On Thursday, Columbia Banking System (NASDAQ:COLB) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Columbia Banking System reported first-quarter earnings per share of $0.66 and operating earnings per share of $0.72, with substantial increases in pre-provision net revenue and operating net income due to the Pacific Premier acquisition and balance sheet optimization.
The company successfully completed the PAC Premier Systems conversion and consolidated nine branches, achieving significant cost savings and positioning itself for continued financial stability and growth.
Management highlighted strong commercial loan origination and deposit growth, with plans to continue share repurchases, supported by a robust capital position and a focus on optimizing performance and enhancing shareholder returns.
Full Transcript
OPERATOR
Hello and welcome to Columbia Banking Systems First Quarter 2026 Earnings Conference. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised to withdraw your question. Please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jackie Bolan, Investor Relations Director to begin the call. You may begin. Thank you. Good afternoon everyone. Thank you for joining us as we review our first quarter results. The earnings release and corresponding presentation are available on our website 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 the 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. We'll now hand the call over to Columbia's Chair, Chief Executive Officer and President Clint Stein.
Clint Stein (Chair, Chief Executive Officer and President)
Thank you Jackie. Good afternoon everyone. Our first quarter results reflected continued execution against the same core priorities we have previously outlined, delivering consistent, repeatable results, optimizing our balance sheet and returning excess capital to shareholders. We also completed the PAC Premier Systems conversion and consolidated nine branches during the quarter, putting us on track for full realization of all acquisition related cost savings by the end of this quarter. I want to thank our highly experienced team of associates for their months of meticulous planning and the seamless execution of this key integration milestone. Our operating results for the first quarter reflect the continuation of momentum established late last year as solid CNI production offset a decline in below market rate transactional loan balances. We also reduced our reliance on wholesale funding as customer deposit balances expanded despite seasonal pressure typical during the first quarter. The resulting mix shift in both assets and liabilities fortifies and positions our balance sheet for sustained attractive returns over time. Our banker's proven ability to generate balanced relationship centric growth in deposits, loans and quality fee income is driving sustainable earnings growth. We do not need to produce net balance sheet growth to achieve our epsilon and rotce objectives. Columbia's cost conscious culture further enhances our top quartile profitability profile. Beyond savings associated with the PAC Premier acquisition. Our expense base reflects continuous fine tuning. We remain disciplined in identifying offsets that create reinvestment dollars for initiatives that drive revenue and enhance efficiency. AI is becoming an important tool for driving efficiency across Columbia. During our Pacific Premier Core Systems Conversion, we used AI to automate work that traditionally would be completed manually. Historically, time consuming conversion tasks such as reviewing and validating thousands of data fields were automated and completed in a fraction of the time historically required. Instead of relying on manual checks and custom coding, AI helped us move faster and reduce complexity, which shortened review timelines and improved execution. More broadly, AI is helping our technology teams work more efficiently. It allows our developers to move faster, test changes more quickly, and write software that is more secure. The result is higher productivity and better outcomes without adding incremental resources. We also enhanced our customer support experience with an AI powered virtual assistant. Our ratio of human calls to AI powered agent chats moved from 2 to 1 in favor of humans to 3 to 1 in favor of AI agents as many routine administrative questions are now handled by the virtual assistant. Macroeconomic headlines continue to dominate the industry narrative, often driving outsized stock price reactions and unilaterally treating all banks as the same. We are not all the same and Columbia's fundamentals warrant differentiation. Over my tenure at Columbia bank, we have repeatedly demonstrated the ability to withstand industry stress as we consistently turn disruption into opportunity. During the global financial crisis, Columbia delivered strong credit performance while leveraging FDIC assisted transactions to grow and strengthen our franchise. Since then, we have continued to expand our customer base through both organic growth and strategic acquisitions. Our best in class low cost core deposit franchise consistently ranks in the top quartile when measured on both cost and mix of non interest bearing balances. More recently, we successfully navigated the banking sector volatility of March 2023, again another point in time where many regional banks were treated as one. The Columbia team navigated this volatility without a discernible adverse impact to our business while simultaneously executing a successful systems conversion. Just three weeks after closing the UMPQUA acquisition, our credit fundamentals remain sound. Our office portfolio continues to perform modest uptick in Our CRE exposure, which is attributable to acquired portfolios, continues to decline. Turning to another closely watched area, our NDFI exposure is minimal, well below peer averages and underwritten with the same conservative and consistent rigor we apply across our broader loan portfolio. Our first quarter results marked the beginning of our third consecutive year of stable operational performance and strong organic capital creation. Given our current capital position and strong forward outlook, we increased our pace of buybacks during the first quarter returning $200 million to our shareholders, underscoring our belief that the best investment we can make at this time is in the stock of our own company. Looking forward, we will continue to execute on our established priorities, optimizing performance, driving new business growth, supporting the evolving needs of existing customers, and consistently delivering superior returns to our shareholders. I'll now turn the call over to Ivan.
