Webster Financial Corporation (WBS) Q3 2025 Earnings Call Transcript

Webster Financial Corporation (NYSE: WBS) Q3 2025 Earnings Call dated Oct. 17, 2025

Corporate Participants:

Emlen Harmon — Senior Managing Director

John R. Ciulla — Chairman and Chief Executive Officer

Luis Massiani — President and Chief Operating Officer

Neal Holland — Chief Financial Officer

Analysts:

Jared Shaw — Analyst

Mark Fitzgibbon — Analyst

Andrew Leischner — Analyst

Matthew Breese — Analyst

Casey Haire — Analyst

Anthony Elian — Analyst

Bernard Von Gizycki — Analyst

David Smith — Analyst

Daniel Tamayo — Analyst

Janet Lee — Analyst

Jon Arfstrom — Analyst

Laurie Hunsicker — Analyst

Presentation:

Operator

Good morning. Welcome to the Third Quarter 2025 Webster Financial Corp. Earnings Call. Please note, this event is being recorded.

I would now like to introduce Webster’s Director of Investor Relations, Emlen Harmon, to introduce the call. Mr. Harmon, please go ahead.

Emlen Harmon — Senior Managing Director

Good morning. Before we begin our remarks, I want to remind you that comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today’s press release and presentation for more information about risks and uncertainties, which may affect us. The presentation accompanying management’s remarks can be found on the company’s Investor Relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue.

I will now turn the call over to Webster Financial’s CEO, John Ciulla.

John R. Ciulla — Chairman and Chief Executive Officer

Thanks, Emlen. Good morning, and welcome to Webster Financial Corp’s Third Quarter 2025 Earnings Call. We appreciate you joining us this morning. I’m going to start with a recap of our results. Our President and Chief Operating Officer, Luis Massiani, is going to provide an update on developments in our operating segments, and our CFO, Neal Holland, will provide additional detail on financials before my closing remarks and Q&A.

Highlights for the third quarter are provided on Slide 2 of our earnings presentation. Our results were strong with a return on tangible common equity of 18%, ROA of nearly 1.3% and growth in both loans and deposits of over 2% linked quarter. Overall, revenue grew 2.3% over the prior quarter. In aggregate, Webster’s results this quarter reflect how our strategic position fuels our performance, including diverse balance sheet growth while maintaining substantial liquidity and conservative credit positioning.

Robust profitability is supported by a unique business mix and capital generation that supplements organic earnings growth opportunities. More specifically, loan growth was driven by a diversity of categories with all of our portfolios increasing this quarter. Deposit growth was also diverse as we grew the commercial and health care financial services books in addition to regular seasonal growth in our public funds business.

Webster’s capital generation is a distinct strategic advantage. We repurchased 2.2 million shares or 1.4% of the outstanding shares at the end of the second quarter. At the same time, tangible book value grew 3.7% over the prior quarter. We continue to see the inflection point in asset quality that we projected at the onset of the year. Importantly, criticized loans were down over 7%, with nonaccrual loans essentially flat.

Charge-offs of 28 basis points remain near the bottom of our anticipated normalized range of 25 to 35 basis points, and our provision of $44 million is down modestly from last quarter, even as we built slightly more conservative macroeconomic scenarios into our loan loss reserve modeling.

As we look to the future, despite recent market volatility, macro tailwinds for the banking industry are building, and we are in a good position to benefit. Loan growth remains solid, and we are seeing opportunities to originate assets with appealing risk-reward characteristics as we did this quarter.

As always, we point to the diversity of our deposit generation on Slide 3, which is a key factor supporting the balance sheet as activity accelerates. We continue to see indications of a more appropriate regulatory tailoring, which should, over time, allow us to allocate resources towards activity appropriate risk management practices. While we remain vigilant, tariffs and labor market uncertainty are not significantly impacting the credit performance of our loan portfolio, and we are not seeing pockets of correlated credit risk emerging. We’ll also stay on our front foot in terms of business development opportunities for our existing segments.

I’ll now turn it over to Luis to review developments in our operating segments this quarter, including an update on commercial banking activity, the Affordable Care Act opportunity for HSA Bank and our credit joint venture with Marathon.

Luis Massiani — President and Chief Operating Officer

Thanks, John. On our business lines, activity was positive in Q3. Clients have proven to be resilient, have gained a better understanding of the potential impact from tariffs and have continued with their business investment plans. We referenced strong commercial lending pipeline activity in our Q2 call, which came through in the third quarter with growth at the higher end of our outlook range with all major lending categories in commercial and consumer contributing.

We also saw a nice pickup in loan-related fees as capital markets businesses were more active. Our diversified deposit businesses continue to perform well, with the Ametros posting strong new account growth and record volume and lifetime deposit case value added. We also delivered significant growth in deposits in interSYNC, commercial, public sector and business banking, funding our loan growth with deposits, which has allowed us to maintain a strong liquidity profile.

