Q3 2025 Webster Financial Corp Earnings Call

Speaker #3: Good morning, welcome to the third quarter 2025 Webster Financial Corp earnings call. Please note, this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon, to introduce the call.

Emlen Harmon: Good morning. Welcome to the third quarter 2025 Webster Financial Corporation earnings call. Please note this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon, to introduce the call. Mr. Harmon, please go ahead.

Speaker #3: Mr. Harmon, please go ahead.

Speaker #4: Good morning. Before we begin our remarks, I want to remind you that comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Luis Massiani: Good morning. Before we begin our remarks, I want to remind you that comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. The presentation accompanying management's remarks can be found on the company's investor relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I'll now turn the call over to Webster Financial CEO John Ciulla.

Speaker #4: And our subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us.

Speaker #4: The presentation accompanying management's remarks can be found on the company's investor relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue.

Speaker #4: I'll now turn the call over to Webster Financial CEO, John Ciulla.

Speaker #5: Thanks, Emlen. Good morning and welcome to Webster Financial Corp.'s third quarter 2025 earnings call. We appreciate you joining us this morning. I'm going to start with a recap of our results.

John Ciulla: Thanks, Emlen. Good morning and welcome to Webster Financial Corporation's third quarter 2025 earnings call. We appreciate you joining us this morning. I'm going to start with a recap of our results. Our President and Chief Operating Officer, Luis Massiani, is going to provide an update on developments in our operating segments, and our CFO, Neil Holland, will provide additional detail on financials before my closing remarks and Q&A. Highlights for the third quarter are provided on slide two of our earnings presentation. Our results were strong, with a return on tangible common equity of 18%, ROA of nearly 1.3%, and growth in both loans and deposits of over 2% linked quarter. Overall revenue grew 2.3% over the prior quarter. In aggregate, Webster's results this quarter reflect how our strategic position fuels our performance, including diverse balance sheet growth while maintaining substantial liquidity and conservative credit positioning.

Speaker #5: Our President and Chief Operating Officer, Luis Massiani, is going to provide an update on developments in our operating segments. Our CFO, Neil Holland, will provide additional detail on financials before my closing remarks and Q&A.

Speaker #5: Highlights for the third quarter are provided on slide two of our earnings presentation. Our results were strong, with a return on tangible common equity of 18%, ROA of nearly 1.3%, and growth in both loans and deposits of over 2% linked quarter.

Speaker #5: Overall revenue grew 2.3% over the prior quarter. In aggregate, Webster's results this quarter reflect how our strategic position fuels our performance, including diverse balance sheet growth while maintaining substantial liquidity and conservative credit positioning.

Speaker #5: Robust, profitability is supported by a unique business mix, and capital generation that supplements organic earnings growth opportunities. More specifically, loan growth was driven by a diversity of categories, with all of our portfolios increasing this quarter.

John Ciulla: Robust profitability is supported by a unique business mix and capital generation that supplements organic earnings growth opportunities. More specifically, loan growth was driven by a diversity of categories, with all of our portfolios increasing this quarter. Deposit growth was also diverse as we grew the commercial and healthcare financial services books, in addition to regular seasonal growth in our public funds business. Webster's capital generation is a distinct strategic advantage. We repurchased 2.2 million shares, or 1.4% of the outstanding shares, at the end of the second quarter. At the same time, tangible book value grew 3.7% over the prior quarter. We continue to see the inflection point in asset quality that we projected at the onset of the year. Importantly, criticized loans were down over 7%, with non-accrual loans essentially flat.

Speaker #5: Deposit growth was also diverse, as we grew the commercial and healthcare financial services books, in addition to regular seasonal growth in our public funds business.

Speaker #5: Webster's capital generation is a distinct strategic advantage. We repurchased $2.2 million shares or $1.4% of the outstanding shares at the end of the second quarter.

Speaker #5: At the same time, tangible book value grew 3.7% over the prior quarter. We continue to see the inflection point in asset quality that we projected at the onset of the year.

Speaker #5: Importantly, criticized loans were down over 7%, with non-accrual loans essentially flat. Charge-offs of 28 basis points remain near the bottom of our anticipated normalized range of 25 to 35 basis points, and our provision of $44 million is down modestly from last quarter.

John Ciulla: Charge-offs of 28 basis points remain near the bottom of our anticipated normalized range of 25 to 35 basis points, and our provision of $44 million is down modestly from last quarter, even as we built slightly more conservative macroeconomic scenarios into our loan loss reserve modeling. As we look to the future, despite recent market volatility, macro tailwinds for the banking industry are building, and we are in a good position to benefit. Loan growth remains solid, and we are seeing opportunities to originate assets with appealing risk-reward characteristics as we did this quarter. As always, we point to the diversity of our deposit generation on slide three, which is a key factor supporting the balance sheet as activity accelerates. We continue to see indications of a more appropriate regulatory tailoring, which should, over time, allow us to allocate resources towards activity-appropriate risk management practices.

Speaker #5: Even as we built slightly more conservative macroeconomic scenarios into our loan loss reserve modeling. As we look to the future, despite recent market volatility, macro tailwinds for the banking industry are building, and we are in a good position to benefit.

Speaker #5: Loan growth remains solid, and we are seeing opportunities to originate assets with appealing risk-reward characteristics, as we did this quarter. As always, we point to the diversity of our deposit generation on slide three, which is a key factor supporting the balance sheet as activity accelerates.

Speaker #5: We continue to see indications of a more appropriate regulatory tailoring, which should, over time, allow us to allocate resources towards activity-appropriate risk management practices.

Speaker #5: While we remain vigilant, tariffs and labor market uncertainty are not significantly impacting the credit performance of our loan portfolio, and we are not seeing pockets of correlated credit risk emerging.

John Ciulla: While we remain vigilant, tariffs and labor market uncertainty are not significantly impacting the credit performance of our loan portfolio, and we are not seeing pockets of correlated credit risk emerging. We'll also stay on our front foot in terms of business development opportunities for our existing segments. I'll now turn it over to Luis to review developments in our operating segments this quarter, including an update on Commercial Banking activity, the Affordable Care Act opportunity for HSA Bank, and our private credit joint venture with Marathon Asset Management.

Speaker #5: We'll also stay on our front foot in terms of business development opportunities for our existing segments. I'll now turn it over to Luis to review developments in our operating segments this quarter, including an update on commercial banking activity, the Affordable Care Act opportunity for HSA Bank, and our credit joint venture with Marathon.

Speaker #4: Thanks, John. On our business lines, activity was positive in Q3. Clients have proven to be resilient, have gained a better understanding of the potential impact from tariffs, and have continued with their business investment plans.

Luis Massiani: Thanks, John. On our business lines, activity was positive in Q3. Clients have proven to be resilient, have gained a better understanding of the potential impact from tariffs, and have continued with their business investment plans. We referenced strong commercial lending pipeline activity in our Q2 call, which came through in the third quarter with growth at the higher end of our outlook range, with all major lending categories in commercial and consumer contributing. We also saw a nice pickup in loan-related fees as capital markets businesses were more active. Our diversified deposit businesses continue to perform well, with Ametros posting strong new account growth and record volume in lifetime deposit case value added. We also delivered significant growth in deposits in commercial, public sector, and business banking, funding our loan growth with deposits, which has allowed us to maintain a strong liquidity profile.

Speaker #4: We referenced strong commercial lending pipeline activity in our Q2 call, which came through in the third quarter with growth at the higher end of our outlook range, with all major lending categories and commercial and consumer contributing.

Speaker #4: We also saw a nice pickup in loan-related fees, as capital markets businesses were more active. Our diversified deposit businesses continue to perform well, with a mutuals als posting strong new account growth and record volume in lifetime deposit case value added.

Speaker #4: We also delivered significant growth in deposits in Intersync, commercial, public sector, and business banking, funding our loan growth with deposits. This has allowed us to maintain our strong liquidity profile.

Speaker #4: Our private credit joint venture with Marathon Asset Management is now fully operational, and we're working through a significant pipeline of potential lending opportunities. Early returns are positive, with good alignment between our two organizations on operations, risk appetite, and good referral activity on loan deposit and fee opportunities.

Luis Massiani: Our private credit joint venture with Marathon Asset Management is now fully operational, and we're working through a significant pipeline of potential lending opportunities. Early returns are positive, with good alignment between our two organizations on operations, risk appetite, and good referral activity on loan, deposit, and fee opportunities. The JV is working as intended and has expanded our ability to offer more lending solutions to our existing sponsors' client base. At HSA Bank, new legislation continues to support an increase in the addressable market for HSA accounts. As discussed last quarter, the original bill that passed in July enacts HSA eligibility for bronze and catastrophic Affordable Care Act healthcare plans beginning in 2026.

Speaker #4: The JV is working as intended and has expanded our ability to offer more lending solutions to our existing sponsors' client base. At HSA Bank, new legislation continues to support an increase in the addressable market for HSA accounts.

Speaker #4: As discussed last quarter, the original bill that passed in July enacts HSA eligibility for bonds and catastrophic Affordable Care Act healthcare plans beginning in 2026.

Speaker #4: Our assessment of the original legislation was that the change would increase the addressable market for HSAs by 7 million customers and drive $1 billion to $2.5 billion in incremental deposit growth at HSA Bank over the next five years.

Luis Massiani: Our assessment of the original legislation was that the change would increase the addressable market for HSAs by 7 million customers and drive $1 billion to $2.5 billion in incremental deposit growth at HSA Bank over the next five years. In September, the Center for Medicare and Medicaid Services clarified that new HSA eligibility for bronze and catastrophic plans was more expansive than originally thought, which would further increase enrollment eligibility in the addressable market. We're working through quantifying the potential impact on account deposit growth. We are investing in our existing mobile and web enrollment systems to best serve ACA participants ahead of the annual planned enrollment period, which will begin in November. These refinements will streamline and optimize the enrollment process and help us better capitalize on this growth opportunity. I'll turn it over to Neil.

Speaker #4: In September, the Center for Medicare and Medicaid Services clarified that new HSA eligibility for bonds and catastrophic plans was more expansive than originally thought.

Speaker #4: Which would further increase enrollment eligibility in the addressable market. We're working through quantifying the potential impact on account deposit growth. We are investing in our existing mobile and web enrollment systems to best serve ACA participants ahead of the annual plan enrollment period, which will begin in November.

Speaker #4: These refinements will streamline and optimize the enrollment process and help us better capitalize on this growth opportunity. I'll turn it over to Neil.

Speaker #6: Thanks, Luis, and good morning, everyone. I'll start on slide four with a review of our balance sheet. Total assets were $83 billion at period end, as both loans and deposits were up over 2% this quarter.

Neil Holland: Thanks, Luis, and good morning, everyone. I'll start on slide four with a review of our balance sheet. Total assets were $83 billion at period end, as both loans and deposits were up over 2% this quarter. We continue to operate from an advantageous capital position, where ratios increased modestly despite the fact that we repurchased 2.2 million shares this quarter. Loan trends are highlighted on slide five. In total, loans were up $1.4 billion, or 2.6%. Every loan category grew, including a pickup in commercial real estate, which has the potential to be a contributor to growth going forward. We provide additional details on deposits on slide six. Public funds were up $1.2 billion seasonally, though we saw growth in the commercial and healthcare financial services businesses as well. Deposit costs were up 3 basis points over the prior quarter. Income statement trends are on slide seven.

Speaker #6: We continue to operate from an advantageous capital position, where ratios increased modestly despite the fact that we repurchased $2.2 million shares this quarter. Loan trends are highlighted on Slide Five.