Ivan
Thank you, Clint and good afternoon everyone. As Clint highlighted, our first quarter results reflect continued execution of our strategic priorities. Turning to Slide 10, we reported earnings per share of $0.66 and operating earnings per share of $0.72 for the first quarter on an operating basis, which excludes merger, expense and other items detailed in our non GAAP disclosure. First quarter pre provision net revenue and operating net income increased 45% and 50% respectively compared to the first quarter of 2025 due to the addition of Pacific Premier, continued progress on our balance sheet optimization targets and disciplined expense management. Turning to Slide 11, average earning assets were $60.8 billion during the first quarter, coming in at the midpoint of the range that I outlined in January. As continued, balance sheet optimization contributed to modest contraction relative to the prior quarter. We modestly reduced cash as planned during the first quarter and utilizing excess balances to reduce wholesale funding sources, which declined by 560 million from December 31. Although wholesale funding declined as of March 31, balances were higher on an average basis during the first quarter due to typical seasonal customer deposit flows. Overall, the results were as anticipated, reflecting a balance sheet, a stable balance sheet outlook and a remix in our loan portfolio out of transactional and into relationship based lending. Following the modest earning asset contraction during the first quarter, we expect the balance sheet size to remain relatively stable with commercial loan growth offset by contraction in the transactional portfolio. Slide 12 outlines contributors to the sequential quarter change in net interest margin. Net interest margin was 3.96 for the first quarter, right at the top end of the range that I outlined in our last call. While the headline net interest margin is down from 4.06 last quarter, recall that our net interest margin in Q4 benefited from an 11 basis point impact of the amortization of a premium on acquired time deposits and an accelerated loan repayment pro forma. For those factors, we were roughly flat quarter over quarter and relative to the first quarter of 2025, net interest margin has expanded by 36 basis points, reflecting the impact of our balance sheet optimization strategy. We exited the first quarter with an improved funding mix relative to the fourth quarter and expect ongoing balance sheet optimization to drive net interest income growth and net interest margin expansion with the first quarter setting the low water mark for 2026. As I outlined in our Last Call, we anticipate our net interest margin to grow modestly in Q2, crossing over 4% at some point in the quarter. Our latest interest rate modeling continues to show that our balance sheet remains neutrally positioned to interest rates on Slide 13, and you'll note that we have over $6 billion in fixed and adjustable loans set to reprice over the next 12 months. Not interest income in the first quarter was $83 million on a GAAP basis and $81 million on an operating basis as detailed on Slide 14. Within our guided 80 to $85 million range, the sequential quarter decrease was driven by lower swap, syndication and and international banking revenues following the strong performance in the prior quarter. Despite that, operating non interest income is up 25 million or 44% relative to the first quarter of 2025 from the impact of Pacific Premier alongside strong growth in fee income streams. As Tori will highlight later, we continue to expect non interest revenues in the low to mid $80 million range for Q2. Slide 15 outlines non interest expense which was 369 million on an operating basis excluding intangible amortization of $41 million. The first quarter's $328 million run rate was below our guided range due to the earlier realization of cost savings following January system conversion as well as some planned investments which fell back into Q2 as of March 31, we achieved 102 million of the targeted $127 million in synergies. Although these savings were not fully run rated in the first quarter's results. Excluding CDI amortization, we expect non interest expense in the 335 to 345 million range for the second quarter before declining in the third quarter as we realize all cost savings related to the transaction. By June 30, CDI amortization will average around $40 million per quarter. Moving on to Slide 16, provision expense was $28 million for the first quarter, reflecting loan portfolio runoff, credit migration trends and changes in the economic forecast used in the credit models. Relationship in the agricultural industry drove a modest increase in net charge offs and non performing assets relative to the fourth quarter, with our overall credit metrics remaining stable and healthy. Slide 17 details our allowance for credit losses by portfolio with coverage of total loans at 1% at quarter end and 1.28% when credit discount on acquired loans is included. Turning TO Capital Slide 18 highlights our regulatory ratios at quarter end, our CET1 and total risk based capital ratios declined modestly to 11.5% and 13.3% respectively, down approximately 30 basis points from the prior quarter end as our regular dividend and increased buyback activity outpaced capital generation during the quarter. During the first quarter we repurchased 6.5 million common shares, returning 200 million to our shareholders as of March 31. Our capital ratios remain comfortably above well capitalized regulatory minimums and our long term target ratios. We have excess capital of approximately 500 million and 400 million remains in our current repurchase authorization. Tangible book value declined slightly to $19.03 from $19.11 as of December 31, reflecting a higher accumulated other comprehensive loss on our securities portfolio. Given interest rate changes between periods, we expect share repurchases to remain in the 150 to $200 million range per quarter through our current authorization. Overall, we are very pleased with the financial results for the first quarter driving a 1.3% ROAA and over 15% ROTCE. We feel well positioned to drive strong profitability through the remainder of 2026 as our balance sheet optimization activity and continued share repurchases enhance long term value creation. With that, I will hand the call over to Tory.
