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Operator: Ladies and gentlemen, thank you for joining us, and welcome to the W.R. Berkley Corporation Third Quarter 2025 Earnings Call. This conference call is being recorded. The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including, without limitation, believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will, in fact, be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2024, and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results. W.R. Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise. I would now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir. W. Berkley: Nicole, thank you very much. And let me echo your warm welcome to our Q3 call. So in addition to myself on this end of the phone, we also have Executive Chairman, William Berkley, as well as Chief Financial Officer, Rich Baio. We're going to follow our typical agenda where momentarily, I'll be handing it over to Rich. He's going to run through some highlights of the quarter. I may follow with a couple of sound bites of my own, and then you will have the 3 of us to -- at your disposal to try and answer any questions or engage in any discussion that participants would like to engage in. But before I hand it over to Rich, let me just as oftentimes I do state the obvious. And that is -- I think the past 90 days is just a continuation of clear evidence that the insurance industry is still a cyclical industry. And for whatever the reason may be, some would say, fear and greed. The industry continues to seemingly make an art out of self-sabotage when it comes to its own success. That having been said, we, as an organization, are not completely insulated from that, but we are able to mitigate that quite effectively because of how we what parts of the market, I should say, we focus on, particularly specialty and further more small accounts, which a lot of the challenge that continues to percolate and seems to be building momentum, again, we are somewhat protected from. So let me leave it there. I'm going to hand it over to Rich, who'll run through some thoughts, and then we'll -- I will come back and offer a few more mines. Rich, please? Richard Baio: Great. Thanks, Rob. Appreciate it. Good evening, everyone. Third quarter results were excellent with a return on beginning of year equity of 24.3%, reflecting an increase over the prior year's quarter of almost 40% and net income, $511 million or $1.28 per share. Operating income increased 12% over the same period to $440 million or $1.10 per share, with a return on beginning of year equity of 21%. Further growth in underwriting and investment income drove the strong performance, combined with net investment gains. Pretax quarterly underwriting income increased 8.2% to $287 million. Calendar year combined ratio was 90.9%, and the current accident year combined ratio ex cat was 88.4%. Cat losses represented 2.5 loss ratio points or $79 million compared with the prior year of 3.3 loss ratio points or $98 million. Current accident year loss ratio ex cat for the current quarter was 59.9%, reflecting an increase over the prior year attributable to business mix, however, comparable to the second quarter of 2025. Drilling down further, the Insurance segment's quarterly accident year loss ratio ex cat was relatively consistent with the first half of 2025 at 60.9% bringing the accident year combined ratio before cat to 89.3%. Reinsurance and monoline access segments, accident year loss ratio ex cat was 52.6% with a strong accident year combined ratio before cats of 82.4%. Moving to our top line. Quarterly net premiums earned continue to benefit from written growth, reaching another record of more than $3.2 billion. Gross and net premiums written were $3.8 billion and $3.2 billion, respectively. Net premiums written grew in all lines of business in both segments. The comparable third quarter expense ratios were 28.5%, in addition to benefits from the growing net premiums earned on our expense ratio several of our recent start-up operating units are gaining scale and contributing favorably to the expense ratio. Technology enhancements are also contributing to operational efficiencies. Our pretax quarterly net investment income grew to $351 million, driven by an increase in our core portfolio of 9.4%. As a reminder, 2024 did benefit from heightened Argentine inflation-linked income and excluding such income from both periods, would increase the core portfolio growth to 14.6% quarter-over-quarter. Fixed maturity portfolio had a book yield of 4.8%. We do expect investment income from our fixed maturity portfolio to grow in the foreseeable future due to strong operating cash flow of almost $2.6 billion on a year-to-date basis and new money rates comfortably above the roll-off of existing securities. The duration of our fixed maturity portfolio, including cash and cash equivalents increased to 2.9 years in the third quarter while strengthening our AA- credit quality of our portfolio. Stockholders' equity reached a record of $9.8 billion, increasing 16.7% from the beginning of the year, driven by strong earnings an improvement of $428 million in our after-tax unrealized investment losses and currency translation losses as well as capital return of $362 million through ordinary and special dividends and share repurchases. As of September 30, our after-tax unrealized investment losses included in stockholder equity decreased to $177 million, and our financial leverage has improved to historic low levels of 22.5%. We've continued to generate significant capital. Company proactively refinanced its debt when interest rates were historically low, resulting in a low cost of capital and adding permanence to our capital structure with our nearest scheduled maturity in 2037. Our liquidity remains strong with almost $2.4 billion of cash and cash equivalents to invest. Book value per share before dividends and share repurchases grew 20.7% year-to-date. And 5.8% on a quarter-to-date basis. Rob, with that, I'll turn it back to you. W. Berkley: Okay. Rich, thank you very much. So maybe just a couple of quick soundbites for me that perhaps will invite a bit of conversation later on. Starting out with some observations regarding the market. The reinsurance marketplace, clearly, the property market, particularly property cat, that bloom is off the rose. From our perspective, there's still margin in the business. We'll see how long that lasts. It's without a doubt eroding. And to that end, you can feel the growing groundswell, but frankly, it's palpable around 1/1 and the appetite that's going to be coming from the reinsurance market. So we'll have to see what 1/1 holds. As far as the liability side, again, from our perspective, and we've expressed this in the past, we've been a bit frustrated in the reinsurance marketplace, drawing a line in the sand and demonstrating some discipline, it would seem as though that reinsurers are dissatisfied with the underlying rate increases that their [ cedents ] are achieving from our perspective we think that there should be opportunity to push a little harder. That having been said, obviously, it endures to our benefit as a buyer of reinsurance. Flipping over to the Insurance side, for the comment earlier, from our perspective, and again, using a very broad brush year, larger equals more competition, smaller equals less competition, which certainly bodes well for us. On the property front, highlighting that, clearly, the world of shared and layered, as we talked about, give or take, 90 days ago is where the competition is heating up the greatest. It is also pronounced just in E&S in general. That having been said, from our perspective, clearly, the small admitted space as well as select parts of the homeowners market continue to offer attractive opportunity. Not different from what we've expressed in the past as well. The world of professional liability is very much a mixed bag. On one hand, you have D&O that continues to erode, although at a slower rate from where it had been and the E&O market, generally speaking, is choppy. One of the brighter places, and by the way, it needs every drop of it and then some would be the world of HPL as an example, or hospital professional. As far as workers' compensation goes, Main Street comp from our perspective, consistent with what we shared with you in the past, tends to be particularly competitive. We have talked and talked and talked about California and certainly some of the challenges that market faces and happy to see the rate action coming through. A lot of that indigestion is being -- is coming about as a result of cumulative trauma and litigation stemming from that. GL, it would seem, at least from our perspective, for the moment, one is able to keep up with trend. Auto has been on again and off again. I think it was the first quarter where we expressed a view that there were some green shoots. In the second quarter, it was a little less encouraging and quite frankly, it remains pretty choppy. A bit of a puzzle to me, and I believe, colleagues because there is no product line that has been more exposed to social inflation in our opinion than auto, but we'll have to see what happens with that. as far as our portfolio goes, and we can get into it later, we are reducing exposure. We're taking a lot of rate. And quite frankly, our top line is growing considerably less than our rate. Over to umbrella, again, not without its challenges for the marketplace. Clearly, the smaller end of town has been the better place to be. And in addition to that, the indigestion that the umbrella line has experienced disproportionately has been impacted by auto. Rich covered our quarter in some detail. So maybe just a couple of quick observations on that front from me. Top line up 5.5 rate ex comp coming in at 7.6 different folks can interpret that in whatever the way they wish to. But from my perspective, it highlights the concept or the idea that this is an organization that is focused on rate adequacy. And to that end, we are very attuned to the fact that we are in business to make good risk-adjusted returns, not solely to issue insurance policies. You would have seen some on the insurance front, growth in the short-tail lines, just to call a couple of pieces out, what's really driving that because you may be scratching your head saying, well, how do I reconcile this? What he was just babbling about? As far as the property line and competition. There's really 2 pieces that are driving that. One is our personal lines effort in Berkley One, that being the private client personal lines. Where there is great opportunity, and we continue to lean into that. And in addition to that, our accident and health business continues to prosper as well. You would have also perhaps taken note of the growth in the workers' comp line. That not dissimilar to what we've talked about in the past is really driven by specialty comp. Some of it tends to be higher hazard and so on and so forth. It is not Main Street comp. The growth under the reinsurance banner, really, as far as the property piece goes, that's just us getting our last bite at the apple before the apple starts to rot. We have a view as to rate adequacy and we have no problem drawing a line in the sand as we have demonstrated in the past. And as far as the excess line with the growth is coming from is primarily excess comp. Risk covers the loss ratio, the expense ratio. As far as the cat goes, that was really just SCS that gave us a little bit of noise there. The expenses, again, continue to be benefiting from our focus around automation, as Rich highlighted, but please understand we continue to make investments. So on occasion with the expense ratio, you will see us having to take half a step back in order to take multiple steps forward. Flipping over to the investment portfolio. And again, I'm not going to completely pile on what Rich has already covered, but I would just flag that the duration did nudge out to 2.9 years. And we feel as though that we have a fair amount of runway before us. A, as Rich highlighted, the strength of the cash flow continues to build the size of the portfolio. And in addition to that, we see the book yield continuing to go up from here. So just as a point of reference, the domestic book yield at the -- for the quarter was 4.6%, and our new money rate is, give or take, right about 5%. So growth in the portfolio, higher new money equals runway ahead. By and large, it was a pretty solid quarter. And it wasn't just because the wind didn't blow and the earth didn't shake in a consequential way. It's because this is the trajectory that we're on, and it would take a lot to take us off that path. So when the day is all done, the underwriting opportunity continues to unfold. The discipline remains in place to ensure that, that margin is there. And our other economic engine being the investment portfolio, again, has much opportunity ahead of itself. So let me pause there. Nicole, we are going to turn back to you, please, if we could open it up for questions. Thank you very much. Operator: [Operator Instructions]. Your first question comes from the line of Alex Scott with Barclays. Taylor Scott: Think I got this unmuted correctly. So let me know if you can hear me, but. W. Berkley: Yes, we can hear you. We get stuff on mute at all the time. You're coming through a couple of times a day. Taylor Scott: All right. I'll jump into it then. So I first wanted to ask you about how you're thinking about capital position of the company and just hearing a little bit more restraint in terms of what you're willing to grow into? But you're still getting some decent growth. What would your plans be for the additional capital flexibility that, that would give you? And what would the pecking order look like? W. Berkley: So a couple of comments. If you were to take the rating agents -- some of the rating agency models, I don't know if it's all of them, but certainly, several of them. And you ran us through their sausage maker, it would tell you that we have significant headroom to the tune of 10 digits as far as excess capital. So loads of flexibility there. In addition to that, as you pointed out in your own words, we are generating capital more quickly than we are able to consume it. Obviously, as we've discussed in the past, we want to make sure we've got plenty of wiggle room that having been said, we're also equally conscious of the fact that the capital does not belong to us. It belongs to the shareholders. And to the extent that we are not able to utilize it effectively, we should be thinking about returning it to the shareholders. We have multiple tools to do that. And so we have not been shy about utilizing them. Rich flagged the balance sheet, in particular, the capital structure. So not in a rush to do anything as far as the debt or related securities and that would really leave us with 2 options that being dividends and repurchase. And again, we are open and regularly thinking about that question. So let me pause there. That was probably a lot of babble without specific answer that you're looking for, but I'm probably not going to be able to give you a specific answer. But this so happens that my boss is here, and he spends a lot of time thinking about capital and excess capital, particularly as our by a wide margin, largest shareholder. William Berkley: So we spent a lot of in thinking about it. There'll be opportune times buy back stock. We've been a very effective utilizer of that tool, and we've bought back a lot of stock over the years. But it's because we're not impatient, we wait the opportunity comes. We continue to do that. In the meantime, we feel that special dividend is a way to let the shareholders know, we work for them. That opportunity to buy back shares can come at any time. We'll keep plenty of powder available so we can seize those opportunities. We don't think it's there right at the moment. W. Berkley: Got it. Thanks for the question, Alex. Nicole, was there another question out there? Operator: Your next question comes from the line of Tracy Benguigui with Wolfe Research. W. Berkley: Tracy, are you there? Tracy Benguigui: Hello. Can you hear me now? W. Berkley: We can hear you now, Tracy. Sorry for the confusion with the new platform. Okay. I'm sure it was a brilliant question. I ask all my best ones when I'm stuck on mute, too. Tracy Benguigui: That's okay. I want to go back to your comments about your excess capital position. It's my observation that this is an industry-wide phenomenon. Are you worried that the industry is sitting on too much capital and your competitors are so used to growth coming off a hard market, it's going to be hard for them to take their foot off the pedal. I'm just curious to your thoughts like what catalyst can you envision that could turn pricing around given the supply-demand equation? W. Berkley: Well, maybe a couple of comments there. So we took ex comp, and we back out comp because presumably, that's sort of keeping up through weight inflation. But we took 7.6 points of rate in the quarter. So as far as our ability to keep getting rate and keeping up with trend, we feel pretty good about that. That having been said, as far as excess capital, some of our peers have a lot of excess capital, some of them don't. We're really just focused on what we're doing, and we're focused on our value proposition to the marketplace every day. And if at some point, it means that we have irrational competitors that drive parts of the market to unattractive places as we've demonstrated in the past, so be it will shrink the business. As I, in a clumsy way, was trying to allude to in my comments earlier, given the breadth of our offering or how many different parts of the market we participate in and how the marketplace has decoupled as far as where product lines are in the cycle, that positions us as an organization to be more resilient when it comes to growth. But look, when the day is all done, people may become more aggressive. Seeing some version of the movie in the past, and you and others have seen how we respond. As I suggested earlier, we're focused on making good risk-adjusted returns. If we can't do it, so be it, we'll let the business shrink. Tracy Benguigui: Got it. And I want to go back to your auto comments. Since your growth was flattish, can you just unpack how much exposure you're reducing balanced by the pricing you're seeing there? W. Berkley: I don't think we break out that detail. I will double check with Karen. And if we do provide that to the world, then I can assure you she will follow up with you tomorrow. But what I can say is I wouldn't have made the comment I made earlier, if it was just rounding. It's meaningful. And we're just seemingly, there are some market participants, particularly those with delegated authority that don't seem to get where loss costs are. But that end in tears eventually, and we will have an opportunity. Operator: Your next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: Okay. Perfect. My first question, I guess, is just on Mitsui Sumitomo. I know we have not seen a regulatory filing hit indicating that they've hit a 5%... W. Berkley: Yes. I noticed that too... Elyse Greenspan: In the company. Do they have to file when they hit 5%? Is there any update? I know you guys are... W. Berkley: My understanding is yes. I am not an SEC attorney, so full disclosure. That having been said, my understanding is they get to 5%, they need to file and every X amount of shares that they buy beyond that, they will have to do follow-on filings. I do not believe there is any reason for them not to have to comply with what everyone else does. But as we also mentioned in the past, in an effort to ensure that we are not handicapped in our ability to participate in the market, we have no information beyond what you have as far as where they stand in their process. Elyse Greenspan: And then my second question, you guys saw kind of stable rate price in the quarter. Growth slowed, right, mostly due to commercial auto, a little bit of their liability. It feels like that's a trade-off, right, Rob, you guys are willing to make. I know last quarter, you said we're kind of in this 8% to 10% growth world. This was a little bit lighter. So does it feel like we're in a little bit lighter growth world as you guys look to keep as much price in the portfolio as you can? W. Berkley: So from my perspective, the answers, Elyse, that we have major parts of the marketplace that are in some period of transition. Some are eroding and will likely erode further. Some are healthy and others are somewhere between the bookends, perhaps going through some stage of fits and starts in our opinion is you will likely see it needing to firm from here commercial auto being an example of that. It's these periods of time of transition, which makes it really, really hard to predict what the opportunity will be over the next 90 days. So once upon a time, we tried to give guidance because we were trying to be helpful. I'm not sure if that proved to be the case or not, but that was the intent around what the growth opportunity is. I do believe that there's still opportunity for us to grow and grow at a healthy rate from here. But as you pointed out, thank you for flagging. We are not going to compromise our underwriting and particularly rate integrity in order to juice the top line. And that sort of highlights what we've talked about on occasion in the past. That's because we have a sense of ownership, obligation and responsibility to the capital we manage. We get rewarded our colleagues throughout the organization get rewarded not this monetarily, but emotionally based on delivering good risk-adjusted returns coming out of the underwriting in part. As opposed to an MGU where you know what, it's just about how many widgets you can roll off the assembly line today. Operator: Your next question comes from the line of Rob Cox with Goldman Sachs. Robert Cox: For my first question, I just wanted to ask about the catastrophe losses in the insurance segment. It just looks like it was more in line with the average ratio -- cat loss ratio we've seen for the last couple of years, whereas some peers are reporting lower cats. I know you called out SCS. But is there any particular geography or large loss to call out there? Or is this just a result of growth in short tail lines recently? W. Berkley: I would tell you that it's 2 things. One is a bit of frequency with very modest severity. And number two, as you pointed out -- look, we -- the property market, in particular, it's been a pretty good run. So we leaned into it because we like the risk-adjusted returns that were available. As a result of that, we got a little bit more exposure. But I would caution you not to read too deeply into it. Robert Cox: Okay. Great. That makes sense. And just a follow-up on homeowners. It sounds like there's still some opportunity there. Can you talk about how Berkley One has performed compared to your expectations and where you're growing? Is