Speaker #6: In total, loans were up 1.4 billion, or 2.6%. Every loan category grew, including a pickup in commercial real estate, which has the potential to be a contributor to growth going forward.

Speaker #6: We provide additional details on deposits on slide six. Public funds were up $1.2 billion seasonally, though we saw growth in the commercial and healthcare financial services businesses as well.

Speaker #6: Deposit costs were up three basis points over the prior quarter. Income statement trends are on slide seven. Overall, we saw a positive trend on PP&R, up $5.8 million over the prior quarter.

Neil Holland: Overall, we saw a positive trend on PP&R, up $5.8 million over the prior quarter. The provision was $44 million, down $2.5 million from the last quarter. Net income of $261 million is up from $259 million in the prior quarter, and EPS grew to $1.54 from $1.52 in the prior quarter. Our tax rate increased to 21.3%, consistent with our outlook for the back half of the year. On slide eight, we highlight net interest income, which increased $10 million, driven by balance sheet growth and the higher day count quarter over quarter. This was partially offset by a decline in NIM. The net interest margin was down 4 basis points from the prior quarter to 3.4%. Recall, there was a discrete benefit from a non-accrual reversal that added 2 basis points to NIM in the second quarter. The trend in the quarter also reflects some organic spread compression.

Speaker #6: The provision was $44 million, down $2.5 million from the last quarter. Net income of $261 million is up from $259 million in the prior quarter, and EPS grew to $1.54 from $1.52 in the prior quarter.

Speaker #6: Our tax rate increased to 21.3%, consistent with our outlook for the back half of the year. On slide eight, we highlight net interest income, which increased by $10 million, driven by balance sheet growth and the higher day count quarter over quarter.

Speaker #6: This was partially offset by a decline in NIM. The net interest margin was down four basis points from the prior quarter to 3.4%. Recall, there was a discrete benefit from a non-accrual reversal that added two basis points to NIM in Q2.

Speaker #6: The trend in the quarter also reflects some organic spread compression. Slide nine illustrates our net interest income sensitivity to rates. We remain fairly neutral to interest rates on the short end of the curve, with a slightly greater impact on our NII from down rate shock scenarios.

Neil Holland: Slide nine illustrates our net interest income sensitivity to rates. We remain fairly neutral to interest rates on the short end of the curve, with a slightly greater impact to our NII from down rate shock scenarios. On slide 10 is non-interest income. Non-interest income was $101 million, up $6 million over the prior quarter. We had a modest increase in swap fee income, and we also realized a positive legal settlement of $4 million. Slide 11 has non-interest expense. We reported expenses of $357 million, up $11 million linked quarter. The largest driver of this change was an $8 million increase in incentive accruals, reflective of performance of the bank in the quarter and year to date. Slide 12 details components of our allowance for credit losses, which was up $6 million relative to the prior quarter.

Speaker #6: On slide ten is non-interest income. Non-interest income was $101 million, up $6 million over the prior quarter. We had a modest increase in swap fee income, and we also realized a positive legal settlement of $4 million.

Speaker #6: Slide 11 has non-interest expense. We reported expenses of $357 million, up $11 million from the linked quarter. The largest driver of this change was an $8 million increase in incentive accruals, reflective of the performance of the bank in the quarter and year to date.

Speaker #6: Slide 12 details components of our allowance for credit losses, which was up $6 million relative to the prior quarter. The largest portion of this increase was tied to balance sheet growth, as the positive asset quality trends we realized last quarter continued.

Neil Holland: The largest portion of this increase was tied to balance sheet growth, as the positive asset quality trends we realized last quarter continued. Our CECL macroeconomic projections are slightly worse this quarter. Slide 13 highlights our key asset quality metrics. Charge-offs of 28 bps were consistent with last quarter. Our commercial classified ratio declined 10 bps from the prior quarter, and non-performing loan ratio was down 1 bp. Turning to slide 14, our capital ratios remain above well-capitalized levels, and we maintain excess capital to our publicly stated targets. Our tangible book value per share increased to $36.42 from $35.13, with net income and improvement in AOCI partially offset by shareholder capital return. I will wrap up my comments on slide 15 with our outlook for the fourth quarter. We're expecting net interest income to be effectively flat to the third quarter.

Speaker #6: Our Cecil macroeconomic projections are slightly worse this quarter. Slide 13 highlights our key asset quality metrics. Charge-offs of 28 basis points were consistent with last quarter.

Speaker #6: Our commercial classified ratio declined 10 basis points from the prior quarter, and the non-performing loan ratio was down one basis point. Turning to slide 14, our capital ratios remain above well-capitalized levels, and we maintain excess capital above our publicly stated targets.

Speaker #6: Our tangible book value per share increased to $36 and 42 cents, from $35 and 13 cents. With net income and improvement in AOCI, partially offset by shareholder capital return.

Speaker #6: I will wrap up my comments on slide 15 with our outlook for the fourth quarter. We're expecting net interest income to be effectively flat to the third quarter.

Speaker #6: Balance sheet growth will be offset by lower quarterly NIM. Underlying this assumption, we anticipate seasonal outflows of deposits. We will also have higher debt costs in the quarter until we redeem the subordinate notes due in 2029 and 2030, which we intend to do this quarter, subject to market conditions.

Neil Holland: Balance sheet growth will be offset by lower quarterly NIM. Underlying this assumption, we anticipate seasonal outflows of deposits. We will also have higher debt costs in the quarter until we redeem the subordinated notes due in 2029 and 2030, which we intend to do this quarter subject to market conditions. Fees are likely to step back a bit without the benefit of another legal settlement. The roughly 1% decline in deposits is an effect of lower public funds on a seasonal basis. Excluding this, we would expect to grow deposits by roughly 1% this quarter. On a full-year basis, relative to the outlook we provided in January, we'll be above the range on loan growth, at the top end of our NII guidance, and a bit higher than the midpoint on fees and expenses. With that, I'll turn it back to John for closing remarks.

Speaker #6: These are likely to step back a bit without the benefit of another legal settlement. The roughly 1% decline in deposits is an effect of lower public funds on a seasonal basis.

Speaker #6: Excluding this, we would expect to grow deposits by roughly 1% this quarter. On a full-year basis, relative to the outlook we provided in January, we'll be above the range on loan growth at the top end of our NII guidance and a bit higher than the midpoint on fees and expenses.

Speaker #6: With that, I'll turn it back to John for closing remarks.

Speaker #5: Thanks, Neil. This past week, Webster celebrated its 90th anniversary of its founding as the first federal savings and loan association of Waterbury in 1935. Originally founded by Harold Webster Smith with $25,000, he borrowed from friends and family to help people build and buy their homes.

John Ciulla: Thanks, Neil. This past week, Webster celebrated its 90th anniversary of its founding as First Federal Savings and Loan Association of Waterbury in 1935. Originally founded by Harold Webster Smith with $25,000 he borrowed from friends and family to help people build and buy their homes amidst the Great Depression, First Federal, now Webster, has grown to one of the country's largest commercial banks, offering sophisticated financial products to diverse client segments. The bank's sustained success is the result of a consistent commitment to doing what's right for our colleagues, clients, and the communities we serve. Webster's strong and consistent results this quarter echo the bank's performance since its founding. I'd like to thank all of these parties and our other various business partners for helping to grow Webster into the institution it is today.

Speaker #5: Amidst the Great Depression, first federal, now Webster, has grown to be one of the country's largest commercial banks, offering sophisticated financial products to diverse client segments.

Speaker #5: The bank sustained success as a result of a consistent commitment to doing what's right for our colleagues, clients, and the communities we serve. Webster's strong and consistent results this quarter echo the bank's performance since its founding.

Speaker #5: I'd like to thank all of these parties and our other various business partners for helping to grow Webster into the institution it is today.

Speaker #5: Our performance this quarter, this year, and over Webster's history is a true team effort, and we're proud to drive consistent and comprehensive positive outcomes.

John Ciulla: Our performance this quarter, this year, and over Webster's history is a true team effort, and we're proud to drive consistent and comprehensive positive outcomes. Thank you for joining our call today. Operator, we'll take questions.

Speaker #5: Thank you for joining our call today, operator. We'll take questions.

Speaker #3: Thank you. If you would like to ask a question, please press *1 on your telephone keypad. If you would like to withdraw your question, simply press *1 again.

Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Again, we ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from Jared Shaw of Barclays. Your line is open.

Speaker #3: Again, we ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from Jared Shaw of Barclays.

Speaker #3: Your line is open.

Speaker #7: Good Good morning, everybody.

[Analyst 1]: Good morning, everybody.

Speaker #8: Hey, Jared.

John Ciulla: Hey, Jared.

Speaker #7: Maybe just starting with the Marathon partnership, if you can give any detail on early success there and is that reflected in sort of the optimism for growth in 2025? And I guess how should we think about that in 2026?

[Analyst 1]: Maybe just starting with the Marathon partnership, if you can give any detail on early success there, and is that reflected in sort of the optimism for growth in 2025, and I guess how should we think about that in 2026?

Speaker #4: yeah, Jared, this is Luis. so, so far so good, is that what we characterize it? We have, you know, started, you know, building a nice pipeline of business, of business there.

Luis Massiani: Yeah, Jared, this is Luis. So far, so good, as how we characterize it. We have started building a nice pipeline of business there. Annually, we do weekly calls and meetings of the investment committee to actively review transactions. We've started approving transactions. We've started originating transactions and placing them into the joint venture. From the perspective of what we thought it was going to allow us to do, which is being able to offer an expanded product set to our diverse universe of sponsor clients, it's essentially achieving exactly that, which is great.

Speaker #4: Annual, you know, weekly, you know, calls and meetings of our investment committee to actively review, you know, transactions. We started approving transactions, we started originating transactions, and, and, and placing them into the joint venture.

Speaker #4: So, from the perspective of what we thought it was going to allow us to do, which is being able to offer an expanded product set to our diverse universe of sponsor clients, it's essentially achieving exactly that, which is great.

Speaker #4: And so long-term, we feel that the, the prospects for what we're trying to do there are good, which is we're going to be able to offer more and that's going to result in both transactions for the JV as well as opportunities for, for on-balance sheet business, which, you know, you haven't seen the impact of that much because it's still early stages, but as we move into 2026, we think that that's going to be a good, it's going to allow us to, to, you know, expand, you know, an expanded product offering, which should reflect in some on-balance sheet business as well and other types of opportunities with deposits, fees, capital markets, business also.

Luis Massiani: Long term, we feel that the prospects for what we're trying to do there are good, which is we're going to be able to offer more, and that's going to result in both transactions for the JV as well as opportunities for on-balance sheet business, which you haven't seen the impact of that much because it's still early stages. As we move into 2026, we think that that's going to be a good, it's going to allow us to expand an expanded product offering, which should reflect in some on-balance sheet business as well as in other types of opportunities with deposits, fees, capital markets business also. So far, so good.

Speaker #4: So, so far so good.

Speaker #7: Okay. All right, great. Thanks for that, thanks for that detail. And then I guess shifting over to the deposit side, you know, Mitros balances are up; InterSync balances are up.

[Analyst 1]: Okay. All right. Great. Thanks for that. Thanks for that detail. I guess shifting over to the deposit side, Ametros balances are up, Intersync balances are up. How should we think about the trajectory of growth over the near and midterm there and the priority of those versus broker deposits?

Speaker #7: How should we think about the trajectory of growth over the near and midterm there, and the priority of those versus broker deposits?