Tori
Thank you Ivan Our teams had another strong quarter of business generation as new loan origination volume of 1.2 billion was up 38% from the year ago quarter. As a result, Columbia's commercial loan portfolio inclusive of owner occupied commercial real estate increased 6% on an annualized basis, contributing to the continued remix of our loan portfolio toward higher return relationship based lending as transactional loan balances continue to decline. Although payoff and prepayment activity in the first quarter slowed relative to the fourth quarter's elevated level, first quarter slowed relative to the fourth quarter's elevated level, declining balances in the transactional portfolio contributed to slight overall loan portfolio contraction to 47.7 billion from 47.8 billion as of December 31. We continue to expect relatively stable net loan portfolio balances in 2026 as we optimize our balance sheet for sustainable profitability improvement. Turning to Customer Deposits Our team's ability to generate new business and strong quarter end inflows offset seasonal deposit pressure during the first quarter resulting in $110 million of increase in customer balances as of March 31st. Our small business and retail deposit campaigns continue to bolster our deposit generation and our current campaign has generated nearly 450 million in new balances to Columbia through mid April. Further, the HOA business we acquired from Pacific Premier provided a countercyclical benefit during the first quarter as balances seasonally expanded, increasing nearly 160 million since year end. Customer balance growth and the cash deployment Ivan discussed contributed to a $760 million reduction in broker deposit balances as of quarter end, accounting for the decline in total deposits to 53.5 billion from 54.2 billion as of December 31st. Although customer fee income decreased following our strong fourth quarter performance, our results highlight the notable progress we have made over the past year driven by the addition of Pacific Premier and our continued efforts to expand the contribution of core fee income to total revenue. As Ivan discussed, operating non interest income increased significantly between the first quarters of 2025 and 2026 with an exceptional growth in financial services and trust revenue, treasury management, commercial card, merchant income and other recurring customer fee business. Our core fee income pipeline remains healthy, as do our loan and deposit pipelines, and we remain outwardly focused on generating business in a disciplined manner. I will now hand the call back over to Clint.
Clint Stein (Chair, Chief Executive Officer and President)
Thanks, Tori. I want to take a moment to thank our team of talented associates for their hard work and and contribution to our ninth consecutive quarter of solid financial performance and consistent results. Relationship driven loan and deposit growth and our balance sheet optimization efforts are creating tangible earnings results as evidenced by our net interest margin expansion over the past year. This concludes our prepared remarks. Chris, Tori, Ivan and Frank are with me. We're happy to take your questions now. Dede, please open the call for Q and A.
OPERATOR
Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q and A roster. And our first question comes from Jon Arfstrom of RBC Capital Markets. Your line is open.
Jon Arfstrom (Equity Analyst at RBC Capital Markets)
Thanks. Good afternoon everyone. Hi John. This all looks good, but maybe loans and margin, I guess. Can you guys talk a little bit about the billion two plus in originations? Kind of where that's coming from in general trends? It seems maybe a little better than a typical first quarter. But just give us an idea of what you're seeing there and what the drivers are.
Tory
Yeah, sure. John, this is Tory. I would say it's quite a bit better than kind of year over year. Q1 2025. The combined of a billion two in the commercial space is about a billion dollars, about a 40, roughly almost 35% growth from Q1 2025. And I think we've talked about this previously. I mean there's been a Lot of, a lot of progress made in the company in an outbound effort to just deploy our resources to bring new relationships into the bank. I think we've been very successful. We watch pipelines all the time. You know, it's not coming from one particular part of the company. It's spread throughout the organization. We're seeing growth certainly in our historical Pacific Northwest markets, seeing some growth out of Southern California, seeing some nice growth in our de novo markets. So it's kind of been spread throughout the company. And I think it's a combination of just a significant effort on the part of our bankers to tell the story of Columbia Bank. And it's a great story and we're having a lot of success with it.
Ivan
Okay, good. And then Ivan, maybe for you, can you give us a little more on what you're thinking on the margin? I know it seems like it's projecting the trajectories higher. Maybe it's a little better than you thought. But can you talk a little bit about maybe medium term expectations and then touch on what you're seeing in terms of deposit pricing competition? Yeah, that sounds great. I'll start us off and then I'll maybe look to Chris to talk a little bit about what we're seeing in the marketplace regarding deposits. I mean, I think you kind of nailed it this quarter. We landed right at the top end of the rail that we provided last quarter. And to unpack that a little bit, I think that there's two counteracting effects that we saw in Q1. When I think about our margin quarter over quarter, the headwind that we deal with in Q1 and it's the headwind that we deal with every year in Q1 is the seasonality in which we see those deposit outflows and a heavier reliance upon the wholesale funding channels. And so while our ending wholesale funding point to point was down on average, we had a 7% increase in average reliance on brokered and FHLB relative to Q4. And we see that pretty much every year. I think what counteracted that and what allowed us to stay stable this year relative to past years is the tailwind. And what we're benefiting from is the continued optimization of the balance sheet and specifically the loan portfolio in terms of the repricing of low coupon, low duration transactional loans during Q4 or Q1, we saw an additional roughly 230 million of that portfolio run down. That stuff's coming off at the mid low to mid 4% range. And we continue to replace it with Core relationship lending with a six handle on it. And that is a very positive continued engine for us that we expect to continue going forward. I think last 90 days ago I hedged and said that sometime in the spring or summer we'll cross over the 4% level. I said just moments ago I think we will be roughly at that 4% marker here in Q2 of this year and then we will continue to step up from there and move upwards north of 4% into the second half of the year. From a deposit perspective, you know there was a bit of noise in Q4 as you'll recall, associated with some one time kind of tail event items with the PPBI deal, the Premier on acquired deposits. But if you adjust for that, our Q4 cost of interest bearing was 220. For Q1 it was 2.04. So 16 basis points down spot to spot end of last quarter versus end of this quarter we saw an additional 8 basis point decrease without any Fed funds actions obviously in Q1. And I think that continues to point to the discipline that we bring to the table back book CD pricing as well as just evaluating on a relationship basis the deposits that we have. And so was really pleased to see continued momentum in that arena as well. I'll hand it over to Chris. Thanks Ivan.
