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Operator: Greetings, and welcome to the Huntington Bancshares Fourth Quarter 2025 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Eric Wasserstrom, Director of Investor Relations. Eric, please go ahead. Eric Wasserstrom: Thank you. Good morning, and welcome, everyone, to our fourth quarter call. Our presenters today are Stephen Steinour, Chairman, President, and CEO; Brantley Standridge, our President of Consumer and Regional Banking; and Zachary Wasserman, Chief Financial Officer. Brendan Lawlor, Chief Credit Officer, will join us for the Q&A. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information, and copies of the slides we'll be reviewing today are available on the Investor Relations section of our website, which is www.ir.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting about one hour after the close of the call. With that, let me now turn it over to Steve. Stephen Steinour: Thanks, Eric. Good morning, and thank you for joining us. Beginning on slide three, as we enter 2026, the year of Huntington's 160th anniversary, it's a moment of pride, but even more a moment of anticipation. Our heritage and deeply rooted values continue to guide us, yet it's the opportunity ahead that energizes us. We're focused on becoming the country's leading people-first, customer-centered bank, and that ambition is taking shape across the franchise. Nearly every part of Huntington is performing at a high level, creating powerful momentum as we look to the future. We've developed a differentiated operating model. Beginning next month, our consumer and regional bank franchise will have a presence in 21 states, many of the fastest-growing in the country. Our local delivery of national capabilities is a franchise-defining competitive advantage. We also have a leading national commercial bank, which includes the fifth-largest equipment finance lender in the nation, 15 unique specialty finance verticals, as well as an expanding set of capital markets capabilities. These functions make us a premier provider to companies ranging from small and middle-market businesses to large corporate entities. Our approach is entirely customer-centric. Our business lines lead with advice and guidance, deliver award-winning customer service, and are supported by top-tier digital capabilities. And we adhere to our aggregate moderate to low-risk profile. In summary, our vision and values guide how our colleagues support our customers. These attributes, combined with our scalable business model and recent positioning in the most attractive states, will enable growth far into the future. Slide four illustrates the core components of our model and how they drove excellent full-year results for 2025. We have activated a flywheel of value creation in which our operating model drives sustainable high growth, enabling us to accelerate reinvestment and strengthen our competitive advantage. In '25, this model delivered truly outstanding results: 11% revenue growth, 16% adjusted EPS growth, 290 basis points of positive operating leverage, and strong credit performance. All of this drove powerful capital generation. Slide five summarizes our key messages. First, our focused execution is generating significant organic growth. Second, we have proven expertise in integrating new partner banks. And third, we're delivering exceptional profitability and value creation to our shareholders. We are driving outstanding revenue, earnings, tangible book value growth, and returns while investing for growth in the years ahead. As shown on slide six, our organic growth engine remains exceptionally strong. We delivered another year of significant above-peer cumulative organic loan and deposit growth. And as Zach will talk to in a moment, our value-added fee services are showing a similar trend. These outcomes reflect how our teams are executing with discipline across all of our customer segments. This quarter, we delivered strong growth in primary bank relationships, up 4% year over year in consumer banking and 7% in business banking. We are focused on deepening customer relationships and expanding wallet share while maintaining diversified portfolios. Slide seven highlights some of the strategic investments we made in 2025 that accelerate our flywheel and enhance our long-term growth trajectory. We continued our branch build-out in North and South Carolina and expanded our middle-market banking in Texas. We added new commercial verticals, and the Veritex and Cadence partnerships augment our scale and density in states that are projected to grow roughly 30% faster than the national average. We also added to our platform and capabilities. With the addition of TM Capital and Janney Capital Markets, we expanded the breadth of our financial advisory, as well as increased our categories of fixed income trading. Additionally, we added functionalities and services within our commercial payments platform. We executed several integrated partnerships to deliver new fintech solutions for our consumer and small business customers, and we continued our investment in industry-leading digital capabilities. These initiatives expand the breadth of customers we serve, deepen our relationships, and help accelerate our fee revenue growth. In summary, 2025 was an extraordinary year for Huntington. Our outstanding financial results reflect the substantial investments we've made in our capabilities over the past several years, and we intend to continue investing across all elements of our franchise going forward. These investments and our recent partnerships position us to sustain strong growth well into the future. With that, let me turn it over to Brant to share some updates on the partnership integrations. Brantley Standridge: Alright. Thank you, Steve. Starting on slide eight, I want to share our differentiated and proven approach to partnerships. Our approach is collaborative and transparent, designed to align around our common objectives, creating a strong foundation for long-term value creation. We're able to quickly identify and engage the leaders and make thoughtful decisions around the talent of the combined organization. Our objective is to create a welcoming environment for our new colleagues. We work with rigor and speed, mobilizing dedicated teams to migrate our partners' entire organization to Huntington platforms. We thoughtfully sequence the activities to minimize disruption and operational risk. We've found that this approach creates an experience that is as frictionless as possible for both colleagues and customers. We are also intentional about approaching key customer product migrations with a people-first, white-glove process. We actually like to call it the green glove process. We quickly deploy the full suite of Huntington capabilities, including products, balance sheet capacity, value-added services, and digital capabilities. This approach for our new customer-facing colleagues enables them to stay engaged with their customers throughout the entire process, expanding their existing relationships and growing new ones. For their customers, it ensures continuity of service while gaining exposure to the expanded set of capabilities we can offer. This approach drives economic value by empowering and engaging our partners, being thoughtful and focused in our talent management and retention efforts, deploying the full breadth of our capabilities, developing deeper lending relationships and value-added services, and moving quickly to migrate systems. We're able to realize substantial cost and revenue synergies. Turning to Slide nine, let me give you an update on how we've applied this approach to our partnerships with Veritex and Cadence. We've spent extensive time in the market with our new colleagues, aligning the local leadership structure and demonstrating our culture. For example, with Cadence, we undertook a 22-city tour right after the announcement to get to know our new colleagues and learn about their customers and the markets they serve. We undertook similar meetings with Veritex and have frequent senior leader connectivity and end-market engagement. We could not be more excited to welcome these new colleagues to Huntington. Engagement with the leadership and colleagues of our partners is fundamental to our ability to execute integration activities quickly, effectively, and get to the critical focus of value creation. We have undertaken a thoughtful approach to our combined organization's talent decisioning with a lot of input from the Cadence management team and completed this work well in advance of closing. This creates certainty for our new colleagues and provides immediate line of sight to a large percentage of our cost synergies. We've made significant progress on systems integration. With Veritex, we substantially completed this process last weekend. This concludes what has been an extremely efficient and well-executed conversion. It's only taken 187 days since the announcement. We can say with confidence that Veritex is now integrated into Huntington. For Cadence, we're already advanced in our product and data mapping and expect systems migration to occur midyear. This would also represent a highly expedited time frame. Because of these actions, we are already realizing our targeted cost synergies from Veritex, which we expect to be fully included in our run rate by the second quarter. For Cadence, we expect to begin realizing the identified cost benefits immediately upon closing and reach the full run rate in the fourth quarter of this year. As we deploy the full Huntington franchise in our new markets, we expect to begin benefiting from revenue synergies. This is already the case at Veritex, and we expect this to accelerate now that we are operating on the Huntington platform and our new colleagues have access to the full array of our product platform and capabilities. We would expect a similar pattern in Cadence. Some revenue synergies achieved early after close and acceleration in the second half of the year and in 2027 following the systems migration. We are excited about how these two partnerships will springboard our growth in Texas across a number of new markets for us. We see extensive opportunities in these areas and across the breadth of our expanded footprint. And we intend to invest to drive market growth, density, and share of customers' wallet. With that, let me turn it over to Zach to discuss the quarter's financial results in detail. Zachary Wasserman: Thank you, Brant, and good morning, everyone. Beginning on slide 11, I'll cover our financial performance. We delivered exceptional profitability in the fourth quarter and for the full year of 2025, supported by strong organic loan and deposit growth, expanding fee revenues, improving margins, positive operating leverage, and excellent credit. For the quarter, earnings per common share was $0.30. On an adjusted basis, excluding acquisition-related expenses and other notable items, EPS was $0.37, up 9% year over year. I'll review the drivers of this performance in detail on the next several pages. Turning to Slide 11, average loans grew 14.4% year over year, excluding the addition of the Veritex portfolio. Average loans grew $10.9 billion or 8.6% year over year. This growth was well balanced between core and new initiatives. New initiatives account for $1.8 billion in the period and contributed nearly half of the total organic loan growth for the year. Key contributors included our organic expansion into Texas and North and South Carolina, as well as strong performance in our funds finance and financial institutions group commercial verticals. Of the remaining $1.4 billion in loan growth in the fourth quarter, from the core we delivered $500 million from corporate and specialty banking, $400 million from regional banking, $400 million from auto, $400 million from floor plan businesses, and $200 million from commercial real estate. These gains were partially offset by a $200 million decline in equipment leasing, a $200 million decline in residential real estate balances, and a seasonal decline of $100 million in RV marine loans. All told, in 2025, we generated organic loan growth of $10.1 billion, which exceeded the $9.5 billion of loans added through our Veritex partnership. This performance underscores the exceptional execution by our colleagues across the company. The businesses are firing on all cylinders, and our teams continue to deliver outstanding organic growth. Turning to deposits on slide 12, average deposits increased 5.1% quarter over quarter and 8.6% year over year. On an end-of-period basis, excluding Veritex, core deposits grew $5.5 billion year over year or 3.4%. We continue to drive strong volume growth while maintaining disciplined pricing throughout the rate cycle, resulting in a 35% cycle-to-date down beta. This performance is enabled by our sustained focus on growing primary banking relationships across both the consumer and commercial segments. Veritex deposits contributed meaningfully to this quarter's growth while we optimized select acquired funding categories as planned. Together, these dynamics underscore the depth and quality of our relationship-oriented deposit-gathering capabilities and the effectiveness of our funding strategy. We continue to execute well on our down beta plan. Similar to the third quarter, we quickly implemented actions after the Fed rate reduction in December to achieve a 40% down beta in the last two weeks of the fourth quarter. The deposit environment remains competitive. However, our approach to optimizing volume growth and pricing is working. Our goal remains to maximize revenue growth and ensure robust core funding for our continued strong organic loan growth. We will continue to manage our asset yields and funding costs to optimize this outcome. On to slide 13, our NII dollar growth and margin expansion continue to demonstrate powerful momentum. During the quarter, we drove $86 million or 5.6% sequential growth in net interest income. This represents over 14% growth on a year-over-year basis. Net interest margin was 3.15% for the fourth quarter, up two basis points from the prior quarter and aligned to our outlook. This is largely driven by contributions from Veritex core NIM. Expanding on that for a moment, as we've noted, Veritex closed in October, and the final rate marks and detailed loan level accretion schedule was updated at that time. This update resulted in a modest reduction in expected PAA and modest accretion to tangible book value excluding one-time costs. The updated schedule is noted in the appendix of the presentation for your reference. Moving to fee income on slide 14, our fee businesses were strong across virtually every area. Year over year, payments grew 5%. Commercial payment revenues continue to be the primary engine of this growth, up 8% year over year. Wealth management grew 10%. Adjusted for the sale of a portion of our corporate institutional custody and trust business last quarter, it grew 16%. This was powered by continued household acquisition and assets under management net inflows. Capital markets performed well, delivering its second strongest revenue quarter of all time, trailing only 2024. Some advisory deals did push from the fourth quarter to close early in 2026, and so our first quarter is off to a very good start. Loan and deposit fees are up over 20%, driven by strong loan commitment fees. Based on our solid commercial lending pipelines, we expect this trend to continue over the next several quarters. Clearly, momentum in the fee businesses remains strong, and we anticipate broad-based growth going forward. On the next slide, I'll step back for just a moment to reflect on the multiyear of these businesses. Turning to slide 15, on a full-year basis, our fee income businesses have been growing at a steady high single-digit CAGR since 2023. And we see this CAGR as sustainable over our long-term planning horizon. As we've highlighted many times, we view three businesses, payments, wealth management, and capital markets, as having long-term strategic growth opportunities. The financial performance of these businesses validates our strategy, which has focused on expanding where we believe we can offer these value-added services to our customers in a manner that enhances our relationship and meets their needs. Moving to expenses on slide 16, on a core basis, excluding one-time costs and the impact of absorbing Veritex's expense base, Huntington's operating expenses were up just $7 million sequentially, or just about one-half of 1%. This reflects our cost discipline and focus on continuous expense reengineering, essential elements of our value creation flywheel. We set out in early 2025 to deliver positive operating leverage for the year, and we delivered results well above that budget. Coming into the year, our plan assumed approximately 100 basis points of positive operating leverage. It was a solid, achievable planning target given our growth agenda and the level of strategic investment we intended to sustain. As we drove significant outperformance on revenues over the course of the year, we delivered a much wider 290 basis points of adjusted operating leverage while accelerating investments across our enterprise. This outcome is an expression of the model we've been building toward and will drive substantial value creation. Slide 17 recaps our capital position. Over the last year, we drove adjusted CET1 higher. Our capital management strategy remains focused on our top priority of funding high-return loan growth, then supporting our strong dividend yield, and finally, capital return and all other uses. As we have noted, we intend to continue driving adjusted CET1 toward the midpoint of our 9% to 10% operating range. Given our projections for strong capital generation, we expect to have the capacity to add approximately $50 million per quarter of repurchases to the mix of distribution in 2026 following the close of our partnership with Cadence. Slide 18 gives an overview of how the flywheel of our operating and economic model is generating powerful return and driving shareholder value. In 2025, we grew adjusted ROTCE by 40 basis points through robust PPNR expansion while