Speaker #4: Yeah, so, as Neil, we continue to do all we can to grow the attractive categories in HSA and a Mitros. Those are great businesses, and we love growth there.

Neil Holland: Yeah. So this is Neil. We continue to do all we can to grow the attractive categories in HSA and Ametros. Those are great businesses, and we love growth there. We have seen strong growth in Intersync this year, and we prefer Intersync balances over broker deposits. You know we pretty much have no cost to originate. The operating costs are more than offset by the fees we earn in that business, and it's 100% beta. In a down environment, it will be an attractive balance for us. We really use broker deposits in Q2 and Q4. We have seasonal inflows of public deposits, which come in, obviously, in Q1 and Q3. As you'll notice, this quarter, we had seasonal inflows of those public deposits. Our broker concentration is down to about 2%. Next quarter, it may jump up to 4%.

Speaker #4: We have seen strong growth in InterSync this year, and we prefer InterSync balances over broker deposits. You know, we pretty much have no cost to originate; the operating costs are more than offset by the fees we earn in that business.

Speaker #4: And it's 100% beta, so in a down environment, we'll be an attractive, balance for us. We, we really use broker deposits to, in Q2 and Q4, we have seasonal inflows of public deposits, which come in obviously in Q1 and Q3, and so as you'll notice, this quarter we had seasonal inflows of those public deposits, so our broker concentration is down to about 2% and, you know, next quarter it may jump up to 4% and then Q1 we'll probably be more back down in that 2% range.

Neil Holland: Q1 will probably be more back down in that 2% range. We really use broker deposits to offset those swings in our public deposits.

Speaker #4: So we really use broker deposits to offset those swings in our public deposits.

Speaker #7: Okay, thank you.

[Analyst 1]: Okay, thank you.

Speaker #8: Thanks, Jared.

John Ciulla: Thanks, Jared.

Speaker #3: Your next question comes from Mark Fitzgibbon with Piper Sandler. Your line is open.

Operator: Your next question comes from Mark Fitzgibbon with Piper Sandler. Your line is open.

Speaker #5: Hey, guys, good morning.

[Analyst 2]: Hey, guys. Good morning.

Speaker #4: Mark, good morning.

John Ciulla: Mark, good morning.

Speaker #5: there's been a lot of talk, John, this past week about the private credit space, and so I wondered if you could share with us any details on sort of what sort of lending exposure you have, you have to the private credit industry.

[Analyst 2]: There's been a lot of talk, John, this past week about the private credit space. I wondered if you could share with us any details on sort of what sort of lending exposure you have to the private credit industry and maybe any areas that you might be avoiding within that space.

Speaker #5: And, and maybe any areas that you might be avoiding within that space.

Speaker #4: Yeah, Mark, I'll give you an overview of our NDFI exposure. Obviously, everybody's been talking about this a lot; it is a pretty amorphous and large category for us.

John Ciulla: Yeah. Mark, I'll give you an overview. Our NDFI exposure, and obviously, everybody's been talking about this a lot, is a pretty amorphous and large category. For us, it's pretty simple. We've got about $6 billion in what would be characterized as NDFI. 90% of that for us is really in two categories and relatively evenly split. One is fund banking, which everybody understands: lower yielding, lower risk. That's really tied to the LPs fulfilling their commitments to private equity funds, right? There's no operating risk with borrowers. As I think people know, in the history of that product, there's been virtually no losses. The other half for us is in lender finance. It's about $2.6 billion. We've been in that business. We're not newcomers for about 10 years. The way we characterize that business for us is we deal with top-name asset managers with significant AUM and experience.

Speaker #4: It's pretty simple. We've got about $6 billion in what would be characterized as NDFI. Ninety percent of that for us is really in two categories, and relatively evenly split.

Speaker #4: One is fund banking, which everybody understands: lower yielding, lower risk. That's really tied to the LPs fulfilling their commitments to private equity funds, right?

Speaker #4: There's no operating risk with borrowers, and as I think people know, in the history of that product, there's been virtually no losses. The other half for us is in lender finance; it's about $2.6 billion.

Speaker #4: We've been in that business; we're not newcomers for about 10 years. The way we characterize that business for us is that we deal with top-name asset managers with significant AUM and experience. We advance on a pool of loans.

John Ciulla: You know we advance on a pool of loans, effective senior leverage, and attachment point of 2.7 times across the book as we go through that. We have had zero losses, zero classified or non-accrual loans over the 10-year period. I think it's really important for us, and we feel very, very comfortable in this space. Many of them are 20% risk-weighted assets, so significantly lower risk, and they carry a lower yield as well. As we've grown that, that's been in our plan. We feel very comfortable with our NDFI exposure, just given the characteristics and nature and our history in the business. We haven't been exposed to the headline credits that you've seen in the last few days, I guess, mostly. We're very confident that the underwriting we have in there is extremely solid, and we're not in any sort of other esoteric risk classes.

Speaker #4: Effective senior leverage and an attachment point of 2.7 times across the book as we go through that. We have had zero losses, zero classified, or non-accrual loans over the 10-year period.

Speaker #4: And so I think it's really important for us, and we feel very, very comfortable in this space. Many of them are 20% risk-weighted assets, so significantly lower risk, and they carry a lower yield as well.

Speaker #4: And as we've grown that, we've, you know, that's been in our plan. So we feel very comfortable with our NDFI exposure, just given the characteristics and nature and our history in the business.

Speaker #4: So you know, we haven't been exposed to the headline credits that you've seen in the last few days, I guess mostly. But we're very confident that the underwriting we have in there is extremely solid.

Speaker #4: And we're not in any sort of other esoteric risk classes.

Speaker #5: Okay, great. And then just to follow up, kind of changing gears a little bit, I know John, you've said in the past that you're not interested right now in doing bank M&A. But I guess I'm curious if the category four threshold is lifted.

[Analyst 2]: Okay. Great. Just to follow up, kind of changing gears a little bit, I know, John, you've said in the past that you're not interested right now in doing bank M&A, but I guess I'm curious if the category four threshold is lifted. Given that the regulatory environment's so welcoming these days of bank M&A, why not sort of push that to the front of the line in terms of priorities?

Speaker #5: And given that, you know, the regulatory environment is so welcoming these days for bank M&A, why not sort of push that to the front of the line in terms of priorities?

Speaker #4: Yeah, Mark, we're, we're, we are going to be consistent with what we did, what we've said many times. I don't think the lifting of the category four hurdle changes our outlook, right?

John Ciulla: Yeah, Mark, we are going to be consistent with what we've said many times. I don't think the lifting of the category four hurdle changes our outlook, right? It could benefit us from an expense perspective and let us focus on competing and growing our business lines instead of necessarily building out other regulatory-mandated infrastructure. As it relates to M&A, you know we have said, and we continue to believe that it would be highly, highly unlikely for you to see us acquire a whole bank over the short or medium term, given our momentum and given what we think we can create and given the risk of getting involved in M&A on an offensive basis. We continue to look at smaller healthcare-related acquisitions that wouldn't dilute tangible book value significantly and could add to our fee and deposit-generating capabilities.

Speaker #4: It could benefit us from an expense perspective and let us focus on competing and growing our business lines instead of necessarily building out other regulatory-mandated infrastructure.

Speaker #4: But as it relates to M&A, you know, we have said, and we continue to believe that it would be highly, highly unlikely for you to see us acquire a whole bank over the short or medium term, given our momentum and given what we think we can create, and given the risk of getting involved in M&A on an offensive basis.

Speaker #4: We continue to look at, you know, smaller healthcare-related acquisitions that, you know, wouldn't dilute tangible book value significantly. And could add to our fee and deposit generating capabilities, but as it relates to whole bank M&A, we're not interested in participating at the current time.

John Ciulla: As it relates to whole bank M&A, we're not interested in participating at the current time.

Speaker #5: Thank you.

[Analyst 2]: Thank you.

Speaker #3: Your next question comes from Chris McGratty with KBW. Your line is open.

Operator: Your next question comes from Chris McGraty with KBW. Your line is open.

Speaker #9: Hey, how's it going? This is Andrew Leisheron for Chris. Just on.

[Analyst 3]: Hey, how's it going? This is Andrew Leisher on for Chris.

Speaker #8: Good morning.

[Analyst 1]: Good morning.

Speaker #9: A morning. Just on the loan growth, looks like the Q4 guide is back around where you've been after the strong quarter this past quarter.

[Analyst 3]: On the loan growth, it looks like the Q4 guide is back around where you've been after the strong quarter this past quarter. Can you speak in a little bit more detail about current pipelines and then how we should be thinking about the loan growth outlook going into 2026? Thanks.

Speaker #9: Can you speak in a little bit more detail about current pipelines and then how we should be thinking about the loan growth outlook going into 2026?

Speaker #9: Thanks.

Speaker #8: Yeah, I think our pipelines are continuing to be relatively robust. We talked about a big pipeline heading into the third quarter, and you saw us pull through.

John Ciulla: Yeah, I think our pipelines are continuing to be relatively robust. We talked about a big pipeline heading into the third quarter, and you saw us pull through. I think our view on the fourth quarter is that we anticipate, as normally happens in the fourth quarter, maybe a higher level of prepayments. I think our view of looking at a relatively solid pipeline, our pull-through rates, and year-end prepays and payoffs, that's why you see us not going with the same level of third-quarter loan growth. We could outperform that if payoffs don't come through and we continue to originate. I'd say we feel really good about our pipelines.

Speaker #8: I think our view on the fourth quarter is that we anticipate, you know, as normally happens in the fourth quarter, maybe a higher level of prepayments. And so I think our view of looking at a relatively solid pipeline, our pull-through rates, and year-end prepays and payoffs is why you see us not going with the same level of third quarter loan growth.

Speaker #8: We could outperform that, you know, if payoffs don't come through and we continue to originate. But I'd say we feel really good about our pipelines.

Speaker #8: We're also, I think, really getting narrowly focused on capital allocation and trying to make sure that our risk-return profiles on the loans we're originating work. We're, you know, wanting to continue to grow core CNI categories as we move forward.

John Ciulla: We're also, I think, really getting narrowly focused on capital allocation and trying to make sure that our risk return profiles on the loans we're originating work, and we're wanting to continue to grow core CNI categories as we move forward. Kind of business mix, what we believe in payoffs, and a pretty solid and robust pipeline will lead us to good, solid growth in the fourth quarter. We just don't anticipate it being as strong as in the third quarter.

Speaker #8: So, kind of business mix, what we believe in, payoffs and a pretty solid and robust pipeline will lead us to good solid growth in the fourth quarter.

Speaker #8: We just don't anticipate it being as strong as in the third quarter.

Speaker #9: Okay, great. Thank you. And then just one follow-up. Given that CEC1 is still above your near-term target, at 11.4, how should we be thinking about the pace of buybacks going forward?

[Analyst 3]: Okay. Great. Thank you. Just one follow-up. Just given that CET1 is still above your near-term target at 11.4%, how should we be thinking about the pace of buybacks going forward? Thanks.

Speaker #9: Thanks.

Speaker #8: Yeah, I think I'm going to give you the boring answer that we always do. You know, we're looking to deploy capital into loan growth.

John Ciulla: Yeah, I think I'm going to give you the boring answer that we always do. You know we're looking to deploy capital into loan growth. We're looking at potentially some strategic, you know, small, smaller inorganic growth with respect to our healthcare vertical on fees and deposit growth capabilities. If we don't have robust loan growth and we don't have opportunities to deploy capital in the aforementioned healthcare space, I think then you'll see us look at returning capital to shareholders. Obviously, we also take into consideration volatility in the market and where credit's trending as well. You'll continue to see us buy back shares, and the pace of that will be dependent on what I mentioned earlier in terms of other priorities for capital use.