Chris
Yeah, John. That disciplined approach that Ivan's outlining there, it's always been there. Tori and myself constantly are looking through exception requests. We're working with our bankers on each and every one of them, you know, monitoring the competition that's out there for RAC rates. We like where we're positioned there, but we continue to look for opportunities to trim a few basis points here and there where we can. And I think our bankers have really grabbed a hold of that and are moving forward. And then, you know, if we do get a Fed cut later on in the year, you know, obviously we've shown a playbook and a real nice system to deal with that in a large volume. But I can, trust me. Tori and I are looking at this every single day as those things come due. And I think the results are speaking for themselves. Yep. Okay.
Jon Arfstrom (Equity Analyst at RBC Capital Markets)
All right, thank you very much guys.
OPERATOR
Thank you. And our next question comes from David Feaster of Raymond James. Your line is open.
David Feaster (Equity Analyst at Raymond James)
Hey, good afternoon everybody. Hey David. I wanted to start on just kind of following up on Pacific Premier. Well, it sounds like the deal's gone pretty well so far, but I specifically wanted to talk about the conversion and the integration. How did that go relative to expectations? How was feedback from clients? Have you seen Any attrition and just post conversion, how is the team doing? And has their go to market focus shifted at all? Just integrated and we're all heading in the right direction?
Clint Stein (Chair, Chief Executive Officer and President)
Yeah, great question, David. And as usual, you pack a lot into what appears to be one single question. So we'll attempt to hit all those points and if we miss one, just redirect us. But you know, I've said since the very first set of town halls we had on this a year ago with the team at PAC Premier that it was different, their reaction was different. The enthusiasm they showed for the combination and becoming part of Columbia and our market position throughout the west and that carried through all the way to the systems conversion. And I'll probably offend a couple hundred people in our organization when I say that it went so smooth that I almost forgot that we did a conversion in the first quarter because there was no drama that's typically associated with it, no customer disruption. And I think it was probably out of all the ones we've done, the best that we've ever had. And that's not only attributed to the talent that Columbia had, but also the talent and experience that PAC Premier brought to the table as well. In terms of where things have been since the January conversion, for me, my perspective is, and how I term it is pretty much business as usual. And I think that if anybody thought that we got distracted or inwardly focused, look at the performance that we had during what is typically our seasonally weakest quarter and the production and momentum we had on the CNI side, actually growing customer deposits during the first quarter. I mean, that's definitely something that I'm pleased with, even though it was a nominal amount. But Chris and Tori live this every single day and are much closer to the frontline associates and team members. So I'm going to step back and let them give you a little more perspective on what they're hearing and seeing at the customer level.
Tori
Sure, David, I'll start. And Chris has a couple things he wants to say as well. I would say I'm incredibly impressed and proud of the Pacific Premier folks and just how excited they've been from day one to be a part of Columbia, how they have kind of gone through the conversion and it went extraordinarily well. We've got a ton of momentum in Southern California. The teams that we've had down there prior to the acquisition, they've all kind of folded in and become one very unified, strong presence and strong team in Southern California. We haven't really lost anybody of note. At all from an associate standpoint. So we've got high retention of people, very high retention of customers. We continue to. To find a lot of opportunity in the existing PAC premier book to grow relationships. And we're kind of seeing that every day. And their momentum is very strong. And I think they feel very good about being a part of our company and the opportunity that's in front of them. So it's been all good and they've done an exceptional job. And I think Chris wants to say something.
Chris
Yeah, David, as we try to write down everything you packed into that you asked about feedback from clients and during the conversion itself, you always have the chance when people are reaching out and using the contact center that they can leave comments afterwards. We had numerous comments where they raved about the conversion, that they had personally been through them before, how this was the best, how they loved the bank. And there were so many of them that at one point I accused the contact center of planting them and doing them themselves. But they were real customers and it was flat out phenomenal. And you know what that really does is happy customers, they lead to happy bankers. And as Tori was talking about, it gets them back into the market. We've got the new capabilities that came from putting both organizations together and our bankers are taking advantage of that. And we're starting to see bankers in our markets reaching out to us and asking what it's, what it's like and what are we doing and can they possibly come on board?
