year marker with what our board has authorized regarding that. But no, we're not counting on Basel III regulatory capital relief to be able to fully leverage that program. But again, it'll take longer than the one-year marker that we executed this latest authorization under.
Great. Thanks for taking my questions.
Thank you.
Our next question comes from the line of Matthew Clark with Piper Sandler. Your line is open.
Hey, good afternoon, guys. Wanted to hone in on that securities yield up nicely this quarter. I know last quarter rates up. You got tagged with creating less of the discount. But just wanted to answer the question that I'm sure I'm going to get as to why that wasn't a headwind this quarter with rates up.
Thanks, Matt. I'll take that one. I think you've got the backstory right. You'll recall that last quarter I noted as part of our discussion around the investment portfolio itself, that while we had some temporary headwinds with regard to the accounting yield, I expressed confidence that over a long period of time, we'd continue to see the bond portfolio yield increase, which is essentially what we're seeing. We continue to have the dynamic of purchases and front-book acquisitions in the bond portfolio coming in at significantly better yields and rates than the back book as that kind of matures off or amortizes away. We've got something like $250 million- $350 million per quarter of that activity occurring.
As you think about kind of modeling us out over a longer period of time and/or if you look kind of on a year-on-year basis, you'll continue to see that fixed asset repricing story continue. More specifically to your question, last quarter, what we saw was a decline in the discount accretion associated with rising interest rates, essentially translating into slower prepayment speeds. Directionally, I think that that makes sense. I guess the nuance that I would introduce to the conversation there is that for those underlying assets, predominantly mortgage-backed securities and commercial mortgages, rates and prepayment speeds aren't linear. As we dig deeper into the modeling, there's typically an S-curve that goes into it. Unlike last quarter, we didn't see a meaningful headwind to discount accretion via CPR speeds in Q3.
Rates moved up, but prepayment speeds had essentially already reset or adjusted to very low levels last quarter in response to the initial rate increase in the marketplace. With refinance activity already minimal, this quarter's additional rate movement didn't really translate significantly into CPR speeds. Overall, our discount accretion on the securities portfolio in Q3 wasn't all that materially different than it was in Q2, i.e., very low. It's still significantly below what we recognized in Q1 when we were in a lower rate environment. If you were to kind of balance out two factors, last quarter, the factor of discount accretion recognition reduction was greater than the core back book repricing factor, and it was the inverse this quarter, right?
That we kind of took our lumps and sustained at a lower level on discount accretion recognition in Q3, and then really the core thesis being kind of that back book repricing kind of carrying the day from a securities yield perspective. Probably more than you asked for, Matt, but you did ask, so figured I'd get into the details there a bit.
That's great. Great color. Thank you. On earning asset levels and loan balances, net loans down less than last quarter. I think the expectation is flat to down until maybe mid-next year on loans. Just help us think through kind of net loan balances. I would assume they're still maybe down a little bit, but in overall earning asset levels over the next few quarters.
Yeah. I think you've got it right. I think for the next quarter, two quarters, probably three quarters, you can continue to expect to see more of the same from us in terms of core focus on driving relationship-based lending. The variable there that probably is the most, the transactional portfolio has been fairly consistent, and we keep a very close eye on that. I look at it almost daily in terms of the trends that we see within that portfolio. One factor that could play out in Q4 and into Q1 is a slight reduction in CPR speeds in that book as rates have reset to a higher for longer environment. But it's been pretty consistent in order to plan around that transactional portfolio at roughly a quarter of a billion dollars per quarter.
The CRE marketplace, as Tory described it earlier, is dynamic, and we have each and every time erred on maintaining our discipline, both regarding structure and price, as Tory talked about. We think that that is serving us very well as we continue to kind of work through this in a disciplined manner and optimize our portfolio. So I think flat to slightly down over the course of Q4 and into Q1 would be a fair expectation there. Maybe I'll just ask Tory if there's anything else that he'd speak to in terms of what we're seeing in the marketplace.
No. Activity wise, pipeline, the things that I'm seeing on the commercial side of the house is pretty confident that our C&I growth can remain in this low to mid-single digit level, kind of consistent with what we've done the last three quarters. Obviously, barring any big macroeconomic headwind. But lots of good activity, lots of good stuff going on in the various parts of the franchise. So feel relatively optimistic to kind of continue what we've been doing.
Great. Thank you.
Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of David Chiaverini with Jefferies. Your line is open.
Hi. Thanks for taking the questions. Wanted to ask about deposit costs. You guys mentioned about down 1 basis point. Can you talk about deposit beta assumption and the outlook from here on deposit costs?
