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Edra: Hello, everyone, and welcome to the SmartFinancial, Inc. Third Quarter 2025 Earnings Release and Conference Call. My name is Edra, and I will be your coordinator today. We will be taking questions at the end of the presentation. I will now hand you over to Nathan Strall, Director of Investor Relations, to begin. Please go ahead. Thanks, Edra. Nathan Strall: Good morning, everyone, and thank you for joining us for SmartFinancial, Inc.'s third quarter 2025 earnings conference call. During today's call, we will reference the slides and press release that are available in the Investor Relations section on our website, smartbent.com. William Carroll, our President and Chief Executive Officer, will begin our call followed by Ronald Gorczynski, our Chief Financial Officer, who will provide some comments and some additional commentary. We will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list the factors that might cause these results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early development, or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendices of the earnings release and investor presentation filed on 10/21/2025 with the SEC. And now I'll turn it over to William Carroll to open our call. William? William Carroll: Thanks, Nathan, and good morning, everyone. Great to be with you. And thank you for joining us today and for your interest in SmartFinancial, Inc. I'll open our call today with some commentary, then hand it over to Ronald Gorczynski to walk through the numbers in some greater detail. After our prepared comments, we'll open it up with Ronald, Nathan, Rhett Jordan, Miller Welborn, and myself available for Q&A. It's been a busy quarter for us, and we've had a number of very positive things happening with our company. The focus on execution that's going on right now is outstanding. Our team continues to have a keen focus on hitting targets we've set for this year in regard to revenue, returns, and prudent expense growth, and I remain very bullish on our outlook. So let me jump right into some of our highlights. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company. Moving up to $26 per share including the impacts of AOCI, and $26.63 excluding that impact. That's growth of over 26% annualized quarter over quarter. For the quarter, we posted operating earnings of $14.5 million or $0.86 per diluted share. This is our sixth consecutive quarter of positive operating leverage and hit our $50 million quarterly revenue target in Q3, which we had set for our team this year. We actually hit it a few months early, and I look forward to seeing that number continue to grow. We had outstanding growth on both sides of the balance sheet, posting 10% annualized growth in loans and 15% annualized growth in deposits. Our history of strong credit continues. Only 22 basis points in nonperforming assets. I'm pleased to see these numbers continue at exceptionally low levels. Total operating revenue came in at $50.8 million as net interest income continued to expand and noninterest income was solid again. Our operating noninterest expenses also came in on target at $32.6 million. Looking at the charts on page four and five, you'll see very nice trends. We're building our return metrics and most importantly, growing our total revenue, EPS, and as I mentioned earlier, tangible book value. All those charts are great graphics to illustrate our execution. I'm looking forward to and expecting these trends to continue. So just a couple of additional high-level comments from me. On growth, our continued balance sheet expansion is a direct result of the focus of our sales team. I've enjoyed watching this company transform into a very good organic grower. As we have hired well over the last several years, we've also built an outstanding foundational process that includes aggressively going after new client relationships, growing existing ones along with a very diligent prospecting process. As I stated, we grew our loan book at a 10% annualized rate quarter over quarter. As sales momentum stays strong and balanced across all of our regions. Our average portfolio yield, fees, and accretion, was up to 6.14% and our new loan production continues to come onto the books accretive to our total portfolio yield levels. Regarding deposits, again deposits were up 15% annualized or $179 million for the quarter inclusive of reducing some of our brokered CD positions. It's important to recognize how we're building this bank with core relationships as we have an intense focus on both sides of the balance sheet. We've made investments in our treasury management team over the last several quarters and it's nice to see this line of business gain outstanding momentum. Our loan to deposit ratio was at 84% which is actually down quarter over quarter even with 10% loan growth. This strong position gives us continued flexibility to leverage a great balance sheet. Our pipelines continue to look good, and I'll discuss these a little bit more in closing comments. But, also, when you look at the highlight bullets, in our earnings release, we've had a lot going on this quarter. All of it tied back to building the foundation of a bank that is on track to becoming one of the Southeast's strongest regional community banks. Everything accomplished this quarter is part of our focus on efficiency and growth. A well-executed sub-debt issuance, a sale with a subsequent minority reinvestment on our insurance platform, a repositioning trade with our bond portfolio that did not impact our book value as we leverage the gain off the insurance deal. And continued contract evaluations and renegotiations. Including our core data processing vendor interchange payment rails, and some new tech token tech-focused initiatives looking into 2026. So all in all, a very nice third quarter for our company. And I'm gonna stop there, hand it over to Ronald Gorczynski to let him dive into some greater detail. Ronald? Ronald Gorczynski: Thanks, William, and good morning, everyone. I'll start by highlighting some key deposit results. For the quarter, we had strong non-broker deposit growth of $283 million representing more than 24% growth on an annualized basis. This increase resulted from both new deposit production and seasonal client liquidity build following the previous quarter outflows. The cost of new non-brokered production was 3.47%. This growth gave us the opportunity to pay down $104 million of brokered deposits which had a weighted average cost of 4.27%. Our overall interest-bearing cost rose by three basis points to 2.98% but were down to 2.93% for the month of September. Despite funding almost $100 million of loan growth, and paying down $104 million of brokered deposits, our overall liquidity position which includes cash and securities, at quarter end was approximately 21%. Included in our liquidity position was $98 million in net proceeds from our sub-debt issuance which closed in August. As we look ahead to Q4, we anticipate our liquidity position normalizing as we already retired $40 million in our existing sub-debt on October 2, and we expect to pay down an additional $111 million in brokered deposits with a weighted average rate of 4.28% during the fourth quarter. As William had mentioned, we utilized the gain generated from the sale of our insurance operations to offset losses associated with selling $85 million of securities with a weighted average rate of 1.4%. The proceeds of the security sale were reinvested in securities yielding 4.95% which will generate $2.6 million of additional annual interest income and increase our overall weighted average securities portfolio yield to 3.7%. During the quarter, our net interest margin experienced some temporary compression declining four basis points to 3.25% primarily as a result of timing differences between issuing new sub-debt prior to paying off our existing sub-debt and higher rates for new deposit production. However, the average rate of new loan production was 7.11% which continues to push the yield on our overall portfolio higher. Furthermore, any future cuts to the Federal Rates Fund will positively impact our deposit portfolio costs as approximately 45% is variable cost adjusting in lockstep with any Fed actions. We believe these factors in conjunction with anticipated broker deposit pay downs and enhanced yields on our overall securities portfolio has our balance sheet well positioned heading into the fourth quarter and into 2026. Looking ahead, we're projecting our fourth quarter margin to be in the 3.3% to 3.35% range. Our quarterly provision expense decreased to $227,000 from $2.4 million reported in the previous quarter. The growth-related provision this quarter was offset by the adjustment to our qualitative factors specifically an improvement in our CRE concentration ratio which decreased to 271% from 301% in the previous quarter. This decrease was due to the downstream of $45 million of proceeds from our sub-debt issuance to the bank as equity capital. Additionally, our asset quality continues to remain robust with non-performing assets comprising 0.22% of total assets and net charge-offs to average loans of 10 basis points on an annualized basis. Our allowance for credit losses is now at 0.93% of total loans. Operating non-interest income after adjusting for the gain in sale of our insurance operations and the loss on the securities restructuring was $8.4 million which is $500,000 lower than the previous quarter. As a result of the sale. All other income items remain consistent with our expectations. Operating non-interest expenses after adjusting for previously noted items totaled $32.6 million aligning with results from the prior quarter. We made progress again in our operating efficiency ratio which improved to 64% compared to 66% from the previous quarter. Our ongoing commitment to expense management has allowed us to maintain a level of expense base over the past four quarters and continue to trend positively towards our long-term efficiency goals. For the fourth quarter, with insurance operations removed, non-interest income is projected to be approximately $7 million and non-interest expense is expected to be in the range of $32.5 million to $33 million. Salary and benefit expenses are anticipated to range from $19 million to $19.5 million comparable to the previous quarter due to higher levels of variable compensation and anticipated costs associated with the new hires. Both our bank consolidated Tier two capital ratios increased during the quarter primarily due to the sub-debt issuance. Our total consolidated risk-based capital ratio rose to 13.3% up from the 11.1% in the previous quarter and the company's TCE ratio also improved to 7.8%. Looking ahead, we are confident that our capital ratios are appropriately balanced and well-positioned to sustain growth while optimizing returns on equity. With that said, I'll turn it back over to William. William Carroll: Thanks, Ronald. I want to reiterate again the value proposition with our company, drawing your attention back to page seven of our deck. We are successfully executing on the leveraging phase of growth for our company. We hit our 112% ROE and ROE targets this quarter. And have confidence that this will build from here as we gain even more operating leverage. We're building a great franchise. We're in arguably some of the most attractive markets in the country. And have put together a team that is rapidly moving us forward. You've heard me say before, I believe we are one of the Southeast's brightest stories. Outstanding markets, strong experienced bankers, coupled with a great operational and support team, plus very nice complementary business lines. We expect the remainder of 2025 to have a similar look to what we've seen in the last few quarters. And I believe this will continue into 2026. Our focus will be on doubling down on this current strategy. Getting deeper into our markets and our business lines. As I mentioned, pipelines are good and I think we can continue growing at this high single digits plus pace. On talent acquisition, this continues to be a focus as well. Recruiting is a process. We've added a number of great bankers this year, and have several more in our pipelines. Made some outstanding additions in the third quarter. And I believe we are included with a very small handful of banks that have built a culture where outstanding regional bankers want to work. We will continue to look for these organic growth opportunities and will remain very focused on recruiting. One of the reasons for our successful execution on adding great people is our culture. Arguably, one of the biggest highlights for the quarter for us internally was our company being named to Fortune's list of best workplaces. It is an honor we don't take lightly, and a big shout out to our people team led by Becca Boyd as we continue with huge accomplishments with the culture of our company. So to summarize, we're positioned well for our clients, our associates, our shareholders. We are executing, growing revenue, EPS, and book value while staying prudent on expense growth. We remain optimistic around our margin, as new production stays strong and as we see the tailwind coming with rate reset on our loan portfolio, over the next couple of years. Credit continues to be very sound and we're seeing great new client acquisitions coupled with great overall energy around our company. I appreciate the work of our SmartFinancial, Inc., SmartBank team and the efforts of all of our associates. I'm very proud of what we have going on here at SmartFinancial, Inc. And I'll stop there and open it up for questions. Edra: Thank you very much. Our first question comes from Brett Rabatin with Hofde Group. Your line is now open. Please go ahead. Brett Rabatin: Hey, good morning, guys. Thanks for the question. Wanted to start maybe, William, you mentioned some hires, and I think in the past, you've said the Alabama franchise could double in size over time and you felt pretty optimistic about Alabama. Can you talk maybe about where the hires were in the geographies? And then just, thinking about Alabama, just any update on the growth outlook for that franchise in particular? William Carroll: Yeah. Brett, thanks. It has. You know, as far as just geography, it's really been fairly evenly spread. You know, I think last quarter, I think we've talked about we had we hired several, and then we had several in the pipeline. We continue to add those. We added a couple in Alabama, added a couple in Tennessee, over the last little bit. And so it's really been throughout all of our zones. I do think we're still extremely bullish on Alabama as we're getting started. We're bullish on all of our markets. But we're seeing a lot of this Alabama growth starting to catch stride, especially with some of these teams that we've got in the Birminghams. In the Auburns, the Dothans, the Montgomery's. Those offices really are starting to generate some great momentum in Mobile too. I know Miller and I have been we've done we've been on we've been on the road a lot the last several weeks. And so we've been in most all of those markets over the last little bit. And it's exciting. A lot of new folks coming on. We had a new ad in Panama City. Did have a new ad in Murfreesboro as well. So it's really been across the board, Brett. But we're continuing to focus not just on Alabama, really all of our zones. That had you know, like I said, Florida as well. We're seeing some nice Panhandle opportunity there. And don't see that slowing down. Yeah. Yeah. It's just really been across the board. So again and I made the comment in here the momentum that we've got really everywhere in the company is just really good right now. Our culture's good. We're attracting some great bankers and you know, and our existing legacy teams are performing extremely well. So we're kinda hitting on most all cylinders. Still got always still got work to do and gaps to close, but it's been really good. Brett Rabatin: Okay. That's helpful. And then on the margin guidance for the fourth quarter, obviously a lot is going into that. Wanted to make sure I understood of the guidance relative to the liquidity that you added in 3Q. How much of that drains out? How should we think about maybe the average balance sheet size in the fourth quarter, you know, and how that might impact NII. Yeah. William Carroll: Ronald, do you wanna talk a little more on the margin detail? Ronald Gorczynski: Yeah. You know, a lot of our cash on the balance sheet today will be more deployed. You know, we did $40 million for the sub-debt. Another $100 million for brokered, and we expect to shrink some of the cash put into loans. So I don't think our asset size of our balance sheet's gonna move anything materially. We're just gonna use really the cash on hand to fund most of the production for Q4. Brett Rabatin: Okay. That's helpful. Then if I could sneak in one last one, you mentioned, William, you know, focused initiatives and next in the next year. Does that increase productivity, like AI, so you can have bots doing work that maybe frees up FTEs or any thoughts on how much that might add to an expense base? William Carroll: You know, it really you know, what we've done, Brett, over the last little bit, as I said, we've really worked and had some very favorable outcomes with some new contract renegotiations on several fronts across the company. But some of the stuff that we're doing in tech I think, is allowing us to get some expense reduction so we can reinvest. I obviously, Ronald will continue to quarterly kind of give our quarterly non-interest expense guidance moving forward. I don't see it having a really meaningful impact from an increase standpoint, even these new initiatives. I think we've got those kind of built in kind of where we think run rates are today. But, we've got some great platform enhancements. We're looking at AI. We've started using bots. I think we will continue to do more of that. We're looking at some new things on the digital front as well from a consumer-facing digital piece. We're leveraging Copilot a lot. In our company today. And I do think it overall, I think it increases efficiency. I don't know yet if it doesn't necessarily don't think it necessarily impacts you in from a spot where we're gonna look to reduce that. But I do think it continues to allow you not to add staff as you scale. And I think that's the biggest thing. We're seeing a lot of tools that we're starting to use. I know we've got great support stuff going on, our risk platform tools. Are very helpful. We're spending a lot of time, you know, evaluating risk, evaluating fraud in your company. So a lot of those technologies, I think, will allow us to continue at current staffing levels. Or maybe add just a few instead of adding a lot over the coming year. So it's kind of a mix it's a mixed bag. There's a lot of different moving parts to it, but I'm really excited. I think our technology team is as good as we've ever had it in our company today. And I feel really good about our ability to advance that while still staying within a very reasonable expense profile. It's as much a reallocation and reinvestment as it is. Ronald Gorczynski: Well, additionally, the first sliver of this will be to you know, we wanna provide our clients with better experience, easy to do business easier to do business with. So that's really our first focus when we're going down this path. Brett Rabatin: That's all really helpful. Thanks so much, guys. Ronald Gorczynski: Thanks, Brett. Edra: Our next question comes from Russell Gunther with Stephens. Your