David Feaster (Equity Analyst at Raymond James)
That's great. That's great. That's extremely encouraging. I wanted to. You got a slide in here that's talking about the opportunity that you have to increase density and gain share across your footprint. So I wanted to ask you on the hiring front, I think that's an underappreciated aspect of what you guys have been doing. I know you don't put out press releases on everything that you do, but curious if you could discuss how active that you've been on the hiring front, your appetite for additional hires and maybe what geographies or segments that you're looking to add to or business lines to expand.
Chris
Yeah, David, it's Chris. I would tell you that we're always interested and active. You never know when the best bankers in the market are going to decide that it's time for them to make a move. And so we're always oars in the water, looking at what we can and being ready. And we've always had the philosophy of if it's the right bankers and they can bring value to us, we'll create a position. So it's not by putting job postings out there and things of that nature. We're looking at expanding our wealth management operation, obviously looking at that Southern California footprint and building that out with trust folks, financial advisors, private bankers, and folks that focus on healthcare as well. I know Tory has some of the same parts of it, and so I'll let him chime in as well.
Tori
Yeah. Just to give you a couple geographies, I mean, I'm looking at a list of just over the last six months, we've hired commercial bankers in Scottsdale, in Denver, probably three or four in Utah, in Eastern Washington, in Seattle, in Portland, in Los Angeles, in Orange County. As Chris said, we just have a ton of bankers in the marketplace that, you know, really appreciate, understand the story of Columbia bank and what we're doing and the success that we're having, and they want to be a part of the company. So it's, it's, it's a great place to be. And, you know, we're, we're bringing them in and putting them to work and they're kind of hitting the ground running. So it's, it's really spread throughout, I think the different business lines in the bank and the various geographies that we are in.
David Feaster (Equity Analyst at Raymond James)
Terrific. And maybe just last one, you know, you've got a lot of excess capital as it is. You're continuing to generate a lot of organic capital, but given the regulatory relief that we've seen and the potential capital relief with that, have you done any work around what that could mean for you all, just especially given the treatment of MSRs? And does that change any of your capital priorities or is buybacks. It sounds like that's still the focus for now, but just wanted to get your thoughts on that if you've done
Clint Stein (Chair, Chief Executive Officer and President)
any work around it yet. Yeah, David, we have. And I'll step back in a moment and Ivan can give you the details on what that looks like. But from shifting our capital priorities, the short answer is no, it doesn't. I was intentional in my prepared remarks where I said that we still firmly believe the best investment we can make is in our company, our own company stock. And, you know, and I think that's why you see that, you know, we announced a big buyback last fall and, you know, we're almost halfway through that allotment. And so hopefully folks take that as a sign that we're very serious about executing on that full amount. But in terms of, you know, what the MSR treatment does and Things for our capital ratios. I'll leave those details to Ivan. Yep.
Ivan
And thanks for the question. Yeah, we're like pretty much everyone else, I think we're still evaluating and putting a finer point on the exact impacts of the proposed rulemaking. And obviously we're still in a comment period, so we're holding off our excitement at this point. But what's very clear from our perspective is that there is meaningful capital benefit under the proposed rules. Our current, you know, back of the napkin analysis that we've done on the NPR shows that we'd have a benefit potentially up to the ballpark of 100 basis points of CET1, which obviously would provide for some interesting optionality to consider going forward. But a lot more work to be done to fully unpack that going forward.
David Feaster (Equity Analyst at Raymond James)
That's helpful. Thanks everybody.
OPERATOR
Thank you. And our next question comes from Jeff Rulis of DA Davidson. Your line is open.
Frank
Good afternoon. Maybe Frank on the credit side wanted to get a little more color on the non accrual ads and some of the net charge offs there within the ag book, particularly if you could walk us through a little detail. Thanks. Yeah, Jeff really centered in one customer relationship that just a casualty of what's going on in the ag industry right now with cost inputs being extremely high and margins extremely tight. Those that have a little higher leverage have a more difficult time with it. And that's kind of what happened in this case. I mean it's unfortunate but you know as well as we do underwrite ag, I mean there's inevitably going to be a casualty and this is one of them. And Frank, charge off. Go ahead. I was just going to, you know the type of ag that that was. Do you think it's systemic or like you said, just one. Systemic in the frame of margins are tight, but maybe just the industry that that was in, not systemic. Jeff, this particular one was in the hop industry, if you will. So I mean I think most of us know that. I mean hops and grapes, so beer, wine, spirits even, I mean going through really what I would call a kind of a generational shift in demand. And you know, this, that only compounded what was going on in this situation. So you know, I think it's pretty well explained in that. Okay, and you were going to talk about the charge off. Was it interrelated at least a big interrelated, exactly. Interrelated, yep. Appreciate it. And maybe just just one other one if I could got to commentary on a pretty flattish loan growth year. Understanding that the growth versus transactional Is that pretty straight line over the course of the year? I guess as I try to think about 27 and potentially a return to net growth is the back half potentially have a little bit of uptick there. And if you have a crystal ball to look at 27 and think about, hey, we think we could scratch out low single digit. Any commentary on the trajectory of that flattish for the year?