Our private credit joint venture with Marathon Asset Management is now fully operational, and we’re working through a significant pipeline of potential lending opportunities. Early returns are positive with good alignment between our 2 organizations on operations, risk appetite and good referral activity on loan deposit and fee opportunities. The JV is working as intended and has expanded our ability to offer more lending solutions to our existing sponsors’ client base.

At HSA Bank, new legislation continued to support an increase in the addressable market for HSA accounts. As discussed last quarter, the original bill that passed in July enacts HSA eligibility for Bronze and Catastrophic Affordable Care Act health care plans beginning in 2026. Our assessment of the original legislation was that the change would increase the addressable market for HSAs by 7 million customers and drive $1 billion to $2.5 billion in incremental deposit growth at HSA Bank over the next five years.

In September, the Centers for Medicare & Medicaid Services clarified that new HSA eligibility for Bronze and Catastrophic plans was more expansive than originally thought, which would further increase enrollment eligibility and the addressable market. We’re working through quantifying the potential impact on account deposit growth. We are investing in our existing mobile and web enrollment systems to best serve ACA participants ahead of the annual plan enrollment period, which will begin in November. These refinements will streamline and optimize the enrollment process and help us better capitalize on this growth opportunity.

I’ll turn it over to Neal.

Neal Holland — Chief Financial Officer

Thanks, Luis, and good morning, everyone. I’ll start on Slide 4 with a review of our balance sheet. Total assets were $83 billion at period end as both loans and deposits were up over 2% this quarter. We continue to operate from an advantageous capital position, where ratios increased modestly despite the fact that we repurchased 2.2 million shares this quarter. Loan trends are highlighted on Slide 5. In total, loans were up $1.4 billion or 2.6%.

Every loan category grew, including a pickup in commercial real estate, which has the potential to be a contributor to growth going forward. We provide additional details on deposits on Slide 6. Public funds were up $1.2 billion seasonally, though we saw growth in the commercial and health care financial services businesses as well. Deposit costs were up 3 basis points over the prior quarter.

Income statement trends are on Slide 7. Overall, we saw a positive trend on PPNR, up $5.8 million over the prior quarter. The provision was $44 million, down $2.5 million from the last quarter. Net income of $261 million is up from $259 million in the prior quarter, and EPS grew to $1.54 from $1.52 in the prior quarter. Our tax rate increased to 21.3%, consistent with our outlook for the back half of the year.

On Slide 8, we highlight net interest income, which increased $10 million, driven by balance sheet growth and the higher day count quarter-over-quarter. This was partially offset by a decline in NIM. The net interest margin was down 4 basis points from the prior quarter to 3.4%. Recall, there was a discrete benefit from a nonaccrual reversal that added 2 basis points to NIM in the second quarter. The trend in the quarter also reflects some organic spread compression.

Slide 9 illustrates our net interest income sensitivity to rates. We remain fairly neutral to interest rates on the short end of the curve with a slightly greater impact to our NII from down rate shock scenarios.

On Slide 10 is noninterest income. Noninterest income was $101 million, up $6 million over the prior quarter. We had a modest increase in swap fee income, and we also realized a positive legal settlement of $4 million.

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

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

Slide 13 highlights our key asset quality metrics. Charge-offs of 28 basis points were consistent with last quarter. Our commercial classified ratio declined 10 basis points from the prior quarter and non-performing loan ratio was down 1 basis point.

Turning to Slide 14. Our capital ratios remain above well capitalized levels, and we maintain excess capital to our publicly stated targets. Our tangible book value per share increased to $36.42 from $35.13 with net income and improvement in AOCI, partially offset by shareholder capital return.

I will wrap up my comments on Slide 15 with our outlook for the fourth quarter. We’re expecting net interest income to be effectively flat to the third quarter. Balance sheet growth will be offset by lower quarterly NIM. Underlying this assumption, we anticipate seasonal outflows of deposits. We will also have higher debt costs in the quarter until we redeem the subordinate notes due in 2029 and 2030, which we intend to do this quarter, subject to market conditions.

Fees are likely to step back a bit without the benefit of another legal settlement. The roughly 1% decline in deposits is an effect of lower public funds on a seasonal basis. Excluding this, we would expect to grow deposits by roughly 1% this quarter. On a full year basis, relative to the outlook we provided in January, we’ll be above the range on loan growth at the top end of our NII guidance and a bit higher than the midpoint on fees and expenses.

With that, I’ll turn it back to John for closing remarks.