simultaneously increasing our capital base. We have grown tangible book value 19% year over year while returning 40% of earnings through dividends. And as noted, we intend to initiate programmatic share repurchases in the near term. Turning to slide 19, credit quality continues to perform very well, with net charge-offs of 24 basis points. Forward-looking credit metrics remain stable. The criticized asset ratio rose to 4.2%, primarily due to Veritex commercial real estate loans that we identified during diligence, and remains within our historical range. The nonperforming asset ratio was 63 basis points and has trended within our expected range for several quarters. Let's turn to slide 20 for our outlook for 2026. We're providing guidance for Huntington on a stand-alone basis, but given that we're only a few days away from closing our partnership with Cadence, we thought it would be helpful to give an initial view of how this might contribute to our 2026 results. Naturally, we will refine this outlook after the close. Starting with net interest income, we expect growth on a stand-alone basis between 10% to 13%, supported by 11% to 12% growth in loans and 8% to 9% growth in deposits. We anticipate further net interest margin expansion this year, driven primarily by lower hedge drag and fixed asset repricing. We expect the NII contribution from Cadence this year to be approximately between $1.85 to $1 billion, including PAA. We will update this outlook inclusive of PAA later in the first quarter after we've had the opportunity to do the analysis post-closing. In terms of earning assets, our cash plus securities portfolio is currently about 25% of total assets, and we expect to remain approximately at this level post-closing. On the topic of quarterly expectations for deposit and loan growth, we're expecting to see loans grow faster than deposits in the first quarter as we continue to optimize the funding we have received from Veritex and begin the integration of Cadence. After that, in Q2, Q3, and Q4, we expect to see deposits growing at a level consistent with loan growth as our normal organic process of core funding loans continues. We expect to exit 2026 with our deposit growth in dollar terms equaling our asset growth, giving us strong funding momentum heading into 2027. Moving to noninterest income, we expect fee revenues to grow between 13% to 16%. This represents the continued strong contributions from our three core value-added services, further growth in our loan commitment fees, and the contribution from the new capital markets teams at TM Capital and Janney we added at the year-end 2025. We expect Cadence to add approximately $300 million in fee revenue. We plan to provide an update on our expected revenue synergies later in the first quarter. We anticipate core expenses will grow 10% to 11%, and we expect to deliver a baseline of 150 to 200 basis points of operating leverage. This outlook includes the expected cost synergies we've targeted from Veritex, which we expect to be fully in the run rate of our cost base by the second quarter. We estimate Cadence will increase our expense base by $1.1 billion. Similar to Veritex, we expect to begin realizing cost synergies almost immediately after closing, with the full benefits run rating into expenses in the fourth quarter. We expect net charge-offs for the year to be 25 to 35 basis points. Given our current starting point, we think losses will likely be at the lower end and normalize closer to the midpoint of that range over time. The combination with Cadence doesn't change this view. The effective tax rate for the year is expected to be between 19% to 20%. The fully diluted average share count for the year, inclusive of Cadence-related issuance, is expected to be approximately 2.02 billion shares. For the first quarter, we expect the weighted average share count to be approximately 1.9 billion. Cadence's anticipated February 1 close will result in a partial quarter impact to several income statement and balance sheet items. Also, with the addition of Cadence, we have a new class of preferred shares, which we have addressed in the footnote in the updated appendix slide. Pulling back, let me conclude our guidance discussion with a few observations. First, our current 2026 forecast for Huntington's stand-alone growth in NII, in assets, deposits, and fees generally exceeds the growth we've experienced in these categories in 2025, while our expected operating leverage is at the top end of our typical range. This underscores our focus on delivering strong organic growth even as we move through our integration with Cadence. Second, we are executing against our integration plans. As noted, we expect to realize the cost synergies from Veritex in the second quarter and from Cadence in the fourth quarter. In terms of the revenue synergies, we have already begun to benefit from incremental lending and capital markets activity with former Veritex customers. And Cadence bankers are already actively engaged with their customers to educate them about the broader product platform and capabilities that we will be able to offer. We believe this will contribute to incremental revenue growth in 2026 and into 2027. Turning to Slide 21, we remain confident in our long-term trajectory. Our operating model and the momentum across the franchise give us conviction in the sustainability of our targets for the medium and longer term. The investments we're making position Huntington for continued outperformance. Concluding on slide 23, our flywheel of value creation is working and poised to accelerate. Our differentiated business model drives strong growth and profitability. As our profitability expands and we generate efficiency through cost reengineering, we increase our capacity to invest. As we drive robust investment back into our business, we grow our competitive advantage. That competitive advantage drives further market differentiation and customer expansion, driving revenue growth and sustainable share gains in a virtuous cycle. Looking ahead to 2026, we believe the benefits of our strong organic growth and recent partnerships will enable further expansion of our investment capacity over the next several years. This will increasingly distinguish us from our peer set and drive substantial shareholder value. With that, we'll conclude our prepared remarks and move to Q&A. Eric Wasserstrom: Thank you, Zach. We will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up question. If you have additional questions, please return to the queue. Thank you. Operator: We will now be conducting a question and answer session. Our first question today is coming from Erika Najarian from UBS. Your line is now live. Erika Najarian: Hi, good morning. Thank you for taking my questions. First question is just a clarifying question on the expense trajectory, both the baseline and the Cadence addition and how we layer on the cost savings. So given that you gave the guidance on standalone, I'm guessing the baseline for core expenses would be $4.82 billion, which excludes two months of Veritex. And then we layer on the standalone growth. I guess the other part of the question is that $1.1 billion is equal to eleven months of Cadence based on consensus 26. And so I'm wondering, as I think about Brant's comments, if we then layer on the cost saves, and then I just have a follow-up. Zachary Wasserman: Sure. I'm not sure exactly what your question was there, Erika, but I'll take it and sort of just unpack where the expense guidance is. Fundamentally, what we see at this point is underlying Huntington expense growth in mid-single digits, aligned to generate one and a half to two points of operating leverage. And then with Veritex, bringing in the entirety of the Veritex cost base, and also, I would note the two small capital markets businesses that we added on January 1. Those add about one point of total Huntington expense growth, obviously, more revenues as well. But that piece comes in. And so the totality of all of that together is the 10% to 11% year-on-year growth, which generates really positive operating leverage, 150 basis points to 200 basis points, you know, clearly on top of the 300 basis points of operating leverage we generated in '25. And then Cadence is the $1.1 billion added on, as you noted, eleven months of expenses. It represents the full complete of the cost synergy program for both Veritex and Cadence, by Q2 and Q4 respectively. And aligned to the previous guidance we've given about 75% of three-quarters of the Cadence cost synergies accruing in 2026. You know, I think what is also in there clearly, I tried to highlight this in some of my prepared remarks, is continued investment back into the business. And we think that that is a terrific model not only to drive the kind of revenue performance we're achieving in '26, but even more importantly, over the longer term and continue to drive the competitive and share gains that we've got. So all of that is embedded in that, and we think it's the right model and right posture at this point. Erika Najarian: Got it. That's clear. So that addition includes both cost saves and investments back into the business. And the second follow-up question I had, maybe at the is more for Steve and Brant. I thought it was notable that when you talk about Veritex and Cadence, you say the word partnership very intentionally. You know, maybe talk about how your approach has been generating more goodwill in order to perhaps create revenue synergies and cost synergies. And perhaps a better timeline than other traditional acquisitions that are perhaps not treated as partnerships. Stephen Steinour: Erika, great question. And I'm going to let Brant answer this for the most part because he's been on point driving this. Literally from the outset. But the format of the partnership has been incredibly beneficial to us. And we have great partners in both Malcolm Holland and Dan Rollins and their teams. And because we've been able to work together very tightly, and Brant will expand on this significantly, we are in a much better position with confidence on both the expense and the revenue synergy side. So, Brant, over to you. Brantley Standridge: Well, Erika, thank you for the question. One of the things that partnership has allowed us to do is to really move with greater speed and rigor on some of the key decisions. And as it relates to board decisions, management decisions, all of our colleague decisions, organizational structure decisions, all of those have been decided and communicated. And that creates a high level of certainty for the colleagues of both Veritex and Cadence. It creates a lot of familiarity for them and, frankly, gives us a lot of confidence in our ability to deliver on the value creation given that we've created so much certainty for them so quickly. The other component, as you know, a large percentage of the cost synergies revolve around people. And so moving quickly to decide on our make all that key people decisions in the case of Cadence gives us a line of sight to the majority of our cost synergies there. So that partnership approach clearly gives us some advantage or a lot of advantages when we think about both cost and revenue synergies. Stephen Steinour: And the teams have just been outstanding. The collaboration here, phenomenal. We are very impressed with the quality of the teams. And both these banks are well run. So these are not sort of fixer-up turnarounds. This is bringing our capabilities, products, etcetera, to terrific teams, which, as Zach pointed out, we will be further investing in to drive the revenue growth in the years ahead. Operator: Thank you. Our next question today is coming from Jon Arfstrom from RBC Capital Markets. Your line is now live. Jon Arfstrom: Thanks. Good morning, guys. Zach, I think you're gonna get a workout this morning, but on expenses. But anything you can do to give us a little tighter range on expected first-quarter expenses or early '26 expenses just to help set this up? Zachary Wasserman: I'll Demir, I'll give you a quarterly guidance. I do appreciate it. Look, if I take a step back, for us, what's important is driving for positive operating leverage. And as we've noted sort of a number of times, even in the prepared remarks highlighted this for 2025, we come into the year thinking somewhere between one hundred and two hundred basis points of operating leverage as a really good level supports the long-term earnings growth rate that we want to achieve. It also is the right balance for us as we execute that flywheel model. Driving reengineering into baseline costs, reinvesting deeply back into the business. To really power continued long-term revenue growth. And so I think that's the approach that we're taking in it, and we think it's the right one, as I noted before. You know, I will also highlight if you look at that guidance slide, just stare at that plus cadence column, the marginal profitability that we're as we bring cadence into the business is really significant. It's a 50% marginal efficiency ratio, and that's even before the full cost synergy. So all of this for us adds up to an earnings growth trajectory that continues to meet our objectives. And generate ultimately the long-term financial commitments that we've set, importantly, including that 18% to 19% return on capital. Jon Arfstrom: Okay. Alright. Just another question here just for clarification. On Slide 20, you talk about the revenue-producing initiatives that are embedded in the expense guide. How material are those? And then what revenue synergies, if any, from Veritex and Cadence is included in the guide? Thanks. Zachary Wasserman: Yes. Good question again. And the answer is very little of the revenue synergies are baked into the guidance at this point. This continues to be aligned to the longer-term objectives that we've said and we discussed at the Cadence partnership announcement call. I guess Brant highlighted in his prepared remarks, our expectation is to share a deep dive around where we expect the revenue synergies to be later this quarter in a further conference and then to layer that on and provide the right guidance around that. So a lot more to come there. Very excited about it. You know, the thing about the investments up into the business, you know, we've been growing investments back into the company at about a 20% clip for five years in a row. Our expectation is to continue the same. And the focus areas for those investments really continue to be digital technology development and capabilities across all areas of our business. Marketing to acquire new customers. There's gonna be a terrific opportunity to deploy digital acquisition across the new partner acquired footprints. And then, you know, people to build out the businesses that we've been growing, and we'll continue to do that. Operator: Thank you. Next question is coming from Ken Usdin from Autonomous Research. Your line is now live. Ken Usdin: Thanks. Hey, Zach. Can you just back to Slide 20, do you have the starting point FY 'twenty-five baseline for core expenses that the 10%, 11% is built on? Zachary Wasserman: Sure. It's $4.871 billion. Yes. Exactly. Ken Usdin: Okay, great. Thanks. And then the second question is I guess there's a little back and forth today about the cost base still being a little bit higher. But I wanted to ask if I look back at the October deck when you talked about $2 of pro forma EPS in seven. I just want to make sure that there might be some timing differences in terms of how much you're reinvesting and how much things all come together. So we're still tracking towards that $2 pro forma EPS that you guys had suggested back in October in the merger deck? Zachary Wasserman: Yes. It's a terrific question, Ken. It's a I love that question because it kinda comes back to ultimately the value creation model that we're trying to drive here is what is where our focus is and the answer is yes. We continue to be on track for the fundamental drivers of that earnings power. If you think about it, the way I think about it is first of all, three major drivers of value creation from the partnership: seamless integration, and retention of talent and kind of continuing with the momentum of the underlying businesses. I will note that both Veritex in the period after close before conversion performing exceptionally well, driving above expectations loan and deposit and revenue growth. And Cadence, likewise, we haven't even closed. We're expecting that just a week from now. They just reported their results this morning and those likewise. Expectations continue to show very strong underlying growth in SAAR. Partnership model would just enable that to continue. Secondly, it's the cost synergies. We have full line of sight to achieve or beat them. And then lastly, it's these revenue synergies, which are not in this guidance yet, but really will be powerful as we add those on. We continue to finalize the plans to go and achieve them. And so those are kind of the fundamental building blocks. As I think about the EPS, you know, look, we've generated 16% earnings per share growth in twenty-five. The guidance I've given here on page 20 applies somewhere in the kind of mid to high teens for underlying organic EPS in '26. You should expect the same kind of growth in earnings power as we go into 'twenty-seven. And on top of that, you'll get the full run rate of the cost synergies that's probably something on the order of a dime. And then revenue synergies and of course the PAA will be what it is. Ultimately, and we'll give guidance on that once it's finalized. Operator: Thank you. Our next question today is coming from Matthew O'Connor from Deutsche Bank. Your line is now live. Matthew O'Connor: Good morning. You gave the expense impact from the capital market deals? You said it added about 1% to the expense base. How about on the fee side? What's your rough estimate on the fee contribution from the corporate market deals? Zachary Wasserman: Yeah. It's coming in sort of $80 million and $90 million of expense above revenues. Matthew O'Connor: Okay. Then I guess maybe talk about some of the other drivers of the fees because obviously, my model could have been wrong, but the fee guide seemed better