line is now open. Please go ahead. Russell Gunther: Hey, good morning, guys. I wanted to begin with just a follow-up on the expense. So six consecutive quarters of positive operating leverage. You've talked about continuing to hire bankers as the opportunity arises. We just touched on the expense initiative the tech initiatives. So how are you thinking about that streak of positive operating leverage going forward? Is that something we should expect to see over the course of 2026 alongside this franchise investment? William Carroll: Yeah. I'll start, and then, Ronald, maybe you can add some additional color as well. Yeah, Russell. I think so. I mean, you know, when you look at where the company's positioned today, we're really bullish on our ability to continue to grow that revenue line. Again, the production that we're seeing happen throughout all of our markets, the repricing that we've got going on, we're gonna get we're gonna continue to get that revenue lift. You know? And it's definitely gonna outweigh our expense run rates. Now we're gonna wanna continue to invest and add people but we're gonna do that balanced as we grow this revenue line. I think it's really important for us right now to continue hitting these operating leverage targets over the next few quarters. We really believe we can do that. We feel good. We're starting to run Air 26 models and feel very good about where our company can be. Again, we've gotta execute. We've gotta do the right things to do that. But, we've demonstrated our ability to do that. In '24 and '25. We think we can continue that in '26. So, yes, I do think we can continue to increase this consecutive streak of gaining operating leverage. But Ronald, I have any additional comments that you've got. Ronald Gorczynski: Yeah. No. Exactly right, William. You know, we're probably you know, again, we're not going into '26 guidance, but we're probably keeping our band tight. We've been focused on containment for the prior four or five quarters. And we're probably looking around the 34, if you want numbers, 34 to max $35 million range for the full year next year. So yes, we will be focused on containing it with our growth. Russell Gunther: That's great color, guys. I appreciate it. And then just switching gears, to the margin. Appreciate the sort of level set for 04/2025 given the moving pieces in March. You give great detail in the deck, around the average earning asset repricing schedule. And in the past, you've talked about how that would translate to about two to three basis points of margin expansion quarterly. Is that still sort of the range you're thinking about as we move beyond April, or have some of the actions taken this quarter changed that in any way? Ronald Gorczynski: No. Actually, you know, the prior quarters was two to three basis points. We're pretty bullish in our margin expansion going into 2026. Overall, I think we're probably looking at five to seven basis points expansion quarter over quarter for '26. Russell Gunther: That's very helpful. Scott. Thank you, guys. Okay. Thanks for taking my question. Thanks, Russell. Edra: Our next question comes from Catherine Mealor with KBW. Your line is now open. Please go ahead. Catherine Mealor: Thanks. Good morning. Ronald Gorczynski: Good morning. Edra: Maybe just one follow-up on the margin on the deposit side. With growth improving as much as it has into next year, how do you think the deposit beta could be on the next 100 basis points of cuts versus what we've seen on the past 100 basis points of cuts? Just given I think we'll see better growth rates coming, you know, in the next the next course of the year. Ronald Gorczynski: Yeah. I think I think, for the variable intend to, as best we can, is to really follow dollar or basis point per basis point. So we're still targeting 45%. I know we're probably in the thirties right now, but we wanna target that 40% range beta. Catherine Mealor: Okay. And from the past twenty-five of cut, I know it's early, but have you already seen the ability to do that? Ronald Gorczynski: Yes. Yes. We have. William Carroll: Yeah. We've been trying to step down, Catherine, a little bit as we were. You know, we've got we have we have some of the deposits are tied directly to, the rates or market rates. And so those come down as rates come down. Some are more correlated. Some and that gives us the ability to move a little bit faster in some other too. So, yeah, we've been able to move those down and still pick up the growth that we've needed. Teams have done a nice job to be able to do that. And I think, yeah, we're still staying right there in market and staying on top of of what's going on in all of our different zones, and each of our different zones have different competitive pressures. And different competitors, but, but we've done a nice job being able to pull that down. Catherine Mealor: Okay. Great. Then just a quick question on fees. Any outlook for fees as we go into next year of just things to be aware of that could drive better fee growth? I know that the insurance fees settled be over the moving piece. I was just kind of curious on how we're seeing that fee growth into twenty-six. William Carroll: Yeah. I'll start, and then, Ronald, I'd love to get your you know, some color Catherine as well on that. We yeah. We've got several things working. Again, yeah, we'll kinda reset without that insurance component line item going forward. But, yeah, we've got I think we still got some really good plans when you look at fees for us on the whole. Continue to think that that's gonna, have the ability to trend up. I know you know, we've talked a little bit about payment rails and renegotiation. I think we've got some things that we're working on on our, on our interchange income. I did mention I think there's some opportunities there. And I did in my comments our mortgage unit. I'll tell you. Our mortgage unit is having probably as good a year as we've ever had. And really excited about what that mortgage team is bringing to the company. We're seeing, as we've grown our footprint, grown our platform, we continue to add some, great new sales team members on the mortgage side, and our legacy team continues to perform well. So that's a, that's I think that'll be a plus. You know, our investments arm continues to really execute, you know, continue to grow our AU in there. We've added a really nice producer in one of our Alabama markets. New FA down there this year. Yes. And, you know, Ronald, I know we talk we always talk about TM. Well, TM is a piece of it as we continue to grow that TM platform. I know that those dollars continue to just kinda build and become a really nice annuity. So Catherine, I think there are several pieces. I don't know, Ronald, if there's any others that you think of, but I do think we'll continue to get some nice growth. We'd love to see that accelerate. That's going to be a strategic focus for us next year. But I know, Ronald, any comments on that from you? Ronald Gorczynski: Other than, you know, more like more looking at the customer fees and making sure more market. But, no, you hit all the highlights, William. Yeah. Catherine Mealor: Okay. Great. Thank you. William Carroll: Thanks. Edra: Our next question comes from Steve Moss with Raymond James. Your line is now open. Please go ahead. William Carroll: Maybe just starting here on loans, just on the pipeline here, Bill, you sound really optimistic on things. So I'm assuming it's going to be likely to be a really good fourth quarter. Just kind of curious as to is that pipeline enough to support double-digit growth into 2026 Again, I keep guiding to kind of the high singles. We've been able to beat that a little bit. You know? And you know, I think we'll be right there I think we'll be right there at that plus minus 10 number. You know, that's and that's a that's a big bogey as we get larger. I'll tell you, one of the things that we talk about a lot internally you know, the production levels that we've had have really been outstanding. Again, the teams are doing a nice job. You know, we're still seeing the payoffs in paydowns that that, you know, that'll you know, a lot of our as we read and look at other releases, and see a lot of other things going on the market, you know, we're not immune to that. We're getting a lot of pass paydowns. It's just our production is so strong It's still allowing us to get up there and kinda hit this 10% ish number. So, you know, that's know, that's that's a lot to continue to ask our team to do. But as we look over the at least the near term, I do think we can continue at at or around that pace. Again, pipelines are solid, you know, when you're out when you know when we're out in these markets and and with the rents at renting a lot of them, the miller and I are in a lot of them. I mean, we're out, and there's just there's a there's an energy and a really good calling effort. Going on throughout, throughout the company. So, yeah, I think we can continue that know, there might be a quarter that we're a little lighter. Little heavier, but I still think we'd be right around that plus minus 10. Ronald Gorczynski: Yeah. I like the markets. Okay. And they're just all so positive, and the teams seem to be so positive. It does get harder to feed the beast, but I think we're certainly up for. William Carroll: Right. And maybe just in terms of being the beast, I hear you guys in terms of hiring as well. Just curious, you know, as you think about I know you guys are always opportunistic, but know, you obviously have merger disruption in your markets. You'll kind of do you think there's a possibility of a step up in hiring over the next twelve months Just kinda curious. I know you guys are talking about positive operating leverage, but just curious on that aspect expense. William Carroll: Yeah. I'll tell you. See, we're we we're all we're very selective as we go through this hiring process. I you know, I don't necessarily think it's gonna pick up dramatically. I think couple of reasons. I think that it you know, you the disruption that you we see in the market I mean, these are these are good banks, they're gonna be they're gonna be fighting to hold on to good talent. And, you know, and I just and I think over the over a period of time, you may see some you know, dislocation in in in some different bankers and some of those, you know, different markets throughout the Southeast. But I don't think there's a lot. I think we're just gonna continue to be diligent and trying to find just incrementally good bankers that that fit our culture, that fit our teams, And I think we're probably gonna be I would imagine, looking into 26. Kinda keeping the same tight pace that we saw in '25, which will just be just, you know, add great talent. We can find it. Like I said, I think we probably in the process. I think we've added Nate, I think we stopped. We're probably maybe 12 to 15 net for, you know, kind of what we've done, you know, in the pipeline or on we've added this year, I think we'll continue to do that. And, I I think Steve, for us, it's just gonna be just continuing to be diligent. Again, find the right types of bankers that fit the types of of of deals that we wanna look at. William talks off about ADR, always be recruiting. Always be recruiting. That's talent and clients, and I but I think it's it takes a special we're recruiting the quality, not the quantity. And I think that's important for us, culture fit and who they are. Yeah. Alright. Appreciate appreciate that color there. William Carroll: Maybe just one more for me here on the loan loss reserve release. Ronald Gorczynski: Did I understand that correctly because you did I hear correctly that downstream some capital and therefore a lower reserve ratio lower, CRE concentration ratio, that was kinda one of the qualitative factors that drove the reserve lower. Ronald Gorczynski: Yeah. Our, our share concentration ratio one of our qualitative factors was there was our because we're over to 300 that we downstream $45 million from, you know, the parent to the bank, it lowered it to $2.71. Yeah. That was a that was one of the main factors. Okay. William Carroll: Okay. So going forward, you know, relatively stable to maybe a modest build on reserve ratio as as you continue to grow here? Ronald Gorczynski: Yes, sir. Correct. Okay. Awesome. Well, I'll step back in the queue. I really appreciate all the color here, and nice quarter, guys. William Carroll: Thanks, Steve. Thanks, Steve. Edra: Thank you very much. Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open. Please go ahead. Stephen Scouten: Good morning, guys. Just wanted to clarify a couple of things real quick. Ronald, did you say that 45% of your deposits are variable costs? And is that to say, if I heard that right, that those are directly indexed? Ronald Gorczynski: We have the ability to move 45%. We have about 32% that are directly indexed, and we have the remainder that's tied to internal index that will move with the rate moves. So, yeah, 45% all in, though. Stephen Scouten: Okay. Great. Perfect. And then on the on the NIM trajectory, I think you said five to seven basis points a quarter in 2026. Is that your expectation each quarter in 2026? Or just wanna make sure I'm hearing that right. Ronald Gorczynski: Yes. Each quarter in 2026. Stephen Scouten: Great. Fantastic. Okay. And then last thing, think I know Catherine maybe had asked this on the on the fee revenues and insurance. Did you give a guidance for expected fourth quarter overall fee revenues? Ronald Gorczynski: Yes, $7 million. Stephen Scouten: $7 million. Great. Okay. Perfect. And then, on the broker deposit front, you obviously had some nice reductions here this quarter. Sounds like think you said maybe another 111 next quarter. So I'm doing math remotely correct. Like maybe a $120 million or so left in that ballpark. What's the plan for the remaining broker deposits? Would the objective still to get those down from here? Or is that kind of an acceptable level moving forward? Ronald Gorczynski: Yeah. We were at $268 million in June. September at $164 million. Minus the $111 million. Yeah. We intend to as soon as they are due, we're gonna pay those down. So yes, we're looking not to have brokered deposits at someday. That's our goal objective is not have those. Stephen Scouten: Okay. Great. And then I guess last thing for me, you know, the stock's been trading fantastically. The results have been great, kind of ahead of schedule on our operating revenue line. Sounds like hiring has continued well. Do you think about M&A as a piece of that puzzle at all? I think there were some a note maybe in the slide deck, that said you know, maybe more trying to find the verbiage. Maybe more strategic than it was previously. M&A focus shifted to strategic and or needle moving opportunities. I guess, maybe if you could kind of speak to that comment and what that might look like? William Carroll: Yeah. Steven, us, it really and I'm in my comments, said we've our strategy really hasn't changed a ton. A lot of it is just, again, doubling down on this organic strategy, deeper into the markets. That's strategy one a. You know? Yeah. Yeah. I think, you know, we're really not shifting that to really look at M&A. But we've said and continue to say, you know, we will evaluate you know, needle moving opportunities that make sense. I've said you know, before, we don't necessarily, you know, we don't wanna do M&A just to be bigger. You know, we want if we did it, we'd want it to make us better. And sometimes that's just tough to find. You know, if we find that unicorn, we find the right piece that fits us and we would evaluate. But, really, I mean, it's I say that because, you know, you never know what could come down the road. But, man, our strategy is really focused on continuing just to lever you know, this balance sheet and grow as we've done the last couple of years the way we've done it. That's the primary focus. You can't ever say you're not gonna look. I think we are open to look. But William talks often about now, you know, organic is one a and M&A would be one b. M&A might be one c, but we're continuing to look. Yeah. That makes a lot of sense. Well, the strategy is working, so I guess if it ain't broke, don't fix it. Right? So great job, guys. Stephen Scouten: Well, it is. You know, it is. But I but I think I do think you know, and as we've talked to you and a lot of your colleagues, I mean, it's just you know, it's really important for us to message what we've messaged. It's you know, we've built this company by design. We were, again, a little bit kinda mile wide inch deep. By design for a reason. And we it's been very important for us gain this operating leverage and do that. And that's done that. We've executed well. We're executing well. We still got room to grow, and we've got wanna continue to see this move forward. So not really changing anything, on our outlook moving forward. It's just we're gonna just keep doubling down on what we're doing. Stephen Scouten: Perfect. Thanks a lot. Edra: Thank you very much. Miller Welborn: Thanks. Edra: Currently have no further questions. So I will hand back over to Miller Welborn for any closing remarks. Miller Welborn: Thanks, Edra, and thanks, everybody, for being part of the call today. We are very excited about where we are and where we're going. Thank you for being part of the SmartBank family, and have a great day. Edra: Thank you very much, Miller, and thank you to all the speakers for joining today's line. That concludes today's conference call. Thank you, everyone, for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, it's Taylor Morrison Home Corporation's 2025 Earnings Webcast and Conference Call will begin shortly with your host Mackenzie Jean Aron. We appreciate your patience as we prepare your session today. During the call, we encourage participants to raise any questions they may have. We will begin shortly. Good morning, and welcome to Taylor Morrison Home Corporation's Third Quarter 2025 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I'd now like to introduce Mackenzie Jean Aron, your host. Vice President of Investor Relations. Please go ahead. Mackenzie Jean Aron: Appreciate you joining us today. Before we begin, let me remind you that this call, including the question and answer session, will include forward-looking statements. These statements are subject to the Safe Harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Denise Palmer. You, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer, and Erik Heuser, our Chief Corporate Operations Officer. We are pleased to report strong third quarter results despite the continuation of challenging market conditions. Driven by our diversified portfolio and our team's careful calibration of pricing and pace across our well-located communities, we once again met or exceeded our guidance on all key metrics, including home closings volume, price, and gross margin. The ongoing execution of our balanced operating strategy has allowed us to maintain healthy performance even as we have adjusted pricing and incentives, particularly in entry-level price points. Combined with a thoughtful approach to land lighter financing tools and effective cost management, our business is generating strong bottom-line earnings, cash flow, and returns for our shareholders. With approximately 70% of our portfolio serving move-up and resort lifestyle homebuyers, our financial performance is supported by the strength of our broad consumer set. However, even though these generally well-qualified buyer groups are less sensitive to affordability constraints, all