it in states with more cat exposure, less cat exposure? Any context would help. W. Berkley: I think, Brian -- well, first off, I think Berkley One has proven to be a great success. It basically started -- not basically, it was started from catch with a small team of people that made it happen. And today, it is comfortably more than a $0.5 billion business and growing at a healthy pace. No, we are not leaning into California or anything akin to that. I would tell you, we have a certain group of states that we're in, and we are just going deeper this is not just an idea to try and go into every last nook and cranny. We're going where our colleagues believe the opportunity is and where we feel as though we have a value proposition that we can deliver consistently day in and day out. But no, the growth there isn't because California became the flavor of the day for us. We do not participate in the California market. Operator: Your next question comes from the line of Ryan Tunis with Cantor. Ryan Tunis: I guess just a question on the casualty side, just low single-digit growth in other liability. Less than I expect. I'm just curious, are you starting to see more competition in some of those lines? Or is there something else that's kind of causing that decel? W. Berkley: I think there's a couple of things. One, we have a view on rate. Is there a bit of competition? Yes, there's a bit of competition, but it's also how we're pivoting the portfolio at this moment in time. Ryan Tunis: Got it. And then I guess I was a little bit surprised that Berkley One and A&H, could move the needle that much in short tail lines. Could you just give us some idea? But then again, I don't know how big those lines are. So could you give us some idea of how much of that short tail lines line item is noncommercial property, if that makes sense? W. Berkley: I don't have a specific number here. So if it's okay with you, Ryan, let me ask Rich or Karen to follow up with you. But I don't have it at my fingertips, and I don't want to -- but it's consequential, obviously, hence, the comment earlier. Thanks for the question. Operator: Your next question comes from the line of Brian Meredith with UBS. Brian Meredith: Awesome. So 2 questions. First one, big picture. So -- and maybe this is kind of for you as well as the Chairman. I recall Bill saying that one of his biggest regrets from the last hard market was starting to pull back too early. When there was still a healthy margin in the business. Is that a debate that's going on right now? Kind of how are you thinking about that? W. Berkley: So Brian, it's funny. I recall that comment from the Chairman usually about 7:45 every morning, at least 5 days a week. So I'm going to yield the floor to him. William Berkley: So I think it's always -- if you look at your business and you say, our price is going to go down more there at the bottom, how much margin do you have? And where is the current accident you're going to come out because you've had a lot of years of substantial price increases. And as all of us know, -- this is a business where you don't know the ultimate margin for several years after you've written the business. And in that case, it was 86%, give or take, we have much more margin than we were reporting. And we didn't realize it and we cut back too soon. So there are 2 pieces to this puzzle. Are you being pessimistic as to the margin you're presenting because you haven't appropriately reflected the price increases. And then the second question is where prices change and what's happening with the loss ratio. And that is the issues you faced, and it was different in 1986 than it is today. There's more litigation. There are more lawyers who are incentivized, bringing about litigation, that's a tougher decision. But I would say that you can still grow. There are still opportunities. You don't have to run away at this moment. But it will come at some point in time. We guess it's not here quite yet, but it is going to evolve to that point. It may be shorter duration because of all kinds of other things than last time because when those losses happen, it could happen all of a sudden. W. Berkley: Brian, thanks for the question and highlighting the genetic flaw that runs through the family. Did you have a second question? Brian Meredith: Yes. My second question, Rob, I know you chat a little bit about the first quarter and you didn't see much on... W. Berkley: Brian, are you there? Brian Meredith: Yes, I'm still here. Can you hear me? W. Berkley: Yes. Please go ahead. Brian Meredith: Okay, good. Question on tariffs. Are you seeing anything yet in your loss picks? W. Berkley: We are preparing for it, but we're not seeing anything particularly consequential yet. But we are certainly preparing for it in all the product lines, as you'd expect, that are more exposed, highlighting, obviously, property and APD. Operator: Your next question comes from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: Okay. First question is around loss development. It looks like really net nothing. But wondering if you could talk about if you had some releases in 1 area, some adverse in another area? Any color on that you could share would be appreciated. W. Berkley: It was basically incremental between the two segments. To your point, it was almost at push. And as you can appreciate, there's a lot of moving pieces that's where it ultimately ended up coming out to. But as far as additional detail, I don't know if we publish it, it will be in our Q, I guess, Andrew. So we don't have it all in front of us right now. Andrew Kligerman: Anything off top of mind in casualty that stuck out? Was there adverse there or... W. Berkley: I don't have the numbers in front of me. I think we're but as I suggested earlier, we're paying close attention to the auto liability line and we're mindful of what that could mean for the umbrella line. Andrew Kligerman: Got it. And then just, Rob, just your commentary throughout this call. I'm just trying to put numbers around it a little bit. First quarter market seemed very different, and you rightly thought you could grow double digit this year. Last quarter, you were thinking maybe 8 to 12. Should I be thinking we've kind of migrated more into the kind of mid-single-digit zone just given what you said about rates, et cetera? W. Berkley: It could very well be the case, Andrew. I think really what I was trying to articulate earlier is you got a lot of pieces of the broader marketplace that are in some kind of flux, and we are going to respond to that. So is it possible that next quarter, we could grow 4%? Yes. Is it possible next quarter, we could grow 10%? Yes, absolutely. So I can't speak with the level of confidence I'd like to and perhaps you would like me to just because of my comment earlier about big chunks of the marketplace. Being in notable flux -- improving some eroding. Andrew Kligerman: That's very fair. If I could just sneak a quick one in. When you talk about Berkeley's business being at the small end of the spectrum type accounts. Any way to size that? I know you even brought a team in from -- I think they were at Hamilton or Kinsale in the small end. Like any way to size the small end of the spectrum at W.R. Berkley in the... W. Berkley: So obviously, some of the business we write -- one way to quantify it would be limits. As far as giving one, a sense of scale of accounts that you write, not the only one, but certainly one would be -- and if you look at the policies that we write, some of them like workers' comp, you have a statutory exposure, so you can't have a limit on it. So if you take the stuff out of the pie, that has statutory limits like comp and you look at what does that leave you with as far as the limits profile. I was told by a colleague earlier today, that between 85% and 90% approximately of our policies have a limit of $2.5 million or less. So I don't know, hopefully, that gives you some sense or direction. Andrew Kligerman: Definitely. Thanks a lot. W. Berkley: Thank you. Andrew, just one other comment. Even though it's smaller account size, it tends to be very specialized in nature. So I would encourage you not to confuse size with commodity. Operator: Your next question comes from the line of Mark Hughes with Truist. Mark Hughes: A quick follow-up on the other liability. You said the -- you were pivoting the portfolio. I wonder if you could expand on that point? Is there something you're seeing in the loss development trends perhaps that makes you want to pivot around other liability? W. Berkley: There are countless different variables, and it could include just appetite based on the general exposure. It can be based on state and it certainly can be based on attachment point. So those would be a couple of examples or variables that can lead to the pivot. Mark Hughes: And I think you talked about how commercial auto was -- had been volatile lately. When you see this pivot, that's something that probably persists depending on which variables are driving it. Is it something that... W. Berkley: Yes. I would not read too deeply into 1 quarter, would be my comment. Thanks for the question. Operator: Your next question comes from the line of David Motemaden with Evercore ISI. Please go ahead. David Motemaden: Okay. Great. Just had another follow-up just on the other liability line. You had mentioned there are some pockets of competition picking up there. I was wondering if you could elaborate. Is that more primary casualty? Is it more excess or umbrella E&S more large account admitted? Any order of color on that would be helpful. W. Berkley: There are certain exposures that we've examined and given how we see the legal environment, we've adjusted our appetite. And that comes through both in the exposure itself as well as, in some cases, how we think about attachment point and certainly how we think about jurisdiction of exposure. David Motemaden: Got it. Okay. So that sounds like across both primary GL and umbrella sounds like sort of a book wide comment. Is that correct? W. Berkley: Correct. And those changes are well underway. And I don't think that you should assume that this is necessarily a perfect indicator for what to expect going forward because a lot of that change has been affected. David Motemaden: Got it. Okay. That's helpful. And then maybe just on workers' comp, and you sort of mentioned it a little bit in your prepared remarks. But pretty good growth this quarter also this year to date as well. Could you remind me how much of the book is that you guys would say specialty or high hazard versus how much of it is Main Street just so I can sort of think about the moving pieces underneath that 9% growth this quarter. W. Berkley: So what I'd like to do, if you don't mind, David, is, a, I got to make sure that, that's detail that we provide. And to the extent it is, if you don't mind, Karen, I will follow up with your first thing tomorrow. I just -- I don't want to inadvertently color outside the lines. Operator: Your next question comes from the line of Michael Zaremski with BMO. Michael Zaremski: My first question is broad, focusing on the E&S market specifically. At least the data points we see is the deceleration of the increased competitiveness and the growth in the E&S market, you mentioned it to in your prepared remarks, is coming more so from the pricing side of the growth equation, whereas policies in force are continuing to grow at a double-digit pace. I'm just curious from your perspective, is that if to the extent pricing continues to moderate, should we would it be normal for the policy growth to also kind of start moving back into the primary market? Or are you seeing any trends there? Because it feels like the policy growth is really what's supporting ultimately a lot of the still healthy growth in D&S? W. Berkley: So a couple of things there. One, I think when we talk about E&S, one needs to draw the distinction between the property line and other, other being professional and certainly casualty. Long story short, a lot of the growth that we have seen over the past couple of years within E&S has been disproportionately driven by property. We've shared the observation in the past that when the property market gets hard, oftentimes, it tends to spike and then it comes back down at somewhat of a precipitous rate. As opposed to the liability market when it starts to harden, it tends to oftentimes be a bit more of a gradual sense and it has more staying power. We, as an organization within the commercial lines, particularly specialty and more specifically, E&S. We are much more of a liability player than we are a property player. So did we cash a bit on the property wave? Yes. But that having been said, the lion's share of our E&S participation on a net basis happens to be the liability lines. So when I think about this market unfolding, and I think we've expressed this view in the past, I think property has barring the unforeseen event, and it would have to be very unforeseen. I think the bloom is off the roads. I think you're seeing the retro market starting to erode that will waterfall down into the property cat market. And certainly, you're going to see that had continued pressure on E&S property. We, as an organization, will be impacted by that, but it will be far less than our peers because of our weighting towards the liability line. I think social inflation continues to be an issue. And you are going to see the opportunity within the E&S space become more and more weighted towards the liability lines, particularly casualty, I think professional is a bit of a mixed bag. Michael Zaremski: Okay. That's helpful. And my follow-up, Rob, is back to the earlier comments on the rating agency capital models and the their sausage maker throwing out perhaps a 10-digit excess capital number. So in my words, maybe we'll make it $1 billion to buy that by our shareholders' equity. That's, whatever, 10%. Is that 10% a much higher level than historically? And do we care about the agency capital model to manage to different models. W. Berkley: The answer is we care about everything, but we don't run the business for the rating agencies. We are conscious of those data points. The math you did, I'm not going to comment on whether that's right or wrong. I just was trying to articulate the point that we have a lot of cushion, and we will figure out how to deal with the surplus and what we believe is the most sensible and economic way to return excess to the owners that it belongs to. So I think if you look at our capital ratios over an extended period of time there is no moment in time that I recall that we, from a ratio perspective have had the amount of headroom that we have today. Operator: Your next question comes from the line of Andrew Andersen with Jefferies. Andrew Andersen: Just looking at the investment portfolio. I think I heard you say 4.6% on the domestic yield book, so maybe some pressure on the Argentina side. Maybe if you could just comment on the... W. Berkley: Argentina has come off a little bit from the peak. If you throw Argentina and there it brings up to 4.8%. What we were really trying to articulate is the lion's share of the portfolio is no surprise domestic, highly rated bonds, call it strong AA-. And again, the duration sitting at the 2.9. And really, again, the highlight that we were trying to flag was if you compare 4.6% to 5%, there's opportunity for improvement from here. Andrew Andersen: Okay. Great. And then just looking at the expense ratio and then the corporate expense at the consolidated level, it seems like that numbers lower than what the year-to-date or the first half was. So I guess -- are we still pushing... W. Berkley: The expense ratio is what? Andrew Andersen: I just look at the expense ratio and then looking at the corporate expense, and it looks like that's a little bit lower relative to where first half. So I guess are you pushing some expenses into the segment? And where are we with that? W. Berkley: Rich is just not paying on the holding company anymore. Richard Baio: It's a couple of things. It's one, as you pointed out, we have had some of our start-up operating units move out of our corporate expenses, they've got scale and move into the underwriting expenses. And the second item is with regards to in the first half of the year. You might remember, we had also paid a special dividend and for accounting purposes, the vested but mandatorily deferred RSUs, the dividends on that wind up getting characterized as compensation expense. That's the driver. W. Berkley: As far as the first piece goes, those businesses that Rich referred to that once they get to a certain maturity, we move them out they are moved out, but they are dilutive to the expense ratio. So hopefully, they will continue to scale, and that will get some relief there. Operator: Your next question comes from the line of Josh Shanker with Bank of America. Joshua Shanker: So as I'm listening to the 2Q conference call, commentaries from some brokers, from your peers, there was a commentary that the E&S property markets were very, very weak, and that contributed to the weakness. But that stay tuned for 3Q, which is a low property quarter, everything is rosy in the other lines of business, and so we won't see that same headwind. And then when you began your prepared remarks with the word self-sabotage, I got very, very concerned... W. Berkley: Okay. Why did it upset you? Joshua Shanker: I mean the self-sabotage sounds like an extreme thing. I mean we're all guilty of it from time to time, but hopefully in modest amounts. What is the takeaway, I guess, on pricing right now compared to 3 months ago? Is it along the same track? Or did you see a real step down, I guess, compared to 3 months ago. W. Berkley: Are we talking -- what part of the market are we talking about? I just want to make sure I'm following. Joshua Shanker: Book relative to the marketplace. When you read your book... W. Berkley: Our overall book, I think, was essentially flat. Obviously, there are a lot of moving pieces. But as far as the rate increase goes, I think we were at [ 7.6% ] and we were, give or take, at a similar level last time. Did we get there exactly the same way? Absolutely not. But ultimately, I think that by and large, it's in a similar place. the parts of the market that at this moment in time are under the greatest pressure. Again, in our mind, you're going to see it with property cat and that likely will not become particularly visible until 1/1. But in the meantime, you certainly are seeing it in E&S property. And that -- while we are not a big player in that space, we're certainly an observer and a modest participant. And that's how it looks to us. But again, why is our rate where it is? Because we are a modest participant in the part of the market that's under the greatest pressure right now. It doesn't mean we're insulated completely, as suggested earlier, but we have, again, a pretty broad offering. And we only have a toe in that pool. Joshua Shanker: And there's different ways to compete for business. And in this environment, are you seeing carriers offer to increase commissions to distributors in order to get a larger share of their business. W. Berkley: I think that Chapter 2. We're still in Chapter 1. That's the long book. Thanks, Josh. Operator: Your next question comes from the line of Meyer Shields with Keefe Bruyette. Meyer Shields: Great. So a couple of quick questions. One, going back to the pivoting comment. You mentioned the legal environment. Has your overall view of casualty loss trends changed over the past 3 to 6 months? W. Berkley: No. Meyer Shields: And then I know the numbers are small, but I'm looking at most interest rates sort of declining in the quarter and an extending duration. And I'm wondering what is it that you're seeing that makes now the right time for that duration extension? W. Berkley: Well, I think just to frame it, we went from 2.8 to 2.9 and there's a little bit of rounding in there. So I would encourage you not to read too deeply into it. Obviously, we try to be opportunistic at any moment in time as far as putting the money out that luxury of opportunism is not as comfortable as it was in the past. As short-term rates are coming down. So that will put more pressure on the organization to put might to work. But again, going from 2.8 to 2.9, I would cost you not to read too deeply into it. Now I'd like to go back to the first question for a moment, if I may. So our general view around loss cost trend in the environment is consistent. But our view about particular niches within the marketplace, we are constantly examining and reexamining, and that can instruct our appetite at a more granular level. It's not all on or all off. Operator: Comes from the line of Bob Jian Huang with Morgan Stanley. Jian Huang: This is just more of a follow-up. Previously, you talked about that because the varying lines of business are decoupling from a pricing perspective, you can essentially turn on and turn off growth. Can you maybe help us to understand how quickly you can turn that growth, say, the 4% or the 10% you're referring to earlier. Just maybe help us understand the mechanics that you visit just simply just saying, okay, we're going to stop doing business here. I'm trying to understand how you're thinking about growth and managing the ability to go in and out of the market? W. Berkley: I think ultimately, it's really just about market conditions, and we are consistently in the marketplace at a rate level with terms and conditions that we find to be appropriate. The market may move away from us or when we were talking about how we were pivoting some of the other liability. It's not necessarily that we just washed our hands of it, but we have a view on rate. We have a view on attachment and we have a view on terms and conditions and perhaps the market doesn't find it palatable and perhaps the market can find someone else is willing to do it. So again, it's not that we abandon a market is that our appetite and how we're willing to approach it can adjust based on the data and the information that we see and how we process that. So that's -- and our ability to do that, we can do it very quickly. You rely on our colleagues with the expertise and various niches to decide how and when to pivot. Jian Huang: Okay. That's very helpful. Very last one. In terms of the market competition, you kind of talked about a decent amount of businesses in the smaller market side of it. Now if we do go into a more challenging macroeconomic environment, are you perhaps concerned about small and medium enterprise tend to be more exposed to macroeconomic conditions. So consequently, that could potentially play into your core market? Like just curious how you think about that? W. Berkley: So the answer is no, while we're conscious of it and certainly the health and well-being of our clients is a priority for us. If you use COVID as a data point, actually, we were able to navigate through that, and we're pleased with how our clients fared and our ability to continue to support them. Operator: Your final question comes from the line of Wes Carmichael, with Autonomous Research. Wesley Carmichael: Great. So just one question, but just coming back, Rob, to your comments around property and property cat reinsurance. You mentioned the routing of the apple or at least impending routing of the apple. I just wanted to get your view -- curious your view because it seems like there's a lot of rhetoric that property is still rate adequate, but do you think we're really there where things could start to turn at 1/1? Or is that going to take more time? W. Berkley: I think it depends on what the feeding frenzy is like at 1/1. Everyone needs to assess how much margin they think is in the business. Obviously, rates went up dramatically. Attachment points shifted significantly, so on and so forth. And while whatever 9 months ago, we saw a softening, and I think the expectation is given the performance, it's likely there will be further softening at 1/1 for this coming year. We'll have to see how aggressive the market is. I we have a view as to how much margin is in the business and where -- and at what point we shift our posture from an offensive one to a defensive one. But that's just the reality of a cyclical business. Thank you for the question. Nicole, was there anyone else? Or have we covered it? Operator: We've covered it. There are no further questions at this time. I will now turn the call back to Mr. Rob Berkley for closing remarks. W. Berkley: Okay. Nicole, thank you very much for your assistance and hosting. Thank you all to the participants for your interest in the organization. And hopefully, it's quite evident we had a very strong quarter. But equally, if not more importantly, the table is set for a good balance of the year, and in all likelihood a very strong 2026. So again, thank you for dialing in, and we look forward to speaking with you in about 90 days. Bye-bye. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to the ServisFirst Bancshares Third Quarter Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mange, Director of Investor Relations. Thank you, Davis. You may begin. Davis Mange: Good afternoon, and welcome to our third quarter earnings call. Today's speakers will cover some highlights from the quarter and then take your questions. We'll have Tom Broughton, our CEO; Jim Harper, our Chief Credit Officer; and David Sparacio, our CFO. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom. Thomas Broughton: Thank you, Davis. Good afternoon, and thank you for joining our third quarter conference call. I'll give you a few highlights followed by credit update from Jim Harper and followed by David Sparacio with some financial updates. Talk about loan growth, it was below our expectation for the third quarter. We went back and reviewed loans booked and draws versus paydowns over the 3 quarters of 2025 and loan paydowns were up $500 million over the prior 2 quarters in the third quarter. So this contributed to the lack of -- real significant loan growth. We did see a nice increase of over 10% in our loan pipeline in October compared to September. In comparing our loan pipeline to 1 year ago, the pipeline is 40% higher today. In addition, the projected payoffs today are 30% of the projected pipeline versus 1 year ago, there were 41% of the projected new loans. So we do see that there is a slight decline in the pipeline as a percent of the loan payoffs as a percent of the loan pipeline. So the pipeline is not scientific, though we do stress to our bankers, and we want to be as accurate as possible. Every fourth quarter that I can remember has been -- we've had solid loan growth -- so my expectation will be that we'll have a good closing long quarter in loans. And I'll say that not all loan payoffs are bad because some of them that are low fixed rates pay off on the asset sale. So we've had several this quarter. So we're glad to see those pay off. So on the deposit side, we did see some continued reduction in our high-cost municipal deposits in the third quarter. They were offset by some large corporate deposit inflows -- so -- but as David will discuss in a few minutes, we're trying to manage down our total deposit costs as the Federal Reserve reduces the Fed funds rate. On the new markets, we did hire 7 new producers. In the quarter spread throughout our footprint. And we're also proud of that all of our markets are now profitable. I don't think we've ever achieved this before since our first year in business. So we're very proud of that. So I'm going to turn it over now to Jim Harper for a credit update. Jim Harper: Thanks, Tom. As Tom noted, lending activity softened a bit during the third quarter, but activity as we moved into the fourth quarter has been robust. With activity across our footprint. From a credit metric standpoint, charge-offs totaled just over $9 million in the third quarter, which results in an annualized net charge-off to average loan percentage of 27 basis points, on higher than recent historical periods, the charges were primarily taken on loans, which had previously been impaired with one exception of a $3 million charge taken on a loan that had not previously been impaired. From an allowance perspective, the allowance to total loan percentage remains static compared to the second quarter at 1.28% at quarter end. Nonperforming assets were notably higher at [ 9/30 ], increasing by approximately $96 million during the quarter with the increase driven by our relationship consisting of 8 loans with a large merchant developer, rehabilitator of multifamily properties. Properties associated with the loans are in Alabama, Louisiana and Texas. Despite us placing these loans on nonaccrual during the quarter, the bank was able to successfully obtain additional collateral to -- bolster our position. Additionally, the borrower is actively selling assets as evidenced by purchase and sale agreements on 5 properties and 8 letters of intent on others as well as pursuing other corporate actions, which are expected to produce meaningful liquidity in the coming quarters. ServisFirst continues to aggressively manage our NPAs, and we expect to have resolutions on several material credits as soon as late in the fourth quarter of this year. I will now turn it over to David to provide his comments on our third quarter financial performance. David Sparacio: Thank you, Jim. Good afternoon, everybody. For the quarter, we reported net income of $65.6 million and diluted earnings per share of $1.20 and preprovision net revenue of $88.3 million. This represented a return on average assets of 1.47% and a return on common equity of 14.9%. Net income grew more than $9 million or 18% from same quarter last year. During this quarter, we had a few unique transactions. The first was the reversal of about $4.4 million of accrued interest on the credit that Jim spoke of. Secondly, we recognized a loss of $7.8 million on the sale of bonds. And thirdly, we invested in a solar tax credit, which gave us a benefit of about $2.4 million in tax provision. When we take these 3 transactions into account, we view our normalized net income for the quarter to be $73.8 million or $1.35 earnings per common share. I will talk more about these 3 transactions later on. And lastly, our book value grew by an annualized 14% versus last quarter and by more than 13% from the same quarter a year ago ending at $32.37 per share. We continue to be well capitalized with common equity Tier 1 capital ratio of 11.5% and risk-based capital ratio of 12.8% for the quarter. Of course, these are preliminary numbers. In net interest income, our amount for the quarter was $133.4 million as reported and normalized net interest income was $137.8 million. This equates to a net interest margin of 3.09% as reported and more importantly, 3.19% when normalized for the interest income reversal previously mentioned. This normalized net interest income is $8.4 million higher than the normalized number for second quarter of '25 and more than $22.7 million higher than third quarter of '24. We are pleased with the continued margin expansion. We certainly benefited from the Fed's rate reduction in September and are expecting continued margin expansion in fourth quarter due to anticipated additional rate cuts. On the provision side, we had single-digit loan growth, which equated to a reduction of about $1.8 million of provision expense for the second quarter -- I'm sorry, versus the second quarter. We had little change in our economic and credit indicators in our CECL model. And as a result, our allowance ratio held steady at 1.28%. During the quarter, we recognized, as I mentioned, $7.8 million loss on the restructuring of our bond portfolio. As we did in the second quarter, we strategically sold $83.4 million of bonds with a weighted average yield of 1.66% at a loss. We took advantage of the opportunistic market and reinvested the proceeds in new investment purchases yielding an average of 6.14%. The expected payback period on this transaction is about 3 years. This restructuring will position us for stronger margin performance in future quarters. This transaction has significantly reduced our low-yielding bonds as well as our accumulated other comprehensive losses, and we do not anticipate continued restructuring of our bond portfolio. Excluding these bond losses, our net interest revenue increased by more than $1.6 million from the second quarter of '25, to the third quarter. This positive increase is primarily driven by our increased service charges, which were implemented on July 1 and on stronger mortgage production. We continue to focus on noninterest income growth, especially through our credit cards, merchant services and treasury management products. As our revenue is growing, we are managing our noninterest expense, which resulted in an improved efficiency ratio. Our best-in-class efficiency improved from 36.90% in third quarter of '24 to 35.22% in third quarter of '25. Our adjusted efficiency ratio for this quarter is 33.31%, which has dramatically improved from same quarter last year. During this quarter, our noninterest expense was up versus second quarter of '25 due primarily to the rightsizing of our incentive accrual in the second quarter. Versus the same quarter last year, we experienced an increase in noninterest expense of about $2.4 million, which is more than outsized by the $12.6 million increase in revenue. My goal remains to constrain noninterest expense growth to a fraction of our revenue growth. We remain focused on expense control and continue to seek opportunities to reduce our operating cost. So all in, the third quarter of '25, our pretax net income was up about $2.2 million compared to the second quarter of '25 and up over $6.4 million versus third quarter of '24. We remain focused on organic loan and deposit growth priced both competitively and profitably, and we are concentrated on continuing the expansion of our margin. As I previously mentioned, we also invested in a solar tax project, which essentially lowered our effective average tax rate for the year to 18.9%. The solar investment is our first, and we will continue to evaluate other tax improvement opportunities as they arise. This concludes my remarks, and I will now turn it back over to Tom for additional comments. Thomas Broughton: Thank you, David. Last thing I'd like to cover is there's been recent attention in the media in recent days on the increase of fraud and a few regional banks. Much of this is related to category -- lending called NDFI, which stands for nondepository financial institutional lending. We have avoided any significant exposure in most of the categories that fall within the NDFI category for one main reason, and that's because trois more common in NDFI loans, and it's hard to full-proof your process. warehouse lending, ABL lended and floor plans historically have had a greater incidence in fraud than any other types of loans. To cover our total NDFI exposure is $71 million or less than 1% of our loan portfolio. I think everybody knows that our correspondent division does business with our -- with community correspondent banks. And -- most of our exposure is to holding company lines of credit to community banks, a holding company. So we certainly are comfortable with our exposure in this category. I would differentiate a fraud issue from a credit issue. It's not that the credit deteriorated where there's [ fall ]. This [ fall ] is just a fraud and it typically is fairly common. You see it all the time. It continues in some sort of a pony scheme type situation until they are found out by their lender. And they have to come clean on it. So we avoid most of these categories like this, we avoid -- we shared national credits. We try to lend to borrowers. We think we know well, owner-managed companies and real estate developers are the best examples. We -- as lenders, we all make mistakes from time to time, but we -- because we have a record of lending to people we know. Our loan losses have been much lower and our credit quality has been much better at ServisFirst Bank. So we consider ourselves of community buy. We have 11 community banks plus our correspondent division. So we are proud of what we have built here over the last 20 years and certainly still the test of time, and we'll continue to do so. So this will conclude our prepared remarks, and now I'll turn it over to operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Steve Moss with Raymond James. Stephen Moss: Good afternoon, guys. Maybe just starting with the nonperformer here. Just curious, what was the dynamic, if you can give us any color that pushed the borrower over to nonperforming status -- and also, what's the loan-to-value on the loans? Thomas Broughton: Well, we -- as again, said we took additional substantial additional collateral during the quarter and substantially he offered it. And we -- because he was expecting a large payment before quarter end, it did not come in. So we will have no choice other than -- move it to nonaccrual and we'll start -- like to think we will turn it to accrual status over the next 6 months. As [ selling ] these properties and many others. So it's workforce housing redeveloper, long-term customer. We have confidence in the this borrower. So we feel good about our exposure. We don't have a -- it's a good loan. Obviously, it's not a good loan in terms of -- it's not current at the current time. We feel comfortable where we are. Stephen Moss: Okay. Got it. And just in terms of just thinking like when you guys just -- I hear you on the additional collateral kind of like just maybe just a little comfort in terms like what's the loan to cost or just kind of how you're thinking about how secure you are? I hear you're going to start to come back to accrual status just kind of -- you can [ sit limit ]1. Thomas Broughton: So we think through the forbearance process and all the actions that we were able to execute toward the end of the quarter. We did think there was possibly a little bit of a collateral shortfall, and we were able to work with the borrower to obtain additional collateral across several different fronts, and we think we've shored that up. So our loan to value, while certainly elevated, we don't -- we certainly think that it's below 1:1 at this point, and we've got adequate security to cover the loans for sure right now. Stephen Moss: Appreciate that. And then in terms of just kind of on the margin front. I hear you guys about the amount of the reversal of accrued interest. Just curious, probably getting effect that next week, underlying margin was 3.19% -- just kind of curious on the cadence of margin are you guys still thinking something close to high single digits to tens given rate cuts? And also just curious on loan yields, where loan pricing is these days? David Sparacio: Yes. So Steve, this is David. Yes, we're still confident with, I'll call it, 7 to 10 basis points improvement in margin each quarter as we've been seeing -- for reference, our -- I don't want to call it adjusted, but our normalized spot rate for September was [ $328 ], right, for the month, excluding the net interest accrual reversal. So we're in good shape on margin. the Fed cut happened September 17, so we only experienced about 2 weeks of benefit from that -- so we'll see that throughout the fourth quarter as well as we anticipate additional cuts in the October and December meetings. The Fed is going to have -- so we're going to continue to see improvement in margin. As far as loan yields, the going-on rate dropped a bit. Last quarter, we were at [ $7.07 ] this quarter, we're at [ $6.87 ] for loans going on. But we're continuing to manage through the process. We continue to have healthy repricings and cash flows. We're still sitting at about $1.7 billion in the next 12 months. in cash flows. And then on top of that, as Tom alluded to in earlier conference calls, we have another roughly $300 million a year in covenant bust that get repriced. And so we're sitting at about $2 billion worth of opportunity of repricing on loans. So we feel really good about the margin expansion and we think that's going to continue at least for the foreseeable Future as long as there's nothing drastic done by the Fed. Stephen Moss: Got you. And just in terms of the cash flows for the next 12 months, it's still in the high 4s in terms of fixed rate loans, cash flow? David Sparacio: Yes. It's still in the high 4s. [ 4.87 ] was a number for second quarter. We don't have an updated number from our external ALM consulting yet for the third quarter. So -- but we can get that to you, but still in the high 4s. Stephen Moss: Of course. Okay. And Tom, in terms of the loan pipeline here picking up, just curious where are you seeing the growth and kind of what you're seeing the demand for loans [indiscernible]? Thomas Broughton: I can't give you a good answer, Steve. It's all over the [ bollard ]. That's what it it, we obviously would like to see more C&I than we spend more commercial real estate oriented. But our AD&C is the lowest it's been in. Unknown Executive: In years and years -- from a percentage. Thomas Broughton: The CRE is below 300% of capital -- so it's by region, it's hit or miss, it's here or there in younger. I mean, Atlanta has been really strong, and we've had pockets of places that some of our markets are doing quite well. Some of our near markets, obviously, you would think they would do well, right? And they are. The new markets are Memphis and Auburn and Piedmont region have had good loan growth this year, and that you would expect that and they are doing that. So I mean, I'd still say loan demand is okay. I saw a banker, Saturday and he said, "I was loan demand. He said Okay. I said, yes, I know it's okay. It's not great. So we need a few more rate cuts to hopefully help out loan demand overall. Operator: Our next question comes from the line of Dave Bishop with Hovde Group. David Bishop: I'm curious -- Tom, on the expense side, Tom and Dave came in a little bit, I think, above expectations. Sounds like there was some shoring up on the incentive accruals. Is that correct? And maybe you can sort of ring fence that about maybe expectations where you see that compensation, salaries and benefits maybe settling into the final quarter of the year? Thomas Broughton: Yes, Dave, the true-up really happened in second quarter. So when you compare second quarter to the third quarter, it's really second quarter that was lower because of the true-up. We did an incentive true-up, it's all in incentive comp. And so it's going to depend a lot on loan production. We went back to accruing our normal incentive rate for the third quarter. And so fourth quarter, at this point in time, given the the uptick in the pipeline, we expect fourth quarter to be very similar to third quarter from an incentive standpoint. And so I would expect the noninterest expense to come in at the same level as well. So roughly $48 million. I know it's higher than expected. But I would just guide you back to our efficiency ratio. Our efficiency ratio is still best-in-class in the [ 130 ] we're not -- the expense increase is a fraction of what our revenue increase is. And as long as we continue on that trajectory. That's what I'm pleased with from the results standpoint. David Bishop: Got it. Appreciate that color. Then Tom, I think when we had you on the virtual road last month or so, still sort of fresh in the news, the opportunities from the MOE in your backyard. Any early signs of success there? Or you're pretty active in terms of recruiting efforts? Any -- any commentary you can provide there in terms of maybe early reads of relationship wins or bank or [indiscernible]? Thomas Broughton: Broadening that it's not only mergers that cause that create opportunity. We're looking at -- obviously, there are other mergers announced are going on and we look for opportunities in many fronts. And feel good about our ability to at least attract customers and offer them a more stable -- base than they've seen in some cases out there in the market. So we we feel confident about where we are and opportunities. Again, you've got to be out seeing people. And again, most of our opportunities come from existing customers, about 80% of our new business comes from referrals from existing clients. So that is something that we emphasize on trying to do a good job of taking care of our clients and they'll send us their friends and colleagues that they do business with and know well. So we think that's the very best thing we can do is take care of our clients and take care of their needs, and we'll get more just like them. So. David Bishop: Got it. And then one final maybe housekeeping question. The tax rate, I know with the solar tax credit investment bounced around a little bit. Maybe a good expectation for the effective tax rate going forward? Jim Harper: Yes. I think the 18.9%, Dave was going to stick for the year, at least for 2025. As Tom mentioned, this deal that we did, it kind of opened our eyes a bit on what's available and what's out there in the market. And so we have some good contacts. We have some good relationships. And so we're going to continue to develop those opportunities and take advantage of them. And so the goal -- you saw our tax rate jumped up a little bit in second quarter. And so the goal is to keep it certainly below 20% for sure. And so for 2026, we don't have anything that's planned right now, but we continue to have discussions with folks that have opportunities for us to take advantage of. So I would expect it to be in the 18%, 19% for the foreseeable future. Operator: Our next question comes from the line of Stephen Scouten with Piper Sandler. Stephen Scouten: David, I want to reconcile one number real quick. I think you said maybe a [ 328 ] margin for the month of September ex the reversal -- is that interest reversal, the main difference versus the [ $297 million ] listed in the supplemental information? David Sparacio: Yes, that is correct. Yes. It was -- it's about 31 basis points on that interest reversal. Stephen Scouten: Okay. Great And so you would expect to kind of see that 7 to 10 basis points, the way you would think about it in the fourth quarter would be 7 to 10 bps potential roughly off of the [ 319 ] all-in number. Is that the right way to think about it? David Sparacio: Yes, that is correct. . Stephen Scouten: Okay. Great. And then, Tom, maybe kind of following up on that question around dislocation. I like how you said that kind of offering stability in the market and being there for your customers. Are there any kind of new markets maybe on the horizon for you guys, where that level of business quality and stability you don't see being offered today that you'd be interested in, whether that's opened up via M&A or otherwise? Thomas Broughton: Yes. I think certainly, we've always had an interest in finding the right people in Texas, and that's something we're very interested in -- it's not easy. Texas is not an easy -- I'm not suggesting it's an easy market. I'm suggesting that there are -- if you have the right group of people with a bank base like ours, I think it could be a really good place to do business. And I think we could -- Texas is a very Texas-centric place. You can't send people there. The Texas people like to do business with Texas. And not people from Alabama or New York or anywhere else. So I get that, and I'm aware of it. So that's something we are certainly keenly interested in that market. And I'm not -- not to change the subject, but doubling back on what, David, to my interest rates, as the Fed cuts rate -- that rates -- that is our opportunity to say, okay, we need to try to manage down our deposit costs at least more than the Fed cut. So if the pay cut is 25, our goal is to manage down more than that, more than that 25 bps. So I think that's it's an opportunity. It's when we see the Fed cutting rates. That's our opportunity, Stephen. And I wouldn't avoid any further questions. Stephen Scouten: Yes, that makes sense. No, I appreciate that. That's a good reminder. And along with that, kind of maybe bouncing back to the NIM a little bit, I guess, when was that security sale completed this quarter? And is there any sort of incremental benefit to the run rate of securities yields in the NIM in the fourth quarter from that trade? Unknown Executive: Yes. The security sale was done in late in third quarter, maybe the third week of September. And so you're not going to see much more benefit at all in third quarter as a result of that. You'll see the full benefit of it in the fourth quarter. And I don't have a number off the top of my head exactly what that is, but it's going to be 500 basis points or 250 basis points on $80 million -- or I'm sorry, $70 million. Thomas Broughton: Thank you, Stephen. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings and welcome to Zions Bancorp Earnings Conference Call. Please note, this conference is being recorded. Now I will turn the conference over to Shannon Drage, Senior Director of Investor Relations. Thank you, and you may begin. Shannon Drage: Thank you, Von, and good evening, everyone. Welcome to our conference call to discuss the third quarter earnings for 2025. My name is Shannon Drage, Senior Director of Investor Relations. I would like to remind you that during this call, we will be making forward-looking statements. Please note that actual results may differ materially. We encourage you to review the disclaimer in the press release or Slide 2 of the presentation, dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release as well as the presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; Chris Kyriakakis, Chief Risk Officer; and Rena Miller, Corporate General Counsel. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour. I will now turn the time over to Harris Simmons. Harris Simmons: Thanks very much, Shannon, and good evening, everyone. As you'll see on Slide 3, the third quarter reflected continued momentum in our core earnings. Relative to the prior quarter, net interest margin expanded by 11 basis points to 3.28%. Customer fees, excluding the net credit valuation adjustment, grew $10 million, and adjusted expenses declined $1 million. The efficiency ratio improved to 59.6%. Average loans and customer deposits increased by an annualized 2.1% and 3.1%, respectively, compared to the prior quarter. These trends, which resulted in positive operating leverage are encouraging. During the third quarter, we recorded a $49 million provision for credit loss. Net charge-offs in the quarter were $56 million or 37 basis points of loans on an annualized basis. As noted in our 8-K filed on Wednesday of last week, legal action has been initiated for the recovery of approximately $60 million and certain guarantors of 2 related C&I loans. We charged off $50 million of the combined balances of the loans at the end of the quarter. Additionally, we have established a full reserve against the remaining $10 million. We view this as an isolated situation resulting from a particular -- a couple of borrowers. We have no further exposure related to these borrowers or guarantors. I would note that excluding the impact of this matter, net charge-offs were minimal at 4 basis points annualized on average loans and credit quality generally improved for the quarter as well. Moving to Slide 4. Diluted earnings per share was $1.48 compared to $1.63 in the prior period and $1.37 in the year ago period. This quarter's results include a $0.06 per share negative impact related to the net credit valuation adjustment. Earnings per share also reflects the adverse impact of the elevated credit provision discussed previously. Slide 5 provides a 5-quarter view of the pre-provision net revenue. On an adjusted basis, our third quarter results of $352 million reflect an improvement of 11% compared to the prior quarter and 18% compared to the prior year period as revenue growth continued to outpace expense growth. With that high-level overview, I'll turn the time over to our Chief Financial Officer, Ryan Richards, for additional details related to our performance. Ryan? R. Richards: Thank you, Harris, and good evening, everyone. Beginning on Slide 6, you will see the 5-quarter trend for net interest income and net interest margin. Net interest income increased by $52 million or 8% relative to the third quarter 2024. We continue to see the benefit from fixed asset repricing and favorable shifts in the composition of average interest earning assets. Growth in average customer deposits in excess of loan growth also contributed to an improved mix in funding relative to the prior quarter. As a result, the net interest margin expanded for the seventh consecutive quarter to 3.28%. Our outlook for net interest income for the third quarter of 2026 is moderately increasing relative to the third quarter of 2025, supported by continued earnings asset remix, growth in loans and deposits, and fixed asset repricing. Our guidance assumes 225 basis point cuts to the Fed funds rate in October and December of this year, with additional 25 basis point cuts in March and July of 2026. Slide 7 presents additional details on changes in the net interest margin. The linked quarter waterfall chart on the left outlines changes in both rate and volume for key components of the net interest margin. The net interest margin expanded by 11 basis points sequentially from favorable earning asset remix and fixed loan repricing as well as improvement in total funding costs. Against the year ago quarter, the right-hand chart of this slide presents the 30 basis point improvement in the net interest margin, which benefited from the improved cost of deposits. Moving to noninterest income and revenue on Slide 8. Presented on the left in the darker blue bars, customer-related noninterest income was $163 million for the quarter versus $164 million in the prior period and $158 million 1 year ago. This quarter's results include an $11 million impact from net CBA loss, primarily driven by an update in our valuation methodology in addition to changes in other market factors. Adjusted customer-related noninterest income, which excludes net CVA, was $174 million for the quarter, representing a 6% increase versus the second quarter and an 8% increase versus the year ago quarter. Notably, capital market fees, excluding net CVA, increased 25% compared to the prior year period, driven by higher loan syndications and customer swap fee revenue. We continue to see solid contributions and growth from our newer capital markets offerings, including real estate capital markets, securities underwriting and investment banking advisory fees. The chart on the right side of this page presents both total revenue and adjusted revenue for the most recent 5 quarters, which were impacted by the factors previously noted for net interest income and customer-related fee income. Our outlook for customer-related fee income in the third quarter of 2026 is moderately increasing relative to the third quarter of 2025. The growth is expected to be broad-based and driven by increased customer activity and new client acquisition. Capital markets continue to contribute in an outsized way. Slide 9 presents adjusted noninterest income in the lighter blue bars. Adjusted expenses of $520 million decreased by $1 million versus the prior quarter and increased 4% versus the year ago period, with the latter increase driven largely by technology and salary-related costs. Our outlook for adjusted noninterest expense for the third quarter of 2026 is moderately increasing relative to the third quarter of 2025. The expense outlook considers increased marketing-related costs, continued investments in revenue-generating businesses and increased technology costs. We continue to expect future positive operating leverage. Slide 10 presents 5-quarter trend in average loans and deposits. Average loans increased 2.1% annualized over the previous quarter and 3.6% over the year ago period. Total loan yields increased by 5 basis points sequentially. Our outlook for period-end loan balances for the third quarter of 2026 is slightly to moderately increasing relative to the third quarter 2025 and assumes growth will be led by commercial loans. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits were relatively flat including 11.5% reduction in average broker deposits. Average noninterest-bearing deposits grew approximately $192 million or 0.8% compared to the prior quarter, partially as a result of the migration of a consumer interest-bearing product into a new noninterest-bearing product in mid-May at our Nevada affiliate, which is now being fully reflected in average balances. Near the end of September, our remaining affiliates completed the same migration of legacy interest-bearing deposits into the new noninterest-bearing accounts. The approximately $1 billion of migrated deposits from the remaining affiliates are reflected in period-end balances in the third quarter and will be fully represented in average balances in our fourth quarter results. The cost of total deposits declined sequentially by 1 basis point to 1.67%. Further opportunities to reduce deposit costs will depend on the timing and speed of short-term benchmark rate changes, growth in customer deposits and market competition and depositor behavior. Slide 11 provides additional details on funding sources and total funding cost trends. Presented on the left are period-end deposit balances, which grew by $1.1 billion versus the prior quarter. Total borrowings declined $1.8 billion during the quarter. Short-term FHLB advances decreased $2.3 billion, partially due to the issuance of a $500 million senior note in addition to customer deposit growth. On the right side, average balances for our key funding categories are shown with the total funding costs. As seen on this chart, our total funding costs declined by 5 basis points during the quarter to 1.92%. Moving to Slide 12. Our investment portfolio exists primarily to be a storehouse of fund to absorb customer-driven balance sheet changes, allowing for deep liquidity through the repo market. Presented here are securities and money market investment portfolios over the last 5 years. Maturities, principal amortizations and prepayment-related cash flows from our securities portfolio were $596 million in the quarter or $291 million when considered net of reinvestment. The paydown and reinvestment of lower-yielding securities continues to contribute to the favorable mix of our earning assets. The duration of our investment securities portfolio is estimated at 3.7 years. We begin our discussion of credit quality on Slide 13. Realized net charge-offs in the portfolio were $56 million this quarter or 37 basis points annualized, driven principally by the $50 million charge-offs that Harris described previously. Nonperforming assets remained relatively low at 0.54% of loans and other real estate owned compared to 0.51% in the prior quarter. Classified loan balances declined sequentially by $282 million driven by a $143 million reduction in CRE and a $141 million reduction in C&I classified levels. We expect the CRE classified balances will continue to decline going forward through payoffs and upgrades. During the third quarter, we recorded a $49 million provision for credit losses, which, when combined with net charge-offs, reduced the allowance for credit losses by $7 million relative to the prior quarter. The reduction reflects lower reserves associated with CRE portfolio specific risks. The allowance for credit losses as a percentage of loans remained stable at 1.2%, and the loan loss allowance coverage with respect to nonaccruals was 213%. Slide 14 provides an overview of the $13.5 billion CRE portfolio, which represents 22% of total loan balances. Notably, this portfolio continues to maintain low levels of nonaccrual and delinquencies. The portfolio is granular and well diversified by property type and location, with this growth carefully managed for over a decade through disciplined concentration limits. As it continues to be of interest, we have included additional details on certain CRE portfolios in the appendix of this presentation. Our loss-absorbing capital is shown on Slide 15. The Common Equity Tier 1 ratio this quarter was 11.3%. This, when combined with the allowance for credit losses, compares well to our risk profile. We expect our common equity from both a regulatory and GAAP perspective [indiscernible] and that AOCI improvement will continue through unrealized loss accretion in the securities portfolio as individual securities pay down and mature. Importantly, our organic earnings growth, when coupled with AOCI unrealized loss accretion, has enabled us to grow tangible book value per share by 17% versus the prior year period. Slide 16 summarizes the financial outlook provided over the course of our prepared remarks for the third quarter of 2026 as compared to the third quarter of 2025. Our outlook represents our best estimate of financial performance based on current information, and we expect to continue to produce positive operating leverage as revenue growth outpaces noninterest expense growth. Shannon Drage: This concludes our prepared remarks. [Operator Instructions] Additionally, if you are considering questions surrounding the events described in our 8-K and public complaints filed on Wednesday of last week, please note that while litigation is active, our comments on these matters will be limited to what we can -- to what can already be found in those filings. Von, could you please open the line for questions? Operator: [Operator Instructions] Our first question comes from Manan Gosalia from Morgan Stanley Investments. Manan Gosalia: I wanted to start on the announcement in the 8-K. I guess you noted that the charge this quarter is an isolated incident. Can you talk about what gives you conviction that this is isolated? Maybe walk us through your internal review process since this came to light. How many loans have you reviewed? Are there any lumpy exposures to real estate funds within your NDFI book that you've come across? Any color there would be helpful. Derek Steward: This is Derek. Just as far as what we've reviewed, we've reviewed -- gone through the portfolio, and we think it's an isolated incident. As we've gone through it, we haven't found similar loans or other issues, so we're very confident that it's -- this is an isolated incident. Harris Simmons: I think I'd just add, I think the most observers our credit history over a number of years is -- speaks for itself in terms of -- I think we do credit well. This was a case where we had some unusual things going on that really are not kind of commonplace. And so -- and this, we've noted we're going to continue reviewing with an external party to make sure that we're learning from experience and seeing what we can continue to improve upon. But I think that our care in extending credit and monitoring collateral, et cetera, speaks for itself. Manan Gosalia: Got it. Maybe if you can expand on that and take us through your NDFI exposure, as we look to the call report disclosure, I think that's about 4% of loans. It seems to be pretty spread out among subcategories. Are there any lumpier exposures or any high-risk categories there that you'd point out? Derek Steward: Sure. Thanks for the question. We, actually for transparency purposes -- this is Derek again. We added in the appendix Slide 36 that details the NDFI exposure. It's actually about 3% of our total loans. And if you -- as you can see on the slide, the growth actually has been fairly minimal over the last several years. As far as the breakout of what's in there, it's a very, very broad regulatory definition. It covers a lot of different segments. What I would say the majority of it would be equipment leasing type transactions. You can think about yellow iron trucks, things like that. There's capital call lines, subscription lines. There's just a number of different areas within that. It's very well diversified actually within the portfolio across a lot of the various lending segments. And this is -- it's a business that we've actually been in for a long time. I don't think we're intending to grow it significantly, but it's an area that we've been in for a very long time and had good experience with. Operator: Our next question comes from Dave Rochester from Cantor. David Rochester: Wanted to start on your NII guide. How much fixed rate asset repricing are you factoring into that NII guide outlook? Can you possibly go through the balances that you're expecting to roll for loans and securities and what that yield pickup is and then what your expectations for longer-term interest rates are as part of that? That would be great. R. Richards: Thanks, Dave. Appreciate the question and happy to provide some texture there. I would point you to our -- to the slight to moderately increasing guide on our loan growth. I think you've seen the pattern trajectory that we've put out for the -- going on years to quarters now on the security side. And certainly, we see the opportunity for the securities remix to continue into loans. But what that translates to on the fixed asset side if things are still -- fully play through, both as it relates to loans and then for some of our fixed rate securities, we see the potential for 2 to 3 basis points on earning asset yields to play through that's sort of embedded in our guidance. David Rochester: Got you. So in terms of the amount of loans, fixed rate loans and fixed rate securities that you're expecting over the next year, do you happen to have a rough dollar amount to those? R. Richards: It breaks across because it's not just those things that were borne as fixed rate things. There are things that are behaviorally like fixed rates. So 5/1, 7/1 10-year ARMs are embedded in there. So it's sort of a mix of things across CRE, C&I and then mortgages that sort of behave more like fixed rate loans that's embedded and that fixed -- what we call fixed rate asset repricing. David Rochester: Okay. And then just as a follow-up on capital, last quarter, you mentioned you weren't that comfortable with the buyback yet. Can you give us your updated thoughts now that capital ratios are a little bit higher and maybe you have some more clarity on portfolio and growth? R. Richards: Yes. Thanks, David. Listen, hopefully, we're staying on the same key here. So we do -- and we've been talking about this, including AOCI when we think about our total capital levels, kind of keeping that in the realm of where our peers are staying in the mix. So as we sort of stare even this quarter kind of where the peers are, including things like AOCI, there tends to be a central tenancy around 10% 12 months or so away from when we would start looking at those levels, approaching those levels, including AOCI based upon current projections. So that's when we would probably be more in the thick of things with peers. Operator: Our next question comes from Ken Usdin from Autonomous Research. Kenneth Usdin: Just wanted to ask about on the guidance, you have kind of moderate, moderate, moderate. However your prepared comments, you're still talking about operating leverage looking out a year. What's the gap that we think -- that you think you're aiming for in terms of the magnitude of operating leverage that you can see being able to do as you look ahead? R. Richards: That's again. Very fair question. Listen, I first want to just reiterate what Harris said. He emphasized in has spoken comments and also in his quote about the strength of our core earnings this quarter. I think showing up with 5 points of operating leverage was an indication of some of the good things that have been happening at the bank. We're still really refining how we think about how the numbers are coming together for next year. We see enough to know that there's going to be a positive operating leverage. Where exactly that lands is not perfectly clear yet, but we know it's there. So I'll probably stop short of giving you a hard number or a hardened range at this point, but we're happy to return to it once we've landed our full year process for 2026. But I understand you struggle with the guide. Go ahead, Ken. Kenneth Usdin: My second question just from last quarter, you were talking about a 3.50% NIM over time, 3.28% this quarter. And then kind of commentary might have changed a little bit after you had said that. I just wanted to kind of ask you to come back on that commentary that you gave and help us think about what the right zone is for your kind of long-term NIM thinking. Harris Simmons: I think it was -- this is Harris. I think I'm the one who put that concept out there. I think that over -- like an economist, skip the number or a date but never both. I think it's kind of where we ultimately would expect to land. I think I didn't intend to convey that's going to be this quarter, next year type of thing. I think we -- I would expect that we'll continue to see improvement in the NIM. We're working very hard at making sure that we're pricing