Ivan
Thanks. Yeah, it's a great question. You know, I think any given quarter we'll see a little bit of movement up and down in the loan portfolio. You know, this, this quarter, obviously we had about $100 million reduction. Our general expectation for the next three or four quarters is that portfolio will stay relatively flat. In the last two quarters, we've seen almost a half a billion dollars of that transactional portfolio run down. And like we talked about earlier, we're replacing that actively with strong growth in CNI owner occupied real estate portfolios. So any given quarter we could see a little bit of movement up or down, but generally throughout the course of 2026, we're expecting roughly flat. Hand it Tory for some color commentary on the pipeline.
Tori
Yeah, maybe I'd just talk a little bit, Jeff, on pipeline. So our combined commercial pipeline as of the end of March was about 3.3 billion, which was up about 600 or so million from the end of the year. So a lot of really good activity. And that's even with the production that we had over the quarter. I mean, it's up to about 50% from a year ago. So a lot of activity, a lot of good stuff happening. Feel very optimistic on our ability to generate CNI loan growth, owner occupied loan growth, relationship growth in the company for sure. And I think to Ivan's point, I think we'll have a, have a really, really good shot at being stable throughout the year. And I think as the momentum picks up, I think that kind of moves into 2027 should be a good year for us.
Ivan
And I failed to mention this earlier, but over the course of a year out of that transactional, we're expecting a billion to a billion in a quarter that book to run down. And so for us to stay flat on that, it does require 4 or 5% loan growth out of that core relationship portfolio. So that is very real in terms of the core loan growth we're seeing there, just to stay even in terms of the size of that total portfolio. Got it.
OPERATOR
Thank you. And our next question comes from Matthew Clark of Piper Sandler. Your line is open. Yeah.
Matthew Clark (Equity Analyst at Piper Sandler)
Good afternoon, everyone.
Frank
Just A few cleanup credit questions. The uptick in 30 to 89 days past due. I know it's not a big number on a percentage basis, but just some color there where FinPAC delinquencies stood at the end of the quarter versus the fourth and then classified balances this quarter versus the end of last year. All right Matt, so your first question with regards to the 31 day, 89 day delinquencies, really the uptick was centered in one commercial real estate loan that is really in the process of being paid off and that really accounted for the entire difference between fourth quarter and first quarter difference. FinPAC. FinPAC is exactly where we thought they would be. Their delinquencies are down from the fourth quarter as were their charge ops. Looking forward, they've been kind of bouncing along the bottom and they continue to bounce along the bottom of the of their charge offs. And so at about a 3.4, 3.45 net charge off clip, I mean that's a great number for that business and that's what they're doing. So where they're non performing are at the end of the first quarter. I would expect next quarter to come in pretty close, maybe a little bit higher than they are but you know that's to be seen. Like I said on previous calls, you can kind of figure about 80% of non accruals roll to net charge offs. And what was the last question you had?
Matthew Clark (Equity Analyst at Piper Sandler)
Another one? Oh, just classified balances. I didn't see it in the deck. I was just curious.
Frank
Classifieds. Classifieds held pretty flat quarter over quarter. Special mention were significantly improved quarter over quarter really due to. We've had some good luck in resolution of some of these special mention as well as had a couple of them pay off.
Ivan
Okay, great. And then the other question I had was around expenses. I think you maintained your adjusted expense run rate guy to 335 to 345. But I believe you have some additional cost saves from pbbi. And then just thinking through kind of all in core expenses for the year. I think the prior guide was a billion and a half but again seems like you're tracking below that at least in the first quarter. Just help us understand maybe you know, why you maintained it and what we should expect to see I guess in the run rate going forward. Yeah, that's a great question. This is Ivan. We did have so a couple things on Q1 just in terms of where we landed, it did come in lower than we had I'd say planned for in Q1, you know there's always a few smaller one off items, just business as usual stuff. And those things amounted to one or two million dollars worth of benefit to us in Q1. That was a positive, I'd say, from a strategic perspective. Just the strong execution on our with synergies and happening a little bit earlier than we'd anticipated was a meaningful factor. And then we did talk earlier about some of the investments that we're making that you'll see us talk about in future quarters, both in terms of bankers across the entire footprint, as well as expansion in markets like Colorado, Utah, Nevada, as well as in our legacy markets. So there is reinvestment happening over the next two quarters. All that said, I do expect that we will come within that $1.5 billion expense guide due to continued expense discipline as we execute on those items.
OPERATOR
Okay, great. Thank you. Thank you. And our next question comes from Christopher Megrati of kbw. Your line is open.
Christopher Megrati
Oh, great. How are you doing, Ivan? Just going back to Matt's question. Just make sure they got a finer point on the expenses. So XCDI 335, 345 in Q2, do you stay in that range in Q3? I haven't fully mapped out the back half, but are you inside that range, maybe the low end? Or can you reach below that once everything's fully in the run rate?