John R. Ciulla — Chairman and Chief Executive Officer

Thanks, Neal. This past week, Webster celebrated its 90th anniversary of its founding as First Federal Savings and Loan Association of Waterbury in 1935. Originally founded by Harold Webster Smith with $25,000 he borrowed from friends and family to help people build and buy their homes amidst the Great Depression, First Federal now Webster has grown to one of the country’s largest commercial banks, offering sophisticated financial products to diverse client segments.

The bank’s sustained success is the result of a consistent commitment to doing what’s right for our colleagues, clients and the communities we serve. Webster’s strong and consistent results this quarter echo the bank’s performance since its founding. I’d like to thank all of these parties and our other various business partners for helping to grow Webster into the institution it is today. Our performance this quarter, this year and over Webster’s history is a true team effort, and we’re proud to drive consistent and comprehensive positive outcomes. Thank you for joining our call today.

Operator, we’ll take questions.

Questions and Answers:

Operator

Thank you. Again, we ask that you please limit yourself to one question and one follow-up. Thank you. [Operator Instructions] Your first question comes from Jared Shaw of Barclays. Your line is open.

Jared Shaw

Good morning, everybody.

John R. Ciulla

Hey, Jared.

Jared Shaw

Maybe just starting with the Marathon partnership, if you can give any detail on early success there? And is that reflected in sort of the optimism for growth in ’25? And I guess, how should we think about that in ’26?

Luis Massiani

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

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

Jared Shaw

Okay. All right. Great. And I guess shifting over to the deposit side. Ametros balances are up. InterSYNC balances are up. How should we think about the trajectory of growth over the near and midterm there and the priority of those versus brokered deposits?

Neal Holland

Yes. So this is Neal. We continue to do all we can to grow the attractive categories in HSA and Ametros. Those are great businesses, and we love growth there. We have seen strong growth in interSYNC this year, and we prefer interSYNC balances over broker deposits. We pretty much have no cost to originate. The operating costs are more than offset by the fees we earn in that business, and it’s 100% beta. So in a down environment will be an attractive balance for us. We really use broker deposits to — in Q2 and Q4.

We have seasonal inflows of public deposits, which come in, obviously, in Q1 and Q3. And so as you’ll notice, this quarter, we had seasonal inflows of those public deposits. So our broker concentration is down to about 2%. And next quarter, it may jump up to 4% and then Q1 we’ll probably be more back down in that 2% range. So we really use broker deposits to offset those swings in our public deposits.

Jared Shaw

Okay, thank you.

John R. Ciulla

Thanks, Jared.

Operator

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

Mark Fitzgibbon

Hey, guys. Good morning.

John R. Ciulla

Mark, good morning.

Mark Fitzgibbon

There’s been a lot of talk, John, this past week about the private credit space. And so I wondered if you could share with us any details on sort of what sort of lending exposure you have to the private credit industry? And maybe any areas that you might be avoiding within that space?

John R. Ciulla

Yes. Mark, I’ll give you an overview. Our NDFI exposure, and obviously, everybody has been talking about this a lot is a pretty amorphous and large category. For us, it’s pretty simple. We’ve got about $6 billion in what would be characterized as NDFI. 90% of that for us is really in two categories and relatively evenly split. One is fund banking, which everybody understands, lower yielding, lower risk. That’s really tied to the LPs fulfilling their commitments to private equity funds, right? There’s no operating risk with borrowers.

And as I think people know in the history of that product, there’s been virtually no losses. The other half for us is in Lender Finance. It’s about $2.6 billion. We’ve been in that business, we’re not newcomers, for about 10 years. And the way we characterize that business for us is, we deal with top name asset managers with significant AUM and experience. We advance on a pool of loans effective senior leverage and attachment point of 2.7 times across the book as we go through that. We have had zero losses, zero classified or nonaccrual loans over the 10-year period. And so I think it’s really important for us, and we feel very, very comfortable in the space. Many of them are 20% risk-weighted assets. So significantly lower risk, and they carry a lower yield as well.

And as we’ve grown that, we’ve — that’s been in our plan. So we feel very comfortable with our NDFI exposure just given the characteristics in nature and our history in the business. So we haven’t been exposed to the headline credits that you’ve seen in the last few days, I guess, mostly. But we’re very confident that the underwriting we have in there is extremely solid, and we’re not in any sort of other esoteric risk classes.

Mark Fitzgibbon

Okay. Great. And then just a follow-up, kind of changing gears a little bit. I know, John, you’ve said in the past that you’re not interested right now in doing bank M&A. But I guess I’m curious if the Category 4 threshold is lifted. And given that the regulatory environment is so welcoming these days of bank M&A, why not sort of push that to the front of the line in terms of priorities?