Speaker #8: We're looking at potentially some strategic, you know, smaller inorganic growth with respect to our healthcare vertical on fees and deposit growth capabilities.

Speaker #8: If we don't have robust loan growth and we don't have opportunities to deploy capital in the aforementioned healthcare space, I think then you'll see us look at returning share capital to shareholders.

Speaker #8: Obviously, we also take into consideration volatility in the market and where credit is trending as well. You'll continue to see us buy back shares, and the pace of that will be dependent on what I mentioned earlier in terms of other priorities for capital use.

Speaker #9: Okay, great. Thank you.

[Analyst 3]: Okay. Great. Thank you.

Speaker #8: Thank you.

John Ciulla: Thank you.

Speaker #3: The next question comes from Matthew Breest with Steven Zink. Your line is open.

Operator: The next question comes from Matthew Brees with Stephens Inc. Your line is open.

Speaker #9: Hey, good morning.

[Analyst 1]: Hey, good morning.

Speaker #5: Hey, Matt. The first one's kind of a two-parter. You had mentioned in the release and in your opening remarks that, you know, tighter loan spreads.

John Ciulla: Hey, Matt.

[Analyst 1]: The first one's kind of a two-parter. You had mentioned in the release and in your opening remarks that tighter loan spreads on new loans were a driver of NIM compression. I was hoping you could talk a little bit about that, what new spreads are, and with the five-year down a bit, what new commercial real estate yields are today. The other thing I wanted to hone in on was commercial loan yields for the presentation. We're at 6.41%. Down a healthy 15 basis points quarter over quarter, but so far was relatively flat. I was curious why such a pronounced drop in commercial loan yields as well.

Speaker #5: On new loans, we're a driver of NIM compression, and so I was hoping you could talk a little bit about that. What are the new spreads, and with the five-year down a bit, what are the new commercial real estate yields today?

Speaker #5: And then the other thing I wanted to hone in on was commercial loan yield for the presentation. We're at 6.41%, which is down a healthy 15 basis points quarter over quarter, but so far has been relatively flat.

Speaker #5: And so I was curious why such a pronounced drop in commercial loan yields as well.

Speaker #8: Yeah, I'll let Neil give you specific numbers, but I think we've had a continued trend line of onboarding higher quality credits. If you look at the weighted average risk rating on originations over the past several quarters compared to what's in the existing book.

John Ciulla: Yeah, I'll let Neil give you specific numbers. I think you know we've had a continued trend line of onboarding higher quality credits. If you look at sort of weighted average risk rating on originations over the past several quarters compared to what's in the existing book, there's a significant positive delta there. I think part of it, Matt, is risk selection. Part of it is credit spread compression. The markets, there are tighter credit spreads on high-quality commercial real estate deals and other areas. I would say it's a combination of mix and tighter spreads in what we're originating.

Speaker #8: You know, there's a significant positive delta there. So, I think part of it, Matt, is risk selection. Part of it is credit spread compression. You know, the markets have tighter credit spreads on high-quality commercial real estate deals and other areas.

Speaker #8: So I would say it's a combination of mix and tighter spreads in what we're originating. It goes to my earlier point on the previous question that we continue to look, as we move forward, that it's not just loan growth for loan growth's sake, but we want to make sure we're onboarding high-quality loans, but we're also onboarding good solid loan yields so that we can make sure that the NIM's not contracting perpetually over time.

John Ciulla: It goes to my earlier point on the previous question that we continue to look as we move forward that it's not just loan growth for loan growth's sake, but we want to make sure we're onboarding high quality, but we're also onboarding good, solid loan yields so that we can make sure that the NIM's not contracting perpetually over time. I think that would be my answer. I think we're pleased with what we're being able to onboard in terms of full relationship, high-quality commercial real estate and CNI deals, but they are coming in at a lower yield than historically had been the case.

Speaker #8: I think that would be my answer. And, you know, I think we're pleased with what we're being able to onboard in terms of full relationship, high-quality commercial real estate and CNI deals.

Speaker #8: But they are coming in at a lower yield than historically had been the case.

Speaker #4: Yeah, John hit it. CRE, we're seeing some compression just in the market on spreads. And so you're in that low 6% range on originations, on recent originations.

Neil Holland: Yeah, John hit it. CRE, we're seeing some compression just in the market on spreads. You're in that low 6% range on originations, on recent originations. It really is our loan mix in categories, and the risk weighting of what we've originated the last few quarters has been very high quality, which is great from stable long-term credit performance, but it does put some pressure on our NIM. That has been our trend recently on where we're originating and the high-quality assets we've been putting on our books over the last few quarters.

Speaker #4: And then it, it really is our loan mix and categories. The risk weighting of what we've originated the last few quarters has been very high quality.

Speaker #4: Which is great for stable long-term credit performance, but it does put some pressure on our NIM. So that has been our trend recently on where we're originating and the high-quality assets we've been putting on our books over the last few quarters.

Speaker #5: Got it.

Speaker #9: Okay. And then my other one is, you know, John, back to M&A. You know, obviously there's some big bank deals out there.

[Analyst 1]: Got it. Okay. My other one is, you know John, back to M&A. Obviously, there's some big bank deals out there. It seems like the window is open. I do not get the sense that you're a whole bank buyer near-term or medium-term, but I am curious what you think strategic options are on the sale front and how seriously that's considered. I ask because I'm getting that question more and more frequently and would love your thoughts there.

Speaker #9: It seems like the window is open. And I do not get the sense that you're a whole bank buyer near term or medium term, but I am curious what you think strategic options are on the sale front.

Speaker #9: And how seriously that's considered. And I ask because I'm getting that question more and more frequently, and would love your thoughts there.

Speaker #4: Yeah, I mean, it's always a tough one to answer. We're not looking to sell the bank. We're also pragmatic and good fiduciaries with our board, and so obviously if there was an opportunity to become part of a larger bank, we would have to evaluate that.

John Ciulla: Yeah, I mean, it's always a tough one to answer. We're not looking to sell the bank. We're also pragmatic and good fiduciaries with our board. Obviously, if there was an opportunity to become part of a larger bank, we would have to evaluate that. Matt, as I said earlier, I think the whole dialogue around M&A, I understand why the question's there, and there's obviously going to be probably more transactions. We just take kind of a pragmatic fiduciary approach, make sure that we're operating at a high level and continuing to have a good organic path forward. We would have to react, obviously, if there was an opportunity and look at it from a pragmatic perspective. It's not something that you know we're looking for proactively.

Speaker #4: But, but Matt, I, as I said earlier, I think the whole dialogue around M&A—I understand why the question's there, and there's obviously going to be probably more transactions. We just take kind of a pragmatic fiduciary approach, make sure that we're operating at a high level and continuing to have a good organic path forward.

Speaker #4: we would have to react obviously if, if there was an opportunity and look at it from a, a, a pragmatic perspective. But it's, it's not something that you know, we're, we're, we're looking for proactively.

Speaker #9: That's all I had. Thank you.

[Analyst 1]: That's all I had. Thank you.

Speaker #8: Excellent.

John Ciulla: Thanks, Matt.

Speaker #3: The next question comes from Casey Hare with Autonomous Research. Your line is open.

Operator: The next question comes from Casey Hare with Autonomous Research. Your line is open.

Speaker #8: Yeah, great. Thanks. Good morning, everyone. John, wanted to follow up on the NDFI question. you know, fully appreciate the, your answer and that these asset classes are low risk, but some of the others that were that, you know, are in these headlines, you know, where they got blindsided was the double pledging of collateral.

John Ciulla: Yeah, great. Thanks. Good morning, everyone. John, I wanted to follow up on the NDFI question. You know, fully appreciate your answer and that these asset classes are low risk. Some of the others that are in these headlines, where they got blindsided was the double pledging of collateral, which seems like an easy thing to safeguard against. What measures do you have in place to guard against your borrowers double pledging collateral? Yeah, that's a great question, right? It's around how do you protect against fraud. I think it starts with who you do business with. Again, as you know, a former Chief Credit Officer, I probably, to a fault, tell people you can't promise excellent and perfect credit performance.

Speaker #8: so what seems like an easy thing to safeguard against. So what what what counter what measures do you have in place to guard against, you know, your borrowers double pledging, double double pledging collateral?

Speaker #4: Yeah, that's a great question, right? It's around how do you protect against fraud. And I think it starts with who you do business with.

Speaker #4: And again, as you know, as a former Chief Credit Officer, I'm always—probably to a fault—telling people that I can't promise excellent and perfect credit performance.

Speaker #4: But if you think about the fact that what I talked about, you know, Jason Soto, our Chief Credit Risk Officer, is always pushing people away when they want to deal with first-time asset managers and people that, you know, don't have great reputations in this space.

John Ciulla: If you think about the fact that what I talked about, Jason Soto, our Chief Risk Officer, is always pushing people away when they want to deal with first-time asset managers and people that don't have great reputations in the space. It starts with dealing with high-quality, established asset managers and then doing strong quarterly reviews. We've had instances on some of these pools in lender finance when a credit goes bad, the asset manager replaces that poor credit with a performing credit. We're at relatively low LTVs when we lend against it. I think it's a combination of being diligent in the underwriting to start and making sure you're dealing with people who have a track record of transparency and being able to provide great information, underwriting and looking through to the portfolio of loans you're lending against. As I said, we've had 10 years of perfect credit performance.

Speaker #4: And so it starts with dealing with high quality established asset managers. And then doing strong quarterly reviews, you know, we've had instances on some of these pools and lender finance when a credit goes bad, the asset manager replaces that poor credit with a with a performing credit, you know, we're at a at relatively low LTVs when we lend against it.

Speaker #4: So, I think it's a combination of being diligent in the underwriting to start and making sure you're dealing with people who have a track record of transparency and being able to provide great information.

Speaker #4: Underwriting and looking through to the portfolio of loans you're lending against, and as I said, we've had 10 years of perfect credit performance. Well, that continued forever.

John Ciulla: Will that continue forever? We're in the business of taking risk. I can never say never, but I think we do a good job. It's kind of the way I describe KCR, our sponsor book, right? Not all things are created equal. People who get involved in that business, we've been in it for 20 years. You kind of know who operates in the industry. You kind of know who you want to deal with. You make your best guesses and diligence on underwriting and monitoring. So far, so good. I think that's the best I can give you.

Speaker #4: We're in the business of taking risk. I can never say never, but I think we do a good job, and I think it's kind of the way I describe KCR, our sponsor book, right?

Speaker #4: It's not that all things are created equal. People who get involved in this business; we've been in it for 20 years. We kind of know who operates in the industry.

Speaker #4: You kind of know who you want to deal with. You make your best guesses and diligence on underwriting and monitoring, and so far, so good.

Speaker #4: And I think that's the best I can give you.

Speaker #7: Gotcha. Understood. Okay. And then, just apologies if I missed this in comparative remarks, but the outlook for, I mean, the credit quality was stable.

[Analyst 1]: Gotcha. Understood. Okay. Apologies if I missed this in prepared remarks, but the outlook for, I mean, the credit quality was stable. It didn't get worse, which is good, but it didn't show much improvement from NPAs and commercial classified. Just wondering, what's the outlook going forward? Is this expected to cure gradually or kind of run in place? You know, just an outlook on how credit quality cures.

Speaker #7: It didn't get worse, which is good, but it, it, it didn't show much improvement from NPAs and commercial classified. So, just wondering, what's the outlook going forward?