than I had even adjusting for like, $80 to $90 million. So maybe some details in terms of what are the key drivers of that growth? Zachary Wasserman: Totally. Fundamentally, if you think about fees, this year in 2020 well, last year, twenty twenty-five, we generated 7% growth in core fees and it was 8% in those three major fee-driving categories we talk a lot about payments, cap markets, and wealth management. As we go into 2026, our expectation was to see acceleration of all of that all of those categories, something on the order of one to 2% acceleration, and we've got strong line of sight to delivering that. As we've noted, it's been a locus of a lot of investment over time. So we're seeing that come through now in terms of acceleration of revenue growth. And then on top of that, you will add the $80 to $90 of revenues from the two new small capital markets divisions that are joining us plus Veritex. And so that's really the kind of the ingredients that could get us to this guide. And have strong line of sight and confidence to deliver. Operator: Thank you. Our next question today is coming from Ebrahim Poonawala from Bank of America. Your line is now live. Eric: Hey, good morning. This is Eric on for Ebrahim. Just maybe another one on the expense side. I was curious if you can talk about the level of investments that you guys have embedded into that underlying Huntington expense growth that you've mentioned at the mid-single digit. Anything new there, any new investments or acceleration in spend that's kind of embedded? Zachary Wasserman: Yeah. Good question, Eric. Thanks for the follow-up. I'll highlight that we expect to grow investments at around 20% back into the business as we go into this upcoming year. And again, as noted before, the kind of the focus of that is always threefold. Digital and technology capabilities across the business, secondly, marketing and last, people to build out their business. So I think about the kind of the initiatives that will power, you know, we're still early days in a lot of the major new growth initiatives we've been talking about the last couple of years. New commercial specialty verticals, both lending and deposit-oriented new geographies that we've been growing into organically, North and South Carolina, Texas, all of those will be focused for continued investment. We've talked about in the Carolina, for example, the expectation in 2026 is to open a new branch there almost every two weeks. And so, of course, that'll be an area that we're investing in. And then, you know, I think Brant highlighted earlier, one of the biggest areas that we see opportunity to really capture revenue synergies in the combined franchise is in digital acquisition and customer acquisition across the footprint. And so there's funding in the investment plan to go after that. Eric: Got it. That's helpful. And then I think just to quick follow-up to clarify. I know you said you'll provide more details post the close, but was curious what level of PAA is embedded into the NII guide? Thanks. Zachary Wasserman: Yep. Because it's somewhere between seven and ten basis points of NIM of, you know, aligned to the prior expectations we had. Again, think we've highlighted that in the Cadence earnings call or Cadence deal announcement call, and we'll update that as we get through the close here in the next month. Operator: Thank you. Next question is coming from Manan Gosalia from Morgan Stanley. Your line is now live. Manan Gosalia: Hey. Good morning. Hi, Manan. Hey. Good morning. Zach, in your comments on the investment spend, just now, you didn't mention AI. Is there any AI-related investment spend in there? And I guess the broader question there is, given that there's a lot going on this year with the acquisitions, that's probably driving a lot of your investment spend. Would you say that 2026 is a high point for investment spend that you plan to make? Zachary Wasserman: Thanks, Manan. Great questions both. And to answer the second one first, the answer is no. Investments are not a high point here. In fact, investing into the business is the flywheel of value creation that we just talked about. We will always want to grow investments at a fast clip and just think about the model going on for a second. Look back at the last six years. Revenue growth CAGR 10%, investment growth CAGR just about 20%, earnings growth in the teens. And so that model is a sustainable long-term model and we will keep driving it. And it's powered by, you know, not only earnings growth, but also disciplined reengineering of our cost base, something on the order of 1% per year. And so that's the model we expect to sustain perpetuity, and that's what's driving our competitive success. You know, if you just move to AI, absolutely there's significant investment happening in AI. I wouldn't characterize the nature of the driver of our investment growth as because of AI certainly, is growing along with those other investments as well. And we're seeing use cases across the organization really exponentially increase at this point. Driving cost savings, driving productivity, driving a better customer experience in lots of different ways, and of course more efficient technology engineering. Stephen Steinour: And then on what Zach referenced, digital and technology, the AI was included in that. Operator: Thank you. Our next question is coming from Steven Truback from Wolfe Research. Your line is now live. Eric: Hey, this is actually Eric. Hey. Derek: Derek, this is Derek. Thanks for taking the question. Our first question we had was on credit guidance. And it looks like, like, the year-on-year increase, like, our assumption is a lot of that is, like, kind of the seasoning of the loans you've put on the last year. But just curious if that's right. Just sort of what would cause you to fall on like one end of the guidance range or the other. Eric: Derek, you're yeah. I think you're talking a little light too. You have you repeat it? I think you referenced seasoning as the reason for the guide. Derek: Yes, I'm sorry. Yes, that's right. Just Eric: Yeah. That's that was the case, let me just say that yes, there's a little bit of that in there. But I mean, the reality is the performance this year was just exceptional. And as you look back over the history, we've been trending between that 25 to 35 basis points range for some time. And that's really the basis of our guide. And as Zach said in his prepared remarks that we would be really in the lower end of that range. And so that's really the expectation for 26. Derek: Sure. That's Eric: And then just a follow-up question on the deposit beta. You mentioned the 40% beta in the last two of the quarter. Just curious as we're thinking about two more rate cuts, if that's also the right level to be thinking about with incremental cuts on the way down? Thank you. Zachary Wasserman: Yeah. Yeah. That's also a terrific question. It's an area of a lot of focus as you know. And, you know, our expectation is to continue to get a solid down beta, something in the high 30s to 40%, aligned with the guidance we've given. You know, I'll tell you that, you know, beta in and of itself is not our objective function. Our objective function is core funding loan growth really powering the ability to continue to drive peer-leading both loan growth and revenue growth with a great marginal return on capital. And that model is working exceptionally well, and you see no. It's, of course, a competitive environment, but you know, the ability of the teams to execute on both volume growth and disciplined pricing continues to be very strong. Operator: Thank you. Our next question is coming from Chris McGratty from KBW. Your line is now live. Chris McGratty: Great. Good morning. Hey, Zach. Going back to the tech conversation for a second, this quarter, a lot of focus you know, tech wallet, growth rate, percent of revenues. Any I heard you on the, you know, of the three things that you're really investing in. But do you have dollars around what you're putting into tech and the rate of growth? Zachary Wasserman: Yes. Great question, Ken. We're smiling here because Chris, I'm sorry. Because we're our expectation is in some of the conferences later this year later this quarter, truly double click into the investments just to share with you more guys on it. So I won't steal that thunder and give you a number today, but certainly, it's a powerful growth, and we've seen you know, in our view, we're investing in technology in exactly the right places. It's all about customer-facing capabilities, driving both our value-added services, but also acquisition, digital marketing, you know, the question that we just got a second ago in terms of beta, you know, the amount of MarTech capability that we've built over the last several years is really what's enabling us to achieve these dual results of great deposit volume and pricing. So, you know, those are the kind of things that we put our in the technology investments against. I'll come back to you with more details here in short order as we go to these conferences. Chris McGratty: Understood. Yep. We'll wait for that. And then on kind of the balance sheet, a lot of times, you do acquisitions companies. Have certain portfolios that know, maybe don't fit strategically. As you kind of evaluate both portfolios, is there any tweaking that you presume, might happen in the next, you know, quarters as you get to another company a little bit better? Stephen Steinour: Chris, as we looked at both partnerships and combined with the that would do for the portfolios, like it on the whole. And there's not, say, an exit portfolio. There's a little more commercial real estate construction than we would prefer, and we'll manage that in due course. Nothing special. With that. And we've got some great growth areas that we're looking for that will offset anything we end up doing on the construction side. Operator: Our next question is coming from Brian Foran from Truist. Brian Foran: Hey, I'm going to apologize in advance. I'm still on the struggle bus with the guidance. So on expenses, I guess the way I'm trying to think about it is, if I understand the math right, you plan on reporting something like $6.5 billion of expenses this year, maybe $6.46 billion to $6.5 if I take the guide literally. And then as I think about the exit from the year, pushing that up would be the twelfth month of cadence. Pushing that down would be the cost saves. But then maybe pushing that back up is how much of the cost saves are reinvested over the course of the year? So is there any way to relate because people have really different takeaways. Some people are like, gonna exit the year with, $6.6 billion. Some people are we're gonna exit the year at $6.2 billion. Like, is there any way to talk to exit run rate of dollars of annualized expenses for the whole thing pro forma? Zachary Wasserman: I don't have that right in front of me to be honest with you, Brian. My guide that you would see like, I think we're gonna on a full year, see an efficiency ratio of around 55%. And we'll continue to see that improve as we go into '27. The growth rate of expenses relative to revenue should be very attractive as we get through Q4. And also kind of goes back to that question we talked before. Are we on track for earnings power in 2027? And the answer is yes. Brian Foran: Okay. Maybe I have to try the same question on loan growth because I'm tying myself in the same set of knots. Like, we get to the back half of the year, you know, everything's integrated. We're not talking about the year over year. We're talking about quarter over quarter annualized. So Veritex and Cadence aren't in there. Like I don't know if the Cadence number for loans is just where they are today or some assumption in it. But, like, you kinda put this all together. Would you expect to be like, still at 9% annualized loan growth exiting the year like where you are today before the acquisitions? Would you expect it to be slower as you do the integrations, faster as you recognize revenue synergies like any any kind of you know, again, I understand the difficulty of doing a guide on what you're gonna report when things are partial year impacts. But once we get through that, any way to talk to like what you expect the core loan growth rate to look like in the back half of 'twenty-six? Again, linked quarter annualized, not year over year. Zachary Wasserman: Yeah. Yeah. Good question for sure. Look, the way I think about it is our underlying loan momentum has been in the 8% to 9% range in 2025. As we thought about Huntington standalone in 2026, our expectation was around the same amount. And in our long-range plan when I say long-range plan, I typically mean so the next few years after that three years, was of a similar growth rate. You know, one of the strategic themes and rationales for us entering the partnership with Cadence and also with Veritex was that they would expose Huntington to even faster organic growth opportunities over the course of time and create new to invest and build the business from there as well. And so that 8% to 9% to me is a minimum. We would expect to see revenue synergies, growth synergies lift that particularly in the near term. Of course, not giving 27 guidance this morning, but I think that kind of fundamental growth power is at or better as we get into the latter part of '26 and beyond. Operator: Thank you. Our next question is a follow-up from the line of Ebrahim Poonawala from Bank of America. Your line is now live. Vikram: Hello? Stephen Steinour: Hello? Hello? Vikram: Hey. Hey, Graham. This is Vikram. Hey, Steve. Just a big picture question. Beyond all the guidance-related questions. It feels like there's a lot going on at the bank. In terms of banker hiring, a couple of deal integrations. As we look forward, just talk to us in terms of how you feel about just the integration of all this over the next six to twelve months. And I think there's an expectation that Huntington could still be on the lookout for additional deals, how should shareholders think about the potential for more M&A over the next maybe six months? Stephen Steinour: Ebrahim, thank you for the question. We sort of thought that one would come even a little earlier. Initially. But we let's start with we've got two partners. And they are performing exceptionally well with us. The teams are doing great work together. Brant, Dan Rollins, Malcolm Holland, and their teams and our team have come together in a very fundamentally sound and strong fashion. We're off to a great start. We've just completed we are completing the Veritex conversion as we speak. Started over the weekend. We will close with Cadence in two weeks. As you heard from Brant, the org management and personnel decisions are made and communicated. We're moving very quickly. With that. At the same time, the core of the company is performing well, and that's our primary focus, drive the core results. So we're completing these integrations. They don't end at a conversion, but we're completing these conversions over the course of this year, maybe this year a little bit more in terms of culture. But rapidly so we can get at the revenue opportunities that we've talked about. And we've used this term springboard on purpose. We think we have great growth potential in these markets. They're much better on average than the markets we've been operating in. And Texas is very unique, and we come together with a number five share. So we've never been in these markets or markets like these before. So very optimistic, we're very focused on driving organic growth and executing these integrations extraordinarily well. And the partnerships are facilitating that and we're aligned at creating shareholder value. As to other M&A, maybe someday, we've been clear. I think it was the Goldman conference. We're not gonna do an MOE. We're not gonna go to auctions. They have to be strategic in nature where they're adding value and revenue growth. For us. And they have to meet financial and risk metrics. And, you know, if someone approaches us with something of that nature, then we would take a look at it. But we're very focused on driving the organic growth of the business. And that's priority one, two, and three for us. We like the position we're coming into '26 with. And the momentum we have, and we're ecstatic about the quality of the partners. These are two really good banks, great people, coming into Huntington. I think we've got a terrific back half of this decade. Just with these combinations. Vikram: Got it. And while I have you, maybe, Zach, just clarifying the 55% efficiency ratio you believe for full year 2020? Zachary Wasserman: Your voice cut out a little bit there, maybe at the end. I think you said am I confident we'll hit 55% efficiency ratio? Is that right? Vikram: Yep. Yep. 55 for '26. Yeah. Zachary Wasserman: Yep. Very, very confident. Operator: Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments. Stephen Steinour: Thank you all for joining us today. We didn't mean to confuse you and I hope we've sorted some of that out in the discussion. We're performing very well. We're coming off an extraordinary year. We've got a lot of momentum. And very clear objectives as we move into '26. We've never been better positioned for the future and we're excited about that. And our 20,000 colleagues and soon to be 25,000 are gonna do everything we can to create shareholder value and build the franchise for years and years to come. We look forward to welcoming these 5,000 new colleagues coming to us from Cadence in the next couple of weeks. Thanks for your interest. We'll be back to you mid-quarter for more details on the models, and appreciate again your support. Have a great day. Operator: Thank you. That does conclude today's teleconference and webcast. You may now disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Operator: Good morning, and thank you for standing by. Welcome to Abbott Laboratories' Fourth Quarter 2025 Earnings Conference Call. All participants will be able to listen only until the question and answer portion of this call. During the question and answer session, you will be able to ask your question by pressing the star one one keys on your touch tone phone. This call is being recorded by Abbott Laboratories. With the exception of any participants' questions asked during the question and answer session, the entire call including the question and answer session, is material copyrighted by Abbott Laboratories. It cannot be recorded or rebroadcast without Abbott Laboratories' express written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations. Good morning, and thank you for joining us. Mike Comilla: With me today are Robert Ford, Chairman and Chief Executive Officer, and Philip Boudreau, Executive Vice President, Finance and Chief Financial Officer. Robert and Philip will provide opening remarks. Following their comments, we will take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected results for 2026. Abbott Laboratories cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott Laboratories' operations are discussed in item one a Risk Factors, to our annual report on Form 10-Ks for the year ended 12/31/2024. Abbott Laboratories undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott Laboratories' ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott Laboratories has not provided the related GAAP financial measures on a forward-looking basis for the non-GAAP financial measures for which it is providing guidance because the company is unable to predict with reasonable certainty and without unreasonable effort the timing and impact of certain items, which could significantly impact Abbott Laboratories' results in accordance with GAAP. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Mike. Good morning, everyone, and thank you for joining us. Before discussing our fourth quarter results, I want to take a moment to reflect on 2025, a year that demonstrated Abbott Laboratories' leadership and innovation, disciplined execution, and strategic actions taken to position the company for sustainable long-term growth. Innovation continues to be the foundation of our success. In 2025, we achieved several important milestones that strengthen our position for the future, including regulatory approvals for our Volt and Tactiflex Duo PFA products, a new indication for Navitor TAVR valve, CMS national coverage for Triclip and CardioMEMS, completing enrollment in our pivotal trial to bring a new LAA device to market, filing for FDA approval for our dual glucose ketone sensor, initiating the pivotal trial of our coronary IVL device, starting the launch sequence in EPD to bring biosimilars to emerging markets, and recently starting the launch sequence in nutrition to bring new products to market that meet evolving consumer preferences. 2025 was also a year of disciplined execution. We delivered top-tier margin expansion and achieved our original target of double-digit earnings growth in earnings per share despite the implementation of new tariffs and heightened market challenges in China. Finally, in 2025, we made important strategic moves to shape Abbott Laboratories' future. Our announced acquisition of Exact Sciences will allow Abbott Laboratories to enter and lead in the fast-growing cancer diagnostics market and add a new high-growth business with an attractive pipeline to the Abbott Laboratories portfolio. We expect 2026 to be another year powered by innovation, operational excellence, and strategic execution. As we announced this morning, we forecast the midpoint of our 2026 organic sales growth range to be 7% and the midpoint of our adjusted earnings per share range to reflect 10% growth. I'll now summarize the fourth quarter results in more detail. I'll start with nutrition, where sales declined in the quarter. Abbott Laboratories has been in the nutrition business for more than sixty years. With that history comes experience, not just in times of growth, but in times that require navigating challenges. As I mentioned last quarter, the US pediatric business is seeing an impact from market share loss partly due to the loss of a large WIC contract last year. But our results this quarter underscore a broader challenge, which is the need to reignite volume growth, a challenge many consumer goods businesses face today. Over the last several years, we've seen manufacturing costs in nutrition rise, in part due to a post-pandemic driven surge in commodity costs that remains in our cost base today. We've increased prices to help mitigate the impact of higher manufacturing costs, but those price increases in the current economic environment have become a factor in constraining volume growth. Many consumer goods businesses are facing this dynamic. Higher manufacturing costs led to higher prices, which in turn are suppressing demand as consumers become increasingly more price-sensitive. This path is not sustainable long-term, so we began to make changes in the fourth quarter. Our goal is to transition our business back to one with a more balanced growth profile, with volume growth playing a greater role going forward. In the fourth quarter, we began implementing price and promotion initiatives to help start the process of reigniting volume growth. To further drive volume growth, we are increasing our focus on innovation, which is an area that was deprioritized the last few years given the necessary heavy focus on production and supply chain management in this business. Following the launch of two new versions of Ensure late last year, we expect to launch at least eight new products over the course of the next twelve months. We expect performance in nutrition to remain challenged in the first half of the year with a return to growth in the second half. While this transition back to a more sustainable volume-driven business has consequences on our near-term results, these are the right steps to take to better position the business for longer-term success. Moving to diagnostics, sales increased 3.5% due to the anticipated year-over-year decline in COVID testing sales. Core Lab Diagnostics grew 3.5%, achieving a third consecutive quarter of accelerating growth and building steady momentum as we enter 2026. For the full year, excluding China, growth in Core Lab Diagnostics was 7%, reflecting durable demand in markets around the world. In point-of-care diagnostics, sales grew 7% in the quarter driven by adoption of our high-sensitivity troponin test, which allows for earlier and more accurate detection of heart attacks. Turning to EPD, where sales increased 7% in the quarter. Growth was well-balanced across the markets and therapeutic areas that we participate in, including double-digit growth in India and several countries across Latin America and The Middle East. By focusing on high-demand therapies and faster-growing markets, EPD delivered its fifth consecutive year of sales growth exceeding 7%. And I'll wrap up with medical devices. Sales grew 10.5%. Philip Boudreau: In diabetes care, sales of continuous glucose monitors grew 12% in the fourth quarter and 17% for the year. With sales in 2025 exceeding $7.5 billion, this marks the third consecutive year that our CGM sales have grown by more than a billion dollars. Our success in CGM continues to be driven by strong underlying market fundamentals, a leading position in cost and scale, and an unwavering commitment to market-leading innovation. These factors have led to a continued increase in adoption across all of the various use groups. Robert Ford: In electrophysiology, sales grew double digits in The US and internationally. In December, we announced FDA approval of our BOLT PFA catheter, which represents our first PFA product offering in The United States. And earlier this week, we announced that we obtained CE Mark for our new Tactiflex Duo ablation catheter, which offers both RF and PFA energy to treat patients battling AFib. In structural heart, growth was driven by double-digit growth in Navitor, double-digit growth in Triclip, and double-digit growth in MitraClip. In the coming weeks, we'll achieve an important milestone completing enrollment in our CATALYST trial. This trial is evaluating the performance of the amulet left atrial appendage device compared to oral anticoagulants in patients with AFib. This trial is designed to generate the evidence to demonstrate the clinical benefits of the amulet, which could lead to broader adoption and expansion of the addressable market. In heart failure, growth of 12% was driven by growth across our market-leading portfolio of ventricular assist devices, which offer treatment for chronic and temporary conditions, and growth in CardioMEMS, our implantable sensor used for the early detection of heart failure. Our investment strategy in medical devices is based upon a true two-pronged approach. Invest to sustain strong performance in high-growth segments like diabetes, structural heart, electrophysiology, and heart failure. And we invest to increase the growth outlook in more foundational segments like rhythm management and vascular. While the investments in traditionally high-growth segments tend to get more attention, the investments we've made in our foundational businesses are generating very impressive returns. In Rhythm Management, growth of 12% was led by continued strong uptake of our leadless pacemaker, Aveir. For the full year, growth of 10% in Rhythm Management represents the third consecutive year of significantly outperforming the market. With Aveir and the investments we're making in conduction system pacing and other novel technologies, we see the $10 billion rhythm management market as a great opportunity to capture market share and drive sustainable growth for years to come. In vascular, growth of 6.5% was led by double-digit growth in vessel closure products and growth from ESPRIT, our below-the-knee resorbable stent. For the full year, vascular sales grew 5%, making this the second consecutive year vascular has delivered mid-single-digit growth. With the expected approval of our coronary IVL device next year, we expect growth in vascular to follow a similar pattern of acceleration that we've seen in rhythm management. And lastly, in neuromodulation, growth of 5.5% was led by strong international growth. We turned our rechargeable spinal cord stimulation device. So in summary, despite facing some challenges in '25, we achieved our original target of double-digit earnings per share growth. Our new product pipeline continues to be highly productive. And combined with the strategic steps we took to shape the company for the future, we're well-positioned for accelerating growth in 2026. I'll turn over the call to Philip. Thanks, Robert. Philip Boudreau: As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our fourth quarter results, sales increased 3.8% when excluding COVID testing sales. Adjusted earnings per share of $1.50 reflects growth of 12% compared to the prior year. Foreign exchange had a favorable year-over-year impact of 1.4% on fourth quarter sales, which was in line with our expectations at the time of our earnings call in October. Regarding other aspects of the P&L, the adjusted gross margin profile was 57.1% of sales, which despite the impact of tariffs, increased 20 basis points compared to the prior year. Adjusted R&D was 6.2% of sales and adjusted SG&A was 25.1% of sales. Adjusted operating margin was 25.8% of sales, which reflects an increase of 150 basis points compared to the prior year. Turning to our outlook for 2026, today, we issued guidance for full-year adjusted earnings per share of $5.55 to $5.80. This reflects 10% growth at the midpoint of the range and contemplates an adjusted earnings per share forecast of $1.12 to $1.18 for the first quarter. For the year, we forecast organic sales growth to be in the range of 6.5% to 7.5%. Based on current rates, we expect exchange to have a favorable impact of around 1% on full-year reported sales, which includes an expected favorable impact of around 3% on first-quarter reported sales. And we forecast our adjusted tax rate to be in the range of 15 to 16%. With that, we'll now open the call for questions. Operator: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone. You will then hear an automated advising you that your hand is raised. To withdraw your question, please press 11 again. For optimal sound quality, we kindly ask that you please use your handset instead of your speakerphone when asking your question. Our first question will come from Larry Biegelsen from Wells Fargo. Your line is open. Larry Biegelsen: Good morning. Thanks for taking the question. So, Robert, on the last call, you seemed comfortable with consensus revenue growth, but you're guiding a little bit lower today. I assume that's related to nutrition. Can you talk about what's changed since the last call? And how you're thinking about the year playing out from a cadence standpoint? I assume, you know, you would expect growth to accelerate through the year given your comments on nutrition and some of the launches. I'll leave it at that. Thanks for taking the question. Robert Ford: Thanks, Larry. I think if I remember, you're the one who asked that question back in October. And you know, when I answered that question, I think consensus was 7.5% top line. EPS was 10%. So today, we guided the midpoint at 7% on the top line, 10% on the bottom. So the midpoint here is half a percent lower than what was consensus. But other than that, nothing's really changed. The EPS is in line with consensus, expecting healthy margin expansions. I'm sure we're going to talk a lot about the pipeline, which is either on target or ahead of schedule in certain products. The balance sheet's in great shape. I feel good about us closing Exact Sciences. So the half-point change on the top line is, as you pointed out, really the change in the near-term outlook, I'd say, of our nutrition business. You saw in our quarter, in our Q4, we had a negative quarter. And as I said in my comments, you know, there's a component of this business. It's a healthcare-driven product portfolio, but there's a component of it, a dynamic of it that is very much aligned with consumer packaged goods. And I'd say the challenges that CPG businesses have been facing are pretty well known following the pandemic. Pretty significant surge in costs between 2022 and '24 to offset that. I think we all went ahead and tried to mitigate it with price increases that obviously drove the top line, but more importantly, I would say, improved or didn't allow the economics and the profitability of the businesses to deteriorate. If you look at our profitability in that business, 2024, 2025, where it was back in 2022, it had that impact. But the higher prices have resulted now in what I see as kind of suppressing demand and lowering the volume growth. And the pressure in the volume growth accelerated, I'd say, as we moved throughout Q4 and consumers became increasingly more price-sensitive. So as I said in my comment, it's not a sustainable path. You'll get down into the spiral if you keep increasing prices. You'll keep on driving volume down. So you know, we could have gone a couple more quarters, maybe nine more months doing this, but it would not be sustainable. And at some point, something fundamentally has to change here. And I just felt that the longer we took to make this change, the more painful it would be. If I look at the strength of the portfolio right now and the growth, all the growth prospects we have, the ability to add a whole new growth vertical, I just thought that the timing was right to do this and do this as quickly as possible to get through it. So we began implementing price promotion initiatives that are going to help invigorate growth. I think early signs right now, Larry, are encouraging. Obviously, we're going to have to keep monitoring that. And then we're also launching a lot of new products to be able to kind of support that volume growth. We haven't had to reallocate R&D resources to be able to do that. You know, this is a business that operates around 2, 2.2% of R&D, so we just reallocated within that budget to focus on new product development. So we'll have a couple of quarters here where growth in nutrition is going to be challenged. And then in the second half, we'll return to positive growth. And I got confidence in the team that's in place today that we can transition back to more of a volume-driven growth business. If you look at what we did back in 2022 when we had supply disruption, it took us about nine to twelve months to get our share back. I don't think it's going to take that long, so I think it's about a six-month process here of reshifting that. And that's really what's creating, I would say, or part of it, what's creating a little bit of this first half, second half dynamic in our growth forecast. But outside of that, Larry, where we were in October, nothing has really changed. In fact, I'd say a significant majority of the company here is either maintaining high single-digit top-line growth or low teens growth or they're accelerating their growth versus 2025, whether it's our cardiovascular franchise or diabetes products, EPD, our pharma business, we're going to be lapping the core diagnostic headwinds that we faced last year. If you remember, we had about a billion dollars of headwind that we faced last year in our diagnostic business, whether it was COVID and the China challenges. That's mostly going to be behind us. We're going to be adding another high-growth vertical with Exact Sciences. So I think there's a lot to like here. I think there's a lot of growth here. And while we know we've got some work to do in nutrition, I can guarantee you that we're not distracted by that from all the great opportunities that we have here. So like I said, I think we've got a good setup for 2026. A lot of accelerating growth as we progress through the year. Larry Biegelsen: Alright. Thank you very much. Robert Ford: Thank you. Operator: Our next question will come from David Roman from Goldman Sachs. Your line is open. David Roman: Thank you. Good morning, everyone. I did want to start, Robert, on the pipeline and then maybe just ask a follow-up question, if we have time, on the guidance and the outlook. You did talk about some of the approvals in the EP business. And most specifically, can you help us sort of frame the Abbott Laboratories portfolio in EP maybe looking back