John R. Ciulla

Yes, Mark, we are going to be consistent with what we did — what we’ve said many times. I don’t think the lifting of the Category 4 hurdle changes our outlook, right? It could benefit us from an expense perspective and let us focus on competing and growing our business lines instead of necessarily building out other regulatory mandated infrastructure. But as it relates to M&A, we have said and we continue to believe that it would be highly, highly unlikely for you to see us acquire a whole bank over the short or medium term, given our momentum and given what we think we can create and given the risk of getting involved in M&A on an offensive basis. We continue to look at smaller health care-related acquisitions that wouldn’t dilute tangible book value significantly and could add to our fee and deposit-generating capabilities. But as it relates to whole bank M&A, we’re not interested in participating at the current time.

Mark Fitzgibbon

Thank you.

Operator

Your next question comes from Chris McGratty with KBW. Your line is open.

Andrew Leischner

Hey, how’s it going? This is Andrew Leischner on for Chris. Just on the loan growth, it looks like the Q4 guide is back around where you’ve been after the strong quarter this past quarter. Can you speak in a little bit more detail about current pipelines and then how we should be thinking about the loan growth outlook going into 2026? Thanks.

John R. Ciulla

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

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

Andrew Leischner

Okay. Great, thank you. And then just one follow-up. Just given that CET1 is still above your near-term target, at 11.4%. How should we be thinking about the pace of buybacks going forward? Thanks.

John R. Ciulla

Yes. I think I’m going to give you the boring answer that we always do. We’re looking to deploy capital into loan growth. We’re looking at potentially some strategic smaller inorganic growth with respect to our health care vertical on fees and deposit growth capabilities. If we don’t have robust loan growth and we don’t have opportunities to deploy capital in the aforementioned health care space, I think then you’ll see us look at returning capital to shareholders.

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

Andrew Leischner

Okay, great. Thank you.

John R. Ciulla

Thank you.

Operator

The next question comes from Matthew Breese with Stephens Inc. Your line is open.

Matthew Breese

Hey, good morning.

John R. Ciulla

Hey, Matt.

Matthew Breese

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

John R. Ciulla

Yes. I’ll let Neal give you specific numbers, but I think we’ve had a continued trend line of onboarding higher quality credits. If you look at sort of weighted average risk rating on originations over the past several quarters compared to what’s in the existing book, there’s a significant positive delta there. So I think part of it, Matt, is risk selection. Part of it is credit spread compression. The markets — there are tighter credit spreads on high-quality commercial real estate deals and other areas. So I would say it’s a combination of mix and tighter spreads in what we’re originating. It goes to my earlier point on the previous question that we continue to look as we move forward that it’s not just loan growth for loan growth’s sake, but we want to make sure we’re onboarding high quality, but we’re also onboarding good solid loan yields so that we can make sure that the NIM is not contracting perpetually over time. I think that would be my answer.

And I think we’re pleased with what we’re being able to onboard in terms of full relationship, high-quality commercial real estate and C&I deals, but they are coming in at a lower yield than this historically had been the case.

Neal Holland

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

Matthew Breese

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

John R. Ciulla

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

Matthew Breese

That’s all I had. Thank you.

John R. Ciulla

Excellent.

Operator

The next question comes from Casey Haire with Autonomous Research. Your line is open.

Casey Haire

Yeah, great, thanks. Good morning everyone. John, I wanted to follow up on the NDFI question. Fully appreciate your answer and that these asset classes are low risk. But some of the others that were — that are in these headlines, where they got blindsided was the double pledging of collateral. So which seems like an easy thing to safeguard against. So what measures do you have in place to guard against your borrowers double pledging collateral?

John R. Ciulla

Yes. That’s a great question, right? It’s around how do you protect against fraud. And I think it starts with who you do business with. And again, as a former Chief Credit Officer, I’m always — I probably to a fault, tell people, I can’t — you can’t promise excellent and perfect credit performance. But if you think about the fact that what I talked about, Jason Soto, our Chief Credit Risk Officer, is always pushing people away when they want to deal with first-time asset managers and people that don’t have great reputations in the space. And so it starts with dealing with high-quality established asset managers and then doing strong quarterly reviews.

We’ve had instances on some of these pools in Lender Finance. When a credit goes bad, the asset manager replaces that poor credit with a performing credit. We’re at relatively low LTVs when we lend against it. So I think it’s a combination of being diligent in the underwriting to start and making sure you’re dealing with people who have a track record of transparency and being able to provide great information, underwriting and looking through to the portfolio of loans you’re lending against.

And as I said, we’ve had 10 years of perfect credit performance. Will that continue forever? We’re in the business of taking risk. I can never say never. But I think we do a good job, and I think it’s kind of the way I describe KCR, our sponsor book, right? It’s — not all things are created equal and people who get involved in that business, we’ve been in it for 20 years. We kind of know who operates in the industry. You kind of know who you want to deal with. You’d make your best guesses and diligence on underwriting and monitoring. And so far, so good. And I think that’s the best I can give you.