consumer segments have been impacted by macroeconomic and political uncertainty, which has weighed on buyer urgency and shopper sentiment. In addition, consumers are aware of the current competitive dynamics in the marketplace and are carefully weighing available incentives, pricing, and spec offerings in their purchase decisions. Appreciating these dynamics, we are focused on deploying innovative and compelling incentives and pricing offers to support buyer confidence and improve affordability. Leaning into the appeal of our well-designed spec and to-be-built homes to meet consumer preferences and carefully managing new starts as we continue to right-size inventory and prepare for next year's spring selling season. Given our quality land locations, the majority of which are in prime core submarkets, our sales strategies are driven community by community based on their unique selling proposition, competitive analysis, and consumer profile. In all communities, we strive to price to market to remain competitive and offer our homebuyers the greatest value. In some communities, this results in a price-focused approach to drive volume, especially where we serve predominantly first-time buyers and differentiation is more challenging given market competitive pressures. However, in move-up and resort lifestyle communities, we are inclined to be more patient to protect values given our distinct locations and product offerings in hard-to-replace communities. We are able to execute this balanced approach in part because we have a well-structured land bank that provides a flexible and capital-efficient lot supply. As I said last quarter, while the near-term outlook calls for a more patient trajectory, we strongly believe that we have the platform to jump-start outsized growth as market dynamics stabilize. In the meantime, we are doubling down on opportunities for cost management with our suppliers, value engineering with our product offerings, and overhead efficiencies in our back office. These efforts helped drive year-over-year improvement in our direct construction costs and 80 basis points of SG&A leverage. We are also continuing to expand our industry-leading tech-enabled sales tools, which are contributing to growing cost efficiencies as well as an improved customer experience. I'm pleased to share that we recently launched an industry-first AI-powered digital assistant across select on taylormorrison.com. Unlike traditional chatbots seen in our industry that rely on scripted responses forcing home shoppers through a predetermined path, our new digital assistant leverages generative AI to provide dynamic data-driven guidance that better mirrors an in-person sales interaction. Our digital assistant guides consumers through their discovery journey, provides them detailed answers to each shopper's unique questions, and helps convert interest into action, supporting lead generation and customer acquisition. This technology marks a meaningful advance in how we engage prospective buyers online, and it's another step in our ongoing digital innovation strategy as today's consumers increasingly seek intuitive, personalized shopping experiences. As to recent demand trends, we were encouraged to see monthly net absorption paces improve each month during the quarter, with September pacing at the strongest level since May, in contrast to typical seasonal slowing into the end of the summer as the improvement in mortgage interest rates helps spur activity. In total, our monthly absorption pace was 2.4 per community for the quarter and has averaged 2.7 year-to-date, slightly below our long-term target as demand has remained somewhat choppy. However, there are positive signs that potential buyers are cautiously engaged in the market. For one, our latest national home buying webinar, a free educational opportunity, we offer home shoppers to equip them with the knowledge needed for a successful home buying journey attracted over 400 attendees. That's a 155% increase from our last webinar. In addition, total website traffic is up double digits and mortgage prequalification volume is trending similarly to year-ago levels. I continue to believe that for our generally well-qualified diverse customer base, improved confidence in the broader economic and political outlook will be the most important determinant of demand stabilization, especially for discretionary home purchase decisions in our move-up and resort lifestyle communities. Among the many headlines impacting confidence, uncertainty related to H-1B policy and broader immigration-related changes have weighed on nonresident buyer activity, with Dallas, Austin, Atlanta, and the Bay Area feeling the greatest impacts. From a consumer standpoint, the mix of our orders by buyer groups stayed relatively consistent sequentially in the third quarter at 30% entry-level, 51% move-up, and 19% resort lifestyle. On a year-over-year basis, our first and second move-up set held in most strongly, while our entry-level segment pulled back as did our resort lifestyle segment due to performance in our non-Esplanade communities. Going a step further, specific to our Premier Esplanade segment, which accounts for just over 10% of our portfolio orders, were flattish year-over-year benefiting from a handful of new community openings. Given the brand's affluent customer base, this segment of our portfolio is relatively insulated from interest rate concerns and instead more reliant on consumer confidence. Positively, we did see improved shopper engagement in Esplanade during the quarter with many consumers exploring multiple communities across markets with a willingness to travel to find their preferred combination of lifestyle, location, and price. With a healthy pipeline of new Esplanade communities scheduled to open in 2026, we remain encouraged by the strength of this consumer group and the opportunity to capitalize on this brand's unique lifestyle offerings in the years ahead. As we look ahead to 2026, it's still too early to provide guidance, but there are a few strategic priorities I would emphasize as we contemplate next year's opportunities against ongoing uncertainties. To begin, we have well over 100 communities expected to open next year, resulting in mid to high single-digit anticipated outlet growth. Many of these communities are slated to open in time for the spring selling season, which should help support our sales pace and delivery goals next year. We also have realized significant cycle time savings as Kurt will detail, providing improved flexibility to start and close homes within the year, including build-to-order homes. While we hope to begin gradually shifting our deliveries closer to a more balanced mix of to-be-built and spec homes over time from our current mix of roughly 70% spec and 30% to-be-built sales, this normalization will take time and be dependent on customer demand. For now, specs will continue to bridge the gap between current buyer preferences for incentivized quick move-in inventory and an eventual return to more historic preferences for personalizing to-be-built homes, especially in our move-up and resort lifestyle communities, which have long been heavily weighted to to-be-built sales. Recognizing this unique environment, we are fortunate to have experienced teams across our divisions with the expertise to respond to local market conditions effectively to best serve our homebuyers. With that, let me now turn the call over to Erik. Erik Heuser: Thanks, Sheryl, and good morning. At quarter end, we owned or controlled 84,564 homebuilding lots. Of these, just under 12,000 lots were finished. The balance are being and will be value-enhanced by normal course entitlement and development efforts over time. Based on trailing twelve-month closings, this represented 6.4 years of total supply, of which 2.6 years was owned. The majority of our lots are in prime locations and core submarkets where we believe long-term fundamentals are healthiest. This core location strategy has helped to partially insulate us from the elevated level of new and existing home inventory in some markets. We control 60% of our lot supply via options and off-balance sheet structures. This is up from 57% at the 2024 and is considerably higher than the year-end low watermark of 23% in 2019, as we have made significant progress in our asset lighter strategy. Importantly, we have done so by prioritizing seller financing, joint ventures, and other option takedown structures, complemented by land banking at rates not historically seen. By utilizing each of these vehicles, we look to optimize the trade-off between gross margin and expected returns. As we continue to strategically deploy these tools, we believe we are well on our way to achieving our goal of controlling at least 65% of our lots. With respect to the land market, we have seen some development cost relief and favorable in land sellers' expectations regarding land structures and values. This has translated into an increased receptiveness on the part of land sellers to structure deals with terms, our preferred financing route, or in a growing share of deals to also adjust pricing. In the third quarter, our investment committee reviewed land acquisition updates that contemplated favorable transaction enhancements impacting nearly 3,400 lots and more than $500 million of purchase price. These enhancements resulted in an 8% average price reduction, six-month average closing deferral, and other structural improvements. These negotiations related to current deal flow as well as deals that were originally approved as far back as 2023. Partially as a result, we have invested $1 billion in homebuilding land year-to-date as compared to $1.8 billion at this time last year. We regularly review and evaluate our deal pipeline to underwriting assumptions and ensure each new deal and additional phase meet our thresholds prior to closing. With the flexibility to be patient, given our existing lot supply, we now expect to invest approximately $2.3 billion this year, down from our prior expectation of approximately $2.4 billion and our initial projection of $2.6 billion coming into the year. Especially in volatile markets, our investment discipline is critically important to ensuring our portfolio is set up to perform for the long term. Turning to our Build to Rent platform. We previously announced that we had entered into a $3 billion financing facility with Kennedy Lewis to support our Yardley business, which as a reminder provides an attractive and affordable single-family living experience in amenitized rental communities. During the third quarter, we transferred 14 of our 22 non-JV projects from our balance sheet into the vehicle, providing capital relief of approximately $140 million. We expect to complete the transfer of a handful of additional projects by year-end, which would release another approximately $50 million. In total, these transfers address over $1 billion of funded project costs. Even more meaningfully, on a go-forward basis, the structure allows us to jointly underwrite new Yardley opportunities, which can then be acquired, developed, and constructed fully off-balance sheet within the vehicle, providing significant capital efficiency and optionality as we continue to scale this unique business and optimize disposition strategies. Consistent with this optionality, we now expect to sell two projects by year-end as we have taken a more patient approach given recent market conditions. Now I will turn the call to Curt. Curt VanHyfte: Thanks, Erik, and good morning, everyone. Turning to the details of our financial results for the third quarter. We reported net income of $201 million or $2.01 per diluted share. This included inventory impairments, pre-acquisition abandonments, and warranty adjustments. Excluding these items, our adjusted net income was $211 million or $2.11 per diluted share. During the quarter, we delivered 3,324 homes, which slightly exceeded the high end of our guidance range of 3,200 to 3,300 homes due to faster cycle times. The average closing price of these homes was $602,000, also slightly ahead of our guidance of approximately $600,000 due to a favorable mix. In total, this generated home closings revenue of $2 billion. We are closely managing our starts volume based on community-specific inventory levels and incremental sales. During the quarter, we started 1.9 homes per community equating to 1,963 total starts. We ended the quarter with 6,831 homes under construction, including 3,313 specs of which 1,221 were finished. Our total spec count was down approximately 15% from the second quarter. As we look ahead to 2026, we will be strategic in putting new spec starts into production in advance of the spring selling season. Appreciating that our current spec inventory remains elevated and the demand environment is fluid. Positively, the ongoing improvement in cycle time has significantly strengthened our ability to flex production levels. In the third quarter, we realized another roughly ten days of sequential savings, leaving us about thirty days faster than a year ago and ninety days faster than two years ago. Even still, we believe there's further room for improvement as we are continuing to find opportunities for additional efficiencies throughout the construction schedule aided by the slowdown in industry-wide starts. Based on our current inventory position, we expect to deliver between 3,100 to 3,300 homes in the fourth quarter. This implies an updated full-year home delivery target of 12,800 to 13,000 homes. Reflecting our current backlog and recent sales paces, we expect the average closing price of our fourth-quarter deliveries to be approximately $590,000, which would leave our full-year closing price at the low end of our prior range of $595,000. Our reported home closing gross margin was 22.1%. While our adjusted home closing gross margin, which excludes inventory impairment and certain warranty charges, was 22.4%. This was slightly ahead of our guidance of approximately 22%. The upside was due in part to a favorable mix of higher-margin to-be-built home closings, which benefited from faster cycle times. Conversely, for the fourth quarter, we expect a modest mix headwind from a higher penetration of spec home closings. With spec homes accounting for 72% of third-quarter sales, but 61% of closings, we expect our spec closing penetration to increase in the near term. As a result, we expect our home closings gross margin, excluding any charges, to be approximately 21.5% in the fourth quarter. This would imply a full-year home closing gross margin of approximately 22.5% on a reported basis and roughly 23% on an adjusted basis, consistent with our prior expectations. Erik Heuser: Now to sales, Curt VanHyfte: Net orders in the third quarter totaled 2,468 homes, which was down just under 13% year over year. This was driven by moderation in our monthly absorption pace to 2.4 homes per community from 2.8 a year ago, partially offset by a 3% increase in our ending community count to 349 outlets. Cancellations equaled 10.1% of our beginning backlog and 15.4% of gross orders. While cancellation activity has increased due to a change in consumer sentiment, we believe our cancellation rates remain below industry averages driven by our emphasis on pre-qualifications, $45,000 average customer deposits, and the overall financial strength of our buyers. Looking ahead, we now expect our outlet count to be approximately 345 at year-end, slightly below our prior guidance as we have intentionally delayed some openings into the New Year when anticipated selling conditions are stronger. As Sheryl said, we have well over 100 communities expected to open next year, resulting in mid to high single-digit anticipated outlet growth in 2026. We once again realized strong expense leverage as our SG&A ratio improved 80 basis points year over year to 9% of home closings revenue. This improvement was driven primarily by lower payroll-related costs and commission expenses. For the year, we continue to expect our SG&A ratio to be in the mid-nine percent range. Our financial services team maintained a strong capture rate of 88% during the quarter, which drove financial services revenue of $56 million with a gross margin of 52.5%. This was up from $50 million and 45% respectively a year ago. Among buyers using Taylor Morrison Home Funding, credit metrics remained healthy and consistent with recent trends with an average credit score of 750, down payment of 22%, and household income of $179,000. Before turning to our balance sheet, I wanted to highlight that during the quarter, we incurred net interest expense of $13 million, up from $3 million a year ago driven primarily by our land banking vehicles. We expect to incur a similar amount of net interest expense in the fourth quarter. Now on to our balance sheet. We ended the quarter with strong liquidity of approximately $1.3 billion. This included $371 million of unrestricted cash and $955 million of available capacity on our revolving credit facility. At quarter-end, our net homebuilding debt to capitalization ratio was 21.3%, down from 22.5% a year ago. During the quarter, we repurchased 1.3 million shares of our common stock outstanding for $75 million. Year to date, we have repurchased a total of 5.3 million shares for approximately $310 million, representing approximately 5% of our outstanding share count at the beginning of the year. As a result, we are well on track to achieve our full-year repurchase target of at least $350 million as we remain focused on returning excess capital to shareholders and taking advantage of the attractive valuation of our equity. At quarter-end, our remaining repurchase authorization was $600 million. Inclusive of our repurchase target, we expect our diluted shares outstanding to average approximately 101 million for the full year, including approximately 99 million in the fourth quarter. Now I will turn the call back over to Sheryl. Sheryl Denise Palmer: Thank you, Kurt. I'd like to end by acknowledging the recent focus on addressing the country's critical need to help make housing more affordable. At Taylor Morrison Home Corporation, we welcome the opportunity to work collaboratively towards expanding homeownership and improving accessibility. We have long strived to build strong communities and deliver affordable, desirable housing options that serve the needs of our customers with both for sale and for rent offerings. We applaud the administration's commitment to improving the cost and availability of housing and look forward to contributing towards meaningful solutions. I also want to end by thanking our entire team for once again delivering results we are proud to share. Your commitment to our customers, communities, and each other is second to none, and I am confident we will continue to navigate this market successfully. Thank you to everyone who joined us today, and let's now open the call to your questions. Operator, please provide our participants with instructions. Operator: Of course. Thank you very much. We'd now like to open the lines for the Q&A. Our first question comes from Trevor Scott Allinson from Wolfe Research. Trevor, your line is now open. Trevor Scott Allinson: Hi, good morning. Thank you for taking my questions. Want to start with your views on the potential action from the administration to encourage volume. And Sheryl, I appreciate your comments in the prepared remarks. Have you guys had conversations directly with the administration on the topic? And if so, can you talk about specifically what they're looking for from you as a home builder? And do these conversations