six months, where we are today, where you are then six to twelve months from now, and contextualize kind of the portfolio relative to competition and where you see the biggest opportunities to accelerate growth there with Volt, Tactiflex Duo, Tactiflex VT, I think even NextGen Agilis, InsightX, etcetera. Robert Ford: Sure. I mean, I think that I do have to put that into context. I mean, if you go back three years, David, there was a lot of concern about our franchise, you know, that was growing double digits that was going to, you know, be flat or even negative because we didn't have a PFA catheter. You know, we developed a strategy. The team put together a strategy. We presented it to our board three years ago in terms of what we were going to do. And over the last couple of years, even without PFA products, we've been able to actually sustain our double-digit growth rates, you know, twenty-four and twenty-twenty-five without a PFA catheter. So, the strategy that you're now referencing about our PFA products, that's just part of our strategy that we presented, you know, three years ago. And laid out here. So we began launching the PFA product line in a much larger installed base of capital and mapping systems. The launch of Volt in Europe has gone very well. I'd say when we talked about developing Volt, we said let's look at where the shortcomings of our first-generation products are and can we build those into Volt. And, you know, the feedback that I can see from the European market and, quite frankly, through the last couple of weeks as we've begun our limited market release here in The US is two things keep jumping out pretty continuously. One, the elegance, the ease, and the smoothness and the predictability of the mapping integrated with the catheter, the visualization, all of that that we spent a lot of time putting together, I continue to hear very positive feedback on that. And then, you know, the ability to potentially do these procedures with sedation versus general anesthesia, that is a recurring theme that I keep on hearing here. So, I'd say the Volt launch has gone very much aligned to what we expected as we were putting the program together. This year, we'll have the launch of Volt here in The US and Tactiflex Duo internationally. I think it comes down to we always wanted to make sure that we had a toolbox approach here for the physicians so they can have choice and they can have greater flexibility about how they use these products. I'm sure that there'll be cases and types of patients and patient profiles that will lend itself more to a balloon and bask type design, and there are going to be types of patients in situations where Tactiflex Duo with its dual energy source will be preferred. And, ultimately, it's going to be up to the physician to make those decisions. But I like the fact that, you know, the team, as they put the strategy together, that we would have both these products. I think you raised this point very well, which is I don't think that there is a company right now that's better positioned in terms of completeness of the portfolio than what we have. You know, whether it's technology or the scale and the infrastructure, starting with, you know, the capital placements that we've got. The incredibly competent clinical specialists that we have out in the field that have shown their value to our customers right now. We've got both RF and PFA products. We've got all the elements, whether it's catheters, patches, etcetera. Introducer sheets, all of that you reference. And on top of that, we've got an LAA device, which is I would say is becoming pretty clear that if you want to be a leader in this space, you can't just look at having a PFA catheter. You've got to have the full portfolio including this device. Right now, it seems like 25% of LAA procedures are done concomitantly. So I think if you put all of that together, the portfolio that we've assembled combined with the resilience of what this team has done and how they've executed, I've got high expectations for this business this year. The team knows that. I expect that we should grow at least in line with the market, David, which I expect I think it seems like the forecast here is mid to high teens. So I think we're in a really good position and I'm excited to see the second part of the strategy that we put together three years ago. And we're really excited to kind of, you know, put that second part of that phase into action now. David Roman: Very helpful. Maybe just a follow-up on the guidance. I think we all know that you don't solve your guidance to meet short-term consensus. And you are committed to achieving your commitments. But as you've thought about putting together the outlook for 2026, considering some of the different variables that you faced over the past couple of quarters, like how did you think about risk adjusting the outlook? And maybe just help us think about the considerations in the guidance and maybe just your philosophy as you kind of put the outlook together here. Robert Ford: Well, I mean, listen. I think if you look at our growth for 2026, I mean, we've always targeted high single digits and double-digit, high single-digit top line, double-digit bottom line. That's our investment identity, and we've kind of followed through with that. If you look at our 2026, I think the way you need to kind of look at it is you've got a very big portion of the company that is going to, you know, that we're sustaining that growth. In some cases, it'll be accelerating, but you know, a large portion of the company sustaining the high single-digit growth, whether it's in cardiovascular, whether in diabetes. We've got a bunch of new products launching to be able to support, you know, those kind of growth profiles in the business. EPD, supporting, you know, with the biosimilar launch, you know, that high single-digit kind of growth rate. So you've got a lot of large portions and even some geographies that, you know, we can sustain that growth and we feel that we're supporting it with product launches and investment to sustain what I consider a pretty differentiated growth rate. Then you've got the second bucket, which is, I'd say, an acceleration in our diagnostics. And all that really is is we've been doing very well taking share in our Core Lab business across the world. And what we had a challenge with last year is with, you know, COVID coming down, 2024, I think it was, like, $750 million coming down to $250 million. So you had half a billion dollars headwind there, and then you had another, you know, $400 million, $500 million headwind in China VBP. Right? Our forecast for COVID is, you know, around that same number, around $200 million. So I'm not expecting, you know, any significant growth or decline. And, you know, a lot of the VBP, you know, they come in waves. The vast majority of our sales in China have gone through the VBP in 2025. So we really felt that impact in 2025. There's going to be more VBPs in China, but the shares that we have in those waves are very, very small compared to what we have. So you've got this whole lapping of our diagnostic business. And as long as we keep on doing what we're doing in the United States, Europe, in Latin America, and other parts in Asia, which we have been doing, you're going to see a nice acceleration in our diagnostic business. And you started to see that throughout the year as the VBP impact started to dissipate a little bit as the year progressed. You've got then, obviously, you know, as I spoke quite at length here about, you know, this transition with nutrition, you've got, you know, probably one or two quarters here where growth is going to be challenged. But I am confident that what we're going to be able to do here is reignite volume growth, and you'll see that business get back to growth. So those elements there, Dave, really look at it and say, okay, you've got continued momentum in a large portion of the business. You've got some lapping that's going to be happening. And then we've got this transition, which I consider to be pretty short-term here, but a couple of quarters, to be able to get to this guide on the nutrition side. And then I'm sure we'll talk about Exact Sciences, but that's another factor here to be able to add on, you know, $3 billion plus business growing 15% a lot of growth opportunities for us. So that's kind of how we looked at it, at least from a top line. And then having that flow through down to the bottom line, making investments in the areas that we need to, and nice gross margin and op margin profile expansion too. David Roman: Great. Thanks so much. Appreciate all the perspective. Robert Ford: Thank you. Operator: Our next question will come from Robbie Marcus from JPMorgan. Your line is open. Robbie Marcus: Great. Thanks for taking the questions. Two for me. Robert, last week, when we were talking, you said you expect CGM to continue to track higher at about $1 billion a year. That would put 2026 somewhere in the low to mid-teens. Is that the right way to think about CGM growth next year? And maybe if you just want to give your updated thoughts on market growth and Abbott Laboratories' position there. Then I have a follow-up. Thanks a lot. Robert Ford: Sure. But you said next year, you mean 2026. Right? Robbie Marcus: Yes. Thank you. Robert Ford: Got it. Yeah. Yeah. I mean, I think yeah. There's all this debate that I read about that the market's slowing, and I get if you're just looking at percentages and that's how you base yourself off it, then I guess if it's that myopic, then I think okay. I understand the conclusion. But I don't consider growing a billion dollars every single year and doing it four years in a row to be slowing down here, Robbie. I think the math will work out to what you just kind of highlighted there. In the kind of low teens. But I think there's still a lot of opportunity for penetration in this both from a market perspective, but then also from our opportunity, you know, our ability to drive market share in and market expansion. I think that if you look at across all three, all three patient groups, whether it's the intensive insulin user, you know, the basal insulin user, and the non-insulin user, all of those areas still there's so much penetration to be able to have here. And you can see across the world, not just in The United States but across the world, you know, a lot of movement whether it's patient groups, healthcare systems that are, you know, looking to expand the use and the adoption of the technology into all these patient segments. You know, The US gets a lot of attention and it's an important market and, you know, there's a lot of great opportunities for us there in terms of the non-insulin user reimbursement opportunity. I continue to see nice progress in this process. Seems to be a lot of support to do this. And the data that we've shown, like we've published three studies already that show that this patient segment also benefits with lower A1c, greater time and range, all the things that have driven kind of reimbursement in the other segments. I think that this is a very strong opportunity for us here in The US. And we'll see how it plays out. I think we'll see some language in the first half and then how it all plays out with comment periods. You know this Robbie, comment periods. There's all of this. So I'm not baking that into my guidance. But, you know, I can tell you we will be 150% ready to execute whether it's having manufacturing capacity and having scale and the position in the primary care side, which is where that'll probably play out more. We'll be ready. So that provides an opportunity to, you know, to outperform, you know, that consensus forecast. I think on the intensive insulin user side, still think there's penetration to be had and adoption to be had, especially in international markets. I think it's only about 50% penetrated. So I think there's still a lot of opportunity to do the work that we're doing there. Obviously, scale and cost matter in the international markets, and I think we've got that position set. And then, you know, as you look at what I think is more specific to us, the opportunity to bring in a very product to look at market share, shift in a segment that I'd say we're probably a little bit underrepresented from a market share perspective, which is on the pumper side with the launch of our GKS sensor. I think that's going to provide us a great opportunity. I'm not going to try and pinpoint the exact quarter here, Robbie. When we get approval, we'll issue the press release, and we'll be out. But we've been working hard already concomitantly with the regulatory process, you know, with KOLs, with, you know, with physician groups, with payers, and I think there was an article that came out in The Lancet in January talking about the beginning of this year talking about, you know, the importance of measuring continuously ketones as DKA is still a major care gap here for people with diabetes. I think you've got a big opportunity here with this product for market share conversion. I think one of the surprising things for me in this as we started to really double click on these patient segments is, you know, we talked about the SGLT2 population. We did some analysis in The US. You got about 6 million SGLT2 users in The US. And if you cross-reference their usage of CGM through, you know, through all the databases, only about a million of those six are on CGMs. So I think there's going to be an opportunity here also to kind of create market expansion with this product. So not just share capture, but also market expansion. So this market is still very robust. It's becoming larger, so I get the large law of big numbers kind of lowers those percentages, but you just look at it from a penetration perspective, Robbie, there's still so much to do in all these segments and different geographies that, you know, we're still very excited and making big investments whether it's in sales and marketing, clinical, R&D, and manufacturing, because we still think that we're this is still I'm not going to say it's the first or second inning, but we're far away from being from the seventh inning on this one. So I think there's still a lot of opportunity here. We're in a good position. Robbie Marcus: Great. Maybe just a quick follow-up. It's great to see you're still able to do double-digit EPS growth in 2026. I would imagine that's coming through the top line and margin expansion. Should we think about the magnitude of margin expansion and the drivers of it? Philip Boudreau: Thank you. Yes. I'll let Bill take that. Philip Boudreau: Yeah. Thanks, Robbie. You know, I couldn't be more proud of what the team accomplished in 2025 as Robert outlined. You know, overcoming uncertainties, volatilities, and whatnot still drive margin expansion. And that commitment to the execution and excellence there maintains in 2026. Expect to do more of the same, focus on the things that are strategically aligned and adhere to where we continue to look at a 50 to 70 basis point improvement in operating margins every year, and that's kind of what we've got built into this and fully expect we'll do that through both gross margin expansion as we've done, but continue to gain leverage in the P&L where appropriate. So that's kind of how we've constructed that double-digit earnings. Appreciate it. Thank you very much. Thank you. Operator: Next question will come from Vijay Kumar from Evercore ISI. Vijay Kumar: Hi, Robert. Good morning, and thanks for taking my question. My first one on maybe on the product side. Aveir, like you mentioned, another double-digit quarter. Just curious on where are we from a penetration standpoint, what innings are we in? And you know, how durable is this double-digit growth in a category that's, you know, a pacemaker, low single-digit growth category, and you guys are doing double digits? Robert Ford: Sure. Well, I made some comments about, you know, we look at this rhythm management $10 billion market as actually an opportunity to grow. So we have been making our investments. Aveir, obviously, is a big driver of that, but we're making investments in other areas of the portfolio to kind of be able to support our ability to take market share and grow at a differentiated rate here. To your question on penetration, listen, the global low voltage or pacing segment market is around $5 billion. Whatever, $4.8 to $5.2, depending on what you're looking at, but let's just call it $5 billion. I'd say Aveir is about 10% of that right now. So, you know, early innings here for us for sure. And as I said previously, when we began this process, I wasn't interested in just getting a flash in the pan sales growth for, like, a year or six quarters. So we really worked hard, and the team did an incredible job to really establish a new standard of care, and get physicians trained. It's a different type of implant. So what we're seeing here is really nice growth in places that, you know, a year, year and a half ago we began the training process and really seeing really strong penetration there. If you look at just single chamber, I think right now The U.S., single chamber pacing, which is about 15% of the total market, that's about 50% penetrated. So there's still a long opportunity here in The U.S. and quite frankly, globally too. So I think the team has done an incredible job here where we've launched new products. We'll continue to launch new products in this space, and we think that this is the next standard CRM is these devices that are communicating with each other, that can be implanted transfemorally and don't use leads. The clinical evidence in terms of what they're able to deliver is pretty impressive right now. So I think we've got a lot of investment here that will support this type of differentiated growth rate. Vijay Kumar: Yeah, that's helpful, Robert. And my follow-up on, or I guess the second question is on cap allocation. Any updated thoughts on Exact Sciences deal close timing, you know, dilution? I think you mentioned 20¢. You know? And when you think about that, your leverage levels, it's still, you know, post-deal, it'll still be pretty modest. You still have capacity. I'm curious when you think about M&A versus