Speaker #7: Is this expected to cure gradually, or kind of run in place? You know, just an outlook on how credit quality cures.

Speaker #4: Yeah, I think it's a great question. And I think, you know, when I talked to Jason, I think we were a bit disappointed to not get more resolution on the non-accruals and classified loans.

John Ciulla: Yeah, I think it's a great question. I think you know when I talked to Jason, I think we were a bit disappointed to not get more resolution on the non-accrual and classifieds. I had mentioned, and we go back, that some of that resolution is a bit sticky, right? We're smart. We know that we want to get those headline numbers down because if people think there's an overhang. We're also looking at economic profit when we look through these things. If we've got a good collateral base and we think that there's not big losses, we're not going to do something stupid economically. I think the key underlying factor of why you heard me not sheepishly but confidently say that we think the inflection point continued is that a lot of this has to do with kind of roll rates, right, and trend lines in risk rating.

Speaker #4: And I had mentioned, and we go back, that some of that resolution is a bit sticky, right? We're smart. We know that we want to get those headline numbers down because if people think there's an overhang.

Speaker #4: But we're also, you know, looking at economic profit when we look through these things. And if we've got a good collateral base, and we think that there are not big losses, we're not going to do something stupid economically.

Speaker #4: I think the key underlying factor of why you heard me not sheepish—sheepishly, but confidently—say that we think the inflection point continued is that a lot of this has to do with kind of roll rates, right?

Speaker #4: And trend lines in risk rating, and that 7% decline in criticized assets, which is, you know, the step before we get to classified and non-accruals, was really important to us. We continue to see in our quarterly reviews an overall improvement in risk rating migration, which portends well.

John Ciulla: That 7% decline in criticized assets, which is the step before we get to classified and non-accruals, was really important to us. We continue to see in our quarterly reviews an overall improvement in risk rating migration, which portends well, absent a credit correction and a recession and other things, it portends well to a lower future inflow of problems. We do see line of sight to resolution on a bunch of those non-accruals and classifieds. For us, we feel like, hey, we'd like to accelerate that. We had line of sight to what we thought was slightly better resolution on some of those. There is no question that from our standpoint, with respect to the level of charge-offs, the risk rating migration trends, and the lower criticized assets, this was another positive step in our credit performance.

Speaker #4: You know, absent a credit correction and a recession, and other things, it portends well to a lower future inflow of problems. We do see line of sight to resolution on a bunch of those non-accruals and classified.

Speaker #4: So for us, we feel like, hey, we'd like to accelerate that. We had line of sight to what we thought was slightly better resolution on some of those, but there's no question that, from our standpoint, with respect to the level of charge-offs, the risk rating migration trends, and the lower criticized assets, that this was another positive step in our credit performance.

Speaker #4: And again, overall, you know, we've been able to continue to post high returns given our active, you know, actual credit costs over the last several quarters.

John Ciulla: Again, overall, we've been able to continue to post high returns given our actual credit costs over the last several quarters. We're feeling good about our credit profile. As I've always mentioned, and I don't want to go on too long, most of our, I should say, a large portion of our classified and non-accrual loans are concentrated in healthcare services and office, right? On two relatively discrete and small portfolios. I think that's why we feel pretty comfortable that credit's trending in the right direction.

Speaker #4: So you know, we're feeling good about our credit profile and, and as I've always mentioned and I don't want to go on too long, but you know, most of our I should say a large portion of our classified and non-accrual loans are concentrated in healthcare services and office, right?

Speaker #4: And so on two relatively discrete and small portfolios. So I think that's why we feel pretty comfortable that credit's trending in the right direction.

Speaker #7: Great. Thank you.

[Analyst 1]: Great, thank you.

Speaker #4: Thank

Speaker #4: you, Casey.

John Ciulla: Thank you, Casey.

Speaker #3: The next question comes from Anthony Ilian with JP Morgan. Your line is open.

Operator: The next question comes from Anthony Ehlien with J.P. Morgan. Your line is open.

Speaker #5: Hi, hi everyone. On credit more broadly, just to follow up, your metrics on slide 13 look really good. I'm curious if, beyond your comments on NDFIs earlier on this call, there are any portfolios you're taking a closer look at today or scrubbing, especially after the recent events.

[Analyst 1]: Hi, everyone. On credit more broadly, just to follow up, your metrics on slide 13 look really good. I'm curious if beyond your comments on NDFI lending earlier on this call, if there are any portfolios you're taking a closer look at today or scrubbing, especially after the recent events.

Speaker #4: Yeah, I mean, I guess I, I guess we're, you know, we think we're proactive. And as I've mentioned several times, we haven't really seen any pockets of correlated risk in, in any either asset class geography, business line of ours.

John Ciulla: Yeah, I mean, I guess we're, you know, we think we're proactive. As I've mentioned several times, we haven't really seen any pockets of correlated risk in any asset class, geography, or business line of ours. Obviously, we looked at auto when we saw this. We've got very small exposure to auto. I think it's like $300 million overall, and that would include any part of the entire ecosystem. That's that. We don't have a specialty team. We're not involved. That's sort of just in our general commercial business. I would say no. You know, we focused on resolving office. We continue to move. It's been a little bit slower the last quarter. Obviously, we're keeping an eye on rent-regulated multifamily because of all the noise around the potential election of the mayor there. We still feel very comfortable with that portfolio.

Speaker #4: Obviously, we looked at auto when we saw this. We've got very small exposure to auto. I think it's like 300 million dollars. overall, and that would include, you know, any, any part of the entire ecosystem and so that's, that we don't have a specialty team.

Speaker #4: We're not involved; that's sort of just in our general commercial business. So I would say no. You know, we focused on re-resolving office; we continue to move.

Speaker #4: It's been a little bit slower the last quarter. You know, obviously we're keeping an eye on rent-regulated multifamily because of all the noise around the potential election of the mayor there.

Speaker #4: We still feel very comfortable with that portfolio. It's extremely granular, and, you know, it's performing well with a good updated debt service coverage ratio.

John Ciulla: It's extremely granular, and it's performing well with a good updated debt service coverage ratio. I don't think there's anything that's high on our radar screen in terms of flashing yellow lights or red lights.

Speaker #4: So, I don't think there's anything that's high on our radar screen in terms of flashing yellow lights or red lights.

Speaker #9: Thank you. And then my follow-up, slide 28 shows that loan originations rose from the prior quarter, and much of that increase came from commercial real estate.

[Analyst 1]: Thank you. My follow-up, slide 28, it looks like loan originations rose from the prior quarter, and much of that came from commercial real estate. I'm curious on the types of commercial real estate loans you originated during the quarter and if this is a good level for commercial real estate originations going forward. Thank you.

Speaker #9: I'm curious about the types of CRE loans you originated during the quarter and if this is a good level for CRE originations going forward.

Speaker #9: Thank you.

Speaker #4: Yeah, sure. That's, you know, a great question. And part of that was, you know, we alluded to the pipeline that was, you know, a little bit softer at the beginning of the year. We started to, and we talked—I think it was in the first quarter earnings call.

Luis Massiani: Yeah, sure. That's a great question. Part of that was, you know, we alluded to the pipeline that was a little bit softer at the beginning of the year. We started to, and we talked, I think it was in the first quarter during this call, that we had started to see that build up in the early part of the second quarter and then throughout the second quarter. Part of how to think about Q3 is that there was some pent-up activity in the pipeline that was fully reflected and came through in Q3. Therefore, the growth was stronger than prior quarters. It was good, diversified, industrial, and kind of multi-asset classes. The mix of the business was great. You know, good structure, relatively good pricing. We were very pleased with the type of originations that we saw. With that said, the pipeline is still in very good shape.

Speaker #4: that we had started to see that build-up in the early part of the second quarter and then throughout the second quarter. And so part of how to think about Q3 is that there was some, you know, pent-up activity in the pipeline that was, you know, fully reflected and came through in Q3.

Speaker #4: And so therefore the growth was, you know, stronger than prior quarters and you know, and it was, you know, good, diversified, industrial and you know, kind of multi you know, asset classes.

Speaker #4: And so the mix of the business was great. You know, good structure, relatively good pricing. So we were very pleased with the type of originations that we saw.

Speaker #4: With that said, pipeline is still in very good shape, but as John alluded to, the the combo of potentially some accelerated payoff activity, particularly if rates go down, and then the fact that you don't have that quarter and a half or two quarters of pent-up demand that we had from the first and the second quarter, we think that there's going to be good commercial real estate originations in Q4 and then into 2026, but it's, it shouldn't be you know, kind of the, the Q3 numbers should not be seen as a watermark, a high watermark for what what originations will be going forward.

Luis Massiani: As John alluded to, the combo of potentially some accelerated payoff activity, particularly if rates go down, and then the fact that you don't have that quarter and a half or two quarters of pent-up demand that we had from the first and the second quarter, we think that there's going to be good commercial real estate originations in Q4 and then into 2026. It shouldn't be, you know, kind of the Q3 numbers should not be seen as a watermark or the high watermark for what originations will be going forward. Still good, strong growth.

Speaker #4: But still good, strong growth.

Speaker #5: And I, I would just add to that, we feel very comfortable. We're still in the, you know, mid-250s. with respect to concentration on CRE as a percent of tier one capital plus reserves and we can bounce around, you know, down or up 10% from there.

John Ciulla: I would just add to that, we feel very comfortable. We're still in the mid-250s with respect to concentration on CRE as a % of tier-one capital plus reserves. We can bounce around, you know, down or up 10% from there and feel very comfortable that from a regulatory perspective and from an overall risk management perspective, we're comfortable. It's an important category for us. You'll probably see growth. To Luis's very good point, I think, you know, it'll be thoughtful growth as we move forward.

Speaker #5: And we feel very comfortable that, from a regulatory perspective and from an overall risk management perspective, we're comfortable. So it's an important category for us.

Speaker #5: You'll probably see growth, but to Luis's very good point, I think, you know, it'll be thoughtful growth as we move forward.

Speaker #9: Thank you.

[Analyst 1]: Thank you.

Speaker #3: The next question comes from Bernard von Gesicki with Deutsche Bank. Your line is open.

Operator: The next question comes from Bernard von Gezicki with Deutsche Bank. Your line is open.

Speaker #10: Hey guys, good morning.

[Analyst 3]: Hey, guys. Good morning.

Speaker #5: Bernard. Good morning.

John Ciulla: Bernard, good morning.

Speaker #10: Neil, first question for you. So, you noted the higher debt costs. It looks like you might be absorbing one more rate cut than previously assumed in your guidance.

[Analyst 3]: Neil, first question for you. You noted the higher debt costs. It looks like you might be absorbing one more rate cut than previously assumed in your guidance. It looks like sponsor obviously might have been maybe a bit better than expected. I know that's a bit higher yielding. The 4Q net NII of $630 million. What are you thinking of the exit run rate for the NIM in 4Q? Any changes there?

Speaker #10: It looks like the sponsor obviously might have been maybe a bit better than expected. And I know that's like, a bit higher yielding. The fourth unit, the $630 million, just what are you taking of the exit run rate for the NIM in Q4?

Speaker #10: Any changes there?

Speaker #4: Yeah. Yeah, so on the last call, we talked about a Q4 NIM being in the range of 3.35 to 3.40. You know, after you take into account the seasonal factors, the extra sub debt that we'll be holding in Q4, we've got a little bit of timing around the seed portfolio and kind of loss of very high yielding.