Yeah. Great question. You'll note, I think, in our materials that we now have kind of the yo-yo is going to keep bouncing around here. So we showed an upped run in the beta there, and then a down run. We've been pretty consistent, and I've guided to a 50% beta on a through-the-cycle basis. And when I think of that beta, my personal bias is to view beta over the course of months and quarters, not days and weeks, because some of these things take time to fully settle in. What we saw in the marketplace is in Q2, really, the market started to react in what we've seen from competitive pricing perspective. We did adjust some of our pricing around our money market and CD rates over the course of summer. But we've maintained discipline as rates have increased.
I would say 50% beta is a fair assumption going forward thinking about Q4 and beyond. I will turn it over to Chris.
Yeah, David. What I would add to what Ivan laid out there is that he previously in this call stated that fourth quarter rates could projected to potentially rise. We always look at it from the standpoint of whether rates go up or they go down, we are going to perform better than the peers. I think we have been able to show that through this latest cycle, that we are able to hold costs low through our relationship strategy and disciplined approach between higher priced CDs and things of that nature. The goal is to outperform what the market is. What Ivan puts out there is a good proxy for it. We battle it each and every day. We talk about deals each and every day, and it just all adds up. It is just part of our discipline.
That is helpful. On the non-interest-bearing deposit mix holding in nicely at 33%, how do the pipelines look on that side? Is the ability to hold this steady in the cards, given, or I should say, despite the backdrop of higher rates?
Yeah. This is Tory. I would answer that pretty briefly and say yes, the goal and the assumption is to continue to maintain that mix. It is a result of core operating accounts, new businesses brought into the company, managing and working through all the things we have been talking about for relationship banking. It is just going to come with non-interest-bearing demand deposits, and that is the emphasis and focus.
Yeah. In the current rate environment, that's a pretty steady. We've seen it be steady, and that's kind of the mix that the customers or how they're choosing to keep their money between operating accounts and money market accounts or whatever it may be. It'd take a pretty significant rate decrease before people start looking at it and going, "There's no reason to move it into a money market." I think that's the goal, and I think we're seeing that just over and over with, especially with new customers as well.
Great. Thank you.
One thing that we do, I'll just add on one thing real quick, is this relationship profitability model that we leverage in the company of how we price loans, how we price deposits, is dependent on all the various pieces that we earn from the customer. Some of that is just good old-fashioned blocking and tackling and telling customers, "Hey, this is what you need to have with us so that we can maintain this level of pricing so that we can all continue to win and be profitable.
Good color. Thank you.
Thank you. Our next question comes from the line of Janet Lee with TD Cowen. Your line is open.
Good afternoon.
Afternoon.
You've clearly made a lot of good progress running off and repricing the transactional portfolio. I just want to make sure that I'm understanding this correctly on slide 25. The non-transactional loans there have been flat over the past year. Is that basically due production being offset by payoffs? What changes that gets overall loan growth back to positive around mid-2027?
Page 25 is just a quarter-on-quarter view, so it's not a full year-on-year. But you're right that excluding the rundown in the transactional portfolio, it's been roughly flat over the course of the quarter. We talked about production levels. We've, I think, bounced around between call it $1.2 billion, $1.3 billion. I think we've hit a high point potentially from a production perspective on lending up to $1.4 billion. So we've been in that range pretty consistently.
You don't see a lot of volatility in terms of the production that we produced. We continue to, as Tory alluded to earlier, drive core commercial lending at kind of in a 5%-6% annualized level pretty consistently each and every quarter. So it really has been that transactional headwind from a growth perspective that has held our balance sheet level kind of in check to where it's been here the last several quarters. What could change that? A variety of factors. Macroeconomically, I mentioned earlier that there's the potential that some of these transactional credits stick around for longer under a higher-for-longer scenario. If that does occur, we still have the benefit of repricing behavior within the portfolio. The buckets that we laid out here on slide 25 are generally not maturity dates, but they're when these assets come up for repricing.
Even if they stick around for a little bit longer, they become less and less of a headwind. I think you see that in the form of this transactional portfolio kind of inching up over time in terms of the yield associated with it.
Okay. It seems like it's $40.3 billion, the same from a year ago slide, but maybe I'm misunderstanding something. Can check back. You've been obviously holding the line very well on expenses, which is really impressive. As the growth accelerates in 2027 versus 2026, should the growth trajectory on expenses change in any meaningful way versus what we've seen over the past couple of years? Thank you.
Great question. Obviously this year, we had over the course of Q4 in 2025, and then Q1 and Q2 of this year, we were operating through identification and execution on $127 million worth of PPBI cost synergies. The $127 million being our original target, we outperformed that. I think we landed at $132 million or $133 million in terms of total identified savings. That provided an opportunity to continue to bring our expense base down from H1 to H2. I signaled that a range for Q4, that's pretty static to where we landed this quarter in terms of operating expenses. Then as we think about 2027, we guide to something that is in the realm of kind of inflationary-based expenses. Something in the 2% type range is probably a pretty reasonable modeling assumption. Again, we're building our plan now.