change your views at all on your approach to volume versus pace in the current environment? Sheryl Denise Palmer: Well, thanks, Trevor. Appreciate the questions. You know, as has been reported, there's a number of meetings that have been held. And, honestly, I believe it's great for the industry that we're having these very productive conversations with the administration. So the discussions are really about how we can overcome the housing shortages in this country and most critically, how do we make housing more affordable. You know, we do have some excess inventory in the system. Everyone knows today that builders are working through, and we need to be very thoughtful about how that happens. But I think we can all agree that we have an affordability issue, and it didn't happen overnight. It's gonna require tremendous collaboration by a number of stakeholders to solve. It's a very complicated issue, you know, but the good news is it's getting tremendous focus by a lot of smart people. We need to tackle rising land costs, local regulations. The list just goes on and on. I would tell you we are in the early days. So more to come. But rest assured that Taylor Morrison Home Corporation and all the big builders want to be part of the solution on providing the right housing for Americans. And I'm quite confident given the meetings we've had that we'll see opportunities and progress. I'd also point you to the LDA statement that went out a couple of weeks ago. I think it did a really nice job representing the position of all the big builders. And as far as your second part of that question, you know, we're gonna continue to do the right thing community by community, asset by asset. As we've talked about for years, Trevor, we don't make that decision globally. We really look at the balance of price and pace in consumer group in every community. And we'll continue to do that. It's not gonna be helpful to flood the market with inventory that can't be absorbed. So we just need to be very conscious of, you know, the dynamics in each submarket. Trevor Scott Allinson: Thanks for that, Sheryl. And makes a lot of sense. I think that's a very logical approach. And then second, on recent demand trends, you talked about demand improving sequentially throughout the quarter, which is very encouraging. Are you seeing a difference by consumer segment just thinking as rates came down, did you see entry-level traffic become more engaged? Or is it more broad across consumer segments? And then any color on if those improved trends continued into October? Thanks. Sheryl Denise Palmer: Yeah. Great question. You know, I would tell you it's been pretty broad-based, Trevor. And I shared just like, you know, prior discussions, that it almost comes down to, once again, community by community. You know, for example, entry-level, absolutely, we've seen traffic pick up. But we know we have, you know, affordability issues we're trying to solve for. When we look at our move-up and our resort lifestyle business, you know, there continues to be increases in traffic, increases in web traffic, foot traffic, and actually, I'm quite encouraged, you know, with the resort lifestyle as we move into the shoulder season. That's gonna continue. That consumer group is, you know, more sophisticated. They know what's going on in the market. So the opportunity is to convert them from traffic to action. And we have a lot of tools if it's anything from everything from our incentives, our mortgage programs to our new AI tool to help consumers get from start to finish. Trevor Scott Allinson: Thank you for all the color, good luck moving forward. Sheryl Denise Palmer: Thank you. Appreciate the questions. Operator: Thank you very much. Our next question comes from Michael Glaser Dahl from RBC. Michael, your line is now open. Michael Glaser Dahl: Hi, great. Thanks for taking my questions. Cheryl, as part of the sequential trends, I was hoping you could elaborate on incentives. You talked in your remarks in the press release about kind of innovative and compelling. I mean, obviously, rate buy-downs have been out there for years now. So you know, what are you doing that's different? Is this kind of lower teaser rate? Is it arms? Like, what do you think you're doing that may be playing a role in helping to drive that customer off the sidelines? Sheryl Denise Palmer: Yeah. I would tell you, honestly, Mike, it's all of the above. As you know, we continue to use, you know, both on the conventional and the FHA loans, we're using buy-downs. We're using adjustable loans. We also have proprietary loans for our inventory that's, you know, just gotten in the ground or specifically our to-be-built. Really trying to stimulate that business. Have recently just introduced a new proprietary nine-month program for our to-be-built. I think most of those are done with Fannie and Freddie through the window. We've got a slightly different program. And it really gives our customers flexibility on a forward lock. But the, you know, security of a longer period of time they, you know, if they believe rates are gonna drop. Obviously, in most of these programs, we also have the ability for a free float down. So you know, I think for us, Mike, it's really about making sure we personalize each customer's experience. Some of them need help with closing costs. Some of them, you know, don't know how, you know, aren't expecting to be in the house a long time and adjustable program seems most helpful. Some need the confidence of a thirty-year lower fixed rate. So it's really making sure we understand the customer needs and we just have a plethora of programs to provide. Michael Glaser Dahl: Okay. Got it. That's helpful. And then, Cheryl, I know it's early to give 2026 commentary. You did highlight a couple of things around community account growth. Specs maybe being a bridge to help you a little bit in the near term. I think some of that probably alludes to the fact that your backlog down nearly 40% in dollar terms year on year and probably the year somewhat similarly. The obvious question we get from investors is if you have a traditional kind of build-to-order builder go into next year with backlog down that much? How can you possibly drive to even flat revenues? Or do you have a significant gap out? So maybe can you just talk to how you're viewing that as you go into the spring? It sounds like maybe you're a little more willing to put some specs in the ground where others are pulling back a little. But just give a little more detail on how we solve thinking about that positioning. Sheryl Denise Palmer: Yeah. I think you have to hit it from a number of angles. Mike, first of all, I think we've been very clear that we're gonna do look at each community and make sure we understand the right need and put the right number specs in the ground. Our specs, as I said, I think both Kurt and I said in our prepared remarks, are a little higher. We pulled back a little bit in the third quarter to see what happened to sales paces. We have the fourth quarter given the reduction in construction cycle. It gives us much more time. I think back to a year ago where we probably had to have houses in the ground by January and February and probably no later than March depending on the community or market. Today, that can go till next July or August. So you've fundamentally picked up at least another quarter of production cycle next year. You combine that with our ability to add new to-be-built, you know, well into next year and the community count growth, then we're gonna really seek to understand the market, and we have the platform to ramp up starts if the market is there for it. But as I've said, we're not gonna force inventory in the ground. In some communities, we find that pricing has been inelastic. And so we really have to make that decision community by community and balance, you know, profitability along with volume. Michael Glaser Dahl: Got it. Okay. Thank you. Operator: Thank you very much. As a reminder, if you'd like to raise a question, our next question comes from Michael Jason Rehaut from JPMorgan. Michael, your line is now open. Michael Jason Rehaut: Great. Thanks very much. Good morning, everyone, and congrats on the results. Sheryl Denise Palmer: Thank you. Operator: Wanted to first drill down on, you know, how you're thinking about, you know, specifically about spec inventory. Sorry. Saying early that it remains elevated, I think it's kind of one of the key reasons why you're looking for a little bit of a dip down sequentially in 4Q gross margins. Trying to get my arms around how you're thinking about this going into the first half of next year, if you would expect this kind of drag or headwind to remain in place or even accelerate. And, you know, if you're kind of working through excess spec inventory, let's say, the current fourth-quarter pace, when might assuming the market trends follow normal seasonality, when might that overhang dissipate? Sheryl Denise Palmer: Yeah. I think similar to what I said to Mike Dahl, I think it's a balancing act, Mike. I mean, obviously, it's our intention to work through the inventory, and then we have a lot of new communities that will be bringing new inventory to the marketplace, and we'll be monitoring it month by month as we look at our fourth-quarter starts. We've always said we're going to align sales pretty close to start. You saw us pull back a little bit on that in the fourth quarter because the inventory was in the third quarter. Going into the fourth quarter, and so we're gonna play that by ear, but we're in a position if it's permits on the shelf, ready to respond to the demand in the marketplace. But like I said, we're not gonna flood the market with inventory, so we're really going to pace it based on sales and opportunity. Michael Jason Rehaut: Okay. Appreciate that. And I guess just looking at your different regions, you talked about September being a little bit better from a within the quarter and perhaps that's continued into October. From a regional standpoint, I'm curious if you've seen the strength more concentrated in any areas and specifically maybe you could kind of go around the world in terms of which markets remain on the margin stronger than average, weaker than average. We heard comments yesterday that maybe Florida showing a little bit of signs of stabilization. So love your thoughts on that as well. Sheryl Denise Palmer: Certainly. I'd be happy to. Yeah. You know, I would with the comments on Florida, Mike. You know, we continue to be very bullish around Florida. I think Florida was the last to really adjust if we think about the last few years, but the good news is given how late it was to the party, we're already seeing green shoots on inventory sales activity. When I look at our sales, half of our Florida markets were up year over year. In fact, Orlando had the highest paces in the country. Closings for the quarter were up almost across the board in all of our Florida markets. And half the market saw improvement in their margin in the quarter year over year. Heading in the shoulder season, like I said, I stay optimistic that we'll have a good season for the resort lifestyle business. We're also seeing a decent reduction in both new and resell inventory. And once again, I'm delighted to see that. If I go to Texas and you see it in the numbers, Mike, you know, it was a tougher quarter from a volume standpoint. Inventories have been elevated in Texas. If I kind of run around the state, you know, Austin, they've been at this for it feels like darn close to three years. It does feel like we're starting to see the bottom, which I would say is encouraging. Months of supply have come down. And it feels like it's holding pretty steady. You know, we'll go a couple more months and see if that's true. But when we look at, like, underproduction QMIs in the market, they've settled. More reasonable levels. Margin recovery, you know, we've seen them up a little bit quarter over quarter. And the land market, I would tell you, continues to be tough. The teams have been very diligent in their assumptions not to get ahead of themselves. Until we really find final pricing in the But the good news is we have a very strong portfolio of quality assets, that will continue to carry the day. You know, Dallas I think it slowed down a bit, a little bit more. The lowest price points in Dallas are hypercompetitive. And most builders, it appears as real have subscribed to, I would say, more of an inventory strategy. Resales have remained generally stable, maybe up a bit. Once again, I tell you our balanced portfolio gives us some great opportunities because it's a high-growth market for us as we look forward. Great land pipeline. Margins are still strong. Probably the thing I'd point to in Dallas I think I said it in my prepared remarks. Say that three times. Prepared remarks, Mike, is the H-1B buyers. You know, we've seen that both in the demand and from a cancellation standpoint. And then if I wrap up with Houston there, you know, the first-time buyers it's competitive, very competitive for them. The good news is there's lots of them. It actually hasn't one of our highest paces in the quarter in the country. Our core communities continue to do well. But you have to put it on a relative basis. Paces are down from the peak levels. Certainly in Texas, more than we've seen across the board. But I think our locations doing well. The ones in the court are doing better. Qualifications qualification seems to be the biggest issue for our first-time buyers there. And we're having to use both rate incentives buy downs, really every tool we have in our toolbox to assist these buyers get to a payment that they can afford. I'd probably describe it as competitive but steady. But like I said, pulled back from our peak levels. Carolina is broadly doing really good. You can really start to see the difference between core and some of the fringe markets, and our core assets are really performing nicely. I move to California, you know, we've been discussing for a while. On the capital front. We've really, you know, tightened up our investment. The communities we have in SoCal are doing well. We have pulled back the investment a little bit. You know, once again, SoCal's above the company average or even pull so it's pulled back from its peak. Their absorptions are above the company average. If I go to the Bay I would say tech has had an impact on both probably Bay and Seattle. And if I go to stack and round out California, you know, I'd say they're holding steady. They're getting more than their fair share in the marketplace. When I look at our resort lifestyle business there, we have one that's approaching closeout, one that's in the new stage. In a new state you know, newer stages of opening without the amenity. So those are kind of balancing each other out. I'd say Sacramento overall stable, consistent community count paces year over year. And then maybe I'll wrap up with Phoenix. I think that market probably provides the most diverse offering across all consumer groups for us. It's a balanced market with our to-be-built and inventory offering. We've seen good improvement on cycle time. We definitely, with our move-up buyers here, have a more discerning buyer. But we have the options to meet their needs. Paces have been constant sequentially. Once again, I'd say this is a market that's kind of punching about their weight, strong margins for us. Modest incentives compared to the rest of the country. You know, in the land market, it's a little bit mixed. We're seeing some wonderful opportunities. We're very deal specific. We've been able to renegotiate terms and price. We've seen, you know, just coming out of an auction, a state that was pretty frothy. So a little bit of everything in the marketplace. You know, I just wrap my with just a macro that I know there's been a lot of discussion on California. I mean, excuse me, Florida and Texas. When you look at migration patterns, they're still leading the country. They continue to be very important markets for the industry. Consumers still have strong equity in their homes. Income networks are growing. So I'd say, you know, the green shoots are starting. But, Erik, I'm sure I missed a lot. Anything you can think of? Erik Heuser: You covered it long term. You know, excited about the population gains. And net move-ins that we've seen in those markets over time. And specifically, as you think about months of supply and price in the retail market, if you're to indicators we've watched carefully. You know, seeing some real stabilization, a few examples, maybe Sarasota and Tampa, by way of example, were months of are actually down and pricing has stabilized, so there's no real movement there. Houston's been interesting in that the months of supply are down about 4%. On a moving average. And stable pricing. And so some real examples of some stabilization. Of course, we'll continue to watch seasonality. And evolution. And on a new inventory side, the cycle is a little different than all others. There is always a little bit of seasonality. But we continue to monitor the core versus noncore benefits that we think we have. Sheryl Denise Palmer: I really see difference in performance. Erik Heuser: Right. Sheryl Denise Palmer: Yeah. Michael Jason Rehaut: Great. Thank you very much. Sheryl Denise Palmer: Thank you. Operator: Thank you very much. Our next question comes from Matthew Adrien Bouley from Barclays. Matthew, your line is now open. Matthew Adrien Bouley: Morning, everyone. Thank you for taking the questions. So I wanted to ask on the I guess, the over 100 new communities to come next year. I'm curious any detail on how that may break out either from a regional or product perspective? And specifically, I'm curious on your Esplanade expansion. I think you said it's still hanging around kind of 10% of sales today. I know you guys had some, you've got some, ambitious goals of expanding that product. So should we expect to see any movement on that mix of Esplanade next year as well with all those openings? Thank you. Sheryl Denise Palmer: You know, we really leaned in, Matt, talking about 26. So we we're not gonna go too far. But I will give you a tidbit. I'll give you an Esplanade we have three new Esplanade opening in the first quarter. Along with amenity centers, nine holes of golf in one of our communities, so very exciting when I look at next year and just across the Esplanade. Portfolio with the amenities that are opening along with new communities. I think we're excited. Very consistent with what we discussed at our investor day. I think before we get into more detail, on community's card, I think you wanna add to that. We really wanna wait till next quarter. Yes. I think we'll wait, Matt, until we kind of wrap up the year. But as you can imagine, I think the outlet growth will be pretty broad-based kind of throughout the country. So I think we'll leave it at that for now. We can handle that more when we wrap up the year. Matthew Adrien Bouley: Okay. Got it. I appreciate that. Secondly, just SG&A. Looked like a lot of leverage there despite sort of flattish homebuilding revenue year over year. Can you speak a little more around what you're doing to control costs here? Was there anything one-time in that 3Q result? Or should we think you've kind of found a new run rate level here in Q3 that we can kind of use to model out the next year on SG&A? Thank you. Curt VanHyfte: Yeah, Matt. Thanks for the question. SG&A, yeah, that's a focus of ours. Ideally, it's part of the culture. The teams are focused on it. We're constantly looking at kind of our throughput kind of results that we get on various metrics. In the quarter specifically, we benefited from some lower kind of payroll-related costs and lower commission costs as well. And as we said in our prepared comments, we're tracking to be in that mid-nine percent range for the year. So all in all, I'm very happy with where we're at from an SG&A perspective. The teams are focused on it. And we're doing a lot of good things from a cost control perspective. And I should also highlight the fact that from a back-office standpoint, we're continually trying to find ways to improve kind of how we're operating whether it's our shared contract kind of program that we have where we're centralizing all of our contracts and we're moving the needle on that as well on some of the other aspects of the business. The other one I'd point to, I think you're Sheryl Denise Palmer: our contracts department that we've had in place for a year now, right, where all the contracts are centralized. I think that's a good one. I think the other one I'd point to, Kurt, is what we're seeing in the reservation system. I mean, even just in September, we saw about an 800 basis point reduction from our overall business to those that came in reservation and co-broke. So if we can keep that up, generally month to month, we've been seeing four, 500 on average. 