Casey Haire

Got you. Understood. Okay. And then just — apologies if I missed this in prepared remarks, but the outlook — I mean, the credit quality was stable. It didn’t get worse, which is good, but it didn’t show much improvement from NPAs and commercial classified. So just wondering what’s the outlook going forward? Is this expected to cure gradually or kind of run in place? Just an outlook on how credit quality cures.

John R. Ciulla

Yes. I think it’s a great question. And I think when I talked to Jason, I think we were a bit disappointed to not get more resolution on the nonaccrual and classifieds. And I had mentioned and we go back that some of that resolution is a bit sticky, right? We’re smart. We know that we want to get those headline numbers down because if people think there’s an overhang. But we’re also looking at economic profit when we look through these things. And if we’ve got a good collateral base and we think that there’s not big losses, we’re not going to do something stupid economically.

I think the key underlying factor of why you heard me not sheepishly, but confidently say that we think the inflection point continued is that a lot of this has to do with kind of roll rates, right, and trend lines in risk rating and that 7% decline in criticized assets, which is the step before we get to classified and nonaccrual was really important to us that we continue to see in our quarterly reviews an overall improvement in risk rating migration, which portends well — absent a credit correction and a recession and other things, it portends well to a lower future inflow of problems, and we do see line of sight to resolution on a bunch of those nonaccruals and classified. So for us, we feel like, hey, we’d like to accelerate that.

We had line of sight to what we thought was slightly better resolution on some of those. But there’s no question that from our standpoint with respect to the level of charge-offs, the risk rating migration trends and the lower criticized assets that this was another positive step in our credit performance. And again, overall, we’ve been able to continue to post high returns given our actual credit costs over the last several quarters. So we’re feeling good about our credit profile.

And as I’ve always mentioned, and I don’t want to go on too long, but most of our, I should say, a large portion of our classified and nonaccrual loans are concentrated in health care services and office, right? And so on two relatively discrete and small portfolios. So I think that’s why we feel pretty comfortable that credit is trending in the right direction.

Casey Haire

Great, thank you.

John R. Ciulla

Thank you, Casey.

Operator

The next question comes from Anthony Elian with J.P. Morgan.

Your line is open.

Anthony Elian

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

John R. Ciulla

Yes. I mean, I guess, we’re — we think we’re proactive. And as I’ve mentioned several times, we haven’t really seen any pockets of correlated risk in any either asset class, geography, business line of ours. Obviously, we looked at auto when we saw this. We’ve got very small exposure to auto. I think it’s like $300 million overall, and that would include any part of the entire ecosystem. And so that’s — we don’t have a specialty team. We’re not involved. That’s sort of just in our general commercial business. So I would say no. We focused on resolving office.

We continue to move. It’s been a little bit slower the last quarter. Obviously, we’re keeping an eye on rent-regulated multifamily because of all the noise around the potential election of the mayor there. We still feel very comfortable with that portfolio. It’s extremely granular and it’s performing well with a good updated debt service coverage ratio. So I don’t think there’s anything that’s high on our radar screen in terms of flashing yellow lights or red lights.

Anthony Elian

Thank you. And then my follow-up, Slide 28, it looks like loan originations rose from the prior quarter, and much of that came from commercial real estate. I’m curious on the types of CRE loans you originated during the quarter and if this is a good level for CRE originations going forward? Thank you.

Luis Massiani

Yes, sure. That’s a great question. Part of that was — we alluded to the pipeline that was a little bit softer at the beginning of the year, and we started to — and we talked — I think it was in the first quarter earnings call that we had started to see that build up in the early part of the second quarter and then throughout the second quarter. And so part of how to think about Q3 is that there was some pent-up activity in the pipeline that was fully reflected and came through in Q3. And so therefore, the growth was stronger than prior quarters, and it was good, diversified industrial and kind of multi-asset classes. And so the mix of the business was great, good structure, relatively good pricing. So we were very pleased with the type of originations that we saw.

With that said, pipeline is still in very good shape. But as John alluded to, the combo of potentially some accelerated payoff activity, particularly if rigs go down and then the fact that you don’t have that 1.5 quarters or 2 quarters of pent-up demand that we had from the first and the second quarter, we think that there’s going to be good commercial real estate originations in Q4 and then into 2026, but it shouldn’t be — kind of the Q3 numbers should not be seen as a watermark or a high watermark for what originations will be going forward, but still good strong growth.

John R. Ciulla

And I would just add to that, we feel very comfortable. We’re still in the mid-250s with respect to concentration on CRE as a percent of Tier 1 capital plus reserves. And we can bounce around down or up 10% from there and feel very comfortable that from a regulatory perspective and from an overall risk management perspective, we’re comfortable. So it’s an important category for us. You’ll probably see growth. But to Luis’s very good point, I think it will be thoughtful growth as we move forward.