Neil Holland: Yeah. On the last call, we talked about a Q4 NIM of being in the range of 3.35 to 3.40. After you take into account the seasonal factor, the extra sub-debt that we'll be holding in Q4, we've got a little bit of timing around the seed portfolio and kind of loss of very high-yielding loans from the seeding of the JV, which put some one-time pressure. As I mentioned before, in the continuing to originate the high-quality kind of lower spread, new originations, that puts pressure on Q4. If you take our $630 million NII, that equates to a guide of right around 3.35 for the Q4. There's opportunity and risk to that depending on how quickly we reprice deposits. If you look at our growth rate last quarter, which was almost 10% annualized on loans and deposits, there's less opportunity for us to price down.

Speaker #4: Loans from the seeding of the JV kind of put some one-time pressure. We, we're, as I mentioned before, continuing to originate the high-quality, kind of lower spread, new originations.

Speaker #4: That puts pressure on Q4. So, you know, if you take our $630 million NII, that equates to a guide of right around $335 million for Q4. There's opportunity and risk to that, depending on how quickly we reprice deposits.

Speaker #4: And that's, you know, if you look at our growth rate last quarter, which was almost 10% annualized on loans and deposits, there's less opportunity for us to price down.

Speaker #4: So, what we're looking at in Q4 is potentially a little bit lower growth. And so there is potentially a little bit of opportunity to outperform; but we, we've kind of guided more towards the lower end of what we stated last quarter for Q4.

Neil Holland: What we're looking at in Q4 is potentially a little bit lower growth and so potentially a little bit of opportunity to outperform. Our guide is more on the lower end of what we stated last quarter for Q4. That being said, Q1 next year, we're not ready to talk about Q1 guidance, but we've talked about our seasonality trends. I would clearly expect Q1 next year to be back up higher than Q4 of this year. We'll talk more about full-year 2026 guidance when we meet next time.

Speaker #4: Now that being said, Q1 next year, we're not ready to talk about Q1 guidance, but you know, we've talked about our seasonality trends. So, you know, I would clearly expect Q1 next year to be back up higher than Q4 of this year.

Speaker #4: And then we'll talk more about full year, 26 guidance when we, meet next time.

Speaker #10: Okay, great. Thanks for that color. just so it's my follow-up, for Luis, this is for you. obviously they just say, pipelines growing, you know, you mentioned, obviously from last quarter, the target addressable market increasing.

[Analyst 3]: Okay. Great. Thanks for that color. Just as my follow-up for Luis, this is for you. Obviously, the HSA pipeline is growing. You mentioned from last quarter the target addressable market increasing that opportunity, at least on the deposit side, being the $1 to $2.5 billion. The recent changes and catastrophic accounts should increase it further. I know you're still assessing. Just any progress you can share, just longer term, how we should think about the fee income growth opportunity. I know you have the 3.5 million accounts there. I'm not sure if you can share how many of those have a bank account or bank product or just anything you can help frame how big this opportunity could be potentially next year or further?

Speaker #10: that opportunity, at least on the deposit side, being, you know, the one to two and a half. And, the recent changes and catastrophic accounts should increase it further.

Speaker #10: And I know you're still assessing, but just any progress you can share? Just long term, how should we think about the fee income growth opportunity?

Speaker #10: I know you have the three, three and a half million accounts there. I'm not sure if you can share how many of those have a bank account.

Speaker #10: Are bank products just anything? Could you help frame how big this opportunity could be, potentially next year or further?

Speaker #4: Yeah, that's a great question. In the short answer to that last part that you asked on, you know, I'll call it the cross-sell of other banking products into that channel is that it's not much.

Luis Massiani: Yeah, that's a great question. The short answer to that last part that you asked on, you know, I'll call it the cross-sell of other banking products into that channel is that it's not much, is the way to characterize it today. We view that as being one of the big opportunities and untapped, you know, kind of channels where we think that we could do a substantially better job going forward. Part of that is making the investments that we have on the technology front, on people, and on, you know, expanding the product set to be able to create something that from a product perspective and from a product bundle perspective is attractive to be able to sell into that 3.5 million client channel that we have there. Part of that is, you know, traditional banking products. Part of that is insurance-related products, Medicare-related products.

Speaker #4: Is the way to characterize it today. But we view that as being one of the big opportunities and untapped, you know, kind of channels.

Speaker #4: Where we think that we could do a substantially better job going forward. And so part of that is making the investments that we have on the technology front, on people, and on expanding the product set.

Speaker #4: To be able to create, you know, something that from a product perspective and from a product bundle perspective is attractive to be able to sell into that 3.5 million client channel that we have there.

Speaker #4: And so part of that is banking, you know, traditional banking products. Part of that is, insurance-related products, Medicare-related products. and so that is, you know, it's coming together.

Luis Massiani: That is, you know, it's coming together. We anticipate and expect that there is going to be greater activity broadly in the HSA channel in 2026. I'll remind you that the opportunity going forward, particularly as it relates to the addressable target market, is slightly different or it's actually very different to what we do today, right? Today, the vast majority of what we do in HSA is a B2B2C business where we're going through large employers. It's not the client relationship, even though it is a deposit account with us, is one step removed in the sense that it really goes through the large employer that is our, you know, kind of the, that's how we originate the transaction accounts. As we move into the catastrophic and the bronze plan opportunities with the increase and expanded target size, that's really a direct-to-consumer business.

Speaker #4: We, you know, we anticipate and expect that there is going to be greater activity broadly in, in the HSA channel in 2026. and I'll, you know, I'll remind you that the, the opportunity going forward, particularly the, as it relates to the addressable target market, is slightly different or it's actually very different to what we do today, right?

Speaker #4: Today, the vast majority of what we do in HSA is a, you know, B2B to C business or we're going through large employers. And so it's not the, the, the client relationship, even though it is a deposit account with us, is one step removed in the sense that it really goes through the large employer that is our, you know, kind of the per, that's how we originate the, the transaction accounts.

Speaker #4: As we move into the catastrophic and the bronze plan opportunities with the increased and expanded target size, that's really a direct-to-consumer business. It's much more akin to what we do in our traditional banking side with consumer banking and through our direct channels.

Luis Massiani: It's much more akin to what we do in our traditional banking side with Consumer Banking and through our direct channels. That's why we think that that's a great opportunity in that, you know, that is identifying an HSA client that could absolutely become more than just HSA because it's going to be a direct-to-consumer relationship. We're going to be, you know, data mining to identify the individuals and then having them be a direct, you know, kind of broad HSA and Webster client. A long-winded way of saying that it's a great opportunity for us. We're building that, we have the investments, and we're making the investments to be able to capitalize on that. We envision that in 2026, we should start seeing some benefit out of all the investments that we've made.

Speaker #4: And so that's why we think that that's a great opportunity in that, you know, that is identifying an HSA client that could absolutely become more than just HSA because it's going to be a direct-to-consumer relationship.

Speaker #4: We're going to be, you know, data mining the, you know, to identify the individuals and then have them be a direct, you know, kind of broad HSA and Webster client.

Speaker #4: And so you know, along with a way of saying that it's a great opportunity for us, we're building it, we have the investments and we're making the investments to be able to capitalize on that and we envision that in 2026 we should start seeing some benefit out of all the investments that we've made.

Speaker #10: Thank you for taking my questions.

[Analyst 3]: Okay, thanks for taking my questions.

Speaker #3: The next question comes from David Smith with Truist Securities. Your line is open.

Operator: The next question comes from David Smith with Truist Securities. Your line is open.

Speaker #11: Good morning. outside of HSA, can you talk about the investment opportunities you're prioritizing for the bank and, you know, with the, you know, likely rise in the, category four threshold, you know, does that free up investment dollars that you can redeploy into you know, ones that are more directly related to, to, to revenue or the profitability of the bank?

Neil Holland: Good morning. Outside of HSA, can you talk about the investment opportunities you're prioritizing for the bank? With the likely rise in the category four threshold, does that free up investment dollars that you can redeploy into ones that are more directly related to revenue or the profitability of the bank? Thank you.

Speaker #11: Thank you.

Speaker #4: Yeah, I mean, I think that's a great question. And the short answer is yes. You know, we've talked openly about the fact that, you know, Neil talked about a kind of $60 million over three years, a $60-ish million investment run rate increase in expenses related to category four.

John Ciulla: Yeah, I think that's a great question. The short answer is yes. We've talked openly about the fact that, you know, Neil talked about a kind of $60 million over three years, a $60 million investment run rate increase in expenses related to category four. We are taking a, again, a pragmatic approach. We're going to wait to see and get more clarity on whether that threshold's lifted. I think we believe that there is a reasonable probability that that happens. That would allow us to either avoid some of those costs or clearly spread them out over a longer period of time. Our view is that we can take some of that and increase current profitability, but we want to certainly redeploy some of those investment dollars into new business initiatives. Those would include.

Speaker #4: You know, we are taking, again, a pragmatic approach. We're going to wait to see and get more clarity on whether that threshold's lifted.

Speaker #4: You know, I think we believe that there is a reasonable probability that that happens. And that would allow us to either avoid some of those costs or clearly spread them out over a longer period of time.

Speaker #4: And you know, our view is that we can take some of that and increase current profitability, but we want to certainly redeploy some of those investment dollars into new business initiatives.

Speaker #4: those would include our.

Speaker #1: Continued digitization of channels across our various business lines, treasury management capabilities, new teams, and key geographic middle market segments. And so, you know, it's kind of being able to really focus on accelerating some of our business opportunities.

John Ciulla: Continued digitization of channels across our various business lines, treasury management capabilities, new teams in key geographic middle market segments. It's kind of being able to really focus on accelerating some of our business opportunities. HSA, we talked about it here before. I think we have some adjacent opportunities in HSAs as well. I think it'll give us an opportunity to accelerate some of those investments as we move forward. I think what we're trying to do is we will have more clarity on that, on the regulatory thresholds by the time we get to the January earnings call. We're going to our board in a couple of weeks to get our three-year strategic plan vetted and approved. I think we'll be able to talk a lot more about how we redeploy some of those investment dollars when we're clear that we can redeploy those investment dollars.

Speaker #1: HSA, we talked about it here before. I think we have some adjacent opportunities in the Metros and HSA as well. So, I think it'll give us an opportunity to accelerate some of those investments as we move forward.

Speaker #1: And I think what we're trying to do is, I think we will have more clarity on that on the regulatory thresholds. By the time we get to the January earnings call, we're going to our board in a couple of weeks to get our three-year strategic plan vetted and approved.

Speaker #1: And I think we'll be able to talk a lot more about how we redeploy some of those investment dollars when we're clear that we can redeploy those investment dollars. And that should all be factored into our guidance in January.

John Ciulla: That should all be factored into our guidance in January.

Speaker #2: Thank you.

Neil Holland: Thank you.

Speaker #1: Thank

Speaker #1: you.

John Ciulla: Thank you.

Speaker #3: The next question comes from Daniel Tomeo with Raymond James. Your line is open.

Emlen Harmon: The next question comes from Daniel Timaeou with Raymond James. Your line is open.

Speaker #2: Thank you.

Speaker #4: Good morning, everybody. I apologize; I had to jump on the call a little bit late. As it relates to the most recent rate cut, I'm just curious about the ability you've had to reprice funding downward and if you've had to move all loan rates down in an equivalent manner or if you've been able to hold the line.

Luis Massiani: Thank you. Good morning, everybody. I apologize. I had to jump on the call a little bit late. As it relates to the most recent rate cut, I'm just curious about the ability you've had to reprice funding downward and if you've had to move all loan rates down in an equivalent manner or if you've been able to hold the line. I'm just curious on the impact of the rate cut on spreads.