800 was a September was a peak for us. But, obviously, the more we get through our reservation system with that reduction that will continue to show the leverage in the SG&A. Matthew Adrien Bouley: Got it. Super helpful. Thank you, Sheryl and Kurt. Good luck, guys. Sheryl Denise Palmer: Thank you. Operator: Thank you very much. Excuse me. Our next question comes from Alan S. Ratner from Zelman and Associates. Alan, your line is now open. Alan S. Ratner: Guys. Good morning. Thanks for all the details so and nice quarter. I guess just first on the SG&A just since that was the last topic there. Just trying to back into what the implied guide for 4Q is and to get to mid-9s for the year. I think it does imply that rate does tick up a bit sequentially on a fairly similar revenue base. So is that just some conservatism around that 800 basis point reduction in the broker side that you just mentioned, Cheryl? Or is there some other that I should be aware of on Curt VanHyfte: Yes. Hi, Alan. I think it's a couple of things. A, yeah. We are seeing a potential influx of commission costs for Q4 as what we're seeing from some of the competitors in the marketplace and what everyone's doing to drive maybe their closings for the year. With Sheryl Denise Palmer: brokers, right? With brokers. And then what I would also say is that based on our guide of, you know, the midpoint of our range of 3,200 units, with our average sales price at $590,000, we are losing a little bit of leverage just because of the top line. It's going to be a little bit less than it was in Q3. Alan S. Ratner: Got it. Okay. Understood. Thanks for that Kurt. Second question, and I apologize, I missed some of these numbers, but I thought the detail that Erik gave surrounding some of the successes you've had on land renegotiation was really encouraging to hear. So I was hoping, first, you just repeat that? And second off, on the deals where you were actually able to get lower pricing, can you quantify like what maybe the margin impact is on those particular projects? And just the general timing of when we should expect to see that benefit beginning to flow through? Hi, Alan. Yes, great question. Appreciate it. It was about 3,400 lots in the quarter that rolled through our investment committee that were renegotiated. And that renegotiated a renegotiation took the form of deferrals. So those on average were about six months. But a relatively surprising level were actually on price, and it was basically an 8% decrease in the original purchase price on deals that were rolling back through the investment committee that had been negotiated from fourth quarter twenty-three through relatively current. So, you know, as you think about navigating this particular cycle, it's been interesting to me in participating in it. That this one's been relatively quick in terms of seller receptiveness for the call. But also, you know, our proactiveness in making sure that we're playing offense and communicating clearly. And we've seen success. And so maybe to your question relative to what should we expect, as we review deals that we had in our original expectation in terms of gross margin and return production, we want to make sure that we're holding those. And sometimes that does require an adjustment. And so I wouldn't say that's going to result in significant upside. But we are maintaining our original expectations in most cases. And then in terms of timing, those are gonna roll through. You know, over time. So again, relatively current on deals that we'll be closing on in the next few months. Developing. And so it's gonna take some time for that to roll through the system. The last thing I would say, interestingly, as we're talking about the land environment, this one being a little bit different than past, is we have seen some interesting finished lot pickups. And so about 25% of the land rolling through our system most recently are actually finished lots. Those have been difficult to find, over the last couple of years. And I think that's Alan S. Ratner: likely Erik Heuser: the case of some other builders maybe walking from deals on our ability to renegotiate those in a way that makes sense for us. And as I alluded to, we're also seeing some development cost relief. So those would be a couple of other upsides that we see. Sheryl Denise Palmer: And, Erik, would you just so we don't get over our ski test. I mean, it's been interesting. Right? Because your point, we've had some tremendous renegotiation. We've had other guys that just won't move. And we've been forced into a position to walk away. Erik Heuser: Completely agree. The success cases, as I mentioned, are the deferrals and the purchase price and, in some cases, just some restructuring of the deal. But there are also instances where they just don't work and we're standing our ground and just having to walk from those. And so that was you'll see it all through the system as well. Hey, Erik. Can I squeeze in one more on that topic? Because I think it's really, really interesting. Have you seen any common thread on the deals that you have been able to renegotiate? Are you more are you seeing more success with, say, land bankers or kind of your more institutionalized land sellers and developers or more success perhaps with kind of the one-off mom and pop landowners, farmers, etcetera, curious if there's a common thread on the deals that people are kinda holding their guns or versus the ones that seem to be a bit more willing to negotiate? Yes. It's really all categories. Alan. And so we start with the seller financing, you know, can you just carry this? And we need some more time on it. And so we've seen success there. The land banking appetite continues to be relatively strong so we use that as a in a surgical way where we can optimize our return by using by using land banking. But would say the supply of the availability of land banking is been very high. And then lastly, with regard to just the price changes, as I mentioned of those 3,400 lots, about 75% of the lots actually resulted in some kind of price change. And so it's been really interesting as we think about the solutions, which are many. Alan S. Ratner: Great. Thanks for all the detail, guys. I appreciate Sheryl Denise Palmer: Thank you, Alan. Operator: Thank you very much. Our next question comes from Rafe Jason Jadrosich of Bank of America. Rafe, your line is now open. Rafe Jason Jadrosich: Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask in terms of the incentive change, you comment sort of that entry-level was where you're seeing the most pressure, but you're also seeing some hesitancy on the move-up in resort lifestyle. Like, you sort of quantify where the margins are for each of the segments and then maybe how much the incentives have changed for each of them? Like, how different is it across the different segments? Sheryl Denise Palmer: Yeah. I mean, the incentives by consumer group, you know, I always hate averages. Because I think it doesn't tell the whole story. But, certainly, you would expect our most expensive incentives go with those forward commitments. And those are generally our first-time buyers, and we're having to help them get the rate as low as we can. So as to total dollars, the sales price less. So the total dollars are a little less, but the percentage, you know, that's where once again, I think our most expensive set. You go all the way to the resort lifestyle buyer, where that's our, you know, that ASP is probably about $200,000 higher than our average. And those folks generally as concerned about interest rates. And so those incentives work differently. You know, we'll see a lot of support there on helping them with options. You know, if you spend this, we'll give you that. Sometimes it's reduction in lot premiums. They're more sophisticated. They know what's happening in the market. They don't wanna overpay. And if they can't get it in a mortgage incentive, they want it somewhere else. But I'd say, you know, generally, you know, we're using incentives across the board. It's just the how for each customer. But I wouldn't point to significant differences in range except for the call out that our most expensive incentives tend to be with first-timers. Kurt, is that No, think generally speaking, you're in the ballpark. And Rafe, we don't Curt VanHyfte: really provide kind of margins based on kind of the segment. Overall. But I think you could probably imagine what we have said in the past is that our resort lifestyles margins are typically the highest kind of in the portfolio. But to Cheryl's point, it comes down to kind of each buyer's specific situation and we apply and we try to align the to maximize each buyer's situation. Rafe Jason Jadrosich: Okay. That's helpful. And then, you sort of mentioned that cycle times are hard, but they're still coming down. How do we think about how much higher the backlog conversion can go? And then how much opportunity do you have on the cycle times from here? How much more can they come down? Curt VanHyfte: Yes. Rafe, I would say that just from a cycle time perspective, we're essentially at pre-COVID levels for the most part. We have a couple of markets that maybe still have a little bit of opportunity. To kind of run through the tape there. So we do feel like there's continued opportunity there overall for the entire business. Relative to the conversion kind of rate I think we were at about 74%, 75% in Q3. And based on our closing guide and where backlog is today, I think you can expect that that conversion rate will be higher. In Q4 just based on kind of the sheer numbers of the numerator and the denominator there. So you can expect that to be higher probably in Q4 than it was in Q3. Rafe Jason Jadrosich: Is that like a sustainable level going forward? Or is that just because of the mix of spec relative to BTO? Curt VanHyfte: Yes. Rafe, it's more of a function of where specs are today. As you've heard Sheryl talk about, we intend over time to be able to see it in flux or to raise the level of to-be-built over time. So it's a point in time kind of where we're at today. And then as I said we'll see what we can do on the 2B build side of the business in the coming months and quarters. Sheryl Denise Palmer: But the next couple of quarters are going to likely be higher conversion. It's going to be a higher conversion for the next Curt VanHyfte: couple of quarters, yes. Rafe Jason Jadrosich: Okay. That's helpful. Thank you. Thank you. Operator: Thank you very much. Our next question comes from Kenneth Robinson Zener from Seaport Research Partners. Your line is now open. Kenneth Robinson Zener: Good morning, everybody. Sheryl Denise Palmer: Hi, Ken. Good morning. Operator: So Erik Heuser: a couple of things here, just kinda housekeeping. But with incentives, if you were to think about the bucket, I think some of the builders have been Kenneth Robinson Zener: describing it to me, like, you know, half of the incentive is the price reduction. Half and then the other half is kind of split equally between mortgage buy downs and closings. Do you within those three buckets, do you have a comment Sheryl Denise Palmer: Yeah. I would tell you that you know, move a little bit quarter to quarter. And it will be a little different if you're talking growth or net price or you're talking units. But you know, somewhere around 45% of our incentives are specific to financial services. And a subset of that would be what we would call the most expensive. Forward commitments. And then the balance, the other 50%, is gonna be a combination of all the other things we've talked about. You know, it could be options. It could be lot premiums. In some instances, we may have had to reset pricing to market. But it's a combination. Erik Heuser: And just to be clear, when you say financial services, Sheryl, it's Kenneth Robinson Zener: you're recording all that stuff in the homebuilder segment net pricing. Is that correct? Or is there stuff running through financial services, just to be clear? Sheryl Denise Palmer: No. It's running through the margin. Most of the Right. Financial services are running through the margin. I mean, actually, all of them. Are running through ASP, and some are running through cost of goods. Erik Heuser: Right. Okay. Just wanna clarify. And then, Kenneth Robinson Zener: you know, Erik Heuser: obviously with orders, you generally want to follow your starts, we'll generally follow your orders. Kenneth Robinson Zener: I'm just wondering, looking back, so 3Q, starts for below Erik Heuser: orders, both down inventory units make sense. 2Q it was higher Kenneth Robinson Zener: And the idea was there you wanted to build, right? Operator: To have specs. Erik Heuser: Which you know, if let's say spring is Kenneth Robinson Zener: softer, than expected, would you guys still be in the position where you want to keep that volume up relative to the start volume up relative to orders. And I'm thinking you did so much work on it fixed G and A, right? It's like down 20% comparable to your inventory units. I'm just trying to think about how your guys' playbook works there or if you really just have starts follow orders wherever they go, you know, in spring of next year. Curt VanHyfte: Yes, Ken, great question. At this point in time relative to next Kenneth Robinson Zener: year, Curt VanHyfte: probably not going to get into specifics there. But what I can say is we're going to continue to probably we've adjusted our starts in Q3 relative to sales to kind of right-size our inventory position. And generally speaking, we're gonna stay sticky from a start standpoint to sales. But then it's going to come down to a community by community kind of analysis. And how each community is doing, and we'll fluctuate that as necessary. Necessary based on A, the community Entry level is going to be more spec. Townhomes are going to be more spec. And then of course as we move our way up in the consumer segmentation profile we'll look to kind of hopefully pursue more to be built business. But I think the market is going to tell us and lead us to that path down the road. Kenneth Robinson Zener: Okay. No, I appreciate that. I wasn't trying to get next year's guidance as much as kind of your thinking about when to start go above and below orders. Thank you very much for your time. Sheryl Denise Palmer: Thanks, Ken. Bye, Ken. Operator: Thank you very much. Our next question comes from Jay McCanless from Wedbush. Your line is now open. Jay McCanless: Hey, good morning, everyone. Operator: Wanted to ask where is the spread now between spec closings Jay McCanless: and build to order closings? On a closing standpoint, we were sixty-forty, 60% spec or 61% spec and 39% to be built for the quarter. Operator: Okay. Then what's the gross margin spread on that now? Curt VanHyfte: Yes. We continue to run-in that several you know, 100 kind of basis points. As you can imagine Jay, nothing new there. Within our Esplanade communities, with the high premiums and the high option revenue. We can see some of these get up to 1,000 basis points. So but generally speaking, it's at several 100 basis point And then We continue to track to. Sheryl Denise Palmer: Also believe, do you think it's fair, Kurt, even within our Esplanade, non-Esplanade, resort lifestyle? We have a spread. Right? There's our Esplanade tends to deliver the highest. Yep. And our Non-Esplanade still aged targeted restricted a little low. Operator: Okay. Thanks. And then the question I had Jay McCanless: it's encouraging to hear that maybe the land prices are breaking a little bit. But just as we think about how when that can start to help the gross margin Operator: Is it going to be a back half of 2026 event? And also, Jay McCanless: one of your competitors called out, there was a small number, I think it was $1,500 per home tariff impact. Curt VanHyfte: Have you all tried to assess what impact the new tariffs might have on costs for next year? Yes. I'll start with land. Jay. From a timing standpoint, this is current current updates to our underwriting. So you're probably practically not gonna see it really roll through until '27 and beyond for most of that. And in some cases, I would tell you that it's we're just on you know, holding our original underwriting expectations in terms of retrading. And in some limited sort circumstances, we are seeing some opportunistic deals roll through, and those are the ones that you might some future upside on. But kind of a blend of the two, I would just, and then with regard to tariffs, I'll just make a brief comment on the land market, and Kurt can take the balance and vertical But, you know, we are hearing from our teams that, generally speaking, on the land development receipt standpoint, and there's not gonna be a whole lot of specific tariffs impacts, but kind of the magnitude of five to 6% release on cost on the development side. Curt VanHyfte: Yes. And Jay, on the House side, yes, I think we subscribed to the thinking that it will be a modest increase from a tariff standpoint. There's the cabinet stuff that came out the vanities, the steel is out there. But again, I think what I would also add to that is we're doing a lot of things behind the scenes just from an operational kind of execution standpoint. Working with our trade partners, our suppliers on what I'll call cost reduction strategies that the teams are doing a great job working through. I would also add that we've recently hired a new national VP of Purchasing and construction that is helping us lead that charge. And that's one of its focal points as well. So all in all I think we have a pretty good balance approach and dealing with the tariff potential increases. Through some of the other things that we're working on behind the scenes relative to our cost reduction strategy. In light of some of the start activity. That we're seeing. Jay McCanless: Okay. Operator: Thanks, Jay. Thank you very much. We currently have no further questions, so I'd like to hand back to Sheryl Denise Palmer for any further remarks. Sheryl Denise Palmer: Thank you very much for joining us for our third-quarter call, and wish you all a wonderful holiday season, and we'll look forward to talking to you early in the New Year. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.