well on the asset side of the balance sheet. We'll see some of this improvement coming out of the securities portfolio, just repricing, et cetera. But it's -- the number I conveyed is, I think, in kind of the strike zone of where we probably ultimately would expect to be, ought to be and consistent with our history. So that's -- I hope that's helpful. But I'm not wanting to suggest that's going to happen in 12 months. R. Richards: And I think the pacing of that is a little bit harder in a lower rate environment. But listen, I think just... Kenneth Usdin: All right. So not doable, but we'll see what the timing is. R. Richards: Yes. So I think to Harris' point, I think it's really pulling through on some of the core initiatives that we have at play to drive through deposit growth but have yet to play out fully. Operator: Our next question comes from Ben Gerlinger from Citigroup. Benjamin Gerlinger: So just kind of sticking with everyone's favorite slide of 26 of the latent, emergent and implied. It seems like the implication has come down quite a bit quarter-over-quarter. Obviously, some of that is your margin went up, so you recognize it, which is good. And then the Fed fund is lower by 50 bps on the outlook. I think there's 2 measurements kind of point to point a little apples-and-oranges comparison. The implied seems to suggest like minimal improvement. But is it maybe a fact of you kind of casting over and you might see margin compression as you kind of recognize the full 100 basis points? Or is it more just kind of giving you an optics view? I guess there's a lot of scenario analysis of deposit betas and everything within that, too. So just kind of curious, considering the implied is roughly 1/3 of where it was. R. Richards: Yes, thank you for the question. And I think I caught most of that. It was coming through just a little bit faint, but I think that the rest of it is talk us through kind of where things are landing at the 1.4% based upon the implied forward based upon maybe the change period-over-period. I would just try to reinforce, as I tried to every chance, illustrative to show the various interest rate dynamics that we've highlighted in times gone by. And certainly, in a down rate environment, included in my prior response, building upon Harris' is it does make it a little tougher from a net interest income basis, but even with the backdrop of this sensitivity, we layered on top of that was a slightly to moderately increasing loan growth prospects. And the fact that there are some assumptions underlying this sensitivity that can be seen as being relatively conservative, I'll let you judge whether it is or it is not, including things like migration from noninterest-bearing deposits elsewhere, including assumption that securities are 100% reinvested in securities when, in fact, we've shown that we've actually had opportunities to reinvest at least half of those gross cash flows in other gainful places. It wouldn't allow for dynamic aspects of where we might reinvest in higher-yielding loans. As we look to remix our loan book, we've kind of pointed to commercial loans being a primary driver moving forward in 2026 for growth. Those tend to be a bit more yieldy than some of the other places that we could invest our loan dollars. So yes, there is an impact from the forward curve. We try to put some bookends around that from a down 100, up 100. What we're trying to show is even in a place where the Fed could be lowering rates, we still stand to have some upside on our NII from our forecast view when you layer on all the other more dynamic aspects, including loan growth and other assumptions that one could assume moving forward. Benjamin Gerlinger: Got you. That's helpful. And then in terms of capital, there's been some M&A in kind of your footprint or footprint adjacent, you could say. When you look at the opportunity set in front of you and you now have better capital footholds, if you were to do M&A, could you kind of target the potential size you might look at and maybe dilution impact that you might be willing to stretch to, if M&A is on the table at all at this point? Harris Simmons: Well, I think, I mean, the variety of factors that would play into decisions about doing anything. I think most typically kind of smaller deals that increase our density in markets where we already have a presence would be kind of top of the list. I'm not going to -- this isn't a place where I'm going to talk about any metrics that would drive a deal. I think every deal has got its own kind of story. But I'd say that at least I am quite sensitive to the concept of dilution and would want to make sure that it was a really sound, strategic fit for a deal. And so I don't know, we're open to looking at opportunities, but it's not anything that is driving us. We feel no compulsion to get anything done that way. Operator: Our next question comes from Matthew Clark from Piper Sandler. Matthew Clark: Just back to the 8-K. Can you just maybe step back and give us some more color on how things unfolded, when maybe you first discovered that there was a problem and whether or not those 2 credits were adversely rated previously or not and then just how you monitor collateral just in general, just with the collateral kind of moving around in this case? Derek Steward: Yes. This is Derek again. Upon learning the fact during the quarter, we commenced to review and as we described in our 8-K with the connection -- in connection with an event of this type, took a little while for our analysis and review. And once we discovered where we thought we were, we felt it was appropriate for transparency purposes just to put it out there that we -- what we have found. Harris Simmons: I think it's the processes. I mean we have a lot of people around here that are looking at collateral and loan documentation, et cetera, et cetera. I think historically, they did a great job. This is obviously one that was not something that came across the radar screen as early as we would have wished and so one of the reasons that we're doing an outside review. But again, I think, historically, we've got a pretty good track record monitoring and... Benjamin Gerlinger: Understood. Okay. And then just the other question for me just sort of on the loan growth outlook. It looks like you slightly raised the loan growth guide. It looks like it's going to be predominantly driven by commercial, but there was some runoff in C&I. Can you maybe just speak to the runoff in C&I and maybe the related pipeline and how you expect to kind of restore that growth? Scott McLean: Yes, this is Scott McLean. And our loan growth has been sort of in a 3% kind of growth mode, plus or minus for the last 7 quarters, if you go back to the first quarter of '24. And if you just think back over that time period, there's a lot of concerns about the commercial real estate kind of industry issues, concerns about the economy related to that. Tariffs came along as a story. And so as you think about this time period, it's not a time to be -- have to -- investors should expect us -- we expect ourselves to be very thoughtful about where we're lending into the economy. So you're probably going to see us sort of chop along at these levels. That's what we're kind of guiding to. Having said that, we're doing a lot of things on the offensive. Our call programs have never been stronger or more active. You know of our pursuit of the SBA lending activity and our move up the league tables in that regard, moving to the 14th largest originator of SBA 7(a) loans as of September 30, the SBA's fiscal year-end. We've got new products we're bringing to market both for consumers and small businesses, and we've totally revamped our approach to marketing to make it much more of a strategic weapon going forward. I say weapon in a thoughtful, caring kind of way, but I think you understand what I'm saying. So there's a lot that we're doing to really pursue an offensive mindset. So I know that as the economy shows a little brighter, more consistent daylight. I think our portfolio, as it always has will achieve moderate single-digit loan growth, which we've done for many years. R. Richards: And I think, Matthew, in your question there as well, I think you asked a question about the C&I being down perhaps in the quarter. [indiscernible] on an average basis being up on a spot basis, loans being down sequentially. That's against the backdrop, it's not obvious from what we showed you but actually some really good loan production that was just offset in places by some paydowns and payoffs. And so I think you prompted for the C&I piece of that. So we did see some actually activity there and bringing down balances for NDFIs for health care and pharmaceuticals, but there are also some reductions in other categories, including CRE, multifamily and office and some in consumer. We do have a slide in our appendix that shows where the loans ran off across our affiliates and places and across various categories that would also point you to. Operator: Our next question comes from John Pancari from Evercore ISI. John Pancari: On the credit front, I know you mentioned the third-party review here a couple of times. Can you elaborate there a little bit? What exactly is the third-party review looking at? How comprehensive is it? And are your collateral assessments, are they purely done in-house? Or do you also outsource your collateral assessment? And maybe how frequently is that done? Derek Steward: Sure. I can speak to the review. I mean we have a long consistent history of low credit losses relative to the industry, and when these things happen, we're going to do what any prudent bank would do with an event of this type, which is take the steps to review our policies, procedures to see what we can learn. And so we will be doing that. It's just -- it's prudent for us to do that. As far as the question on collateral, we have -- mostly, we monitor our collateral in-house. We have a lot of people in the bank that do a great job every day monitoring the collateral, and we have rarely seen issues like the ones that we saw with these loans. In some cases, we do use -- we do field exams or audits of customers. But in most cases, we will monitor it in-house. John Pancari: Okay. All right. And then also on credit, I know a little while after the GFC and as you collapse your charters and everything, I know you had -- I believe you had moved some of your credit decisioning more centralized. Is your credit decisioning still centralized? Or are there still components of the underwriting and monitoring that are being conducted at the individual banks? Derek Steward: So one of the -- this is Derek again. I mean, one of the strengths of our model is we try to have local decisioning at the affiliates. That's just core to how we operate. Now it's centrally monitored. There's second-line oversight. There's controls and things in place and depending on the size of the credit, that may go up to the corporate level. But there's -- it just depends on the size of the loan and the type of the loan. But again, we try to have local decisioning where they know the customers the best. Scott McLean: I would just add to that, all of our credit executives report up through Derek. And when he's describing local, it's really -- they all report up to Derek, but they are located in each of our affiliate geographies. And so they're working actively with the team there. They're not miles away or states away and -- but they do -- they are part of what we call the second line of defense. They report directly to our Chief Credit Officer. And depending on the loan size, Derek as Chief Credit Officer is involved once loans get to a certain size. Operator: Our next question comes from Peter Winter from D.A. Davidson. Peter Winter: Scott, I wanted to follow up on the loans. And just wondering if you could talk about how loan demand has changed over the last 90 days and what you're seeing in terms of loan spreads. Scott McLean: Yes. Loan spreads have actually improved just a little bit, depending on the category. But boy, to talk about loan conditions over the last quarter, we just don't really think about it quite that way. I know you all do. But if you look back over the last year, it's very much the way I described it and the way Ryan described some of the charge-offs we had on the last -- sorry, some of the loan payoffs that we had in kind of the last portion of the quarter muted the loan growth just a bit. But production, if you actually look at production, it's been up in most months this year compared to 2024. And we generally see pretty good loan growth in the fourth quarter of the year. We certainly did last year. And so none of that would guide towards the fourth quarter. It's going to be a differentiated loan growth period. But we're poised. We're prepared. We're doing the right things to experience loan growth at faster pace when it occurs. Harris Simmons: I'd just add, as term rates have come down a little bit, we have seen some accelerated refinance of the commercial real estate and even the owner-occupied portfolio. So that's been a little bit of a headwind. So that's a factor, but we've -- all -- with that said, improved pipeline and construction loans, which it takes time for those balances to build, this project proceeds. The equity goes in first. And so there's some lag effect there. But that will -- expect will rebuild, but the payoffs come a little faster than the new balance, I suppose. Peter Winter: Got it. And if I could ask, if I think about this year, you ramped up investments, really got more aggressive with marketing, hiring of bankers. You've rolled out some new products such as the consumer Gold and Clearly seeing some good results. But would you expect expense growth to moderate next year? Or do you still plan to kind of heavily invest in various revenue initiatives and see expense growth somewhat elevated again next year? Harris Simmons: I'd expect the -- we're going to continue to invest in building the business and building -- hiring producers if we can find good people. We've been continuing to do that. I expect we'll see some increased marketing spend. But at the same time, we're working really hard to try and offset that with as best we can with saves and back office kinds of nonrevenue producing kinds of functions. So we're working at both at the same time. Operator: Our next question is from Chris McGratty from KBW. Christopher McGratty: Harris, on deregulation, big picture, what does that mean for Zion at this point? Harris Simmons: Deregulation, you say? Christopher McGratty: Yes. Harris Simmons: Yes. Well, listen, I think I suspect that I speak for a lot of my counterparts around the industry. We're looking for solid regulation. We're not looking to -- and we've seen instances where regulators have really started focusing on stuff that's kind of -- it's trivia. It's -- has been politically motivated the whole -- the banking kind of thing, regulation around -- disclosures around the climate trying -- getting us to try and figure out what the impact of small business lending is on climate change. I consider all of that to be not particularly productive and a distraction from doing what we ought to be doing, which is figuring out how we've -- how we land the businesses, individuals to do productive things. And I for one, I welcome the attitudes we're seeing currently out of the regulatory agencies to get back to basics and to focus on the things that are -- can create material weakness in the financial system. But it's not going to change much about how we -- if anything, it's not even -- change anything really materially how we think about credit, how we think about managing risk, et cetera. I think it's going to be helpful in eliminating some of these distractions. But -- so I think it's a good thing. But won't have any material impact on how we operate. Christopher McGratty: Okay. And then, Ryan, for you on the deposit exposures on the noninterest-bearing. Should we think of those as just a reclass and then a little bit more next quarter? Or is it something beyond that, that I missed it? R. Richards: Yes. Thanks, Chris. Listen, we've rolled through our -- all of our affiliates at this point. And it is a reclass over something that was a pretty low-cost consumer interest-bearing into noninterest-bearing. So while maybe being slightly accretive to funding costs are beneficial but not to a great degree. But we're really enthusiastic about the pull-through and the market receptivity that we're seeing so far. And to the earlier point, there's still an opportunity to put some more marketing dollars behind that and that growth agenda that Scott talked about before to really invigorate that program. Scott McLean: Chris, this is Scott. I think the bigger picture with noninterest-bearing deposits is that they're stable. And we saw that stability in the earlier quarters this year, and everybody was wondering going into this year will noninteresting deposits continue to go down. And so I think the story is they're stable. Ours appear really stable now. It's been 3 -- 3 quarters is a trend. I think it is. And that kind of peer-leading mix of noninterest bearing to total deposits, which we've had for 3 decades, if that's any indicator, we've gone through, yet again, another rate cycle and have maintained that peer-leading mix of noninterest bearing to total deposits. But that's -- I think that's the second headline at least that we're pleased about showing this year. R. Richards: And really, the real success will be measured by the net new clients that we obtained through these programs, right? So we're happy with what we're seeing so far, but there's still more work to be done. Operator: Our next question comes from David Smith from Truist. David Smith: Thank you. Getting back to the idea of the transition from modest loan growth shrinkage this past quarter to getting back to that low to mid-single-digit growth rate over the next year. Just talk about your current risk appetite today and whether the current situation with those 2 one-off borrowers has had any impact on it and how your overall risk appetite might evolve over the next few quarters as well. Derek Steward: Yes. Thanks for the question. This is Derek. Yes. I mean that's -- we're going to continue doing -- underwrite the way we've done historically. So this will not change how we look at growth. Now can we learn? Sure. But we're going to continue doing what we've been doing, and it shouldn't impact our loan growth. As Harris did indicate, I mean, we have been working through some commercial real estate criticized and classifieds that we've seen those successfully pay off or improve over the last 6 months. So that's something that will continue. Operator: Our next question comes from Bernard Von Gizycki from Deutsche Bank. Bernard Von Gizycki: Just on the 8-K that you released, I know there's a lot of questions on this, but in there, you noted you became aware of legal actions by several banks and other lenders. I know you couldn't announce the borrower, but there were a handful of issues that appeared in the market before this. And I understand the limitations of what you can disclose, but today, credit seems solid outside of this. Why not put this in perspective for us at the time of the 8-K filing? Harris Simmons: Why not put credit more broadly in perspective? Well, I think we -- listen, we weren't in a position where we wanted to prerelease at the end of the quarter and kind of getting it out there a piece of the time wasn't the intent. The intent, I think, was we filed a lawsuit. That lawsuit is a matter of public record. We didn't want to have somebody stumble across that and have the information that the market didn't have. So I think that was a primary factor in our determination to file an 8-K at the same time, so that everybody would have the benefit of seeing what somebody could have found in the courthouse. It's about that simple. Bernard Von Gizycki: Okay. Understood. And then just separately, when we think about the outlook on fee income, it looks like it's going to be broad-based. I know the cap market piece is going to be outsized. But with regards to the other areas, like any particular areas that stand out outside the cap markets? Or any commentary or color you can add towards that? Scott McLean: Sure. It's Scott. I'd be happy to respond to that. Yes, our capital markets business has been growing nicely -- with the 2, 3 years ago, said we were leaning into -- when it was kind of $70 million-ish a year, we reflected that we would try to perhaps double it over a 3-, 4-year period, and we're well on our way to doing that. But we have seen, this year, broader growth. Treasury management kind of account analysis revenue is up about 4%. Our business and retail service charges, which had been decreasing for some years or flat to decreasing, actually have shown nice growth this year. And our mortgage, kind of a change in how we are pursuing our mortgage business to more of a held-for-sale approach as opposed to held for investment is generating more fee income, and we saw that pull through in the third quarter. So anyway -- and our wealth business, which is an important business for us is a little bit flat right now. And -- but we believe as we look out a year, it will grow very nicely also. So we're seeing a much broader mix of growing businesses than, say, this time last year. Operator: Our next question comes from Anthony Elian from JPMorgan. Anthony Elian: On -- a follow-up on NDFIs more broadly. Harris, you've been in the industry for many years now, which I think gives you a unique perspective relative to other CEOs in the industry. Given the scrutiny by investors on banks' NDFI portfolios, I'm wondering if, in your view, the concerns that investors have on this loan category are overblown or if their concerns are reasonable. Harris Simmons: Well, I'd start by saying, I mean, the NDFI spectrum is pretty broad. It includes some categories that I think are proving to be quite safe. Capital call lines would be a good example of that. It's -- and personally, if I have -- if I think there's risk out there, I think it's probably in private credit. And I say it because given the rate of growth and the lack of regulation, the dearth of covenants and sometimes more liberal structures that I think we see in that kind of credit, I think FSOC, Financial Stability Oversight Council, and others have been expressing greater concerns about that growth in private credit because it's -- when you get something growing as quickly as that's been growing and with magnitude of size of that sector, it's at least kind of a yellow flag. I don't think that direct exposure that most banks have in private credit are particularly worrisome. The greater risk, I think, is going to be the kind of spillover risk if or when that private credit sector finds itself in a period of stress. They don't have the structural backstop of liquidity that the banking sector does with the Fed, et cetera. And so again, given the high