Ivan
No, we'll come in below that in the second half of the year. So I think if you were to do the kind of the math from 90 days ago, it's in the ballpark of 330 to potentially 335 in the second half of the year in Q3 and Q4 as we execute the remaining synergies. I made mention of it earlier. I think we're 102 million executed out of the 127 million that's been fully identified. There's no question mark around the timing or the impact or the sizing of the remaining cost synergy. That's all known, documented, fully written in pen. So that will happen and that will start to flow through in Q3. So you'll see a step down kind of into that range as we turn the corner into the second half. All right, that's great. Thanks. And then moving, just kind of putting the pieces together with the estimated impact from risk weighted assets. I know you don't have an official public target on TT1, but how important is the TCE ratio? I've heard a few banks talk about, obviously with the rating agencies, they focus on it. But how do you Balance, what's the right balance? As you go into the medium term, they think about buybacks after this, after this one's done. Chris, we've always felt like from a TCE standpoint that, you know, we want to be in the neighborhood of 8%. And the reason is that just gives us, I guess you call it what you want, flexibility, comfort, capital, whatever. But also historically, when you back out, the current AOCI impacts of bond portfolios and things. 8% historically for our balance sheet is tied into what would be roughly 12% total risk based capital. And that's, that's a target that continues to be our binding constraint in terms of how we're viewing capital deployment. Okay, thanks for that. And I guess two housekeeping, if you don't mind. Ivan, any help on the tax rate? And then just getting back to the AG loan, that relationship that drove the charge offs and not accruals. Has that been your estimate? Fully addressed, like provision wise in terms of the P and L? Yeah. So I'll take both of those. On the first one, the answer is same as last quarter. I would use a 25% all in effective tax rate as you model it out. And on the second one, you know, I think the answer is obviously yes. Right. We feel very comfortable with the level of allowance that we have, 100 basis points. The modeling and the process that we go through does factor in obviously components of a baseline economic scenario. But we have a lot of deep discussion across the institution. And we also incorporate elements of an S2 downside scenario. And as it sits today, you know, we've got 100 basis points of loss content. That's over three and a half years of charge off content on a run rate basis relative to the last few quarters. And we have an additional 28 basis points of coverage from the credit discounts on the acquired portfolio. So, yeah, fully in line and fully contemplating the credit elements that Frank talked about earlier.
Christopher Megrati
All right, awesome. Thank you.
OPERATOR
Thank you. And our next question comes from David Tiervarini of Jefferies. Your line is open.
David Tiervarini (Equity Analyst at Jefferies)
Hi, thanks for taking the question. So, wanted to swing back to the deposit outlook. You had good success with the 450 million in new deposits from your recent small business and retail campaign. Do you have similar campaigns planned for the spring or summer to continue the deposit momentum? Yeah.
Chris
David, this is Chris. The current campaign will end here in the next 10 days or so, end of the month, two weeks, and then we'll take, we always take a bit of a break in between cleanup, client follow up, make sure everybody's got everything buttoned up like they need to. And then we'll relaunch, see, so that's May, we'll relaunch in June and then we'll have another one that goes into the fall as well. So typically three per year. And I'll probably reiterate that there's no special products, there's no special pricing. This is all the stuff that we have off the shelf. And it's really a campaign around focusing our retail branches on going out and deepening business and winning business.
David Tiervarini (Equity Analyst at Jefferies)
And looking at the non interest bearing deposits on a period end basis, up modestly, sequentially, average basis was down. A bit curious on your view in terms of looking at the forward curve and how there's fewer cuts in the forward curve, to what extent this could be a headwind on non interest bearing deposit growth. Oh, on non interest bearing deposit growth, right. Yeah. I don't think that we'll see a big headwind in terms of non interest bearing deposit growth relative to 90 days or 180 days ago when we expected two rate cuts. I think it's been a competitive market for the last three years, since March Madness and will continue to be. But we talked about the strategies that we're deploying in terms of relationship as banking business, bank of choice on the commercial side and then the campaigns that Chris talked about earlier and we feel like those will continue to drive favorable, positive growth in terms of the core deposit portfolio going forward and then just in general on the interest rate environment. I think that our balance sheet is incredibly well positioned for neutrality, which is by design. And as we think about various scenarios that could go on as we look forward throughout the rest of the year, most of the things that will drive us upwards and forwards are going to be things that we control in terms of the execution of our strategy instead of whether we get one cut late in the year or not. Doesn't really move the needle as much as as kind of our strategic execution plan. So those would be my comments on that. Very helpful. Thank you.
OPERATOR
Thank you. And our next question comes from Janet Lee of TD Cowan. Your line is open. Good afternoon.
Janet Lee (Equity Analyst at TD Cowan)
Good afternoon. For the second quarter, just making sure that this math is reasonably correct for nii. Can we assume flattish average earning assets from here going into the second quarter? And then Ivan, you talked about getting to that 4% NIM. So does that get us to about 605 million ish NIM for this? Sorry, NII for the second quarter. Am I thinking about this correctly or is there a timing Issue on when you reach the 4%.
Ivan
No, I think you're thinking about it correctly.
Janet Lee (Equity Analyst at TD Cowan)
Okay, got it. Thank you. And for. On your slide 12, I believe on the NIMS slide, you said the net interest margin outside of the two one off impacts in the fourth quarter was fairly consistent and stable. If you strip out the entire PAA on a like a core coordinate basis, can you comment on how that has trended and if there has been any change in PAA forecast given the change in environment?