Operator: Good day, everyone. Welcome to Western Alliance Bancorporation's Third Quarter 2025 Earnings Call. To one question and one follow-up only. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead. Miles Pondelik: Thank you. Welcome to Western Alliance Bancorporation's third quarter 2025 conference call. Our speakers today are Kenneth A. Vecchione, President and Chief Executive Officer, and Dale M. Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements, which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-Ks filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione. Kenneth A. Vecchione: Thanks, Miles. Good afternoon, everyone. I'll make some brief comments about our third quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail. I'll then close our prepared remarks by reviewing our updated outlook for the remainder of 2025. As usual, our Chief Banking Officer for Regional Banking, Timothy R. Bruckner, will then join us for Q&A. Also sitting in today is Vishal Adani, who recently joined the team as he and Dale begin their CFO transition. Western Alliance continued our solid business momentum in the third quarter that generated record net revenue and pre-provision net revenue of $938 million and $394 million, respectively. Healthy and broad-based balance sheet growth, with $6.1 billion in deposits along with stable net interest margin supported a 30% linked quarter annualized expansion in net interest income. Firming mortgage banking revenue from lower rates bolstered a $40 million increase in noninterest income. This contributed to a high operating leverage as our efficiency improved almost 3% in the quarter to 57.4%. The adjusted efficiency ratio excluding ECR deposit costs dropped below 50%. In total, Western Alliance generated EPS of $2.28 and improved profitability with return on average assets of 1.13% and return on average tangible common equity of 15.6%. 11.3% as we moved our loan loss reserve to 78 basis points from 71 basis points in the previous quarter. Asset quality performed in line with guidance as total criticized assets declined 17% with reductions in three of the four major subcategories and net charge-offs of 22 basis points. In light of the recent news regarding two credit relationships, let me address those head-on because I and the entire Western Alliance management team take these and any potential credit migrations extremely seriously. You have heard me say previously, early identification and elevation are the hallmarks of our credit migration strategy to protect collateral and minimize potential losses. And that's what's paying dividends now. For the $98.5 million note finance loan to Cantor Group V, which was the subject of our October 16 8-Ks, we believe our circumstances are different than other organizations and that our loan to this specific investment vehicle is secured by loans with a perfected interest in the CRE properties. We have confirmed our lien position through lien searches and title company verification. However, we have determined that in some cases we are junior to other lenders in violation of the credit agreement, hence our allegation of fraud. Although the most recent appraisals indicate sufficient collateral coverage, our reserve methodology for a $98 million non-accrual loan resulted in a reserve of $30 million. This reserve and our portfolio's qualitative overlays raised total loan ACL to funded loans ratio to 85 basis points. We believe the collateral coverage, limited and unlimited springing guarantees, as well as up to $25 million of insurance coverage for mortgage fraud losses will cover losses from this credit if any. Excluding this fraud, non-accrual loans would have remained flat. Once learning of the fraud, we initiated a title review of our $2 billion note finance portfolio. To date, we have reverified titles and liens for all notes greater than $10 million and have found no irregularities and are in the process of confirming titles for more granular notes. No additional derogatory filings or lien discrepancies have been discovered today. While incredibly frustrating, we believe this is a one-off issue in our note finance business and have adjusted our onboarding and ongoing portfolio monitoring practices. Regarding our ABL facility to Leucadia Asset Management subsidiary Pointe Benita Fund One as of October 20, the current balance stands at $168 million with a loan to value of below 20%. This facility is backed by $189 million in accounts receivable from investment-grade retailers led by Walmart, AutoZone, O'Reilly Auto Parts, NAPA, and other investment-grade borrowers. None of these companies have disavowed their obligation. The loan remains current and we continue to receive principal and interest payments as modeled. Jefferies has publicly stated they feel confident in PointBenita's near-term ability to pay off all debt due to the diverse set of assets apart from the First Brands related receivables. Jefferies remains confident and so do we. Overall, this is part of a small ABL portfolio of approximately $500 million and we do not see any other similar risks for this well-secured structured facility. As further support, we have investment-grade obligors that cover our loan balance greater than four times. As a reference point, it's important to remember we have operated in private credit business for over fifteen years. We view our underwriting expertise, ability to evaluate structured credit, and sophisticated approach to minimizing uncovered risks through strong collateral with low advance rates as core competencies of the bank that prevent and mitigate losses. Over the past five and ten years, our net annual charge-offs averaged just ten and eight basis points, respectively. Placing us among the top five U.S. Banks with assets greater than $50 billion. Our deep sector expertise in these areas will continue to separate Western Alliance from our peers and enable us to deliver superior commercial banking services to our clients. And now Dale will take you through the results in more detail. Dale M. Gibbons: Thank you, Ken. I'd first like to start just clarify one comment that Ken made. The facility from Leucadia Asset Management the collateral behind our loan amount is $890 million. That's how you get to this, this 19% advance rate. On the total. Looking closer at the income statement, net interest income of $750 million grew $53 million or 8% quarter over quarter as a result of solid organic loan growth and higher average earning asset balances. Non-interest income rose nearly 27% from Q2 to $188 million led by firming mortgage banking results as AmeriHome grew revenue $17 million quarter over quarter. Overall, lower mortgage spreads and rate volatility are beginning to improve home affordability and demand for adjustable-rate mortgages in particular. Loan production volume increased 13% year over year and the gain on sale margin improved seven basis points to twenty-seven. Non-interest expenses increased $30 million from the prior quarter to $5.44 mostly from the normal seasonally elevated balances and average ECR related deposits in advance of tax and insurance payments made in the fourth quarter. Overall, we delivered solid operating leverage this quarter with net revenue growing nearly 11% which outpaced sub-six percent growth in non-interest expense. Similarly, net interest income inclusive of deposit costs rose 5% or $25 million over the prior quarter driving adjusted efficiency ratio below 50%. Record pre-provision net revenue of $394 million grew 19% over the prior quarter. Overall, total provision expense of $80 million primarily rose from Q2 levels as a result of $30 million reserve and augmented portfolio qualitative overlays to reflect portfolio composition mix change towards C and I providing greater absorption for tail risks. Turning to our net interest drivers, interest-bearing deposit costs were stable. However, overall liability funding costs compressed eight basis points from the prior quarter and benefited from lower rates on borrowings and growth in ECR paying DDA accounts. The held for investment loan yield was relatively stable, ticking up one basis point despite resumption of FOMC rate cuts toward the end of the quarter. The securities yield declined nine basis points from Q2 to 04/1972 its average holdings of lower-yielding securities increased $2.1 billion quarter over quarter. As discussed earlier, net interest income rose $53 million from Q2 to $750 million driven by healthy loan growth as higher average earning assets increased $4.8 billion. Net interest margin was stable from Q2 at three point five three. As the impact of a slightly higher loan yield and lower debt costs offset lower securities yields and stable net interest bearing deposit costs. Non-interest expenses increased $30 million or percent quarter over quarter. Deposit costs of $175 million landed squarely in the middle of our Q3 guidance. Excluding deposit costs, however, non-interest expense was only $2 million higher compared to Q2. Our adjusted efficiency ratio of 48% declined 400 basis points from the prior quarter as we continue to achieve positive operating leverage from revenue growth outpacing non-deposit costs operating expenses. We remain asset sensitive on a net interest income basis but essentially interest rate neutral on an earnings at risk basis in a ramp scenario. This offset is supported by a projected ECR related deposit cost decline and an increase in mortgage banking revenue based upon our rate cut forecast. Our updated forecast is for two twenty-five basis point cuts next week and another one in December. The balance sheet increased $4.2 billion from Q2 to $91 billion in total assets which resulted from sustained healthy held for investment loan and deposit growth $7.00 $7 billion and $6.1 billion respectively. This strong deposit growth allowed us to reduce borrowings by $2.2 billion. On this slide, we also see the allowance for loan loss growth relative to the increase in loans. Over the past year, the allowance rose from 67 to 78 basis points. This explains how our strong year to over year EPS growth of 27% is dwarfed by our industry leading PPNR growth of 38% over the same period. This reflects our robust revenue growth alongside with rising efficiency. Finally, equity increased to $7.7 billion and tangible book value per share climbed 13% year over year. Hold for investment loans grew $7.00 $7 billion quarterly though average loan balances were up $1.3 billion from Q2. Which supported our strong net interest income growth Commercial and Industrial continues to lead loan growth momentum while construction loans fell $460 million as these loans converted to term financing. Regional banking produced $150 million of loan growth with leading contributions from end market commercial banking and homebuilder finance. National business lines provided the remainder of the growth with mortgage warehouse and mortgage servicing rights financing being the primary contributors. Deposits grew $6.1 billion in Q3 with mortgage warehouse clients only contributing $2.8 billion. Solid growth was achieved in non-interest bearing and savings in money market products and mitigated the impact of $635 million in designed higher cost CD runoff. Deposit growth was well diversified across all areas of the bank. Of note, during the quarter, regional banking deposits grew $1.1 billion with over $600 million in end market commercial banking $500 million from innovation banking. Specialty escrow deposits grew $1.8 billion in Q3 with contributions of over $750 million from Juris Banking and approximately $400 million each from our Corporate Trust and business escrow services businesses. This growth positions us to meet our funding for 2025 while incorporating the normal seasonal mortgage warehouse outflows in Q4. As Ken explained, asset quality continues to perform in line with guidance from last quarter. Criticized assets dropped $284 million from $196 million decline in criticized loans. And an $88 million reduction in OREO properties. The decline in criticized loans resulted from special mention loans falling $152 million and classified accruing loans decreasing $139 million. As for our resolution efforts with other real estate owned properties, stabilizing leasing and occupancy rates as well as improved net operating income on these properties reinforce our confidence in the current carrying values. Quarterly net charge-offs were $31 million or 22 basis points of average loans. Provision expense of $80 million was primarily driven by replenishment of charge-offs in the Cantor V reserve. Our allowance for funded loans moved from 46,000,000 higher from the prior quarter to $440 million. The total loan ACL to funded loans ratio rose seven basis points to 85. Relevant to current our current discussions with working with non-depository financial or NDFI clients, it is important to consider that some of the safest asset classes in commercial banking are categorized as NDFI. As mortgage warehouse and capital call and subscription lines of credit, have had virtually no losses across the entire industry. Our overall NDFI loan exposure is disproportionately weighted to mortgage warehouse lines but we have never experienced a loss. Our NDFI loan exposure excluding mortgage credit intermediaries would represent 8% of loan balances, which is aligned with peer averages and below a number of larger banks as seen on Slide 24 in the appendix. On slide 14, will see that Western Alliance's concentration and load loss category skews our ACL lower relative to peers. Reflecting the portfolio's lower embedded loss content. The top chart is our updated adjusted adjusted total loan ACL walk illustrates how credit enhancements such as credit linked notes in structurally low risk segments like fund banking, our low LTV, high FICO residential portfolio and mortgage warehouse elevate our normalized reserve coverage from 85 basis points to 1.4%. The bottom table demonstrates how a applying an industry median loan mix to our portfolio reducing our outside proportion of loans in lower risk categories like mortgage warehouse and residential loans while also increasing our proportion of loans at higher risk loan risk categories like consumer, which shift our allowance above 1%. Our CET1 capital ranks around median for the peer group If you add our less adverse AOCI marks and the loss reserve, our adjusted CET1 ratio capital would be 11.3% The 30 basis point quarterly increase reflects organic growth generating higher stated CET1 supported by improved AOCI marks. The augmented reserve ranks in line with the median for our asset peer group on a one quarter lag basis. We remain confident in our capacity to absorb any losses in concert with steady loan growth review the adjusted capital as the total amount available to absorb losses and support balance sheet expansion. Our CET1 ratio shifted higher to 11.3% from organic earnings accumulation. Our tangible common equity to total assets ratio edged down 10 basis points to 7.1%. Our stable capital levels demonstrate our ability to generate sufficient or capital organically to support balance sheet growth and given stock price volatility, the company is evaluating to issue subordinated debt and using a portion of the proceeds to augment its share repurchase program. We believe will be accretive to EPS. Tangible book value per share increased 2.69 from June 30 to 58.56¢ as a function of organic retained earnings. Of note, since initiating our $300 million share buyback program in September, we completed $25 million in purchases through October 17. Consistent with upward growth in tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by five times over the past decade. Western Alliance has been a consistent leader in creating shareholder value. On Slide 18, we have provided nine metrics we believe are key factors in driving leading financial results strong profitability, sustainable franchise value that ultimately compounds tangible book value and produces long term superior total shareholder returns. For the last ten years, our TSR EPS intangible book value per share accumulation has ranked in the top quartile relative to peers. Based on business metrics, we are the leader in ten year loan deposit and revenue growth while maintaining top tier performance for the net interest margin. Lastly, return on tangible common equity should approach top quartile performance as we generated higher equity returns this quarter and should continue the upward trend in 2026. I'll now hand the call back to Ken. Kenneth A. Vecchione: Thanks, Dale. Our 2025 outlook is as follows: We reiterate our loan growth outlook of $5 billion and raise year-end deposit growth expectations to $8.5 billion. Pipelines remain in good shape, but we remain flexible to changes in the macro environment. Regarding capital, our CET1 is comfortably above 11% and we expect that to hold during the last quarter of the year. Net interest income remains on track for 8% to 10% growth and should lead to a mid-3.5 percent net interest margin for the full year, which has been our expectation. Non-interest income was up sharply in Q3 and positions us to exceed our lofty targets and finish the year up 12% to 16%. Non-interest expense is expected to be up 2.5% to 4% for the year. ECR related deposit costs are projected to land between $140 million and $150 million in Q4, which implies slightly above $600 million for the full year. Operating expenses absent ECR costs now expect to be $1.465 billion to $1.505 billion for the full year. Asset quality should remain should continue to perform as expected with full year net charge-offs in the 20 basis point area. Finally, our fourth quarter effective tax rate is forecasted to be about 20%. At this time, Dale and I and Tim will take your calls. Operator: Thank you. We will now begin the question and answer session. During Q&A, ask questions for your colleagues who request that you please limit yourself to one and Our first question today comes from the line of Christopher Edward McGratty with KBW. Chris, please go ahead. Christopher Edward McGratty: Hello, Greg. Good morning. Kennard Dale, the buybacks post quarter end and the comments about being supportive with the capital arbitrage. Could you just unpack that a little bit? Sure. Sure. So you know, we authorized a $300 million stock buyback We're not changing that number. We executed $25 million against it in advance of this call. And and but to perhaps accelerate some of that usage of that $300 million providing more liquidity at the parent would be helpful and doing a a subordinated debt deal at the bank will take our capital ratios, and you can see that we're about 14% kind of flat. Our capital is really supported Our capital growth has really supported our balance sheet growth, but it would it would enable us to have a little more with that. As you know, though, we also have another goal of 11% CET one, So I can see us come down from where we are at eleven three. That 11 number near there. Yeah. Chris, I'll add just a few other points there. So for the quarter, we purchased 101,000 shares at $83.08. Notably, a 128,000 of those shares were acquired at $77.83. And what that should tell you before the announcement of first brands, and the canter, we were feeling very confident to be buying this stock back in the mid to high eighties, and we even got more confidence to buy it back when the stock dropped. And so, the rest is what Dale said, is we'll we'll put out a subordinated deal and sometime in the future, and we'll look to continue to support the stock, which is what we said when we announced the authorization. Yep. If there was a disruption in the stock, we'd