Anthony Elian

Thank you.

Operator

The next question comes from Bernard Von Gizycki with Deutsche Bank. Your line is open.

Bernard Von Gizycki

Hey, guys.

John R. Ciulla

Good morning, Bernard.

Bernard Von Gizycki

Good morning. Neal, first question for you. So you noted the higher debt costs. It looks like you might be absorbing one more rate cut than previously assumed in your guidance. It looks like sponsor obviously might have been — maybe a bit better than expected, and I know that’s like a bit higher yielding. The 4Q NII is $630 million, just what are you thinking of the exit run rate for the NIM in 4Q? Any changes there?

Neal Holland

Yes. So on the last call, we talked about a Q4 NIM of being in the range of 3.35% to 3.40%. After you take into account the seasonal factor, the extra sub debt that we’ll be holding in Q4, we’ve got — it’s a little bit of timing around the seed portfolio and kind of loss of very high-yielding loans from the seeding of the JV kind of put some onetime pressure. We — as I mentioned before, and continuing to originate the high-quality kind of lower spread new originations, that puts pressure on Q4.

So if you take our $630 million NII, that equates to a guide of right around — sorry, $335 million for the Q4. There’s opportunity and risk to that depending on how quickly we reprice deposits. And that’s — if you look at our growth rate last quarter, which was almost 10% annualized on loans and deposits, there’s less opportunity for us to price down. So what we’re looking at in Q4 is potentially a little bit lower growth, and so potentially a little bit of opportunity to outperform. But we’ve kind of — our guide is more in the lower end of what we stated last quarter for Q4.

Now that being said, Q1 next year, we’re not ready to talk about Q1 guidance, but we’ve talked about our seasonality trends. So I would clearly expect Q1 next year to be back up higher than Q4 of this year. And then we’ll talk more about full year ’26 guidance when we meet next time.

Bernard Von Gizycki

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

Luis Massiani

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

And so part of that is banking — traditional banking products, part of that is insurance-related products, Medicare-related products. And so that is — it’s coming together. We anticipate and expect that there is going to be greater activity broadly in the HSA channel in 2026. And I’ll remind you that the opportunity going forward, particularly as it relates to the addressable target market is slightly different or it’s actually very different to what we do today, right? Today, the vast majority of what we do in HSA is a B2B2C business or we’re going through large employers. And so it’s not — the client relationship, even though it is a deposit account with us is one step removed in the sense that it really goes through the large employer that is our kind of the — that’s how we originate the transaction accounts.

As we move into the Catastrophic and the Bronze plan opportunities with the increased and expanded target size, that’s really a direct-to-consumer business. It’s much more akin to what we do in our traditional banking side with consumer banking and through our direct channels. And so that’s why we think that that’s a great opportunity in that, that is identifying an HSA client that could absolutely become more than just HSA because it’s going to be a direct-to-consumer relationship.

We’re going to be data mining the — to identify the individuals and then having them be a direct kind of broad HSA and Webster client. And so a long-winded way of saying that it’s a great opportunity for us. We’re building — we have the investments and we’re making the investments to be able to capitalize on that. And we envision that in 2026, we should start seeing some benefit out of all the investments that we’ve made.

Bernard Von Gizycki

Okay, thanks for taking my questions.

Operator

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

David Smith

Good morning. Outside of HSA, can you talk about the investment opportunities you’re prioritizing for the bank? And with the likely rise in the Category 4 threshold, does that free up investment dollars that you can redeploy into ones that are more directly related to revenue or the profitability of the bank?

John R. Ciulla

Yes. I think that’s a great question. And the short answer is yes. We’ve talked openly about the fact that — Neal talked about a kind of 60 — over three years, a $60-ish million investment run rate increase in expenses related to Category 4. We are taking, again, a pragmatic approach. We’re going to wait to see and get more clarity on whether that threshold is lifted. I think we believe that there is a reasonable probability that, that happens. And that would allow us to either avoid some of those costs or clearly spread them out over a longer period of time.

And our view is that we can take some of that and increase current profitability, but we want to certainly redeploy some of those investment dollars into new business initiatives. Those would include our continued digitization of channels across our various business lines, treasury management capabilities, new teams in key geographic middle market segments. And so it’s kind of being able to really focus on accelerating some of our business opportunities. HSA, we talked about it here before.

I think we have some adjacent opportunities in Ametros and HSA as well. So I think it will give us an opportunity to accelerate some of those investments as we move forward. And I think what we’re trying to do is — I think we will have more clarity on that, on the regulatory thresholds by the time we get to the January earnings call. We’re going to our Board in a couple of weeks to get our three-year strategic plan vetted and approved. And I think we’ll be able to talk a lot more about how we redeploy some of those investment dollars when we’re clear that we can redeploy those investment dollars, and that should all be factored into our guidance in January.