divestitures or spin-offs, you know, MedTech right now seems to be spin-off seems to be the flavor of the season. I'm curious how you're thinking about those decisions. Robert Ford: Well, you put a lot into that one there, Vijay. Let me see if I can unpack that. I think from a capital allocation perspective, you know, I've always been pretty consistent with our approach. I don't have a formula that x percent goes here, y percent goes there. We are committed to a growing dividend, and we did that again for 2026 when we announced our dividend back in December. So we're growing our dividend. But outside of that, you know, we'll allocate our capital in terms of what we believe is the best balance between short-term and long-term for our shareholders where we can create value. Regarding M&A, listen, my focus right now is integration, closing Exact Sciences integration. That's going to be my primary focus. I think post-close, our gross debt to EBITDA ratio will be around 2.7 times. So to your point, we still have plenty of capacity. But I think in the near term, I'd say focus on integrating Exact Sciences. And if there's opportunities for us to add, there'll probably be more tuck-in type size deals to take advantage of. Regarding the status right now of Exact Sciences, I think we're making great progress towards closing. They've submitted, we've submitted all of our required clearances over here. There's a shareholder vote on February 20. So right now, I'm not changing any assumption regarding timing of close or kind of EPS impact. And, you know, as we integrate and as we put the, you know, as we integrate the business, then we'll go updating it as we go along. But right now, there's no change in terms of timing and in terms of dilution. So I read your note last night, Vijay. I thought that you would have been asking a question about multicancer early detection and the opportunity that exists. I largely agree with your report. I think this is going to be another great opportunity for us. And it's one that as we looked at the deal, says, okay, greater reimbursement of this type of test will really make this a very, very large segment. I think the way I see this is, you know, the same way that we have our lipid panel test every year, the same way that we do a cardiometabolic panel or a white and red blood count panel every year. You know, after a certain age, I believe that if the product is right, performs right, and it's priced the right way, I just envision this being that type of test. So I think that if that becomes the case, I think your forecast is way under cold even on the upper side. Vijay Kumar: That's helpful comments, Robert. Thank you. Robert Ford: Thank you. Operator: Our next question will come from Danielle Antalffy from UBS. Your line is open. Danielle Antalffy: Hey, good morning, everyone. Thanks so much for taking the question. And Robert, just two questions for you on nutrition. Appreciate all that you're saying about the strategy there going forward. But I guess the first part of the question is, what gives you confidence that these are the right prices that you're landing at today to drive that volume increase? Like, did you guys do I appreciate it's global. So imagine it differs by market. And then the second question is now and tell me if I'm wrong here, but presumably nutrition has a different profitability profile and maybe talk about whether, how it changes your view about how this fits into the entire Abbott Laboratories portfolio. Thank you so much. Robert Ford: Sure. Regarding the pricing, so we did some pricing work just before Thanksgiving in time for, you know, what usually is a pretty busy kind of retail activity. And so we did different testing here in The United States. We did different testing internationally also. We got the results back on The US side pretty quickly. You get to see the impact pretty quickly. And like I said in the comments, I think the early signs are encouraging. But I also said, hey. We gotta keep monitoring this. You gotta keep monitoring it for the consumer. You gotta keep monitoring it for competitive activities. But I think right now, based on what we have, I think we've kind of called it right. And, you know, regarding, you know, kind of allocating expenses, listen. We don't have a cookie-cutter approach across all the businesses. You know, it always depends on, you know, momentum, opportunity, the balance of the short and the long term, and so we take a very kind of detailed view in terms of how we're allocating. Yeah. The profitability has improved in this business. I'd say it's probably from a profile perspective going to be in line with what it was in 2025. We've obviously got some adjustments in our spend level and learned how to spend a little bit better, and we did that also in Q4, shifting some of the focus from kind of, you know, marketing and brand to a little bit more kind of price and promotion. At least for these next six months. And that way, we're able to at least kind of maintain a kind of steady profile over here. Danielle Antalffy: Thank you. Robert Ford: Thank you. Operator: Our next question will come from Matt Taylor from Jefferies. Your line is open. Matt Taylor: Sorry. Good morning. Thanks for taking the question. I wanted to start with diagnostics and see if you could unpack the dynamics there a little bit more. You touched on the China headwinds, in VBP and mentioned some smaller programs or categories there. What's the outlook like for diagnostics in China? It does seem like the rest of the world's doing fairly well. But what do you foresee for China growth this year and next in diagnostics? Robert Ford: Well, specifically in diagnostics, like I said, I think we've gone through what I would consider the bulk of our VBP based on the different, you know, the strength and the market share we have and the different aspects. The way they're going about this is they're just looking at categories of assays and then kind of implementing it in the first two were the ones that we had, you know, over 40, 45 market share in those markets. So we kind of felt that pretty significantly. I think the next big area of VBP is going to be on your regular kind of core lab oncology testing, and, you know, we have very little market share over there. So listen. We put a new management team in place there. Put our most experienced commercial person that is driving that business. We've done a lot of work there between working with our distributors, segmenting the market, looking at our product portfolio, looking at different types of product offerings, you know, new product offering versus, you know, legacy product offering. So I think the teams have done a really good job there. And my expectation with that business going forward is, listen, I'm not expecting, you know, I'm not expecting big growth out of it. All I need for it is to be pretty stable. And it being stable, I get to have the other parts of the portfolio that are accelerating. Our US business is actually done better than what it's done in the past, so we're capturing market share over there. Our Latin America business is doing better than what it's done in the past, capturing share there. Our European business is continuing to grow and got a good position over there. So I'd say the outlook of that business is we will be, I'd say, single-digit growth this year versus kind of where we were in 2025. And if you remove China, again, this is a full-year view. If you remove China, then you're in those you're in that kind of 7 to 8% kind of range. So I don't like doing that, Matt, because, you know, China is part of our business. But you'll see an acceleration even with China just because it's a little bit more stable versus where it was last year. Matt Taylor: Great. Thanks. And maybe I could just ask a follow-up on diabetes. You talked about some optimism for the outlook for the market and specifically around the non-insulin type two coverage. We've seen the guidelines change, and so I definitely see a potential for that coverage to expand significantly. You mentioned you've seen some progress in the process. And I guess I was wondering how you think that could play out in the first half of the year, what forms the new coverage could take, or any other thoughts that you had on that? Robert Ford: I don't want to get ahead of myself. What I can tell you is, listen, there's definitely support. There's support from the ADA. There's support from other physician groups. Okay? And their support because the clinical data is backing that support up. Right? I mentioned that we've got three studies that we did with that patient segment and it shows this improved A1c and this better time and range. So I think the support is backed up by clinical evidence and you've got a US HHS and CMS that sees the value of this type of technology, sees the value of being proactive in managing your health even if you're not taking medications or you're not taking insulin, bringing this type of technology improves outcomes. So you have a receptive CMS. Let's call it like that. Like I said, I think you're going to see some sort of language, Matt, in the first half. Okay? But I know how these things go. We've gone through them so many different times at different parts of the product. Language will come out, then there'll be a ninety-day comment period. Then there'll be a sixty-day period to be able to evaluate it. And right now, could that be a different process? There could be a different process. It could be a much shorter comment period. It could be a much shorter implementation timeline. Because there is this support and desire to bring this to more people. But like I said, I'm not going to bake that in. I'm not going to bake that in just yet, but I am being prepared. That means the team is prepared. I mean, if it happened next week, I'd tell you they'd be prepared. So we're doing a lot of work there. I think the key aspect as you think about that expansion is that it's going to happen predominantly in primary care. So how well are you set up? How well is your sales force deployed? How well is your integration into the healthcare systems with Epic and other another. So that's going to be an important part. And outside of that, I think we should just be, think, very enthused I mean, very enthusiastic that this will happen. Whether it happens in the second quarter, the third quarter, for me, like, I'm thinking about this. This is going to be a huge opportunity for this market, not just in The US, but globally for years and years to come. So let's just get it right. Matt Taylor: Great. Thanks so much. Thank you. Operator: Thank you. Our next question will come from Travis Steed from BofA Securities. Your line is open. Travis Steed: Hey, thanks for taking the question. Maybe to spend some time talking about in MedTech kind of the macro procedure environment given some of the worries on APA subsidies. And then I'll just go ahead and my second question out. When you think about for total Abbott Laboratories and growth over 2026, we think about more Q1 first half being more in line with kind of the Q4 growth and then improve from there over the second half? Robert Ford: Yeah. So, yeah, I think that's probably I think that's probably good. I mean, think you know, sometimes these puts and takes, you know, it kind of just masks, you know, sometimes it feels like you're better than what you are because you're lapping something, you know, So I tend to look at it also on a two-year stack basis. So if you look at it at a two-year stack basis, it looks pretty, you know, there's some acceleration. In Q3 and Q4, but not to the extent, you know, without, you know, just on a one-year, one-year basis. But I think that's the right way to look at it. You know, obviously, we're always striving to do better, but I think that's a good it's a good starting point. What was your other question on med tech volumes? Yeah. Listen. I think I read some report that there were some concerns about med tech volumes in Q4. You know, we just reported our Q4. You're going to have a bunch of med tech companies that will report over the next couple of weeks. I would be extremely surprised if you hear that volumes were short in Q4. Our volumes were really good in Q4 across all of our categories. Even what is considered what we call, you know, more foundational or traditionally more slower growth kind of segment. So I think the evidence on our print and our guide is not suggesting that the med tech volumes are slowing, and I think there continues to be given the innovation that's happening in the space, given the clinical evidence that's being generated with that innovation, I still see this as a very attractive segment, not just for, you know, this year or next quarter, but for many, many years to come. Travis Steed: Great. Thanks a lot. Robert Ford: Yep. Operator: Thank you. Our next question will come from Joanne Wuensch from Citi. Your line is open. Good morning and thank you for taking the question. And I think I'm allowed to still say happy New Year. Two questions. I'll put them right Thank you. I'll put them right up front. EPD is sort of held up there in high single digits pretty consistently, but the macro landscape getting a little bit more complicated as we sit still here. I'd be curious if you see anything that we need to sort of be aware of over the next twelve, maybe twelve to eighteen months. And then my second question has to do with structural heart. Looks like you've multiple products, we'll call them multiple shots, and goal is keeping that growth rate going nicely. Anything you want to call out in particular or anything we should be looking at for the upcoming medical meetings? Thanks. Robert Ford: Sure. Regarding EPD, I mean, I think this team is incredibly resilient and I get that there's some concern about geopolitics going forward, but let's face it, Joanne. I mean, there's been macro challenges at least since I've been in this role for the last five years. And so yes. We gotta pay attention to them. Yes. We gotta navigate. But I'm going to rely heavily on a team that has shown that they can actually do that and do that in pretty difficult circumstances already. And continue to be able to drive the business in that, you know, seven, eight, 9% range here. So yeah, it's we gotta be mindful of it, but this is a team that on at least in these markets, have proved to be very resilient, have deep connections in the market, deep relationships, you know, clinical, distribution wise. So, and now that we're bringing our biosimilar portfolio into these markets, biosimilars are now the fastest growing generic kind segment. I feel good about this business. I think, you know, the idea of bringing this differentiated portfolio in a team that has done extremely well in navigating all of this. I think we've got, you know, also strong aspirations for this business. So, yeah, we'll keep an eye on out, but I don't think that, you know, it's something completely new for us or this business. We operate in 160 countries. We're truly a global company. So we will have to figure it out. So and then I think your question on structural heart, yeah, I mean, this is an area that we've invested heavily over the last couple of years. We've developed what I would consider best-in-class portfolio across all three valves. And I think we've got a lot of upcoming, you know, upcoming growth catalysts that will move its way through. I think we've got great new products with Navitor, Triclip, Amulet. Most of these on the early are, I believe, still in their early cycle. Yep. You guys always ask would ask me about, like, when will MitraClip grow or get back to growth. I just clearly say we did double-digit growth in MitraClip. I think that's a result of some of the guideline changes that we're seeing and kind of reigniting some of the growth here in The US. But you got a lot of we got a lot of things going on in this business. We had label expansion in Navitor and MitraClip. Got a next-generation repair technology coming out with both MitraClip and TriClip, fifth generation. I mentioned guideline changes to MitraClip and Triclip. That's having an impact. We just got approval or got approval for Triclip in Japan. That's a whole new market for us that we see a huge opportunity, a big opportunity for us, and we're launching that as we speak in Q1. We've done some bolt-on M&A in this business. I think I mentioned this last time. We acquired a company called Lara Lab, which is an AI-powered imaging interventional cardiology company that's we're integrating that into our product offerings now for pre-procedure planning. So I think that's going to help also since imaging is such an important part in these procedures. And then the pipeline looks really good too. We've got our next-generation amulet. Expect to be launching that beginning of next year. We're going to go into trial, into our IDE trial with our balloon TAVR in the second half of this year. So, again, as I'm thinking about I know what's going to launch in 2027, and I know the impact that those launches are going to have in terms of our growth rate, and we're building our pipeline to be able to ensure that we can sustain that growth in 2028. And I look at this Balloon TAVR program as really being important to do that. And then we're also going to start our IDE trial for our trans-mitral valve replacement program too, which I think is going to be best-in-class. So I think this team has got not only an incredible pipeline to work with, but we've also been making the investments on the clinical side, clinical teams, sales reps, across the world. So I think we're well-positioned in our structural heart business. Crystal, we'll take one more question, please. Operator: Thank you. And our last question will come from Josh Jennings from TD Cowen. Your line is open. Josh Jennings: Just keep it to one on capital allocation, starting to circle back. But I think the focus for your team, Robert, has been to kind of look at inorganic ads for the devices and diagnostics franchise that played out with the Exact Sciences acquisition. I mean, should we be thinking that that remains the focus? Or is the nutrition recovery can you can that business get back to mid-single-digit growth