rate of growth in the sector, I think it's not unreasonable to think that it could pose some increased risk in credit markets. But I think I do think that -- look, we've had the Tricolor and then the First Brands issues. And I think that kind of had the market a little on edge. And when we had our announcement last week, everybody was connecting dots maybe more than this warranted. I don't think there's necessarily a relationship between these 3 credits other than I do think -- again, this is me speaking, but I -- we've been through a prolonged period without a lot of stress in the markets. We're now sort of 15 years out from the financial crisis. Pandemic looked like it could have been one of those moments, but there was enough government assistance flooding the markets to stave that off. And I -- so I'm not wishing for a recession, but there's something that's kind of inherently healthy about cycles, too, and we -- so I worry about what we haven't seen that will hit when we go through a cycle. And again, given the growth, the sort of a lack of oversight -- and I think there's some very responsible lenders in private credit. Don't get me wrong. But I also think there's a lot of pressure to keep growing once you get on that treadmill. It's hard to get off the growth treadmill1. So anyway, those are a few thoughts, but I -- things that I think about. Bernard Von Gizycki: Appreciate that. And then my follow-up, if I look at the new Slide 36 you added on NDFI, where are you paying the most attention to within these allocations? And which of these buckets, if any, would you say are of highest and lowest concern from a credit quality perspective? I know you mentioned capital call lines will be on the safer side. But where are you paying the most focus on? Derek Steward: Well, this is Derek again. I'd say we pay attention to all of them, all of the segments. I think within -- again, this is a very -- it's a very broad regulatory definition. So you really have to go credit by credit. Just within there, I think we pay attention to leverage lending. There's a number of other -- just areas to focus on, but it's hard to just focus on -- say, there's one segment here that I would call out. I think it's important that we focus on all -- certainly, the capital call line, subscription line, those have proven over time to -- even though they are lower return opportunity, typically, they're -- they've proven to be a little more stable. Operator: Our next question comes from Janet Lee from TD Cowen. Sun Young Lee: In terms of your NII guide, am I correct to assume that there will be a 2 to 3 basis point lift to earning asset yields per quarter based on the forward curve? It feels like that 2 to 3 basis point earning asset yield increase has been the color we've pretty much consistently heard for a while now. So -- and also can we assume that the half of the run-off jump in securities is going to get reinvested in the coming quarters? I would appreciate any details on the underlying assumptions for your NII guide. R. Richards: Yes. Thank you for that, Janet. Listen, on the earning asset yields, whether on a latent or an emerging perspective, we still see the same kind of range there of the pickup of earning assets. You might be on one end of the range versus the other but still within the range that I alluded to before. Maybe on latent, maybe be on the high end; on emergent, maybe on the low end when you combine the repricing for loans and securities. In terms of what's to come, you can see where we've been in more recent quarters. And reasonably consistently, we've been reinvesting about half of the gross cash flows that come out of the portfolio. I think we sort of signaled that, that will probably need to taper at some point. We've had -- we've spoken broadly about kinds of rules of thumb. But what it really comes down to is when you go run your liquidity stress test, have the things hold up on that basis. So is there more room to run on the securities portfolio? Yes, there is, but it's probably not the same extent as what we would have said a year or 2 ago. So I guess, we're going on quarter upon quarter, probably closer to a year or more where we've done reinvesting half. I would expect us to continue to reinvesting some. To what extent will depend on other factors as we go. Including the opportunity for reinvesting in loan growth and/or paying down wholesale funding resources. Sun Young Lee: And just to clarify, so on your guidance side, so you are expecting C&I to be a bigger driver for commercial loan growth than CRE over the next 12 months. And also -- and if you could confirm that, that would be great. And also, looking into 2026, do you see that the commercial borrowers are getting more excited or getting more optimistic with the rate cuts coming? And also how much of a bonus depreciation being likely to return in 2026 with the bill? Like is that also a positive reinforcement for improved C&I loan growth heading into 2026? Scott McLean: Yes. This is Scott. And the answer to your first question is yes. A greater portion of growth will come from C&I loans in '26. That's what we believe. In terms of borrowers having an uncontrolled enthusiasm about lower rates, I don't think they thought rates, where they were, were retarding loan growth. I think what you're seeing is not really a rate-driven thing as much as just a concern about the macro economy, whether it was commercial real estate issues or the economy in general or tariffs, possibly the thought of a looming recession. I think that's more on people's mind. And certainly, yes, with lower rates, borrowers will be happy about that. And -- but I don't think they were terribly unhappy about where rates were in terms of making economics really work on projects or investments, et cetera. R. Richards: And I think on your -- maybe your point on the depreciation for the One Big Beautiful Bill, the upfront, I've not seen any modeling on that basis. You can imagine that net-net, that you would think that, that would be supportive of capital investments all else being equal. But in terms of narrative, I don't know that there's much to offer on that yet. Operator: Our next question comes from Tim Coffey from Janney Montgomery Scott. Timothy Coffey: My question had to do with the commercial real estate portfolio and that segment of the portfolio where your construction on an existing building for property improvements, rehabilitation, et cetera. And so my question is have you seen any improvement in the time to lease up once those projects are complete because if I remember correctly, a couple of quarters ago, some of those loans had met it to nonaccrual. And I'm just wondering if there's been an improvement in the lease-up time. Derek Steward: Thanks for the question. This is Derek again. Well, not very many have made it to nonaccrual, but it's -- what I would say is there was -- in '21 and '22, there was a lot of supply [indiscernible] that I point to, at least from our portfolio, which primarily would be multifamily and industrial. And what's just happened, as I've said before, is it's taking longer for those to lease up. But we are seeing them lease up, especially in the multifamily. We see some concessions. So maybe 1 month, 2 months of free rent, but the buildings are filling up. So they're -- it's taken certainly longer than, I think, sponsors or we would have hoped, but they're still leasing up. And I think, over the next year, as we said, I think we're going to continue to see our credit size in classified just hopefully improve. Operator: Our next question comes from Jon Arfstrom from RBC Capital Markets. Jon Arfstrom: Derek, just a question for you. How do you want us to think about the reserve level from here? I think you're saying despite the drama of the past week, I'm sure the antenna is up, but just confirming you're saying you're not seeing anything else abnormal at this point on credit and confirming that. And then how are you thinking about the reserve level? Derek Steward: Well, I mean, we reserve for what we expect. So based on -- primarily based on the economic scenarios that we use and what we've modeled and then apply some judgment to it as well. And so our reserve has stayed fairly stable actually for a number of quarters. So unless -- but it would depend upon the economy and where we think that's moving or to shift. Jon Arfstrom: Yes. Okay. Okay. I can -- I understand what you're saying. Harris, anything else unsaid on credit? I mean, obviously, your stock has been really volatile on it. You've talked a lot about it. But anything else on underwriting and credit that you haven't touched on that you'd like to touch on? Harris Simmons: Well, I was -- earlier this afternoon, I had a -- going through, I was looking at kind of risk-adjusted net interest margins for a lot of the banks that have reported so far this quarter. And even with -- I take the NIM. I subtract actual charge-offs. And we had a risk-adjusted NIM about 3.01%. Now without the $50 million charge-off, it would have been about 3.25%. But at 3.01%, we'd be kind of in the top third of kind of the banks even with this event. As I noted, I mean, this quarter, we had 4 basis points of other charge-off loss. So it's not like I expect to have an event like this one every quarter. I think that we actually do credit really well. I think it's one of the strengths of this place. I think it may have been one of the reasons that it triggered -- got everybody's attention because it was not the kind of thing you'd expect from us. And I hope that we'll always have that kind of reputation. And it's something we take really seriously. A few quarters ago, somebody asked what's the loss you expect to take when you make a loan. I said it was 0. We expect to get it all back. And so we take it seriously when we don't. But anyway, I think we're one of the better ones in the industry, actually, with the track record. I think that's true if you take out this isolated case. I'm not arguing you should because it's happened. But even with it there, 37 basis points isn't out of the realm of kind of what the rest of the industry funds at routinely. So I don't want people to understand that about us. Part of the strength of the place -- I mean you have strength of capital and everything else, but it's also culture and it's credit and -- so I'd call that to people's attention. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Shannon Drage for closing comments. Shannon Drage: All right. Thank you, Von, and thank you all for joining us today. We appreciate your interest in Zions Bancorporation. If you do have additional questions, please contact us at the e-mail or phone number listed on our website. We look forward to connecting with you throughout the coming months, and this concludes our call. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning, ladies and gentlemen. My name is Donna and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs Inc. Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ. Important factors that could cause results to differ materially are set forth in the reports on Form 10-K and 10-Q and news releases filed with the SEC, which are available on the company website. Today's conference call is also available and being broadcast at Cleveland-Cliffs Inc. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special items. Reconciliation for regulation G purposes can be found on the earnings release which was published this morning. At this time, I would like to introduce Lourenco Goncalves, Chairman, President, and Chief Executive Officer. Lourenco Goncalves: Thank you. And good morning, everyone. Our third quarter results were a clear indication that a significant rebound in domestic steel demand has started, and the automotive sector is leading the way. It's now widely accepted and understood that tariffs are here to stay, particularly the Section 232 tariffs on steel, autos, and derivative products. These tariffs are not negotiable, and the only effective way to avoid tariffs is manufacturing in the United States. With all that, the third quarter was our best auto steel shipment quarter since the first quarter of 2024. That's a very encouraging sign for what's coming in 2026 and beyond. Over the past quarter, Cleveland-Cliffs was able to lock in two or three-year agreements with all major automotive OEMs covering higher sales volumes and favorable pricing through 2027 or 2028. These are not small renewals. These agreements represent strategic commitments to domestic steel sourcing by the most relevant auto OEMs. Many of these customers have told us directly that they want to reduce their exposure to tariffs and to foreign volatility. They want stability and resilient supply chains. With a total of nine automotive-grade galvanized steel plants, five of them designed to produce exposed parts in all specs, Cliffs is the natural partner for the car manufacturers expanding production in the United States. President Trump's trade agenda has steel and automotive as part of its core. These two sectors are not just economically relevant; they are fundamental to national security. Rebuilding this strength is essential to sustain America's industrial independence and to improve our national defense readiness. The same industrial base that builds advanced vehicles and powertrains for civilian use, supported by domestic steel production, can also provide the engineering capability, supply chain depth, and logistics expertise required to support the American military. There is no question that the resurgence of the U.S. auto sector, supported by domestic steel, is a matter of great urgency. While other steel companies are still building or promising to build new capacity to be ready in 2028, 2029, or later, Cliffs is ready for 2026. Our state-of-the-art automotive-grade galvanized steel plants in Spartan and Dearborn in Michigan, Middletown, Cleveland, and Columbus in Ohio, and Rockport, Indiana Harbor, Burns Harbor, and New Carlisle in Indiana are all up and running. Cliffs has plenty of capacity right now. And the multi-year contracts we have signed with our automotive clients should give us the demand we need to make all these plants work at full capacity and at full employment levels. This quarter also reminded the automotive OEMs why steel, and Cliffs steel in particular, is irreplaceable. When lightweighting became a major trend several years ago, some automakers jumped on the aluminum bandwagon, chasing immaterial and expensive lightweighting gains while ignoring very meaningful technological advances in the production of high-strength steels and, more importantly, the enormous supply chain risks they were assuming. A huge fire at the nation's largest automotive aluminum-producing mill this past quarter revealed the fragility of that shift. Vehicle models that were years ago moved away from steel and toward aluminum are suffering the most. The silver lining is that switching back to steel is now under serious consideration by the most affected OEMs. Recent trials of conforming parts with our steel using equipment originally designed for aluminum are showing very promising results. This is a huge win for American-made steel and a validation of everything we have been saying for years. Domestic steelmaking, and particularly Cliffs steel, is the backbone of the American automotive supply chain. We fully expect that aluminum's participation in the automotive space will continue to shrink, with Cliffs being the biggest beneficiary of the trend. The resurgence of U.S. manufacturing, enabled and supported by the Trump administration, has made Cliffs very attractive to a number of major global steel producers. These steelmakers supply steel within their respective countries to important clients, and these clients are now moving production to the United States. Exporting steel into the U.S. is no longer a viable option for these foreign steel companies. Like their steel-consuming customers, these folks need a physical presence in the United States. Cliffs is a fully integrated steel company, starting from mining iron ore and going all the way downstream to the production of high-end finished products, and that is all based in the United States. These foreign interests in Cliffs are fully aligned with President Trump's agenda of strengthening America's industrial base and attracting foreign investments. With all that, a few months ago, we were approached by a major global steelmaker who wants to leverage our footprint in the United States to enable a smooth onboarding for their downstream industrial clients moving production from their country of origin to the United States. During the third quarter, we entered into a memorandum of understanding with this global steelmaker, and we expect to make a formal announcement in the next few months. I will not take any questions on this subject today. Separately, we have made excellent progress selling properties that no longer fit into our production footprint. I am pleased to report that we are under contract or agreements in principle for eight of these sites, with a combined total value of $425 million. The proceeds of these sales will go directly toward debt reduction. As for our larger operational asset sales process, run by JPMorgan, this is currently being deprioritized given the comprehensiveness of our MOU with the global steelmaker. We are not quite pencils down on this process, but advancing our negotiations under our MOU is now our top priority. While our U.S. business is on a clear path to recovery, we complete on November 1, our first year of ownership of the Canadian steel company Stelco. The picture in Canada remains disappointing. Roughly 9% of our total sales come from Stelco in Canada, and that market continues to lag our expectations. There's only one cause to the problem: the Canadian government has been completely unwilling to act against dumping steel into Canada. Import steel penetration into the Canadian market stands at a ridiculous and absurd 65%. The Canadian government could easily resolve the problem by replicating what the United States has done under Section 232: impose meaningful tariffs, close loopholes, and enforce implementation of these anti-dumping countermeasures. With other regions of the globe moving in the right direction, even the European Union has recently tightened its quota and tariff regime. Canada stands alone in doing nothing. A bailout loan, as the one given by the Canadian government and the province of Ontario to Algoma, one of our Canadian competitors, is not a fix for the problem. Trying to weaken Section 232 in the United States just to bring back Canadian steel into the American market is even worse. Stelco, under our ownership, does not want to and should not depend on selling steel into the United States for its survival. Stelco could thrive exclusively by selling steel in Canada. While I confess my inability to convince the several Canadian government officials I regularly speak with, I continue to expect Prime Minister Kearney to make a move in the right direction. Let's see how long it takes or if I will need to be more persuasive. Meanwhile, the U.S. government continues to grow as our partner. During the quarter, we were awarded a five-year $400 million fixed-price contract by the Defense Logistics Agency of the U.S. Department of War. This contract covers up to 53,000 net tons of grain-oriented electrical steel, which the U.S. government intends to store for national security purposes. The award underscores Cliffs' position as the only U.S. producer capable of supplying this critical material, grain-oriented electrical steel, further reinforcing the strategic importance of our electrical steels to the nation's defense and energy infrastructure. Also, we recently learned that our two projects receiving grants from the Department of Energy at Middletown, Ohio, and Butler, Pennsylvania, were not included on the constellation list that ended more than 200 other projects. As such, we will proceed with the Butler project on schedule, and we will also continue to work with the DOE on the new scoping of the Middletown project, which is critically important as that blast furnace will be realigned in the next four to five years. Last but not least, the growing strategic value of rare earth elements has prompted us to revisit this potential within our mining portfolio. We view this effort as both an opportunity and as our responsibility. Comprehensive reviews of our ore bodies and tailings basins have identified two sites, one in Minnesota and one in Michigan, where geological surveys show evidence of rare earth mineralization. We continue to assess our potential on both sites. Advancing this initiative will position Cleveland-Cliffs squarely within the nation's pursuit of critical material self-sufficiency. We believe America's industrial foundation must never depend on China or any other foreign source for essential minerals. Cleveland-Cliffs is committed to contributing to our independence from foreign powers on critical materials. With that, I will turn to our CFO, Celso Goncalves, for his remarks. Celso Goncalves: Thank you and good morning, everyone. Our third quarter results were driven by steady operational execution and much better than expected pricing, supported by automotive strength. Our adjusted EBITDA in the quarter improved to $143 million, a 52% increase over the prior quarter, driven by margin expansion from higher realized prices and improved mix. Our steel shipment volumes were 4 million tons in the quarter, a reduction from the prior quarter as a function of summer slowdowns and our continued discipline in the broader market. Fortunately, as a result, our mix shifted favorably toward automotive, which drove our average selling price to $1,032 per net ton, up $17 per net ton over the prior quarter. This improvement in price is entirely driven by automotive shipments moving from 26% to 30% share, and coated volumes moving from 27% to 29% share. On the cost side, we continue to deliver great results as our unit cost adjusted to the much richer automotive mix. Our continued cost performance was almost entirely driven by the footprint optimization activities we announced earlier this year and have fully implemented at this point. The third quarter was the first full quarter we operated with these operational efficiencies in place, and our projected annual savings of $300 million from these maneuvers remain on track. We also continue to take further action to reduce both SG&A run rate and capital expenditure budgets. Our CapEx budget for 2025 is now $525 million, down from our original expectation to begin the year of $700 million. This is reflective of dramatically reduced spend at Stelco, as well as the now changing DOE project at Middletown. In addition, full-year SG&A expectation is now down to $550 million from our original expectation to begin the year of $625 million. These savings are reflective of overhead and incentive pay cost cuts in response to weaker demand conditions. Another upcoming item