be to support it. Okay. So you chip away to 300 sooner versus you're not raising the 300. Got it. Then a follow-up just on the guidance, we have one quarter left, but the ranges are are fairly wide. Could you just speak to biases within the range for for the various items, would you steer us in any direction for NII fees expenses? Thanks. Well, I mean, maybe go with a couple of things. I mean, so coming out of the out of the second quarter for performance, there were some discussions about our about kind of our fee income levels. And we had a stronger in the other category and noninterest income, you can see it was up significantly. Think that's at least going to continue into the fourth quarter. We're in the process now of distributing one of the largest class action settlements of all time. And that will come in through. On the expense side, based upon kind of where we're headed, we believe that there are incentive accruals may need to be bolstered in the fourth quarter. To get to where we think our where we're going to be on a relative to our bonus targets, which were outlined in the proxy earlier this year. So that'll be a factor there. On the insurance piece, you can see that we had a significant significant decrease in FDIC costs. We've been talking about how we're going to continue to roll back, you know, what we've done in terms of, you know, network deposit like Intrify. We've also been scaling back broker. This is largely the fruits of that but we also had a benefit in the in the third quarter from a rebate from prior, overpaid insurance cost a little bit. That said, I think the fourth quarter we're going to earn through that that add back that we had or the benefit we had. And I think insurance costs are going to be fairly stable. Yeah. I want to take a step back here. You know, based on consensus estimates that you guys all produce, we're gonna grow earnings somewhere between 1719% for 2025. Just wanna make sure people remember, as we entered this year, the earnings trajectory had a very steep back end curve, and we're on track to achieving that curve. So, it's also noteworthy that I think there are very few banks at or above our size growing EPS at this pace. Operator: Thank you. Our next question comes from Andrew Terrell with Stephens. Andrew, please go ahead. Andrew Terrell: Hey, good morning. Had a question just around the seasonal kind of deposit flows. I appreciate $8.5 billion plus of deposit growth guidance for the year. You just talk about expectations of the seasonal component in the fourth quarter or how much that takes out specifically the ECR balances? And then just the strength you're seeing in other verticals that would, I'm assuming, offset some of that? Dale M. Gibbons: Yeah. I mean, really, the ECR pickup, you know, that we saw or that half of the deposits that we gained in the in the third quarter was really related to the mortgage cycle. We've talked about this, and those payments are gonna be made you know, sometime around the November, December. And so that's what's really gonna come off. So it ramped up and then it comes down, but it's here for most of the quarter, you know, in terms of an average balance basis, which, of course, is how we compute earnings credit rates. And then and then, you know, kind of more stabilized after that going into 2026. Andrew Terrell: Got it. And if I could ask on on the mortgage banking piece, I know fourth quarter of last year benefited pretty heavily from, I think, direct securities and loan sales directly to banks. I know that's something you guys invested in. Did you guys experience any of that in the third quarter of this year? Led to some of the margin increase? And is that something we should expect again in the fourth quarter of this year? Kenneth A. Vecchione: So for the third quarter, there was less fall volatility, so vol did not take a bite out of the revenue growth that we are showing here for the quarter. That's number one. Number two, we did take a position that rates were going to come down and we held on to a lot of a lot of our securities bonds, if you will, and did not sell them until later in the quarter. And we caught we caught the rise up in price on that. And that helped us a little bit. I I'm not we are not modeling that in our Q4 expectations again. As I said, I I just think Q4 mortgage revenues, come down a little bit from Q3 just because of the seasonal nature. And also, November and February are the two worst mortgage months of the year. And, you know, starting around Thanksgiving through the end of the year, activity begins to slow somewhat. Yeah. We we had some dispositions as we generally do on mortgage servicing rights, but it wasn't, it wasn't for any any type of a gain here. Operator: Thank you. Next question comes from Jared Shaw with Barclays. Jared, please go ahead. Jared Shaw: Thanks. Hi, everybody. Thanks for the color on credit. I guess looking at more broadly the trends in classified loans, What was driving driving that reduction? Was that credits leaving the bank or was that improving underlying fundamentals? And or was any of that from Cantor and First Brands potentially moving out of classified and into nonperforming? Kenneth A. Vecchione: No. So there's a lot of stuff there. So, let me kinda break it down. Our REO decreased $88 million. That is one property that was sold at a marginal profit to what we brought it in at. And another property that was transitioned out of REO. So that's the 88 million. Special mention declined because several credits got resolved with borrowers putting up incremental margin to make us comfortable, and then we were able to elevate the quality of that loan or the rating of that loan. And same thing I would say in terms of sub accruing substandard loans. Where we just got we just resolved a few credits, and those got upgraded in terms of its rating. In terms of nonaccrual substandard, the Cantor loan is in that category. Okay? So that's the one that went up. Right? So special mention went down by one fifty two. Accruing substandard loans fell by one thirty eight. REO decreased by $88 million, and the increase in non-accrual loans was the 95 was $95 million, which all that was for the Cantor Group five. Had that not happened, we would have been flat there. So that hopefully, unpacks it a little bit for you. Jared Shaw: Yeah. That's great. Thank you. And then I guess just as a follow-up Dale, you mentioned growth in Corporate Trust. Deposits. How is that market share gain? I mean, what's what's going on there? Should we expect to see sort of continued continued momentum and growth on Corporate Trust? Dale M. Gibbons: Yes. It is market share gain. I mean, I'm really proud of kind of how we've executed in this category. We we started two and a half years ago, really. And, really, with the the focus we have on CLOs to start, we're now going to be expanding into municipal. But we have become the the seventh largest CLO trust depository in the world. In just two years. And so I think we're gonna be continuing to move up that those ranks, in that in that in that group. It you know, I can't say it's gonna be exactly what's gonna do for the for the fourth quarter. Because some of these are, you know, these are $50 million deals, let's say, and and and there's some you said some of them are refinanced and things like this until they get they get taken out. But we have, we have strong expectations, for how this is gonna go in 2026. Kenneth A. Vecchione: I'll add one other thing too here, which, we've got a very powerful one two punch here. Which is our corporate finance where some of the private credit lending is done. Works alongside of corporate trust when we go in and see clients. And so we get the corporate trust business as well as a credit mandate. And those two things work really well. And what we are seeing, and this is really we're very excited about this on the corporate trust side, is once we get in there, our service level is so superior to some of the larger banks which have not invested in this area. That we get repeat business. And there are repeat businesses coming a fairly nice pace. So we have a great expectations for next year on the deposit growth. From corporate trust. Operator: Thank you. Our next question comes from Timothy Coffey with Ginne. Timothy, please go ahead. Timothy Coffey: Thanks. Everybody, thanks for helping us Looking at the loan to deposit ratio, that clearly come down the past couple of years. Is that a level now that you think is the right size for it? I've got kind of the mid to low 70% range. Kenneth A. Vecchione: So Actually, we think it's a little too low. Alright? And we'd like to see that be higher. And and so we're working on that. So we have plenty of liquidity to put to work. And what we're looking for are good, safe, sound loans that we can do very thoughtful credit underwriting. On. And if we find those loans, then we have the liquidity in front of us. Right now, that liquidity is probably not making any money, not losing any money for us, maybe on the on the on the margin, maybe it makes a couple of bps. But we like to put it to to good use. And so we can see strong activity which we're seeing decent activity in the in the in our markets, we'll put that liquidity to work. Timothy Coffey: Okay. Another question was on the OREO, that you your operating rental income on right now. How should how should we be thinking about that that line item going forward? Is that kind of a recurring revenue line item for right now? Dale M. Gibbons: Yeah. So it has two places. It has a place in other revenue where that's where we get the revenue the the collection of the rents. And then it has an operating expense, is in the other expense category. The net of those two are just marginally profitable, maybe a million to $2 million over the year. And so we took in these properties because we thought we could execute faster upon leasing up these buildings than the sponsors were. And the sponsors were happy to give it to us and we were able to we think we believe we were able to maintain the value of those properties and actually improve them over time. So our goal is as we are able to increase the occupancy of these buildings and then sell them, those the revenues from that will be adjusted accordingly. But right now, you know, the net benefit to the PPNR is really marginal at 1,000,000 to $2 million for the year. Operator: Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Hey. Good good morning. I just wanted to follow-up Ken. So I I think credit's obviously a huge overhang on the stock, and I heard your comments around asset quality. But but just speak to us in terms of one, I think within the NDFI, the business services piece, on a macro level, like, you seen, and this is not just for Western Alliance, but have you seen underwriting standards weaken where we should be expecting more issues coming out of this area? And banks being exposed to non bank financials around this one. Just your comfort level in this space given your still quite active, would be helpful And then beyond this, as we think about asset quality, we had some commercial real estate issues you had in last quarter. Now this as you look forward, I think just your level of comfort when we talk about tested, are they getting better, at as if versus risk of, like, one offs popping up. Thank you. Kenneth A. Vecchione: Okay. You came in a little choppy. And so if I miss something in terms of one of your questions, just just do a follow-up. Or if Dale heard it, clearer than I did, then he'll jump in there. You know, right now, think the overall backdrop to the economy is is pretty good. You've got GDP growing at 3.8 to 3.9% You got the ten year rate coming down to under 4%. Employment for as much as people are talking about and nervous about it, are still in a rather low 4% area. You have greater investments being made into the country from foreign countries. So so that should help continue with economic growth. And you've got a a pro business president. So that's the backdrop to a lot of things that we're seeing. As it relates to us, and some of your question was, I think how do we feel about the non depository financial institution loans? Let me say that a good chunk of those are all mortgage related and MSR related. And as Dale said in some of his prepared comments, we've never the industry has not experienced any losses. And for those people that aren't really knowledgeable, what happens on these mortgage warehouse lines the average loan that we put on there stays for sixteen to eighteen days. And it rolls off very, very quickly. And so these are government generally qualified loans These are government loans, government backed. Credits. They're very high FICO scores. We we like these these these credits, meaning the specialized mortgage credits, the warehouse lending, they're very strong and so are the MSR credits that we have on our books. And we have not seen any weakness in the in that at all. Okay? As it relates to the other part of of our nondepository financial institutions, has gotten some exposure through the Point Bonita controversy that was disclosed about two weeks ago. We like private credit. And I think, for us, it's important that people understand why we like private credit. How it works here in the bank. First, we lend to lenders. Just remember that. We're lending to people that are lending to private equity. Our interests are automatically aligned. And anytime we recommend a covenant, if that means it's good for us, it's gotta be good for the private equity credit lender. And so we're very much aligned. Number two, we are working only with the brand name private credit funds. And we went back and looked at what their average loss rates were, only 25 basis points. All right? Now we still underwrite the losses in the funds because that's the right thing to do. K? But our attachment point which is defined as where will we first take a loss, is at 35%. So the fund has to lose 35% before we take $1 of loss. Right? Contrast that to the 25 basis points that their average loss rates are from these private credit shops. Alright? Most of our structures are rated either double a or triple a. Right? And that's what gets a lower risk weighting on these structures. Now on top of that, we have an active portfolio management process that connects with an active portfolio management process at the private equity private credit shops. And lastly, we have the ability we've got kick out in eligibility rights. On these credits as well. Right? And as we said, we don't think there's a loss here. With the Point Bonita credit. It's paying as we expected. It's unfortunate that our name got put out there. We put it out there, but it's unfortunate that it did. We've never we're we we were not worried because of the diversity of retailers and their investment grade and the fact that we have a loan to value relationship of 20% there when we have $890 million of credit accounts receivable backing up our loan amount, which, as I said, is over four times. So unless I missed anything, Dale, did I miss anything? Did I hear anything? Got it. Okay. Dale said I got it. Hopefully, I got it. Ebrahim Poonawala: Got it. Alright. So that is full response. On the buybacks, I think, Dale, you mentioned you were at 11.3 versus the 11% that you're targeting. Is there an implication there given where the stock is right now? You could accelerate some of the buybacks the first 30 basis points of CET1, you could do in short order if the stock remains where it is today? Dale M. Gibbons: I think that's a I think that's a safe inference. Ibrahim. I mean, we haven't done our debt deal yet. But, but, yeah, do I think we're gonna come down from eleven three closer to our target? Yes. Operator: And key. Our next question comes from Casey Haire with Autonomous. Please go ahead. Casey Haire: Great. Thanks. Good morning, guys. Ken, great answer. Long answer on the, NDFI, but I do have a follow-up. Specifically on on the collateral and how it's validated, You know, it it's all of these I mean, it sounds like you scrubbed the the note finance book the big ticket items there, which is $2 billion, but that leaves about $11 billion of NDFI exposure. It just seems like it's as long as you're not afraid to go to jail, seems easy to double pledge collateral. So what are you doing to validate your collateral and safeguard against future frauds? Dale M. Gibbons: Well, as as Ken indicated and, you know, in his in his remarks, you know, we are you know, confirming through direct sources, you know, with know, with the title insurance or with the title itself, that our lien has been placed in the first position, and then we and then we periodically check those to make sure nothing happened that pushed us down a second. I mean, the issue we had with, you know, with the Cantor deal is we were supposed to be in first position. And in some cases, we see that we are now in second. And, and but the reason why we say that we're okay with collateral is because if I net out the first in front of us, relative to the as is appraisals that we have that we're getting updated, we still have enough money to cover the entire amount of this loan of $98 million. Dollars which excludes the springing guarantees, from two individuals that are ultra high net worth as well as as well as the insurance policy that that we have to for fraud losses ourselves for '25 And, Casey, I wanna just correct you. I I I think I heard a number that Our note finance portfolio is only $2 billion. Okay? Casey Haire: No. I'm Right. And I think you're including that, but I'm talking about the the remaining in the exposure of $11 billion The rest of the NDFI exposure is the overwhelming preponderance. Is, is really these you know, basically lines for residential mortgage. And and those loans are only they only last two weeks, maybe seventeen days. So, you know, so the loan is cable funded to close a house or do a refi. You put the money in, we hold it, then it's pushed off to a GSE you know, two weeks later. So those those clear out all the time. Casey Haire: Gotcha. Okay. Alright. Just switching to the guide on on loans and deposits. It sounds like loan growth is going to have to have a pretty strong quarter. You guys you know, are certainly capable of that, but it's been some time to to that you've put up a $2 billion quarter. So just some color on the pipelines. And then on the deposit side of things, I think you guys had said that you are pricing it differently so that mortgage runoff would be less than the $1 billion that you've experienced last year. But the guide implies about $3 billion of of runoff. So just just looking for some clarification there. Kenneth A. Vecchione: I will split it up. I'll take the loans. I'll let Dale take deposits. You know, so we grew $700 million this quarter. That was a little below what our internal projections were. Had two, maybe three loans that were pushed out For closing from the end of the Q3, and they're coming into Q4. So, that's what gives us sort of the confidence that We'll have a much better Q4 than we did Q3. Dale M. Gibbons: Yeah. If you you'll go to the the deposit guide, like you mentioned, that that your your your analysis is is correct, Casey. So so what's transpired is, you know, gosh, we had this kind of, you know, kind of a rocket third quarter in terms of deposit growth. Mike, My instinctive reaction is, does that give us pricing leverage? Whereby we can we can maybe put put something down and still have, you know, a strong performance. So I think in some respects, in some respects, you know, our our guide, you know, anticipates maybe the run up