Speaker #4: Just curious about the impact of the rate cut on spreads.

Speaker #2: Yeah. So, you know, we're positioned, as we've talked about, pretty neutrally. So, obviously, we did see some yields decline on our variable rate portfolios.

Neil Holland: Yeah. So you know we're positioned, as we've talked about, pretty neutrally. Obviously, we did see some yields decline on our variable-rate portfolios. We tried to be aggressive on the deposit side, and I think we made some good movements on the commercial side. On the consumer side, there's been a little bit of lag in the industry. We've recently moved down and are seeing, about a month after the cut, some pretty good movements down. We are balancing maintaining our loan-to-deposit ratio with the speed of our decline. We'll be monitoring closely during what we expect to be two more cuts throughout the end of this year and hopefully can drive a strong beta. Our forward guidance is based on a beta just shy of 20% or 30% and kind of pretty in line with what we've been talking about the last few quarters.

Speaker #2: We tried to be aggressive on the deposit side, and I think we made some good movements on the commercial side. On the consumer side, there's been a little bit of lag in the industry.

Speaker #2: We've recently moved down and are seeing, about a month after the cut, some pretty good movements down. So, we are balancing maintaining our loan-to-deposit ratio with the speed of our decline.

Speaker #2: So, we'll be monitoring closely during what we expect to be two more cuts throughout the end of this year and, hopefully, can drive a strong beta. Our forward guidance is based on a beta just shy of 30%, which is pretty much in line with what we've been talking about the last few quarters.

Speaker #2: And we have plans in place to achieve that going forward.

Neil Holland: We have plans in place to achieve that going forward.

Speaker #4: Okay, great. Thanks for that. And, you know, you talked pretty bullishly about the opportunities from the Marathon JV, particularly next year and going forward as it relates to adding loan growth for the sponsor book.

Luis Massiani: Okay. Great. Thanks for that. You talked pretty bullishly about the opportunities from the Marathon JV, particularly next year and going forward as it relates to adding loan growth for the sponsor book. Does the uncertainty and the issues that we've had in the last few weeks in private credit and loans to NDFI impact the way that you think about that JV at all? I'm just curious if there's any kind of overlap there.

Speaker #4: Does the uncertainty and the issues that we've had in the last few weeks in private credit and loans to the NDFI impact the way that you think about that, you know, that JV at all?

Speaker #4: I'm just curious if there's any kind of overlap there.

Speaker #2: Yeah, I don't think so. You know, we've talked a lot about our sponsor finance business, right? Which is not NDFI; it's financing, you know, companies that are platform companies of private equity firms.

John Ciulla: Yeah. I don't think so. You know, we've talked a lot about our sponsor finance business, right, which is not NDFI. It's financing, you know, companies that are platform companies or private equity firms. We've had good success over a long period of time. I remind you that our partnership with Marathon is as much a risk management tool as it is an offensive opportunity. It allows us to offer more products and services and a bigger balance sheet implied without taking additional risk on the bank's balance sheet. Our sponsor finance business has not grown in the last eight quarters as much as it had in the prior 10 years because of the proliferation of private credit and because of lower M&A activity and because, quite frankly, we've stuck to our risk profile and I think been pretty conservative there.

Speaker #2: And we've had good success over a long period of time. I remind you that our partnership with Marathon is as much a risk management tool as it is an offensive opportunity.

Speaker #2: It allows us to offer more products and services and a bigger balance sheet implied without taking additional risk on the bank's balance sheet.

Speaker #2: Our sponsor finance business has not grown in the last eight quarters as much as it had in the prior 10 years. Because of the proliferation of private credit and because of lower M&A activity and because, quite frankly, we've stuck to our risk profile, and I think been pretty conservative there.

Speaker #2: So, you know, I think general economic conditions obviously have an impact on the way we look at leveraged finance. However, with respect to what we saw in the market and reactions over the last couple of days, it really has no impact on the way we look at predictable, protectable cash flows of our direct borrowers in the sponsor book.

John Ciulla: I think general economic conditions obviously have an impact on the way we look at leverage finance. With respect to what you saw in the market and reactions over the last couple of days, it really has no impact on the way we look at predictable, protectable cash flows of our, you know, direct borrowers in the sponsor book.

Speaker #4: Terrific. I appreciate that, Kelly and John, and thanks for your prior answer, Neil. That's it for me.

Luis Massiani: Terrific. Appreciate that color, John. Thanks for your prior answer, Neil. That's it for me.

Speaker #2: Thank you, Neil.

Neil Holland: Thank you.

John Ciulla: Thank you.

Speaker #3: The next question comes from Janet Lee with TD Securities. Your line is open. Good morning. Sorry, I joined a little late, so sorry if I missed the prepared remarks.

Emlen Harmon: The next question comes from Janet Lee with TD Securities. Your line is open.

John Ciulla: Good morning. Sorry. I joined a little late, so sorry if I missed the prepared remarks. For the loan growth in the quarter, it was pretty robust on a period-end basis. If I look at the CNI loan growth, is most of this growth coming from the middle market? I know that includes the fund banking part. Given that CRE runoffs will not be in the, I mean, we're not going to see much CRE runoffs in the future quarters, is it fair to believe that the loan growth in 2026—I know you're not guiding to 2026—but loan growth should be improving versus the 4 to 5% growth that was previously expected for 2025. Is that the right way to think about it?

Speaker #3: But for the loan growth in the quarter, it was pretty robust on a period-end basis. So, if I look at the CNI loan growth, is most of this growth coming from the middle market?

Speaker #3: I know that includes, like, the fund banking part. And given that CRE runoffs will not be in—I mean, we're not going to see much CRE runoffs in the future quarters.

Speaker #3: Is it fair to believe that the loan growth in 2026—I know you're not guiding to '26, but loan growth should be improving versus like the 4% to 5% growth that was previously expected for 2025?

Speaker #3: Is that the right way to think about it?

Speaker #2: That's an interesting question. I sat at a conference mid-quarter, and I think it was a panel, and then the investors said 5% loan growth.

John Ciulla: That's an interesting question. I said at a conference mid-quarter, you know, what we expected. I think it was a panel, and the investors said 5% loan growth. I think we think about kind of steady loan growth in next year in this economic environment in that range. We're not ready to provide guidance because, as I said, we're right now going through our plans. We are looking at making sure that our loan growth is diverse. We want full relationship loan growth. Q3 will be a part of that. We'd like, obviously, middle market and traditional CNI to continue to add to that as well. I don't think, Janet, I'm prepared to say that we expect loan growth in 2026 to be higher than those mid-single digits, which I think is what people who have provided guidance and industry experts have said. I'd rather not go there now.

Speaker #2: I think we can expect steady loan growth in the next year in this economic environment, in that range. We're not ready to provide guidance because, as I said, we're currently going through our plans.

Speaker #2: We are looking at making sure that our loan growth is diverse. We want full relationship loan growth; CRE will be a part of that.

Speaker #2: We'd like, obviously, middle market and traditional CNI to continue to add to that as well. I don't think, Janet, I'm prepared to say that we expect loan growth in '26 to be higher than those mid-single digits, which I think is what people who have provided guidance and industry experts have said.

Speaker #2: So, I'd rather not go there now. I think we'd consider that to be pretty good, you know, solid loan growth. As we finish our strategic plan and look at the economic environment, we'll let you know in January what we think we can achieve.

John Ciulla: I think we'd think that that would be pretty good, you know, solid loan growth. As we finish our strategic plan and look at the economic environment, we'll let you know in January what we think we can achieve. As I said to an earlier question that you may have missed, it's not just about balance sheet growth for balance sheet's sake. We want to make sure we're also, you know, onboarding good risk return assets. That's the way I would look at it now, just thinking forward.

Speaker #2: And as I said to an earlier question that you may have missed, it's not just about balance sheet growth for balance sheet's sake. We want to make sure we're also onboarding good risk-return assets.

Speaker #2: So, that's the way I would look at it now, just thinking forward.

Speaker #3: Got it. And just going back on NDFI, sorry to just keep coming back at this, but your exposure is $6 billion. Just given all of these headlines that just keep coming up, does this change your appetite for growing the NDFI exposure? Or are you completely— you said you're comfortable with your position, but does that change your appetite for driving growth coming out of this segment, or does it not?

John Ciulla: Got it. Just going back on NDFI, sorry to keep coming back at this, but your exposure is $6 billion. Just given all of these headlines that keep coming up, does this change your appetite on growing the NDFI exposure, or you said you're comfortable with your position, but does that change your appetite for driving growth coming out of this segment, or does it not?

Speaker #2: It's kind of a trap question, right? Because I think we're all smart leaders here, the way we think about things. And optically, we have to be absolutely sensitive to the way people view the makeup of our balance sheet.

John Ciulla: It's kind of a trap question, right? I think we're all smart leaders here the way we think about things. Optically, we have to be absolutely sensitive to the way people view the makeup of our balance sheet. I would say, fundamentally, the two categories that make up the substantial whole of our NDFI exposure actually are really low-risk and, quite frankly, lower-yielding loan categories that we feel very comfortable with to the extent we have opportunities in fund banking and lender finance. We're not stretching into areas, and we're not dealing with newly formed asset managers or going into different esoteric asset classes. We feel comfortable continuing to originate, but we'll do it in the context of our overall loan portfolio and concentrations and obviously have an eye to what's going on trendline-wise in the industry.

Speaker #2: But I would say, fundamentally, the two categories that make up the substantial whole of our NDFI exposure actually are really low risk and, quite frankly, lower yielding loan categories that we feel very comfortable with.

Speaker #2: To the extent we have opportunities in fund banking and lender finance, and we're not stretching into areas, and we're not dealing with newly formed asset managers or going into different esoteric asset classes, we feel comfortable continuing to originate.

Speaker #2: But we'll do it in the context of our overall loan portfolio and concentrations, and obviously have an eye to what's going on trend line-wise in the industry.

Speaker #2: So, if we were to see significant cracks in a broader private credit screen, obviously we would either pull back or change our underwriting guidelines.

John Ciulla: If we were to see significant cracks in, you know, a broader private credit screen, obviously, we would either pull back or change our underwriting guidelines. Right now, we don't think, based on a couple of days and a few headlines, that we would need to change the way we view the market.

Speaker #2: But right now, we don't think that based on a couple of days and a few headlines, we would need to change the way we view the market.

Speaker #3: Thank you. The next question comes from John Armstrong with RBC Capital Markets. Your line is open.

John Ciulla: Thank you.

Emlen Harmon: The next question comes from John Arfstrom with RBC Capital Markets. Your line is open.

Speaker #4: Hey, thanks. Good morning.

Luis Massiani: Hey, thanks. Good morning.

Speaker #1: Hey, John.

Neil Holland: Hey, John.

Speaker #4: Hey, a lot of the topics have been covered, but on a smaller one, can you talk a little bit more about the non-interest income drivers and what you're seeing there, and what kind of expectations you have?

Luis Massiani: A lot of the topics have been covered, but a smaller one, can you talk a little bit more about the non-interest income drivers and what you're seeing there and what kind of expectations you have?

Speaker #2: Yeah, I could jump in there. So, on the non-interest income side, we had a nice increase quarter over quarter, and we talked about a piece of that being due to a legal settlement.