Ivan
No, we view the discount accretion on the acquired loans as well as any discount accretion, whether it's through a bank acquisition or through regular bond purchases that we do each month. We view that to be core. Obviously, if in unique circumstances like in Q4, if a large credit with a large mark pays off early, there can be some short term volatility. But in general we don't disclose a breakout of paa. In regard to that. Was there a. Was there a second question that I didn't touch on there?
Janet Lee (Equity Analyst at TD Cowan)
No. Yeah, it was on paa.
Anthony Elian (Equity Analyst at JP Morgan)
Thank you. And our next question comes from Anthony Elian of JP Morgan. Your line is open.
Ivan
Hi everyone. Ivan, you saw deposits contract in 1Q as expected. But can you give us some color on what you expect for 2Q deposits? The magnitude of the headwind you expect from tax payments here in April? Yeah, I'll start and then Chris can jump in if he wants to correct anything here. But generally what we see is that deposit contraction begins happening in kind of the latter part of Q4, which is what we saw and disclosed in our Q4 results late last year, kind of as we enter the holiday season from a balance sheet perspective. I talked earlier about the ending versus average nuances on wholesale funding. And that Q4 contraction that we talked about last quarter resulted in about $500 million of draws in the latter days of December. And then generally, obviously, as we go through tax season here in April, we kind of reach a low point kind of in the mid to late April timeframe, and then return to a rebound through May and through June. So, you know, Q1 being one of our historically weaker seasonal quarters, Q2 being a bit of a mixed bag. So you have kind of a V pattern in terms of how that goes. And so. And then Q3 and Q4, you know, Q3 being strong and Q4 like I talked about. So that's generally how we think about the seasonal deposit flows.
Anthony Elian (Equity Analyst at JP Morgan)
Thank you. And then slide 17 on the ACL. Does this 1% feel like a good level? Just Given your earlier comments that you expect stable loan balances for the rest of this year. Thank you.
Ivan
Yeah, I think I mentioned a few things earlier. You know, I feel very comfortable with 1% allowance on loans. You'll note on the right side there that as you factor in the credit discount on acquired components for up to almost 1.3%, you know, we looked at that from every which way and feel very well reserved for the level of risk that's in our portfolio and the macroeconomic outlook going forward.
OPERATOR
Thank you. And our next question comes from Samuel Varga of ubs. Your line is open.
Samuel Varga (Equity Analyst at UBS)
Good afternoon. I just wanted to turn back to loan growth for one more question. If we look at the payoffs on the traditional sort of relationship oriented portfolio, the payoffs still seem relatively elevated after 3Q 4Q and L1Q as well. Just curious, as we sort of look into conceptual, into 2027, do you need to see these payoffs moderate to start producing loan growth or do you think that the production volume on its own is able to push balances higher without the payoffs moderating? Thank you.
Tori
Samuel, this is Tory. I'll start. I think Ivan, probably chime in a bit. You know, I think payoffs, pay downs, the typical flow within the commercial loan book is about where it would normally land. And we had production on the CNI side that far exceeded and outstripped that. So we've got some, I think, nice CNI growth for this quarter. Feel really good about the pipeline and the CNI growth in Q2 and beyond through 2026. And then in 2027 we got a lot of great momentum going on in the company. You know, the payoffs on the real estate side. Much of that is, I think, as we talked about is just transactional, transactional loans that we're just letting go out the door because, you know, they're not going to be a relationship in the company. You know, for those that are transactions that we feel like we can bring in deposits and bring in core operating accounts and make them relationships. And we are doing that. So I think we're kind of on pace of where we are at this point. And then you'll probably see in 27 and 28 you see less of the transactional runoff but continued growth on the production side.
Ivan
And from my seat, one area that we remain laser focused is on that transactional portfolio. We've been talking about it for several quarters in a row. And as you'll see in the disclosure back on page 24, we've got nearly $3 billion of transactional loans that are sitting there that are priced in the mid 4% range that will either mature or hit a repricing date over the next 12 months. And then the volume of that begins to slow down meaningfully as you get into the latter part, call it mid-2027. So that's where I think you've got the potential for an elevated level of prepayment volumes as those loans come back into the market at rates that are markedly different than the ones that they've been enjoying for the last several years. So there is that potential there whether or not we fully replace 100% of that volume. However, we're very confident in our ability to drive positive operating leverage and continue to drive growth in top line revenues. As Clint alluded to and mentioned earlier, we don't need to see net loan growth or balance sheet growth to drive positive operating leverage. And so that's one of the positive dynamics that we have is the optionality that that affords us. Plan A, replace it with core relationship based loan volume. But if we don't fully replace it, we've got opportunity to continue to optimize our funding stack as well and that as well will be accretive to net interest margin. So we feel very positively about driving positive operating leverage going forward.
Samuel Varga (Equity Analyst at UBS)
Great, thanks for that. And just a quick follow up. Do you happen to have the retention number on the transactional loans that came due this quarter and stayed on balance sheet?
Tori
I don't have the number in front of us. I would say that with rates being elevated we're having a lot of success in those that are going from fixed to floating and retaining them at this point at a reprice which is very positive for the bank but also with generating some deposits and operating accounts from those transactional loans and making them full relationship customers of the bank. So a lot of good things happening.
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