would be a little bit higher. If we did that. But I hope we'd be able to save on pricing, in that scenario. I would say, that there is one other caveat though, So, you know, if the AmeriHome operation and mortgage banking generally picks up, what goes into those deposits is normally it's just, you know, your principal and interest. You make a payment, you know, for x thousand dollars. You know, we're gonna go in there and we're gonna see those funds. We're gonna have them for three weeks and then we're gonna remit them to a GSE typically. But, you know, if somebody does a purchase, you know, then maybe it's $500,000 that goes in there. And so those deposits could rise if we get into more of a purchase and or refi business moving in as rates continue to decline. Operator: Thank you. Our next question comes from Matthew Clark with Piper Sandler. Matthew, please go ahead. Matthew Clark: Hey, good morning. Thank you. Morning. Just on that lawsuit in the in the Juris Banking division, just quantify the the settlement or that you anticipate to realize here in the fourth quarter? Dale M. Gibbons: Yeah. So, so so the the the lawsuit was a it was I guess I'll it was Facebook. Cambridge Analytica deal. You probably heard about it. It has more plaintiffs or more participants in the class than anything ever. In the over 10 million. And, and that that process is taking place now. And so and and and if we're the distributor of that, gonna take, you know, a few months to do it. But, but get fees associated with distributing 15 million payments and going through the the process of verification of the individual you know, are they are they certified for the class, things like this? Matthew Clark: Got it. And then I don't think I saw it in the slide deck, but if you had spot rate on deposits at the September and the beta, we should assume as we go through you know, a rate cutting cycle here potentially? Dale M. Gibbons: Yeah. So so the the ending rate was $3.17. For interest bearing deposits. Know, the the beta that we've, you know, we've got, you know, it's we're a little bit little bit faster on the ECR, so it's going to be a little slower than that. In terms of what we're doing. But you know, hence, you know, you see on the net interest income guide in total, we're showing that we're know, slightly, you know, asset sensitive with maybe a little bit of compression as rates come down. But we more than make up for that with what we save on ECR costs and what we save in additional income from the Emera home operation. Operator: Thank you. Next question comes from Ben Gerlinger with Citi. Please go ahead. Ben Gerlinger: Hi. Hi. Good morning. I know we talked through Oreo a little bit. With respect to the properties of the office properties last quarter, seems like you've already sold one and you're leasing up others. I know, Ken, that you you acknowledge that, like, fees and and rent rolls going to in that in or fee income, and then expenses are basically de minimis to one another. Towards your net impact to the income statement. But as you roll those out, it seems like on occupancy levels, you probably acknowledge some gains over the next twelve months was just kinda curious if any timeline you might project on getting rid of the other four that you still have on the REO. Kenneth A. Vecchione: Yeah. I I really don't have a timeline for you. We We'd like to get them off our balance sheet as quickly as possible. The best way to do that is to lease these properties up. We see good leasing activity on the properties, as Dale said, in his prepared remarks. In addition, we're getting some tailwinds. With interest rate cuts coming, which should really improve cap rates. So the best I can say is fingers crossed, that I like to see a couple of those leave us sometime during the course of next year. But we're looking to maximize value here. We're looking to improve our tangible book value now that we brought them on And so we don't wanna sell them too cheaply. Because I we're kind of optimistic that we could we could improve the occupancy of these buildings. Dale M. Gibbons: Every one of these, we have a reasonably current appraisal on, and they're two values in that appraisal every time. Like, one is the as stabilized value, which is, hey. If this thing is operating normally and isn't under some kind of, you know, duress or distress. And then the, the as is guys, nope. Here's what it is today. You know, yes. Of the things don't work. You just see us at you know, you gotta take those into consideration as the buyer. So we're in a situation now that the disparity between the as is value and the as stabilized values on these are some of the highest we've ever seen. And so what you're getting at is, gosh, would it, you know, would it be nice as we stabilize these that maybe we can migrate those numbers up? I'd love to do that. We're obviously never gonna forecast anything like that. Ben Gerlinger: Got it. Okay. That makes sense. Are you looking to buy a building? Nothing. Not for what you're selling it for. I don't have that money. But in terms of in terms of danger, it might be a naive question, but was that an NDFI loan? And if so, what what kind of subcategory was it? Dale M. Gibbons: Yeah. It it was an India pie loan. And it was in, you know, you know, know, the mortgage cap or yeah. It's in our net in our you know, yeah, market banking situation and be you know? So so it it was because as a financial institution that it it's gonna be in there. And, as Ken indicated, you know, what we're doing in our know, our our advances here is our numbers would have been very strong had we had the first position as the borrower you know, presented that they did and as their contracts demand. That's where we get into this fraud situation. Otherwise, this would have never even come up. Operator: Thank you. Our next question comes from David Smith with Truist Securities. Please go ahead, David. David Smith: Hi there. You give us some more details on the mortgage assumptions in your overall earnings sensitivity guide for down rates? Just with a 75% ECR beta on top of what you disclosed about your NII sensitivity, Seems like there's very little, if any, mortgage upside in there. I was wondering if you could help us unpack that some. Thank you. Dale M. Gibbons: Well, so we we you know, one of the key factors in terms of how we do on our it's basically the valuation on the MSR relative to what we have as our hedge against it, is is the spreads that have increased over the past few years. We're seeing today those spreads compress. As if that continues, as spreads compress to historical levels, likely to see higher revenue. In that scenario, because the volatility is something that doesn't really work in our favor. And we saw the inverse of this at the beginning of the the basically, the tariff situation back in April. In terms of what the Mortgage Bankers Association is actually projecting a little bit a little bit better, in terms of, you know, purchase activity or total one to four family in the fourth quarter than in the third. We're not really counting on that. We're thinking it's going to maybe slip slightly just because that's been the seasonal trend. But maybe there will be some higher level of activity because of the rate cuts as long as people are comfortable that the shutdown and things like this aren't gonna move, unemployment higher. Kenneth A. Vecchione: Yeah. The numbers from the MBA for next year they they expect mortgage activity to rise, 10% to $2.2 trillion. Where almost $1.5 trillion will be purchased volume, and then about $700 billion will be refinancings. So again, Q4 revenues for mortgage should be just a little weaker than Q3. Although, you know, I've got some I got my fingers crossed here that could maybe get some tailwinds here. But we we are becoming more optimistic about where that revenue stream is gonna be for 2026. David Smith: Okay. And then just to circle back to the earnings at risk scenario, could you help us just roughly size how much of the offset to the NII asset sensitivity is coming from ECR benefiting and down rates versus mortgage benefiting and down rates for you? Dale M. Gibbons: Yeah. I think the preponderance is gonna be kind of in the mortgage side. But, yeah, but they're both contributors. And if there's more variability, in terms of it improving better in the earnings at risk, it's gonna be the mortgage related as well. I think we're gonna have have a higher beta on the beta based upon kind of what could happen there versus the ECRs, which we talked about those betas already. Operator: Thank you. Our next question comes from Bernard von-Gizycki with Deutsche Bank. Please go ahead. Bernard von-Gizycki: Hey, guys. Good morning. So you have a bit over a third of your total deposit base that has ECRs related to them. And when we think about the composition of the deposit base, and the ECR related costs, which represent about 30% of the total expenses, Can you just talk to expectations of how these change? Know, Dale, you're moving over to a new role next year focusing on deposit initiatives. But are you looking to drive down the percentage of the ECR related balances? Have them grow but more focused on reducing, ECR costs related to them or a combination of both? Any color, you can share with these dynamics? Dale M. Gibbons: Yeah. So so the ECR is really driven by two sectors. The largest, of course, is the kind of what we're doing in the mortgage warehouse deposits. We've talked about that. And the other one is our homeowners association. So going forward, I believe that the homeowners association deposits are not going to shrink. They're not going to grow as quickly as the overall footings of deposits for the company. So proportionately that will decline Meanwhile, I our HOA group, you know, we're the largest in the nation, in terms of what we provide services there. That growth is continuing to be strong. And I think that was going to at least keep pace with the overall size of the company as it grows. So in total, think you're gonna see that it becomes kind of less significant. And in terms of the expenses associated with it, you know, as you go to lower rate levels, you know, numbers just come down and there's really not as much of an offset anywhere else. It's just the dollars are going to fall back a bit. You know, to, to lower levels if, say, we get, you know, four rate cuts over the next twelve months. Bernard von-Gizycki: Okay. And then just on equity income, the uptick there in 3Q, was that primarily due to the reversal in losses from 1Q? Just curious if that's come back. And just given the cap markets activity picking up, how should we look at this line item from here? Dale M. Gibbons: I we don't have that reversal yet. Thanks for remembering that. But, that's still that's still pending. I know this was this these were other types of things. Look. That number does bounce around a bit. You can obviously see that. So, you know, this $8 million handle you know, certainly higher than usual. A little bit of a haircut there. Going forward, but we don't have anything that indicates that anything is either getting dramatically better or worse. Operator: Our next question comes from Anthony Elian with JPMorgan. Please go ahead, Anthony. Anthony Elian: Hi, everyone. You increased the range for ECR costs again this quarter, but this time you maintained the NII range of up 8% to 10%. The increase in the ECR deposit cost range tied to just higher balances or because of a lower ability to reprice? Down those deposits? Dale M. Gibbons: It's it's really balance driven. You know, I mean, frankly, we got a little more in the third quarter than we thought we would. So it's it's balance driven, and and there's been you know, we you know, it's it's a I guess it's a good problem to have in that, you know, some of these dollars grown more quickly, but, know, it does show up in expenses and and it contributes to, you know, the situation where you've gotta look at adjusted you know, adjusted, efficiency ratio, adjusted NIM. Anthony Elian: Okay. And then on my follow-up on your earlier comments, reviewing the note finance portfolio, have you given any thought to potentially casting a wider net in your reviewing the loan portfolio credit procedures more broadly? Beyond note finance and NDFIs. Just investor concerns on the company's credit quality? Thank you. Kenneth A. Vecchione: Hi. Yeah. The I I wanna quell any misconceptions that might be implied through even some of the questions. No one is is more concerned about credit governance, asset quality, than than our executive management. We we've got an entire construct built around the control environment for credit The the second line or credit risk review that's intimately involved. And so the at the earliest stages of something that didn't work, as we expected, those teams are involved inside of our company. We're we're we're listening and and reviewing on a much broader scale. So this work's been ongoing. It goes on all the time as part of our quarterly full portfolio review process. But in addition to that, we we we hold ourselves accountable and we hold our our business accountable through our second and third line who are actively, engaged in that. And so we're not asking ourselves, could this happen again? We're receiving validation of those things through through our internal control network. Operator: Thank you. Our next question comes from Jon Arfstrom with RBC Capital Markets. Jon, please go ahead. Jon Arfstrom: Hey, thanks. Hi, everyone. Hey, John. Ken, maybe for you. Hey, do do you have any balance sheet size limitations It looks like you're going through $100 billion very quickly the next couple of quarters. Anything for us to consider and how are you thinking about no. Not really. Think you're right. You know, of course, not gonna have a lot of growth in the balance sheet for Q4 just because as we've talked about the seasonal outflow of the warehouse lending deposits or the mortgage deposits. But two things we're doing. One, we're growing the business based upon opportunities that we have, and we're not holding our ourselves back. Because we're gonna cross over a $100 billion. Number two, we continue to build out the infrastructure to crossover a $100 billion and be LFI ready. Number three, we're waiting and we're hopeful that the tailing rules will come out probably sometime in the middle of next year. That will move it to $2.50. Alright? But, you know, in all the expense numbers, remember, non non ECR operating expenses quarter to quarter only went up $2 million For the first 3 quarters of this year, non ECR operating expenses were in a band of $5 million and that includes all the development and investment we're making to be LFI ready. So to your balance sheet question, we know we'll cross over a 100 when it's the right time. Based on the opportunities that are in front of us. Okay? And we'll be ready and we continue to invest And if the tail end rules come out, then we may slow some of our investment down to match what some of the tailwind rules are. Jon Arfstrom: Okay. Alright. Fair enough. And then, Dale, for you, in your prepared comments, talked about an upward bias in ROTCE. And top quartile and ability to show improvement I'm assuming you're thinking a starting point that includes a more normalized provision So maybe normalized ROTCE right now is high teens rather than the mid teens you printed? And you can do better from there. Is that fair? Dale M. Gibbons: Sure. Yeah. Yeah. Yeah. Know that that that's completely fair, John. You know, maybe just talk timing a little bit here as well. Yeah, normalized provision, you know, that would have obviously augmented the number, in in the third quarter. As we get to the first quarter in particular, it's a little bit strange. You know, we we lose a couple of days. That's meaningful for us. And, also, you step up again, everyone knows, on, you know, certain types of tax and things like this, you know, kind of starting the new year. So I'm looking for I'm looking for something to, you know, that kind of kick in you know, kind of in the back half of 2016 to hopefully get to the levels you're talking about. Kenneth A. Vecchione: Yeah. You know, one of the things that can really supercharge the return on average tangible common equity will be the mortgage business next year and the growth in the mortgage business. You know, if it grows more than moderately, that's gonna really provide excess earnings and that will improve the return on equity, John. Thank you. Operator: Our next question is a follow-up from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Thanks for taking my question. Dale, just follow-up, I think it's important Just wanna make sure sure in your slide 24, the 16% loans NDFI loans, mortgage intermediaries is about $9.1 billion. The warehouse is about $6 billion and change. I'm trying to figure what the balance is between the 6 and 9, and are those nonresidential warehouse loans, so, like, commercial real estate driven. And would you be holding reserves against those loans, as opposed to the resi mortgage where you show on the slide where you don't need reserves because of the zero loss nature. Just clarify that for us. Dale M. Gibbons: You know, I think we maybe need to pick this up you know, at maybe at the next call, Ebrahim, in terms of in terms of what this what this looks like. I mean, so we you know, we've talked about the the the warehouse piece. And and where we are on the, you know, the NDFI elements whereby we're assuming a first out position and another lender is, is in front of us with the, with the higher level of risk against loans that typically have low loss to begin with. So let's pick this up later today. Operator: Thank you. Our next question comes from Timur Braziler with Wells Fargo. Please go ahead. Timur Braziler: Hi, good morning. Just I guess looking at the Cantor relationship specifically, what internal controls maybe failed to detect some of the collateral deficiencies there? And then it looks like in going through the lawsuit that the credit was converted from the line of of credit in July to a term loan, and then the the suit was filed in August. Was the loan re underwritten in July and the new issues kind of identified we later? Maybe just give me a little bit of a timeline as to what happened around, July, August there. Kenneth A. Vecchione: Yeah. So I'll provide some updates. But, you know, appreciate that this is an active litigation. And our discussion here is gonna be somewhat limited. I'll try to help you with your question. First, we had a long term relationship with this borrower. Alright? It dates back to 2017. And as of this past August, the borrower was current. We made the decision to exit the relationship and convert the revolving loan to a term loan with a May 2026 maturity. It was during that time that we discovered the borrower failed to disclose material facts to us. Consequently, we wasted no time in filing a lawsuit alleging fraud. So that's probably as much as I can tell you given that we have an active lawsuit here. We're working hard to get a receiver in there as soon as possible. And with that, we're gonna have greater insight into the books and records of Cantor five. Operator: Thank you. This concludes our Q&A session. And I would now like to turn the call back over to Kenneth A. Vecchione for closing remarks. Kenneth A. Vecchione: Yes. Thank you all for attending the meeting. Appreciate all your questions. We look forward to the next call. Be well. Operator: Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.
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