Neil Holland: Yeah. I could jump in there. On the non-interest income side, we had a nice increase quarter over quarter. We talked about a piece of that was due to a legal settlement. Outside of that, we saw a nice growth in client activity. As loan originations have picked up, there's more activity, more swap income. We've found some unique new ways for syndication income. I would say, overall, we were pleased with the quarter there. Obviously, as we benchmark, we benchmark against peers positively in a lot of segments. Fee income is one of the areas that we're a little bit lower, and we're working on different initiatives. As Luis mentioned, there's some opportunities on the HSA side. There's obviously opportunities through our JV, and we'll continue to look for ways to drive new categories there.

Speaker #2: But outside of that, we saw a nice growth in client activity. As loan originations have picked up, there's more activity, more swap income. We've found some unique new ways for syndication income.

Speaker #2: So, I would say overall, we were pleased with the quarter there. Overall, obviously, as we benchmark, we benchmark against peers positively in a lot of segments, and fee income is one of the areas where we're a little bit lower.

Speaker #2: And we're working on different initiatives, as Luis mentioned. There are some opportunities on the HSA side, and there's obviously opportunities through our JV. We'll continue to look for ways to drive new categories there.

Speaker #2: But, you know, kind of going forward, I think until those new potential streams kick in, we'll be kind of in that similar growth range that we've been in over the last year or so on the non-interest income.

Neil Holland: Going forward, I think until those new potential streams kick in, we'll be in that similar growth range that we've been in over the last year or so on the non-interest income.

Speaker #4: Okay, good. Thank you on that. John, kind of a high-wire question, but just back on the election: is that a legitimate concern for you as a banker that banks in the city should, and you know, should investors be concerned about it at all?

Luis Massiani: Okay. Good. Thank you on that. John, kind of a high-wire act question, but just back on the election, is that a legitimate concern for you as a banker that banks the city? Shouldn't, and you know, should investors be concerned about it at all? Just how do you think about the potential risks, or are we just, you know, is it overblown in your mind?

Speaker #4: Just how do you think about the potential risks, or are we just, you know, is it overblown in your mind?

Speaker #2: Yeah, it is a high-wire question. I think if we look at credit performance and our credit portfolio, it's not a big issue in the medium term, right?

John Ciulla: Yeah. It is a high-wire question. I think if we look at credit performance and our credit portfolio, it's not a big issue in the medium term, right? I think we look at the way we've underwritten. We look at what a new mayor would have the power of doing in terms of changing rules, regulations, and other things that would really impact our borrowers' ability to generate income and cash flow and service debt. I think that may be a bit overblown. Luis and I talk about this. I do think what you want is a healthy New York City, both from a credit performance, but even more importantly, from a business activity performance and our ability to continue to generate growth and deposits.

Speaker #2: I think we look at the way we've underwritten; we look at what a new mayor would have the power to do in terms of changing rules, regulations, and other things that would really impact our borrowers' ability to generate income and cash flow, and service debt.

Speaker #2: So, I think that may be a bit overblown. You know, Luis and I talk about this. I do think, you know, what you want is a healthy New York City, both from a credit performance, but even more importantly, from a business activity performance and our ability to continue to generate growth and deposits.

Speaker #2: So, that's something that we look at and, you know, try and figure out whether over time the city gets less competitive rather than more competitive if there were a significant change in policy.

John Ciulla: That's something that we look at and try and figure out whether over time the city gets less competitive rather than more competitive if there were a significant change in policy. I think history would tell you that things don't move as dramatically in either direction when you have these changes and that you can navigate through them. In our base case, we don't have thoughts that there's going to be a precipitous inflection point in either business activity or credit performance in the near term. My personal, and I guess when Luis and I talk about it, the longer-term risk is you get a trailing economic growth in the city. You get other quality-of-life changes or things that people perceive, and that could have an impact in the long term.

Speaker #2: But I think history would tell you that things don't move as dramatically in either direction when you have these changes and that you can navigate through them.

Speaker #2: So, in our base case, like we don't have thoughts that there's going to be a precipitous inflection point in either business activity or credit performance in the near term.

Speaker #2: I think, you know, my personal, and I guess when Luis and I talk about it, the longer-term risk is you get a trailing economic growth in the city.

Speaker #2: You get, you know, other quality of life changes or things that people perceive, and that could have an impact on the long term. But as I look over our three-year plan, we don't think there's a material financial impact by the mayoral election in New York.

John Ciulla: As I look over our three-year plan, we don't think there's a material financial impact by the mayoral election in New York.

Speaker #4: And the one thing that I'd add there is that as you think about future opportunities for growth, the vast majority of where we have to the topic that we were talking about before, where we're investing, the thing that we're focusing on, even though we are always going to be a, you know, we're going to have a good, you know, part of our business be, you know, connected and tied into New York City, a fair amount of the growth, particularly in the new business lines, both on the lending and deposit side, are not connected to New York City.

Luis Massiani: The one thing that I'd add there is that as you think about future opportunities for growth, the vast majority of where we have been to the topic where we were talking about before, where we're investing, the thing that we're focusing on, even though we are always going to be a, you know, we're going to have a good, you know, part of our business be, you know, connected and tied into New York City, a fair amount of the growth, particularly in the new business lines, both on the lending and deposit side, are not connected to New York City. Everything that we're doing on HSA Bank, on Ametros, on Intersync, on the deposit side are not connected directly to New York City. From that perspective, we don't see that that should be an impact on our ability to continue to generate good deposit funding.

Speaker #4: So, everything that we're doing on HSA, on the Metros, on InnerSync, and on the deposit side are not connected directly to New York City. So, from that perspective, we don't see that that should be an impact on our ability to continue to generate good deposit funding.

Speaker #4: And conversely, on the lending side, when you think about the diversified verticals, yes, there's a portion of what we do, particularly in CRE, that is New York City connected; but the vast majority of growth and the opportunities that we have seen have not been recently, in the last two or three years post-merger, connected directly to New York City.

Luis Massiani: Conversely, on the lending side, when you think about the diversified verticals, yes, there's a portion of what we do, particularly in Commercial Real Estate, that is New York City connected. The vast majority of growth and the opportunities that we have seen have not been recently in the last two or three years post-merger connected directly to New York City. As we think about the business opportunity or the existing book of business, yeah, it's something that we'll have to deal with, although I think we're in very good position to be able to offset whatever comes our way from that perspective. As we think about the business opportunity longer term and growth trajectory, we don't think that this materially impacts our ability to continue to do what we've been doing.

Speaker #4: And so, as we think about the business opportunity, or the existing book of business, yeah, it's something that we'll have to deal with. Although I think we're in a very good position to be able to offset whatever comes our way from that perspective.

Speaker #4: And as we think about the business opportunity longer term and growth trajectory, we don't think that this materially impacts our ability to continue to do what we've been doing.

Speaker #3: The next question comes from Lori Hunziker with Seaport. Your line is open.

Emlen Harmon: The next question comes from Laurie Hunsaker with Seaport. Your line is open.

Speaker #5: Yeah, hi, thanks. Good morning.

John Ciulla: Yeah, hi. Thanks. Good morning.

Speaker #2: Good morning.

Speaker #5: My first question, my first question is super quick. What's your spot margin?

John Ciulla: Good morning.

John Ciulla: My first question is super quick. What's your spot margin?

Speaker #2: Our spot margin? Our margin at the end of the quarter was down three basis points from the average at $3.37. There's a lot of volatility in spot margin, though, but it kind of ties into what we were talking about in direction.

Neil Holland: Our spot margin? Our margin at the end of the quarter was down 3 basis points from the average at 3.37%. There's a lot of volatility in spot margin, though, but it kind of ties into what we were talking about in direction.

Speaker #5: Yep, appreciate all the color on that. Okay, second question here is around credit. So, I just want to understand a couple of things. Your $6 billion NDFI portfolio, is that within the sponsor and specialty finance book?

John Ciulla: Yep. Appreciate all the color on that. Okay. Second, the second question here is around credit. I just want to understand a couple of things. Your $6 billion NDFI portfolio, that's within the sponsor and specialty finance book, yes or no? Can you help us think about how much there is non-performing and what the charge-offs were? Finally, the $37 million you have in commercial net charge-offs, just because I don't see the breakdown, can you share with us what's CNI, what's Q3, what's sponsor and sponsors, what's office? I know I just hit you with a lot, but I just want some more details on that. Thank you so very much.

Speaker #5: And I guess, secondly, or, you know, yes or no. And then just the, can you think, can you help us think about how much there is in non-performing loans and what the charge-offs were?

Speaker #5: And then finally, the $37 million you have in commercial net charge-offs. Just because I don't see the breakdown, can you share with us what CNI, what's CRE, what's sponsor and specialty, what's office?

Speaker #5: And I know I just hit you with a lot, but I just want some more details on that. Thank you so very much.

Speaker #2: Yes, Lori, we'll try, and we may have to get back on a couple of those things, but I'll tell you that the answer is no.

John Ciulla: Yes, Laurie. We'll try and we may have to get back to you on a couple of those things. I'll tell you that the answer is no to your first question. All of our NDFI is not included in sponsor and specialty. Our lender finance numbers are included in sponsor. Our fund banking is, and we have it footnoted on the slide, included in our CNI business. With respect to some of those specific credit questions, we might get back to you. Let me just give you a high line again, right? We've got the concentration of charge-offs historically and non-accruals have been concentrated in our healthcare services book, which is down to about $400 million. Again, very discrete and low. We've always talked about the sponsor book as having some volatility in risk rating, but not translating into loss. I think that's continued.

Speaker #2: To your first question, all of our NDFI is not included in Sponsor and Specialty. Our lender finance numbers are included in Sponsor. Our fund banking is, and we have it footnoted on the slide, included in our CNI business.

Speaker #2: And then, with respect to some of those specific credit questions, we might get back to you. Let me just give you a high line again.

Speaker #2: Right? We've got the concentration of charges historically, and non-accruals have been concentrated in our healthcare services book, which is down to about $400 million.

Speaker #2: So again, very discreet and low. We've always talked about the sponsor book as having some volatility and risk rating, but not translating into loss.

Speaker #2: And I think that's continued. I'm trying to think of her other question. Lori, what I'm going to do is have Jason and Neil talk to you offline.

John Ciulla: I'm trying to think of her other question. Laurie, what I'm going to do is have Jason and Neil talk to you offline. We're not seeing any material deterioration in our sponsor book. That's the short answer. What we've seen with respect to charge-offs, oh, she had charge-offs in the fourth quarter. As I looked at those charge-offs, there weren't any high single points. All the charge-offs were under $10 million with respect to single-point charges. There was an office loan in there, there was a CNI loan in there, an ABL credit. These were all kind of relatively granular across categories in commercial.

Speaker #2: We're not seeing any material deterioration in our sponsor book; that's the short answer. And what we've seen with respect to charges, oh, she had charge-offs in the fourth quarter.

Speaker #2: As I looked at those charge-offs, there weren't any high single points. All the charge-offs were under $10 million with respect to single point charges.

Speaker #2: There was an office loan in there. There was a CNI loan in there. An ABL credit. So these were all kind of relatively granular across categories in commercial.

Speaker #3: That is all the time we have for questions. I will turn the call over to John Ciulla for closing remarks.

Emlen Harmon: That is all the time we have for questions. I will turn the call to John Ciulla for closing remarks.

Speaker #2: Thank you very much. I really appreciate everybody's engagement this morning. Have a great day and a great weekend.

John Ciulla: Thank you very much. I really appreciate everybody's engagement this morning. Have a great day and a great weekend.

Speaker #3: This concludes today's conference call. Thank you for joining. You may now disconnect.

Emlen Harmon: This concludes today's conference call. Thank you for joining. You may now disconnect.

Neil Holland: Please wait. The conference will begin shortly.