David Smith

Thank you.

Operator

The next question comes from Daniel Tamayo with Raymond James. Your line is open.

Daniel Tamayo

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

Neal Holland

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

Daniel Tamayo

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

John R. Ciulla

Yes. I don’t think so. We’ve talked a lot about our sponsor finance business, right, which is not NDFI, it’s financing companies that are platform companies or private equity firms and we’ve had good success over a long period of time. I remind you that our partnership with Marathon is as much a risk management tool as it is an offensive opportunity. It allows us to have — offer more products and services and a bigger balance sheet implied without taking additional risk on the bank’s balance sheet.

Our sponsor finance business has not grown in the last eight quarters as much as it had in the prior 10 years because of the proliferation of private credit and because of lower M&A activity and because, quite frankly, we’ve stuck to our risk profile and I think have been pretty conservative there. So I think general economic conditions obviously have an impact on the way we look at leveraged finance. But with respect to what you saw in the market and reactions over the last couple of days, it really has no impact on the way we look at predictable, protectable cash flows of our direct borrowers in the sponsor book.

Daniel Tamayo

Terrific. Appreciate that color, John, and thanks for your prior answer, Neal. That’s it for me.

John R. Ciulla

Thank you.

Operator

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

Janet Lee

Good morning. Sorry, I joined a little late, so sorry if I missed the prepared remarks. But for the loan growth in the quarter, it was pretty robust on a period-end basis. So if I look at the C&I loan growth, is this — is most of this growth coming from like the middle market? I know that includes like the fund banking part. And given that CRE runoffs will not be — I mean, we’re not going to see like much CRE runoffs in the future quarters. Is it fair to believe that the loan growth in 2026 — I know you’re not guiding to ’26, but loan growth should be improving versus like the 4% to 5% growth that was previously expected for 2025. Is that the right way to think about it?

John R. Ciulla

That’s an interesting question. I said at a conference mid-quarter, what we expected. And I think it was a panel and the investors said 5% loan growth. I think we think about kind of steady loan growth in next year in this economic environment in that range. We’re not ready to provide guidance because, as I said, we’re right now going through our plans. We are looking at making sure that our loan growth is diverse. We want full relationship loan growth. CRE will be a part of that. We’d like, obviously, middle market and traditional C&I to continue to add to that as well.

I don’t think, Janet, I’m prepared to say that we expect loan growth in ’26 to be higher than those mid-single digits, which I think is what people who have provided guidance and industry experts have said. So I’d rather not go there now. I think we think that, that would be pretty good solid loan growth. And as we finish our strategic plan and look at the economic environment, we’ll let you know in January what we think we can achieve. And we — and as I said to an earlier question that you may have missed, it’s not just about balance sheet growth for balance sheet’s sake. We want to make sure we’re also onboarding good risk-return assets. So that’s the way I would look at it now, just thinking forward.

Janet Lee

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

John R. Ciulla

It’s kind of a trap question, right? Because I think we’re all smart leaders here, the way we think about things. And optically, we have to be absolutely sensitive to the way people view the makeup of our balance sheet. But I would say, fundamentally, the 2 categories that make up the substantial whole of our NDFI exposure actually are really low risk and quite frankly, lower-yielding loan categories that we feel very comfortable with.

To the extent we have opportunities in fund banking and lender finance, and we’re not stretching into areas and we’re not dealing with new — newly formed asset managers or going into different esoteric asset classes, we feel comfortable continuing to originate, but we’ll do it in the context of our overall loan portfolio and concentrations and obviously have an eye to what’s going on trend line-wise in the industry. So if we were to see significant cracks in a broader private credit, obviously, we would either pull back or change our underwriting guidelines. But right now, we don’t think based on a couple of days and a few headlines that we would need to change the way we view the market.

Janet Lee

Thank you.

Operator

The next question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.

Jon Arfstrom

Hey, thanks. Good morning.

John R. Ciulla

Hey, John.

Jon Arfstrom

Hey. A lot of the topics have been covered, but a smaller one, can you talk a little bit more about the noninterest income drivers and what you’re seeing there and what kind of expectations do you have?

Neal Holland

Yes. I can jump in there. So on the noninterest income side, we had a nice increase quarter-over-quarter. And we talked about a piece of that was due to a legal settlement. But outside of that, we saw a nice growth in client activity. As loan originations have picked up, there’s more activity, more swap income. We’ve found some unique new ways for syndication income. So I would say, overall, we were pleased with the quarter there. Overall, obviously, as we benchmark, we benchmark against peers positively in a lot of segments and fee income is one of the areas that we’re a little bit lower. And we’re working on different initiatives.