to highlight is the December 9 expiration of our onerous slab contract. For the past five years, we've been bound by a contract that valued imported slabs using the now irrelevant Brazilian Slab Index. That index no longer reflects the real cost or value of American steel, much less the value of our automotive-grade slabs produced at Indiana Harbor. With the contract expiring, we will reclaim that production internally using our melted and poured slabs to serve growing automotive demand. This past quarter, we also took advantage of the strong high-yield market and refinanced the entirety of our remaining bonds maturing in 2027, leaving us with a runway of more than three years with no upcoming bond maturities. Our next bond maturity is not until March 2029, and those notes can be redeemed at par starting in March. Together with the outstanding balance on the ABL, we have plenty of pre-payable debt to pay down with the incoming proceeds of property asset sales and future free cash flow. Our gross debt amount remains elevated, but we will have ample opportunity to pay it down over the coming quarters. That said, the composition of our debt and maturity runway leaves us with plenty of flexibility going forward. The primary end markets that we serve—transportation, manufacturing, and construction—have been experiencing recession-like conditions over the past twelve months. We have navigated this with our operational improvements, footprint optimizations, and reductions in overhead and capital costs. The construction and general manufacturing sectors still remain relatively weak, but if history is any guide, those sectors will follow the trajectory of the automotive sector, which is now tracing upward. We have finally started to see a bit of restocking activity in the distributor and end-user markets, an indication that the new tariff reality for those buyers is setting in. The signs of a real recovery are forming, and we need consistent demand and stable policy to keep it going. Once these policy changes give us the demand boost that we need, the foundation that we have laid with these operational improvements will propel us further to amplified EBITDA and cash flow. With that, I will now turn it back to Lourenco for his closing remarks. Lourenco Goncalves: Thanks, Celso. Q3 showed the first clear signs that the tide is beginning to turn. Automotive is rebounding, our cost actions are working, and trade policy is delivering measurable results. But we are not declaring victory yet. We can and will do better. Our onerous slab contract will soon go away, our automotive volumes will continue to increase, and we will finish what we have started. That includes the execution of the final agreement and the beginning of the work which will follow our transformational memorandum of understanding with our major global steelmaker partner. With that, I'll turn it back to Donna for questions. Operator: Thank you. The floor is now open for questions. Operator: Our first question today is coming from Nick Giles of B. Riley Securities. Please go ahead. Nick Giles: Thank you very much, operator. Lourenco, Celso, good morning. And nice to see all of these updates. Cliffs has been a national champion in the U.S. metals and mining industry for over a century. So it's really good to see you taking the initiative on the rare earth side. My question is really how quickly could you produce products in this vertical? And could you look to be a vertically integrated producer? Or would you look for a partner? Thank you very much. Lourenco Goncalves: Thanks, Nick, for the question. Look, we have the opportunity to develop the mining assuming that all these original studies will play out as we expect, and we'll go from there. It's very clear that the U.S. government is very quickly realizing the importance of having an industry for this type of minerals inside the borders of the United States. And that's also, in my opinion, an opportunity for cooperation with Canada. Another unexplored opportunity that we can develop with our northern neighbor. So there are several ways to go with this thing. And the important thing is that the geographical location would be good for both. We can do it inside the United States, we can do it in Canada. Because we're very close across the point, across the Great Lakes. So it's very easy to work within the United States. So with Canada, but these are the two options I see going forward. Nick Giles: LG, thanks for that detail. Maybe just as a follow-up. I mean, what resources have you brought in to date to explore the opportunity and when is kind of the first mile marker in terms of potential product mix or any economics? Should we be thinking about something early next year? I appreciate any color. Lourenco Goncalves: Look, we've identified two sites that have the most promising. We are working with the geologists to assess whether these deposits could become commercially viable. That's where we're at. And we don't forget, as you said, we are a mining company. So this is not new territory for us. We understand mining into these lands more than anyone because they have been doing it for a long, long time. And we will see how we'll go from there. But that's a potential that we will not let go without putting a lot of effort and a lot of ingenuity into getting this done inside the United States or in partnership with Canada that has experience in mining. This is not so rare elements that are called rare earths. Nick Giles: LG, thanks again. Really appreciate the update this morning and continued best of luck. Lourenco Goncalves: Thanks, Nick. Operator: Thank you. Our next question is coming from Mike Harris of Goldman Sachs. Please go ahead. Mr. Harris, please make sure your phone is not on mute. Operator: We'll move on to the next question. The next question is coming from Lawson Winder of Bank of America. Please go ahead. Lawson Winder: Thank you very much, operator. Good morning, Lourenco and Celso. Thank you for today's update. Could I ask just about your decision to deprioritize the asset sale process? How has that process gone to date? And then has there been any interest? And if so, in what assets? Lourenco Goncalves: Look, like I said, the process we did not stop by any stretch. Actually, we closed on a portion of the sale of FPT during the weekend. So we have a signed contract. I misspoke. It's not a close yet, but it will be a short closing. And the portion that we sold on FPT is not even a site that we explore for our own EBITDA. So, it doesn't change at all the EBITDA that you generate from FPT. So we're very pleased that we had more than one party interested in that specific portion of the FPT, including the Florida assets. And we are very excited with the opportunity to continue to sell the remaining portions of FPT as we go. The other asset, Lawson, that we're considering selling would be our direct reduction plant in Toledo, Ohio. Because as you might conclude on your own, but I will reiterate here, we have no interest in building flat-rolled mini-mill ourselves. I was keeping that HBI plant to supply Big River in case we had the opportunity to acquire U.S. Steel, which did not play out. So as we did not acquire Big River through the acquisition of U.S. Steel, I don't see any specific strategic value of keeping the direct reduction plant producing HBI with the strict goal of supplying flat-rolled mini-mill producing more of a high-end type of flat-rolled products. That's not my problem anymore. So we still have a lot of interest in that specific plant, but this subsequent work that we're doing with our partner is showing that we might be doing other things with that plant, which I will not elaborate on at this point. So I'm kind of still considering alternatives, but I'm deprioritizing that because the MOU trumps, no pun intended, trumps the opportunity of selling itself as a standalone unit, the Toledo plant. Lawson Winder: Okay. Understood. That's very clear. If I could just follow-up on your comment on FPT. So should we be looking for some sort of announcement on that sale of a portion or partnership? Lourenco Goncalves: I just made it. We are under agreement to sell the Florida assets to SA Recycling. So that's the deal. So it's out. I just said it to you. Lawson Winder: Can you provide any detail on economics at this point? Or is it too early? Lourenco Goncalves: Nope. But it's good. And if you apply a multiple to a site that generates zero EBITDA, you can pick one. So it doesn't change the economics of the rest. That's the importance of this sale. That's why I'm disclosing. There was an asset that for me was always completely irrelevant because I'm not going to put a mini-mill in Florida to produce rebar or anything else. So that was not a site that was interested from the get-go. It came as an addendum to what I was really interested in having the real FPT, the FPT around Detroit, around prime scrap, and that's completely preserved. And there are other companies, more than one actually, interested in acquiring the rest. And they both have the same thing in common. They don't want Florida. So we move Florida. But we're not going to review the number, but the number is extremely good. And you'll see in our liquidity going forward. But got to wait because this is just an assigned agreement, it's not closing yet. So we can't disclose the number. Lawson Winder: Yes, understood. Thanks very much for your responses. I appreciate it. Lourenco Goncalves: Thanks, Lawson. Operator: Thank you. The next question is coming from Phil Gibbs of KeyBanc Capital Markets. Please go ahead. Phil Gibbs: Hey, good morning. Good morning, Phil. Question is on the auto contracts. Do any of the new contracts kick in during this quarter? Or do any of the new contracts kick in during the fourth quarter? Lourenco Goncalves: Yes. We have some kicking in October 1. I'm simplifying when I'm saying 2026 because it's a short quarter. Fourth quarter, particularly in automotive, is not a quarter that we are excited about because we know we're going to have shutdowns through the end of the year. That's normal course. Sometimes we have, I'm not sure about this year because they are really busy, but it's normal course for them to shut down around Thanksgiving as well. But we're going to see a lot of activity coming from these contracts as the year turns to 2026. So we're super excited with everything that's happening with General Motors, Ford, Stellantis with this big announcement of $13 billion bringing back the plants that we were by far the largest supplier. So all these things are coming to us at this point. We have Ford, we have Hyundai, we have Honda, we have Toyota in North America. These are all happening. And the good thing, Phil, is that the common factors finally realized that it's not a good thing to wait and wait and wait and seeing that the Trump administration is not changing their tune. I think Secretary Lighthizer was very clear when he said, The United States will be first in producing automobiles. Canada can be second. So that shows resolve. So I like to see that and that helps us in terms of getting our business moving in the right direction. So we are good. Phil Gibbs: And then just a follow-up on the cost side. What does the guidance imply for further unit cost reductions in the fourth quarter? And should we expect any more momentum in 2026? Thank you. Lourenco Goncalves: I'll let Celso handle this one, Phil. Please, Celso. Celso Goncalves: Yes, sure. Hey, Phil. If you look at the cost performance in Q3, adjusted for the increased automotive mix, we still expect costs to be down $50 a ton year over year when adjusted for this mix. You can see in our track record achieving cost reductions dating back to 2023. We achieved an $80 a ton cost reduction in 2023. We're down another $30 a ton in 2024. And then now in 2025, our unit costs are still expected to be down $50 a ton. So we're not changing the guide there. Just as it relates to other Q4 kind of talking points and general guidance that I can give you. Shipments should be similar to Q3 around 4 million tons. You have to consider seasonality with the holidays offsetting improved demand. Auto shipments are expected to be similar. And then in terms of pricing, you probably have all the pieces that you need to calculate as the ASP for Q4. So relative to Q3, Q4 cost should be relatively similar to Q3. Phil Gibbs: Thank you. Thanks, Phil. Operator: Thank you. Our next question is coming from Carlos De Alba of Morgan Stanley. Please go ahead. Carlos De Alba: Yes. Good morning, Lourenco and Celso. Thanks for the update. Just on following up on the auto contracts. Can you maybe give us some comment on the volume growth implicit in these new agreements? And potentially an indication of how much pricing may be moving up or down or staying flat? Definitely a very important piece of the business going forward. Lourenco Goncalves: Look, directionally these contracts will generate a lot more margin for us, including margin per ton. And that's all I can share at this point with you. These are good contracts. But we realized the one thing, Carlos, that probably has been missed throughout this entire conversation. And I'm trying to, in my prepared remarks, and now using your questions, so thanks for the question. I will try to explain a little bit about what Cleveland-Cliffs really is in terms of the automotive industry. We hear a lot about market share in automotive, gaining market share, losing market share. Let's understand one thing. Cleveland-Cliffs has so much more capacity to produce the steels that the automotive industry needs in comparison with any other supplier or any other wannabe supplier of automotive steel that it is not even a topic of conversation talking about market share, about these types of things. We have five plants, full plants, that are ready to supply a lot more exposed parts than we are supplying right now, not because we lost market share, but because the common factors who are producing cars in places like Mexico, Canada, South Korea, and I'm talking about American car companies, even in Japan, American car companies. So that's the absurd of the entire thing. And that's what's being corrected. So as they are being compelled, in the lack of a better term, to produce cars in North America, in certain cases like Stellantis, they are coming to their senses and coming back to the reality that North America is their main market and Cliffs is their main supplier. We are seeing the business coming back and coming back extremely stronger. Just to give one set of numbers for you to think. Columbus Coatings, it's one galvanizing line ready for extra-wide exposed parts. That produces today something between 280,000 tons a year. The line itself is able, as is, to produce 450,000 tons just by putting more throughput through the line. And that is coming. And the site itself is perfect to double in terms of the capacity in that specific site because we have room to put another line side by side with the existing one to double from 450,000 to 900,000. That's on a single site. And we don't need to invest to put the new line because we have idle capacity in Dearborn. The downstream Dearborn is the most modern galvanized steel plant in the world. It was built in 2013 by Severstal and acquired by AK Steel, and then we acquired AK Steel. So Dearborn is ready for more. Middletown, same thing. Rockport, Rockport needs to be visited. It's all robotic, it's all automated. Has been like that for at least another one or one and a half decades. So it's there. In New Carlisle, that used to be called high-end tech, end quote, by Inland and Nippon Steel long ago, is pretty modern and pretty well equipped to produce not only hot deep galvanized and galvannealed, but also electro-galvanized as well as Middletown. So we have, that's just exposed. If you go to non-exposed, high-end non-exposed, you have Cleveland. It's the Cleveland works is the most technologically advanced mill to produce high-strength low alloys for the structure of cars here in the United States, and we have been doing that, but we have capacity for more. So that's prevalent everywhere. Indiana Harbor, Burns Harbor, our joint venture with the Worthington Steel, Spartan, same thing. So that's nine plants ready to grow as is or adding capacity as needed in the next three, four, five, six years. So this movement that was initiated by President Trump that will percolate for the next five, maybe ten years will be all supported by Cleveland-Cliffs. And I'm explaining to you the capacity. So I'm not going to go into these little details on how much more the contract or this and that. These things are coming now as a wave of new business that we are ready to take right now. Sorry for the long answer. It was a good question. Decided to use it to detail things that probably are not well understood, but I hope after I made that explanation, at least generate more questions that will keep us helping clarify this subject. Carlos De Alba: Great. Thanks for the additional information. And then talking about the other opportunity that just came off Cliffs on the rare earth space. Are there any details or early details that you have in terms of the type of mineralization, regular mineralization that you may have and what type of minerals potentially you could be producing? And also, is there a timetable for a feasibility study or preliminary economic analysis assessment, sorry? Lourenco Goncalves: Look, I think that I want to talk about the heaviest dysprosium or terbium or cerium or lanthanum or neodymium or praseodymium in this call. But I'm a chemistry person. So I would love to, but I don't think that would be a good thing for us today, Carlos. Let's take this offline. And let's discuss. The important thing is that they are there. We found them there. And we want to make it viable. We really believe that we have potential there. And that it will be good for Michigan, for the Upper Peninsula, primarily. And there's even one site in Minnesota that we would go. It's not very friendly to us, but we will still investigate there. But we'll definitely start in Michigan, the Upper Peninsula, because we love the Upper Peninsula. Carlos De Alba: All right. Thank you, Lourenco. Looking forward to that conversation on more details when Yes, sir. Lourenco Goncalves: Thank you. Operator: Thank you. Our next question is coming from Mike Harris of Goldman Sachs. Please go ahead. Mike Harris: Okay. Let's try this again. Hopefully, you can hear me this time. Lourenco Goncalves: Very well, Mike. Mike Harris: Hey, how are you guys doing? Hey, just wanted to follow-up on the electrical steel award that you highlighted. And just to kind of help us, how should we think about that? Is that more of a kind of a one-time opportunity or is this like the first of a series? Lourenco Goncalves: It's a one-time opportunity, Mike, but it's a multi-year one-time opportunity. The U.S. government, the Department of War made the decision to put in storage a safety reserve strategic inventory of this type of materials that we produce. So we are going to build that inventory together with the Department of War. And we are very proud of this partnership. It's extremely good in terms of economic terms and in the long-term viability. Of course, we're going to prioritize that because it's national security. And it will take years to finish. And this probably is the first move into a direction that it's clear that the Trump administration is taking in terms of protecting the country with strategic inventories of things that could be under attack in a moment that's not very peaceful in the world. So it's all good and we are proud of our partnership with the U.S. government and particularly with this specific deal. Mike Harris: Okay. Okay. That helps. And then just a follow-up to and I think, Celso, just a few minutes ago, someone asked a question around the cost reduction effort and you kind of pointed out the track record. I guess I was just curious, what we witnessed in here, is that just you guys now have an opportunity to take out maybe stranded costs from the acquisitions? Or are we seeing the benefits from, I don't know, some process improvement or technological advances? Just kind of help me understand what we're witnessing with the cost reduction effort here? Celso Goncalves: Yes, sure, Mike. Thanks for the question. Yes, I think over time, we've been proactive in terms of optimizing the footprint. We became a steel company in 2020. If you remember. We acquired AK Steel. We closed that deal on March 13, 2020, in the middle of the pandemic. And then we doubled down and we acquired the ArcelorMittal USA assets in the same year, closed on December 9 of that year. And for the subsequent years thereafter, we became a major steel company sort of overnight and it took time to optimize the footprint. It came with a lot of assets. Many of them were very good. Some of them weren't so great. So over the last few years, we've been prioritizing, optimizing the operations across all of our assets. And that's what's really driven the accomplishment on the cost side. And this year was really the completion of those efforts. Mike Harris: Okay. That helps out. Thanks a lot, guys, and good luck and continued success. Lourenco Goncalves: Thank you, Mike. Appreciate it. Operator: Thank you. That brings us to the end of today's question and answer session. I'd like to thank everyone for their participation today. You may disconnect your lines and log off at this time. Enjoy the rest of your day.