We'll continue to invest in infrastructure and people and technology to grow the bank for years to come. But we'll continue to maintain our discipline and find offsets where possible.
Thank you. Please stand by for our next question. Our next question comes from the line of Timur Braziler with UBS. Your line is open.
Hi, good afternoon. In reference to slide 21, it looks like payoff activity slowed this quarter. I am just wondering, was that also rate driven and maybe prepay slowing? Is that level sustainable? Then maybe just provide some color on that $417 million in the other column.
From a payoff perspective, yes, we did start to see a little bit of reduction in prepayment speeds over the course of Q3, in particular in August and September as rates rose. It is anyone's guess as to how that is going to manifest in Q4. But I would suspect that prepayment behavior will slow down relative to earlier in the year in the first half. I did not quite catch the first half of the, or the second question there that you asked.
It looks like in the other column it is - $417 million. That number is larger than it has been in recent quarters. I am just wondering what that driver was.
I don't have that readily available, so maybe we can follow up with you on that one.
Okay. Great. Then maybe just circling back to the deposit commentary. It looks like there's a decent slug of CDs that mature here in the coming quarter. I guess, what's the intent to retain the maturities there? Then appreciate your comments about starting to adjust some of your rates for increased competition. I'm just wondering what your current CD replacement rates are.
Yep. In general, I think the movement that you've seen over the course of the last year around term deposits, a lot of that movement was in the function of brokered CDs. You can see in kind of our liquidity slide that that's a very small piece of our funding stack at this point. So we really have kind of finalized the optimization of our brokered CD portfolio. The vast majority of what remains is retail consumer CD portfolio. We are working to kind of stabilize and maintain that portfolio under its current size. I think we're seeing CD rollover rates probably north of 80% in general, Chris?
Yes.
Which is kind of where we'd like to be there. We've adjusted some of our flagship offers really in kind of the six- to nine-month term structures at this point. Although, we continue to look at rate environment outlook, what's likely, then balance that out with our asset liability management position. So we'll continue to be active, usually one or two terms per quarter where we'll look to adjust our pricing. See if Chris wants to add anything.
Yeah. What I would probably add to that is we really look at those CDs on a daily basis of what is renewing, what is coming in. Obviously, we could, if we saw a need to boost the retention rate, we could change the underlying rate for tomorrow. And vice versa, if we were renewing too much, we could take it back the other day. So it really works hand in hand with what our other balances are doing as well. We do not utilize it as a one-off, "Let us drive balances through higher priced CDs." We use it as a tool amongst the whole portfolio. We are pretty comfortable with where it is at. We are comfortable with where we fall into the market.
You saw earlier in the year where people, a lot of banks went out and raced out and raised rates, and we held ours down for a while and continued to monitor it. And then we would come back to where we typically fall, kind of in the middle of the pack or so. Again, I am not sure what the competitors are going to do, but Monday I will know what the new offers are, and we will go from there.
Great. Thank you.
Thank you. Please stand by for our next question. Ladies and gentlemen, just in the interest of time, our final question will come from the line of Jared Shaw with Barclays. Your line is open.
Hi, this is Jon Rau on for Jared. Most of my questions have been asked, but just looking at the treasury management growth that you've had this year, what's the penetration that you have of your commercial customer base using that product? I guess how much more runway is there to keep extending that?
This is Tory. A couple of things. I'm going to go on memory here a bit. Penetration rate for treasury management commercial is roughly 58%. The growth has been from a few different things that we've incorporated. When I think of treasury management, I'm also kind of adding in some of the other fee-based products, some of the big ones that we mentioned earlier. We have based on customers' behavior, we have a technology in the company that gets driven through Salesforce that based on customers' behavior in their accounts, it kind of signals a next best offer for the customer, which it could be commercial card, it could be international banking, it could be something else. I think that's feeding that to the sales force and our sales force.
We are getting better and better and better at leveraging that technology, having relationship reviews with customers, providing working capital assessments with customers, and just driving the opportunity that our customers need and want to more efficiently and effectively operate their business. The last thing I would just say is over the last year, we've added some not incremental cost into the company, but we've added some really strong treasury management salespeople in the company. When I think about where we've added bankers throughout the franchise, I think the greatest acumen and strength and just banking prowess has been in our treasury management folks. They really have elevated the game, and they're doing some great things. All of those things combined are, I think, allowing us to continue to focus on it and grow the business.
Okay, great. That's a really good overview. That's all for me. Thanks.
Thank you. Ladies and gentlemen, at this time, I would now like to turn the call back over to Jacque for closing remarks.
Thank you, Tawanda. 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.
That concludes today's call. Thank you for your participation. You may now disconnect.