As Luis mentioned, there’s some opportunities on the HSA side. There’s obviously opportunities through our JV, and we’ll continue to look for ways to drive new categories there. But kind of going forward, I think until those new potential streams kick in, we’ll be kind of in that similar growth range that we’ve been in over the last year or so on the noninterest income.

Jon Arfstrom

Okay, good. Thank you on that. John, kind of a high-wire act question, but just back on the election. Is that a legitimate concern for you as a banker that banks the city? And should investors be concerned about it at all? Just how do you think about the potential risks? Or are we just — is it overblown in your mind?

John R. Ciulla

Yes. It is a high-wire question. I think if we look at credit performance and our credit portfolio, it’s not a big issue in the medium term, right? I think we look at the way we’ve underwritten, we look at what a new mayor would have the power of doing in terms of changing rules, regulations and other things that would really impact our borrowers’ ability to generate income and cash flow and service debt. So I think that may be a bit overblown. Luis and I talk about this.

I do think what you want is a healthy New York City, both from a credit performance, but even more importantly, from a business activity performance and our ability to continue to generate growth in deposits. So that’s something that we look at and try and figure out whether over time, the city gets less competitive rather than more competitive if there were a change — significant change in policy. But I think history would tell you that things don’t move as dramatically in either direction when you have these changes and that you can navigate through them. So in our base case, like we don’t have thoughts that there’s going to be a precipitous inflection point in either business activity or credit performance in the near term.

I think my personal, and I guess when Luis and I talk about it, the longer-term risk is you get a trailing economic growth in the city. You get other quality of life changes or things that people perceive, and that could have an impact in the long term. But as I look over our 3-year plan, we don’t think there’s a material financial impact by the Mayor election in New York.

Luis Massiani

And the one thing that I’d add there is that as you think about future opportunities for growth, the vast majority of where we have — to the topic that we were talking about before, where we’re investing the things that we’re focusing on even though we are always going to be — we’re going to have — a good part of our business being connected and tied into New York City, a fair amount of the growth, particularly in the new business lines, both on the lending and deposit side are not connected to New York City. So everything that we’re doing on HSA, we chose on interSYNC on the deposit side are not connected directly to New York City.

So from that perspective, we don’t see that, that should be an impact on our ability to continue to generate good deposit funding. And conversely, on the lending side, when you think about the diversified verticals, yes, there’s a portion of what we do, particularly in CRE that is New York City connected, but the vast majority of growth and the opportunities that we have seen have not been recently in the last two or three years post-merger connected directly to New York City. And so as we think about the business opportunity or the existing book of business, yes, it’s something that we’ll have to deal with, although I think we’re in a very good position to be able to offset whatever comes our way from that perspective. And as we think about the business opportunity longer term and growth trajectory, we don’t think that this materially impacts our ability to continue to do what we’ve been doing.

Operator

The next question comes from Laurie Hunsicker with Seaport. Your line is open.

Laurie Hunsicker

Yeah, hi. Thanks. Good morning. My first question is super quick. What’s your spot margins?

Neal Holland

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

Laurie Hunsicker

Yes. Appreciate all the color on that. Okay. Second question here is around credit. So I just want to understand a couple of things. Your $6 billion NDFI portfolio, that’s within the sponsor and specialty finance book? And I guess, secondly — or yes or no. And then just the — can you help us think about how much there is nonperforming and what the charge-offs were? And then finally, the $37 million you have in commercial net charge-offs, just because I don’t see the breakdown, can you share with us what’s C&I, what’s CRE? And I know I just hit you with a lot, but I just want some more details on that. Thank you so very much.

John R. Ciulla

Yes, Laurie, we’ll try and — we may have to get back to you on a couple of those things, but I’ll tell you that the answer is no to your first question. All of our NDFI is not included in sponsor and specialty. Our lender finance numbers are included in sponsor. Our fund banking is and we have it on — footnoted on the slide is included in our C&I business. And then with respect to some of those specific credit questions, we might get back to you.

Let me just give you a high line again, right? We’ve got the concentration of charges historically and nonaccruals have been concentrated in our health care services book, which is down to about $400 million. So again, very discrete and low. We’ve always talked about the sponsor book as having some volatility in risk rating, but not translating into loss, and I think that’s continued. I’m trying to think of other question.

Laurie, what I’m going to do is have Jason and Neal talk to you offline. We’re not seeing any material deterioration in our sponsor book. That’s the short answer. And what we’ve seen with respect to charges — she had charge-offs in the fourth quarter. As I looked at those charge-offs, there weren’t any high single points. All the charge-offs were under $10 million with respect to single point charges. There was an office loan in there. There was a C&I loan in there and ABL credit. So these were all kind of relatively granular across categories in commercial.

Operator

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

John R. Ciulla

Thank you very much. I really appreciate everybody’s engagement this morning. Have a great day and a great weekend.

Operator

[Operator Closing Remarks]