Operator: Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital, Inc. Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Alison Griffin, VP of Investor Relations. You may begin. Alison Griffin: Thank you. And good morning. The press release associated with today's call was issued and filed with the SEC this morning, October 20, 2025. You may view the press release on the website of dynexcapital.com as well as on the SEC's website at sec.gov. Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan, and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website under Investor, as well as on the SEC's website. This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through the webcast link on the website. The slide presentation may also be referenced under Quarterly Reports on the Investor Center page. Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer; Smriti Popenoe, Co-Chief Executive Officer and President; Rob Colligan, Chief Financial Officer and Chief Operating Officer; and T.J. Connelly, Chief Investment Officer. I now have the pleasure of turning the call over to Smriti Popenoe. Smriti Popenoe: Thank you, Alison. Good morning, everyone, and thank you for joining us today. We continue to execute our strategy to build a resilient company at the intersection of capital markets and housing finance. We believe in the long-term shareholder value creation potential of our differentiated platform. Investing in residential and commercial mortgage-backed securities managed with Dynex's through-the-cycle mindset, risk discipline, liquidity, and capital management expertise. Our offering is unique, and our strategy continues to generate strong returns. Year-to-date shareholder returns were 20% as of last Friday's close, 23% over the last year. In the last three years, our shareholders have seen returns of nearly 72% with dividends reinvested in Dynex. Our total economic return of 10.3% for the quarter and 11.5% year-to-date reflect the disciplined management of the generational opportunity in Agency RMBS we have been talking about since 2022. Keeping book value stable, we have paid out a substantial dividend. Agency RMBS spreads continue to offer returns to our growth and investment strategy. The strong investment environment fueled capital raising, and we crossed another milestone. Our common equity market cap is now above $1.8 billion as we continue to broaden the scope of individuals who trust us with their savings and institutions who trust us with their capital. The operating environment remains highly complex. The global economy is vulnerable to persistent inflation, as geopolitics shape investment at the national level. In the U.S., we are still passing through tariff-related price shocks, a labor market slowdown, and a government shutdown. Risk assets, especially equities, have shrugged off most of these concerns. We are watching for quick shifts in market sentiment as trends in the fundamental economy become more clear. The Federal Reserve appears committed to bringing rates down to more neutral levels, and even so, the uncertainty in the rate path is significant. T.J. will go into more detail during his comments. Our principles of holding liquidity and investing in liquid assets are highly appropriate for this environment. I'll say a word about private credit markets. At Dynex, we have always taken the view that total system risk is like a balloon. You squeeze it on one end, and it shows up somewhere else. The private credit market is a reflection of this. The U.S. economy is highly financialized and operates on a great deal of leverage being available. In the private credit sector, much of that leverage is hidden in funds that do not mark to market like Dynex. Sometimes it's not even possible to get a mark or sell those assets. Even as cracks in this market develop, we are prepared for surprises that could prove much more persistent than they have at similar points in other cycles in history. As I've emphasized, our growth is deliberate. It's anchored in strategy, opportunistic investing, and focused value creation. The team is operating with preparedness, discipline, and tactical agility. Our results are a direct outcome of that approach. I remain focused on strengthening our market position and expanding our ability to capture future opportunities. Rob and T.J. will now give you further details on the quarter and the outlook. I'll turn it over to Rob. Rob Colligan: Thank you, Smriti. Good morning and welcome to everyone joining us today. To start, our net interest income continues to trend upward as we add new investments with attractive yields to our portfolio. And in the current market, swaps add to the carry value of our investments. It's important to note that this quarter's net interest income does not include the impact of the FOMC rate cut in September, and we expect the rate cut will add a tailwind to net interest margin in the fourth quarter. Second, we've been discussing a raise and deploy strategy all year. Tools and TPAs we've held and added this year have greatly benefited from the spread tightening experienced in the third quarter. We had over $130 million of gains on our portfolio in the third quarter alone. T.J. will go into more detail on our portfolio during his comments. Third, this year we've raised new capital. $254 million in the quarter and $776 million year-to-date. Our stock has performed well, allowing us to continue to raise capital at a premium to book value, which is accretive to our shareholders. Growing our capital base is an important part of our long-term strategy to build a strong and resilient company structured to deliver compelling returns for shareholders over all economic cycles. Our portfolio is larger, 10% larger since the end of the second quarter, and has grown over 50% larger since the beginning of the year. While our portfolio has grown, we continue to focus on disciplined risk management and liquidity to weather future volatility. Our liquidity at quarter end was over $1 billion and was over 50% of total equity. Lastly, we are opening up an office in New York City. This new location will allow us to attract important talent in trading and portfolio management positions, as well as being physically closer to many of our business partners for an important part of our current and future success. We look forward to being in New York while maintaining Glen Allen, Virginia as the company's headquarters. Both locations will be strategically important to us as we build a solid foundation for the future of Dynex Capital. With that, I'll turn the call over to T.J. for his comments. T.J. Connelly: Thank you, Rob. Entering the quarter, agency mortgages offered wide spreads to treasuries and interest rate swaps. We maintained one of our highest exposure levels in recent years to capitalize on these high-quality yields. Implied volatility started to decline early in the quarter, as markets got more comfortable with the policy outlook. Nominal spreads remain wide though, and we continue to raise and deploy more capital. As Rob noted, we raised $254 million in new common equity capital in the third quarter, bringing the year-to-date new capital growth to $776 million. We've raised and deployed capital at levels well above the average share price to book ratios during the quarter. As I noted last quarter, we carried a deliberate bias towards lower coupons, which we believe are poised to outperform, especially when mortgage rates declined even just modestly. By mid-September, mortgage rates hit the lowest levels of the last year. The agency current coupon yield declined from nearly 5.75% to nearly 5%. That was enough to generate a sharp increase in the refinance index, as many high-quality borrowers briefly saw a 6.25% or lower no-point 30-year fixed-rate mortgages, and mortgage bankers started to issue adjustable-rate mortgages with even lower note rates. We've discussed in previous calls that prepayment speeds could be very given the technological investments many mortgage bankers have made. And indeed, the latest report may only mark the beginning of this trend. Security selection in the specified pool market remains a source of potential alpha, and the dislocations created by this latest prepaid wave are proving to offer opportunities for us. September's prepayment report released just over a week ago showed fast prepayments for higher coupon mortgages. And we expect that most of the increase in speeds won't be seen until the October report due in early November. Of course, with faster prepayments comes an acceleration in growth supply as borrowers take out new lower loan rate mortgages. Markets ultimately clear based on net supply of new mortgage production, we expect to remain muted with the housing market slow for at least the next few quarters. But growth supply matters in the short term, as investors react differently with respect to the timing of prepayments. Moreover, prepayments shift the composition of the market across coupons. Late in the quarter, as refis increased, we saw more supply in coupons like 4.5% and 5%. And with many segments of 5.5% and even 6% pools notably cheaper, had a slight bias to move back up in coupon to take advantage of the dislocation. Longer term, we expect there will be growing opportunities across the mortgage market as the policy environment evolves. While specific policies are likely still to be developed, the regulatory tone from Washington is towards policy that supports housing and a liquid market for mortgages, both residential and commercial. Longer term, the supply outlook for Agency RMBS could evolve more favorably. The volume of loans that are guaranteed by Fannie Mae or Freddie Mac has fallen slightly in 2025. Production of Ginnie Mae and non-QM MBS backed by loans ineligible for agency MBS securitization have grown relative to that of Fannie and Freddie. And while policy directives from the Federal Housing Finance Agency have been fluid, the initial policy shifts under the current administration tilted towards reducing the GSE footprints with actions like the elimination of special credit programs. Overall, the longer-term outlook favors tighter agency mortgage spreads, and the potential for developing opportunities outside of agency RMBS looks increasingly interesting. For now, credit spreads remain tight. While agency spreads remain notably wide relative to their own history and most credit products. We're watching for more potential cracks in consumer credit. Auto loan delinquencies, for instance, are starting to creep higher. And with labor markets showing hints of weakness, we are watching the consumer closely. We observed that most private and public credit markets offer very little, if any, margin of safety for weaker credit performance. That makes agency paper look very attractive for many traditional fixed-income investors and new investors that may realize the value in liquid assets after carrying too much exposure to private credit. Agency securities continue to offer strong risk-adjusted returns. As investors realize the potential returns in Agency RMBS, we expect that spreads will compress. We also increased our exposure to Agency CMBS modestly in the last quarter as that sector lagged the performance of RMBS. Over time, we expect to increase our exposure to Agency CMBS relative to RMBS as RMBS spreads tighten. Today's portfolio remains extremely attractive. Our shareholders gain exposure to a cheap asset class and a unique platform in which to leverage these assets. Thank you for your focus on our work. I will now turn the call over to Byron Boston. Byron Boston: Thank you, T.J., and good morning to all. I want to make just one very important point. As significant shareholders, the executive team stays focused on durable shareholder-first decisions. Dependable yield is front and center, and Dynex's disciplined approach supports a competitive dividend. On that note, I'm going to turn it back over to Smriti for final comments. Smriti Popenoe: Thanks, Byron. As the quarter came to a close, Rob and I increased our personal investments in the company, strengthening our alignment with shareholders through the purchase of additional shares. I'm genuinely excited about what the future holds for Dynex, and look forward to updating you all again on our progress in January. That ends our prepared remarks, and I'll turn it over to the operator to build the Q&A pipeline. Operator: We will now open for questions. If you would like to ask a question, please press star one on your telephone keypad. Your first question comes from the line of Bose George. You may go ahead. Bose George: Hey, everyone. Good morning. It's your first question. Just wanted to ask about where you see incremental spreads and current ROEs and how that compares to the ROE that's implied in your current dividend. T.J. Connelly: Yeah. Good morning, Bose. It's T.J. The ROEs in agency RMBS remain in the high teens net of hedging costs, and really, you can get to gross in the mid-twenties on a large percentage of the coupon stack. Bose George: And in terms of leverage, does that kind of imply your current leverage? Or yeah. Yes. Is that kind of the implied leverage in that number? T.J. Connelly: Yeah. At the current levels, it would be right around those mid-teen to high-teen numbers. Bose George: Okay. Great. And then can we get an update on book value core to date? T.J. Connelly: Yes. Estimated $12.71 net of the dividend accrual as of Friday's close. Bose George: $12.71. Okay. Great. Thank you. Operator: Our next question comes from the line of Doug Harter. You may go ahead. Doug Harter: Thanks. T.J., in your prepared remarks, you talked about, you know, still seeing mortgage spreads as wide relative to their history. Guess when we look at it, you know, spreads are kind of closer to or slightly tighter than their long-run average. So hoping you could kind of flush out that comment and, you know, kind of what measure you're looking at it appears to come to that conclusion? T.J. Connelly: Yeah. The spread, Ron, if you look at them just versus certain components of the treasury curve, I could certainly see what you're talking about. They're both However, excuse me. Sorry, Doug. I'd say versus interest rate swaps, though, if you look at them versus interest rate swaps, mortgage spreads are still in that top quartile of the widest levels we've seen over the long term. Doug Harter: And then I guess just on that, how are you thinking about, you know, swap spreads? Here? What you know, what could be, you know, any catalyst to get them to change and, you know, risk of moving against you? T.J. Connelly: Yeah. You know, we continue to see the federal deficit as a major factor. We've talked a lot about that in the past. So Certainly, as treasury supply increases relative to expectations, and that's an important construct that we think about it relative to expectations, which are obviously very high for treasury supply at this point. To the extent that you were to outperform those expectations, you were to see treasury supply come in more than expected, then spreads could certainly go more negative. It's important to note, though, that at today's spread levels, you have a nice buffer there. Right? So we can withstand some, you know, more negative swap spreads. And still earn that carryover time. And that's really the beauty of this model with permanent capital and holding the kinds of liquidity that we do that we're able to hold on to these positions and ultimately capture that spread is, I think it's really the best vehicle in which to do that. Doug Harter: Thank you. Operator: Your next question comes from the line of Trevor Cranston with JMP Securities. You may go ahead. Trevor Cranston: Hey. Thanks. Good morning. You guys talked a little bit about the, you know, the supply side of the equation and for agencies over the next year or so. Can you talk a little bit about what you're seeing on the demand side of things and in particular, I'm curious, you know, it looks like the GSEs grew their balance sheets and retained portfolios a bit in the third quarter. I'm curious what you think about the potential for the GSEs as a player on the demand side of things going forward? Thanks. T.J. Connelly: Yeah. Absolutely. That is a source of potential marginal demand that we have not seen in a long time. Their monthly reports show that things have been kind of status quo for the last, let's say, you know, well, several years. I think, you know, GSE Holdings of Agency MBS could certainly increase. So far, their activity looks much like it has for the last several years, but they have the capacity to add as much as $450 billion under the current stock purchase agreements treasury, and they only hold about $194 billion. So it's a massive amount of potential. I see it as I don't think it's a very high probability. We see them use all of that capacity, but it's certainly one of the levers this administration can pull to impact housing markets. Trevor Cranston: Got it. Okay. And then on the end, tried to Your other your other point T.J. Connelly: I'm sorry. I didn't get to all of your I was just focused on the GSEs there. I'll just touch on the supply and demand outlook broadly on the demand side in particular. From the other major institutions. Bank deposit growth should continue to support demand. We're continuing to see solid deposit growth. The banks have been relatively quiet since the first quarter. I suspect that they'll be back in, in a reasonably big way, especially in 2026. Institutional investors, you know, foreign governments, I continue to see them as net net sellers of a small amount of mortgages. And then, you know, domestic bond funds and annuities have continued to see very strong performance. Last week was actually one of the strongest weeks of inflows that we've seen in domestic bond funds in some time. So those are solid marginal sources of demand. And lastly, you know, the mortgage REIT community, we continue to be a preferred method at least of some of the top mortgage REITs out there. I think we are the preferred manager of mortgages on a levered basis in the marketplace, and we are a marginal source of demand too. So overall, I think there's plenty of moving parts. It's created some nice opportunities for us on the demand front as these different sources of demand kind of ebb and flow. And create a little bit more volatility in spreads. Trevor Cranston: Yeah. Okay. That's helpful. On the hedging side of things, you know, with the implied volatility coming down, it looks like your option position increased a little bit this quarter. But is there any real sort of impact on how you guys are thinking about hedging strategy overall with a lower volatility priced in right now? T.J. Connelly: Yeah. When vol is lower, that is what we spend a lot of time thinking about. Where should we look to re some of the options that were inherently short in a levered mortgage position, and there are pockets of cheap volatility. We continue to look at those, and you can see the positions that we've added modestly in the third quarter. So I think you'd say that remains a deep and liquid market. It's a great way for us to continue to stabilize the duration of our portfolio. Smriti Popenoe: I think, also, I'd add there, Trevor, just the macro thought process. You know? Looking at what the distribution of outcomes could be, and, you know, the market seems to be cutting some tails out of the process. And, you know, when that type of opportunity exists, you know, we really think long and hard about protecting our shareholders in these outsized tail events. And when that protection looks cheap, we tend to jump in and make those types of decisions. Trevor Cranston: Yeah. That makes sense. Okay. Appreciate the comments. Thank you. Operator: Next question comes from the line of Eric Hagen with BTIG. You may go ahead. Eric Hagen: Hey. Thanks. Good morning. Just following up on this volatility, market kind of theme. I mean, why do you think the market has shrugged off all these themes which would maybe ordinarily kind of drive more volatility, especially over these last few weeks? I mean, does that change the way that you think about the range for MBS spreads more holistically right now? Smriti Popenoe: So at a big picture, you know, I think there have been events that have narrowed sort of the market's opinion of what the outcomes could be. Right? So there's more certainty. And even the passage of time gives us more certainty. So policy-wise, you know, we're sitting here with the Fed looking like they're firmly committed to some level of eases over the next, you know, two to three meetings. You've also seen a lot of policy outcomes from the administration becoming more clear. So I think the market has reacted to that. But one of the things that does happen is, you know, there's a short-term focus for the markets. And, you know, in our long-term way of thinking and just recognizing everything that we talk about in the global environment, demographics, migration, geopolitics, all of that, that doesn't take away the probability for tail events. Right? There's also, like, massive amounts of liquidity still available in the markets that are driving asset flows that are affecting options prices. Right? So as we look at the fundamentals, the technicals, the psychology, we're evaluating, you know, the whole picture. You know, we like the idea of buying out-of-the-money protection here. Because, you know, the environment isn't as calm as it looks. That's kind of our opinion. So that's the thought process. I mean, the market has shrugged off a lot. You know, I think there's one particular sector in the market that's driving a lot of the thought process, and that's, you know, the advent of AI. But, you know, the rest of the economy still exists. They're still vulnerable to shocks. And that part is really what we how we think about. And as you know, you know, the big money in this sector gets lost or made during periods of extreme volatility. And so we have to think about those scenarios. And even if they're a low probability, we have to be ready. And we think about when protection is cheap, we're doing that thought process. T.J., did you have anything else to add on that? T.J. Connelly: No. I think that's you know, the critical part there is that you're constantly preparing for the unexpected when you run this kind of portfolio. That is what we do. I you know, in some ways, I don't know the answer to your question why have markets shrugged things off. We're preparing for the day when the markets start to react in a big way. Smriti Popenoe: And you're seeing some little things that are pointing in that direction. Right? Like, you're seeing a few things that aren't going potentially as well. So these are just indicators of the vulnerability. Eric Hagen: Yeah. Always appreciate your thoughtful responses. You know, you guys noted the expectation for faster speeds. And so as you guys do reinvest that, do you feel like there's opportunities to pick up alpha like within the coupon stack? Are you pretty much driven into the current coupon in order to support your return on capital? Is there really, like, more flexibility to pick spots? T.J. Connelly: Great question. I think that has been something we've identified as a potential source of alpha for several quarters now, not just taking what the current coupon gives you, not acting like the, you know, largest index kind of player. And, you know, we had that deliberate lower coupon bias, and that was very, very strategic and intentional for the last several quarters. I think it's really starting to pay off. So, yes, you're right. As we reinvest some of the paydowns on the book, the opportunities across the coupon stack are tremendous. And that's the great part about our size. We are at a great scale and can continue to grow while not being so large that we can't move out the current coupon and remain very nimble. Eric Hagen: It's really helpful. Thank you guys so much. Operator: Again, if you would like to ask a question, please press 1 on your telephone keypad. At this time, there are no further questions. I would like to turn the call over to Smriti Popenoe, Co-CEO and President, for closing remarks. Smriti Popenoe: Thank you, operator, and thank you, everyone, for your time and attention. I look forward to updating you all again in January. We'll now close the call. Operator: This concludes today's call. You may disconnect.
Stocks are climbing on Wall Street Monday and pulling near their records following last week's roller-coaster ride.