without any business of external business development initiatives? Thanks for taking the questions. Robert Ford: Sure. Yeah. Listen, I'd say the capital allocation regarding M&A and kind of our focus is, you know, it's going to be in those two areas. Right? Med tech and diagnostics is where we see an opportunity. I don't consider a need for inorganic in, you know, in our nutrition business to execute the strategy that I just described, which is to more emphasis on volume growth. I think we've got the right products, the right brands, and the right teams in place to be able to kind of do that. We know, I think the biggest investment that we're making is, you know, we're seeing the impact of that now. Which is, you know, addressing kind of, you know, price points and doing it comprehensively across the world so that we, you know, we can get everything kind of reignited back to volume growth. So I'd say that's the focus is med tech and diagnostics. So I don't think anything changes there. So I'll close here with a few comments. Listen, we've got I think we delivered a pretty strong year in 2025. Obviously, there were challenges. There'll always be challenges. We delivered on our original EPS target of double-digit, healthy margin expansion. I think I've spent some time on this call talking about our high and how we think about our pipeline and ensuring that we have a nice cadence of pipeline going forward. Not just what we're launching this year, but what we're investing in this year so that we can be ready to launch in '27 and '28. So I think the pipeline has been very productive and we took a very important strategic step to shape Abbott Laboratories for the future, with the announcement of the Exact Sciences acquisition. I think that's going to add a whole new growth vertical for Abbott Laboratories. And I think that cancer diagnostics is going to be a very important clinical and medical need for society, for global society. So I think we're going to be well-positioned there and I feel good about the timing and everything that we put in place there. So as we transition to 2026, yeah, I think I highlighted here, we've got a lot of businesses that are going to sustain what I would consider pretty differentiated growth rates high single digits, teens, and we can support those with the investments we made and the product launches that we've got. And then we've got some large businesses that are going to have some inflection points and acceleration, whether it's Core Lab or even our electrophysiology business here. So I feel good about what we've got put in what we've laid out here in terms of our plan. Obviously, we strive to do better than that, and there's opportunities to do better than that. But I think as I sit here in January, this is a good starting point. And, with that, I'll wrap up, and thank you for joining us. Thank you all for your questions. This now concludes Abbott Laboratories' conference call. Mike Comilla: Webcast replay of this call will be available after eleven a.m. Central Time today on our website abbott.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.
Operator: Good morning, ladies and gentlemen. And welcome to Live Oak Bancshares Fourth Quarter 2025 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. I would now like to turn the conference call over to Gregory Seward, Live Oak's General Counsel. Please go ahead. Gregory Seward: Thank you, and good morning, everyone. Welcome to Live Oak's Fourth Quarter 2025 Earnings Conference Call. We are webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investorliveoakbank. You can go to the events and presentations tab for supporting materials. Our earnings release is also available on our website. Before we get started, I'd like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call, our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. I will now turn the call over to our President, Vijay Moesch. Vijay Moesch: Great. Thanks, Greg. Good morning, everybody. Thanks for joining us. Let's get started on slide four. 2025 was quite an interesting year. And here at Live Oak, I'm really, really proud of the way we navigated through those interesting times. Macro uncertainty persisted throughout the year. Whether it was Doge or tariffs or uncertain economy and ultimately three rate decreases from the Fed late in the year. We continue to navigate through a small business credit cycle and our loan portfolio showed continued credit stabilization over the course of the year. We significantly improved our operating processes and controls. We successfully executed on our first preferred offering. And we finished the year nicely with some outside venture gains from our ventures portfolio. And yet even with that busy and potentially distracting backdrop, we produced some excellent results as you can see on slide five. A few of the biggest highlights were record loan production, 17% loan growth, 27% core PPNR growth, 17% revenue growth, and 13% tangible book value growth, in addition to accelerating our momentum in our key growth initiatives of Live Oak Express and checking. I'm particularly proud of this two-year view of our production on slide six. 57% growth in loan production across both our small business and commercial groups and importantly, strong pipelines heading into 2026. And as proud as I am of those production results, what matters most is how you translate that into profitable operating leverage. And you can see on slide seven that those results are simply outstanding. With adjusted PPNR of 27% over 2024 and adjusted EPS up 49%. New customer acquisition and growth like this doesn't just happen by accident. Our people and how we deliver excellent customer service make the difference. Our goal is to continue this momentum and deliver earnings outcomes that are more consistent and sustainable over time. While credit has been top of mind for us and for investors over the past year, perspective is always important. And on slide eight, you can see our credit trends over ten years relative to all other SBA lenders. And while default rates had moved higher over the last two years, as PPP and stimulus tailwinds have burned off, and rates rose rapidly, Live Oak's performance has consistently been well ahead of peers. Thankfully, we know small businesses and are great credit managers. We're hopeful that these trends start to moderate back towards the long-term trend lines sooner rather than later. Finally, we continue extending our customer product offerings with checking and small dollar SBA loan capabilities. Both of these efforts launched in early 2024. And in just 24 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. At the end of 2024, only roughly 6% of our customers had both a loan and deposit relationship with us. Today, that percentage is 22%. And we've got a lot more runway to travel. On the small dollar 7(a) front, what we call Live Oak Express, production is ramping up meaningfully and will continue to do so. These loans are also very desirable on the secondary market. That are leading to nice gain on sale increases. There's a lot more upside to this business as well. We're just starting. I couldn't be prouder of how our people are taking care of customers making our operations better and profitably growing our company. Thank you to all Live Oakers for the momentum that they have built heading into 2026. And with that, Walt, how about running through some of the financial highlights for the quarter? Walt Phifer: Thanks, Vijay. Good morning, everyone. As outlined on Page 11, we had an outstanding end to our 2025 campaign. With Q4 producing $44 million of net income and $0.95 of earnings per share, both of which were approximately three times 2024. Our strong performance was aided by excellent growth in core profitability trends, as seen in both our reported and adjusted PPNR improvement year over year. Generally improving credit trends and our fourth consecutive quarter of lower to stable provision expense and $28 million of net gains in our ventures investment portfolio primarily driven by the $24 million gain from the Aperture sale. Growth remains excellent. As Q4's loan production of $1.6 billion capped off our highest year of loan production in company history with $6.2 billion driving the 17% annual loan balance growth. Outstanding loan origination that you just won't see replicated broadly across the industry. And we love to see the progress across our two initiatives of growing business checking and originating Live Oak Express loan. Business checking balances of $377 million doubled year over year, materially benefiting our interest expense line, while Live Oak Express contributed $12 million towards our gain on sale totals in 2025. Let's get into the details on the following pages. Page 12 provides a financial snapshot of our Q4 earnings results. With quarter over quarter demonstrated improvement across all major profitability and growth metrics. On the bottom right of the page, you will see several notable items, included within our reported results. Headlined by the $28 million net investment gains from our Live Oak Ventures investment portfolio, In addition, we had approximately $11 million of offsets from warrant losses, capitalized software accelerated depreciation, severance, and allocation of funding to our donor advised fund. Continue to be very excited about our operating leverage trends highlighted on slide 13 as was BJ's. Q4's adjusted PPNR of $64 million as detailed in Slide 28 is 21% higher than 2024. While our adjusted EPS has doubled over the same time period. That doesn't tell the full story. It includes approximately $5 million of accelerated depreciation of capitalized software and severance expenses. As well as an intentional decision to delay some loan sales until 2026 which we'll touch on more shortly. Due to the large aforementioned investment gains. Slide 14 breaks down the $1.6 billion of loan originations by vertical and business unit. A few quick things that hit on here. Approximately 70% of our verticals originate more production in 2025 than they did in 2024. And both small business and commercial lending teams delivered double-digit year over year balance sheet growth rates. Slide 15 illustrates our loan and deposit balance growth. Highlighting the strong, consistent trends on both fronts. Our total loan portfolio grew approximately 4% linked quarter with year over year loan balances increasing approximately 17%. That's just outstanding durable growth. Q4 customer deposit growth was slightly down linked quarter, as was expected due to typical Q4 seasonality. Yet our year over year customer deposit growth rate was 18%. Which is fantastic growth in a very, very competitive market. As I mentioned earlier, we continue to be very excited about the momentum we are seeing in business checking, as highlighted on page 16. We saw our fourth consecutive quarter of growth with checking balances increasing 4% linked quarter to $377 million and are highly encouraged by our progress in deepening customer relationships. As BJ noted, 22% of our customers now have both a loan and a deposit account with us. Our total low-cost deposits and 37% of new loan customers also open a checking account in Q4. including noninterest bearing checking balances, low-cost collateral construction, and loan reserve accounts, now totals approximately 4% of our total deposit base. A two x increase year over year. And tremendously accretive to our earnings profile. Our net interest income and margin trends are detailed on slide 17. In 2025, we saw our quarterly net interest income increase $8 million or 7% linked quarter. And $26 million or 26% compared to 2024. Driving the Q4 increase in net interest income were both our continued outstanding growth as well as our net interest margin expansion of five basis points quarter over quarter, aided by our deposit portfolio repricing downwards in response to the 50 basis points of Fed cuts in Q4. While our variable quarterly adjusted loan portfolio did not reprice until January. As in the past, when we have seen large Fed moves downward of 50 basis points in the quarter, will see near-term compression as our deposit pricing and strong volume catch up. And we continue our upward trajectory on net interest income. Historically, our model operates well in a lower interest rate environment. Once we navigate the journey down as our deposit pricing adjusts. Currently, our base outlook for the Fed consists of three Fed cuts in March, June, and September 2026. Any less cuts or cuts later in the year will provide an earnings opportunity for the bank. Moving to guaranteed loan sale trends on Slide 18. Gain on sale was intentionally down this quarter as our large investment gains provided loan sale flexibility. Essentially allowing us to delay sales into a future quarter while increasing our loans held for sale by approximately $60 million quarter over quarter to maximize net interest income for a few additional months. This is a similar tactic that we have deployed in the past when we have large investment gains. Looking back to 2025, we are more than pleased the momentum that we are seeing in our Live Oak Express product. And the immediate impact it has had on our providing for a meaningful 20% of our gain on sale for $12 million a two x what it contributed in 2024. We remain very focused on ramping our Live Oak Express originations. As that will continue to be the primary driver of our gain on sale growth going forward. Expense and efficiency trends are detailed on slide 19. Q3 reported noninterest expense of $89 million included approximately $6.6 million of one-time expenses detailed within a notable item section back on slide 12. We remain heavily focused on improving both our customer and our employee experiences. And implementing technology and operational improvements across our entire business. All with the goal of creating raving fans moderating expense growth and thus improving efficiency, and providing a solid, mature foundation to support our growth. Taking a look at credit on slide 20, Over thirty days past due remained low for the fifth consecutive quarter with $10 million or nine basis points of our held for investment loan portfolio past due as of December 31. The amount of nonaccrual loans increased to $110 million or 91 basis points of our unguaranteed held for investment loan portfolio in Q4, The linked quarter increase in here was primarily driven by SBA credit, and it's consistent with the broader SBA industry trends. Which LIBOR continues to outperform. Our reserve levels declined modestly in line with the improving trends in past dues, classified assets and net charge offs. Altogether, improvements across these metrics show that the uptick in nonaccruals is manageable. Capital levels remain healthy and robust as shown on page 21. Q4 strong results matched our asset growth. Keeping our capital levels relatively flat linked quarter. A few thoughts on the forward outlook. We are very optimistic about the opportunity in front of us in 2026 and beyond. On the revenue front, we generally see a stable or low rate environment coupled with continued strong loan growth as a favorable backdrop for our bank's growth, margin, and credit outlook. Our two strategic initiatives in business checking and Live Oak Express are nicely with plenty of runway to continue to drive deeper relationships. Increased fee revenue, and lower funding cost. We have refocused our expense base. And investments on the best opportunities. Which will moderate the growth rate while better supporting strong revenue growth. The possibilities that AI and tech innovation provides across the bank are enticing. And will enhance our customer service and efficiency with active efforts ongoing. And above all else, we have an amazing culture, team, and brand here at Live Oak Bank that is irrevocable. With that being said, thank you again for joining this morning. Vijay, back to you for closing comments before we hit the queue for Q&A. Vijay Moesch: Excellent. Thanks, Walt. Let's just take some questions. Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any case. Once again, it is star one should you wish to ask a question. Your first question is from Crispin Love from Piper Sandler. Your line is now open. Crispin Love: Thank you. Good morning, everyone. Just first, NII and the NIM, very strong in the quarter. Nice expansion there. But can you just talk about some of the dynamics into the first quarter, the impact of the last two cuts, the impact of loan yields that there's likely some lag, also deposit costs, then just consequently, NII and the NIM in the first quarter relative to the fourth. Well, I believe you mentioned some compression in the NIM, but higher NI, but if you just flesh that out a little bit, that'd be great. Walt Phifer: Yeah. Hey, Chris. It's Paul. Thanks for the question. I think you hit the nail on the head and kinda go back to some of the comments I made. In the prepared remarks. Typically, anytime you see 50 basis points of Fed cuts in the quarter or the following quarter, As you know, we have a large variable quarterly adjust loan portfolio that reprices on the first business day. So that'll drive both NIM and net interest income compression in the near term. The good news, which essentially, the beauty of Live Oak and our growth engine, is that as the deposit pricing, deposit price continues to adjust, growth really pushes us back to that up into the right migration and both the interest in coming in fairly quickly. Really, and and the seedness of that flow on the up and to the right migration is largely gonna depend on know, what your your whatever fed outlook or forward curve you're thinking or or taking a look at. But I think, you know, a good proxy if you kinda, you know, kinda looking for a guide for what Q1 could look like in terms of NIM Back in '24, we had 50 base points of Fed compression or of Fed rate cuts right at the end of right at September. And you you can see kind of the quarter over quarter change, Q4 twenty twenty four as a result of that. Crispin Love: Okay. Great. Helpful color there. And then just on gain on sale income, down materially in the fourth, not a major surprise. At least directionally, because of the shutdown. And then you also mentioned the aperture gain. Drove some of that decision to hold more. I think you typically sell more in the back half of quarters. But, is that changing in the first quarter because of the shutdown? Have you been active selling in early twenty twenty six? And then just when you look at the first quarter, how would you think gain on sale income should trend just as you look at more normalized quarters like the 2025, my I would expect that it would be kind of higher than that just when you look at the fourth, but I just wanna kinda check to see what you're thinking there. Walt Phifer: Yeah. Thanks, Chris. It's Walt again. You know, I think the government shutdown really did impact us much in Q4. I think we saw a little bit of a timing delay in certain loans, but you saw that, you know, strong s b, SBA production in the quarter You know, so we're able to get, you know, kind of all our loans as we talked about in the last 30 earnings call, you know, kind of position to close once the government opened up, and that's, like, exactly what we did You know, as you think about gain on sale trajectories, I don't think anything will change between when we sell loans versus, you know, January versus February or or March. I think it'll still be much you know, more to the mid to the back end of the quarter. That's our typical approach. I think Q1 historically, for us is our lowest quarter of the year. I know 2020, '5 was a little bit different because of the fintech gains, but I would expect our Q1 to be much more in line with you know, the 2025. And then that's when we start our our up into the right stair step. Momentum within the gate on field line. Crispin Love: Alright. So if I'm looking at one q twenty five, so even if even though that there was a little bit of lag there, it could be below that kinda two Q3 q level. Walt Phifer: I think it'll be closer to what you're seeing in 2025. Yeah. So our 2026 will be closer to what you see in 01/2025, so it'll be a step up versus what you saw in Q4. And then that gets us back into you know, that's I think Q1 twenty twenty five was in the $15 million reach of total gain on sale. That feels you know, that feels appropriate. Crispin Love: Alright. Thank you. Appreciate it, Walt. Walt Phifer: Sure. Operator: Thank you. Your next question is from David Feaster from Raymond James. Your line is now open. David Feaster: Good morning, everybody. Walt Phifer: Hey, David. David Feaster: I wanted to to not to beat a dead horse on the margin outlook, but I just wanted to maybe get some thoughts on the trajectory. I appreciate the commentary on the first quarter. You've got three cuts embedded in your guidance. Obviously, there's some you you there's just gonna be a lot of moving parts. Right? You got the tailwinds from the reprep deposit repricing in the prior cuts. The headwinds on on the the assets repricing lower on on the rate sensitive stuff. I just was curious if you could help us think through with the three cuts that you've got embedded, how do you think about the margin trajectory over the course of the year? Do you think we can given the tailwind from the prior cuts, we can actually see some expansion and kinda just us think through that trajectory over the course of the year. Walt Phifer: Yeah. I think, you know, David this is Walt again. You know, really you know, thing that we think about is not only what the Fed cuts gonna do, it's the it's it's the timing and severity of those cuts. You know, stable environments work really well for us. So if you saw, you know, 2024, we saw compression And then with a stable environment, we saw a nice NIM expansion throughout the year. With 25 basis points of, you know, of Fed cut assumptions, that allows our deposit pricing to catch up relatively quickly. Ultimately, we're you know, we'll expect that step down here in Q1, and then you know, our expectation is to go back on that, you know, start seeing the up and right trajectory or NIM expansion, you know, as we move through the year. It's gonna be driven by growth Now, obviously, you know, positive market is very competitive and what kind of you know we have to do what we need to do to continue to fund our outstanding growth. And, you know, David, like we talked about in the past, we we at Live Oak, I mean, even with a you know, a three you call it anywhere from a three fifteen to a three fifty NIM. You know, we think that's really attractive. We focus a lot on net interest income. That's the beauty of kind of the Live Oak model, right, where you can have double digit net interest income growth year over year. Even with some variations, you know, from your margin trajectory? Absolutely. David Feaster: Terrific. That's helpful. And then, you know, obviously, there was a lot of noise on the expense side this quarter. You alluded to to some of the things. Just was hoping you could give us some puts and takes on expenses. You know, you've got a lot of investments on the horizon. We talked about, you know, the Live Oak Express ramping up. We talked about embedded finance. Could you just help us think through a good core expense run rate from here? What's your investing in and how you think about funding those investments just as I know you've really been focused on expense management. Walt Phifer: David. This is Walter again. Thanks. Great question. You know, we're we're really trying to do our best to make sure that we're balancing both revenue and expense growth. You know, we've as BJ mentioned and I mentioned, kind of looking at the operating leverage slide, we've done a really good job of that, especially over the last few years. They even have extended past, you know, five years with our PPNR or p p PPNR trajectory. You know, I think from, you know, where we're investing, you know, the two strategic priorities for us of both business checking and lab express and Live Oak Express are, you know, heavy focal points. You know, the the the areas with AI and application and kind of across our operational areas of of the bank, it's and our loan, loan origination platform is really exciting. Know, I think from you know, expense growth rate, You know, we typically you we mentioned that in our prepared remarks, we expect that to moderate quite a bit. You know, that that's something probably likely in the in the single digits year over year as we think through, you know, it's just making sure that we're, you know, reporting our money strategically in the right places. David Feaster: Okay. That's helpful. And then just quickly touching on credit. You know, there's there's mixed trends there. Just wanted to get your color on what are you hearing from your clients? Where are some of the pressure points that you're seeing as you as you look into the portfolio? Are there any segments that there's more pressure? And and what drove that increase in nonaccruals? And just how do you think about credit how do you think credit trends near term, and any color on the classified assets trends specifically would be helpful as well. Michael Cairns: Yeah. Good morning. Michael Cairns here. I'm happy to talk about credit a little bit here. And my view on this quarter was it was a fairly uneventful and stable quarter when you compare it to where we were last last quarter. The past dues are low, And to your point or your question, classified loans are flat to slightly improving over the quarter. And when you think about nonaccrual, loans, those live within our classified loan portfolio. And so when we determine that they're a classified loan, at that point, we're assessing the reserve of potential losses against that those loans. And natural progression of a classified loan or the the reason we identify as a potential problem loan is because payment defaults could happen. So you're seeing that in the nonaccrual balances, but you're not seeing a spike in reserve or provision expense because we've already assessed the the potential losses within that pool. And then when you look at and I and I know Walt touched on this already, but when you look at the SBA data, you know, 2025, we still saw higher industry defaults. Live Oak wasn't immune. To that, but we also fared significantly better than the industry. And when I think about that, I think about the fact that we we have always maintained our credit culture don't stress on underwriting standards. And a lot of credit really to our lending staff who are out there historically and today finding loan growth without sacrificing credit quality. And I think that's what has set us up to be a favorable favorable position to the industry and also what will pay dividends for us in the future. And then to when you also think about the interest rate cuts that happened in the 2025, Our borrowers haven't felt the benefit of that quite yet, but they should in 2026. So I expect some relief there, especially if we see some additional cuts And, again, I don't know if I touched on this or not, but the SBA the SBA portfolios that makes up the chunk of the nonaccrual balances and the classifieds. So with all that, I felt like it was a pretty stable quarter. David Feaster: That's great color. Thanks. Operator: Thank you. Your next question is from David from Cantor. Line is now open. David: Hey. Good morning, guys. Walt Phifer: Good morning, Dave. David: Hey, Walter. I just wanna go back to your comments on the margin. You mentioned down similar to that trend in 4Q 'twenty four, I believe. And so it looked like that was down about 18 basis points that quarter. So just wanted to make sure that, that was sort of the magnitude that you were thinking about. And then on slide 17, you guys included a newer line in that some income from a it was other loan income. It was about six basis points on the margin. For the quarter. I was just wondering what that was exactly, and is that something that's going to reverse as that rolls, you know, off of one queue? Or does that stay in the margin trying to figure out if that's incremental to what you guys saw in terms of the trend in 04/2024. Thanks. Walt Phifer: Sure. Hey, Dave. This is Walt. Thanks for that, you know, for the question. On the other loan income, I'll start there. So that line, it was was inflated more than we typically see in any given quarter. This really, relates to few large solar and senior housing loans that paid off that had pretty high prepayment penalty. So that's something that, you know, we don't expect to see the run rate you know, you know, moving forward and especially not to that degree. And then, you know, as you think about the trajectory you know, back in Q4, you know, after the 50 basis points of cuts, Yeah. I think that's, you know, that's in a reasonable range think the one thing that's helping us this year is that we were able to get out front of of the the variable loan portfolio, repricing on January 1. With some deposit, rate reductions there at the end of, of Q4. And, also, we're able to already to reduce the pricing again here in Q1. So we're doing what we can to mitigate it. You know, but I think the the other factor there is, you know, our pipeline has been really slowed down at all. So, you know, we're expecting a pretty strong Q1 in terms of growth. That's gonna, you know, hopefully help you know, you know, manage that that that NIM compression that they're taking a look at. David: Great. Appreciate that. And then just, on expenses, just wanna make sure I heard you right. Were you saying mid single digit growth for expenses next year? Walt Phifer: Slower than what we saw this year? David: Okay. Yeah. Great. And then just on Live Oak Express, it was good detail you had in here on the 12,000,000 of gain on sale. For 25. Are you thinking I guess, bigger picture, what are thinking for the trajectory there? Is that something that I could double in '26? Could it could it go even higher than that? What what are your thoughts there? Walt Phifer: Yeah, Dave. This is Walt again. I'll start and then Peter, you wanna add into you know, from the Live Oak Express efforts. Know, I think we're doing what we can to really make sure we're we're building top of the funnel in that space. We saw you know, we we did see a slowdown in our Live Oak Express origination back 2024 the SBA SOP changes in June. You know, that you know, we had to essentially reset kind of know, our expectations to make sure that we're to build rebuild that pipeline with borrowers or rebuild the pipeline with with borrowers after know, just essentially updating them, educating them on what those SOP changes were. Know, look, I think doubling is very aspirational. I think it'll be something less than that. I'll let Vijay talk and add in if he has any comments. Vijay Moesch: Yeah. I think at cruise altitude, I think, you know, we're our aspirational goals are a billion dollars a year of production. At cruise altitude. That's not next year. That's over time. When we started down the road of building out a Live Oak Express product, it was really by brute force. I think we've talked about it before that, you know, we just never really focused on the small dollar loans, you know, that we our average loans size was more in the 1.2 or $1,300,000 average loan size range. And so know, we started just kind of trying to see how we could do it What we're doing now is intentionally building capabilities so that we can fill you know, the top of funnel, so to speak, and get a lot more leads that we can then work in a much more efficient manner. So for instance, we are, you know, building and co developing a next generation loan origination platform, which will make it simpler, easier, faster, and more efficient for our people to serve our customers much more quickly and get to decisions and funding a lot faster. We have engaged outside expertise in our marketing group. That are expert in performance marketing to find ways to better target customers. That are out there searching for loans that we can that we can do through our Live Oak Express product. And we are making sure that our lenders, have been carrying the bulk of the water, up to now in terms of referrals, can even find more avenues for those referrals and we're encouraging them to do that both through how we how we provide them resources, but then also making it part of the you know, incentive plans that we have for them to grow the business. So we've kinda got a multifaceted way of going after this. Intentionally. So we think that we'll continue to see growth over the next several years towards that aspirational target of 1,000,000,000 a year. David: Alright. Great. Thanks, guys. Operator: Your next question is from Tim from KBW. Your line is now open. Tim: Hey. Good morning. Thanks taking my questions. My my first one is kind of a follow-up on this discussion on Live Oak Express, and you know, we're more than six months now into these SOP changes regarding the smaller dollar loans. Which I think we're now starting to see how that has pressured volume on maybe some of your competitors. So is there any way you're able to maybe not quantify, but you know, characterize the impact that has had on your competitors. And, you know, is that made it a little bit easier for you to win some market share in the smaller dollar space? And, also, like, has that impacted pricing, yields, anything like that? Vijay Moesch: On the latter, I don't think that we've seen an impact on pricing or yields quite yet. On the former, I think we started to see that. You know, we've started to see some lenders back away first the nonbank lenders, because they were were seeing a lot of the the biggest credit pressures And, you know, we're we're starting to see bank lenders be a little more choosy on what they do, which makes a lot of sense. We want a healthy SBA seven a industry. And we have always been very intentional from the outset on our small dollar lending products. We don't play at the highest, highest end of the pricing game. We don't chase you know, spotty credit. We want businesses, small businesses to succeed. And so you know, our total addressable market, so to speak, on the smaller side, is going to be reduced somewhat because we're gonna be cheesier about who we do business with. But on the flip side, we're gonna make it so easy for customers to do business with us. And we're going to target people that have a propensity to do business with us, like they want to, and they are going to get the full power of our brand and our people and our tech over time such that we think that that's going to be a huge differentiator between what they currently get today, particularly on the small dollar side, and what Live Oak is gonna deliver. So really excited about how we're actually thoughtfully building out this business, and I think it'll be quite substantial and a huge part of what we do on the SBA side. For years to come. Tim: Interesting. That that was a great color. Thank you. I was also wondering, like, on the on the flip side of this, if since everyone is not required to do basically full underwriting and you know, the upfront guarantee fees and everything, is essentially equal for the larger loans. Are you seeing some of your competitors kind of move back to Live Oak's more traditional loan size at all. Vijay Moesch: Not necessarily. Not that not that we can discern. You know, we haven't seen much much change from that perspective, Tim. Tim: Okay. And then I was also looking for maybe an update on the opportunities and internal development you guys are doing with regards to AI has brought this up a few times on conference calls. I was looking for an update there. What are kind of the tangible use cases you're exploring and you know, what are the benefits it can provide you whether that's you know, internal efficiency efforts or you know, creating a better experience for customers. Vijay Moesch: Sure. I'll just give a quick update on that. I think starting with our technology and our labs teams, all of our developers are using cursor next generation AI based developing software. And I'm not sure that that's going on across the rest of the industry, but having all of our people well versed in that, we made that pivot very quickly. So that's that's number one, and that's helpful. We are intentionally and introducing our people to AI first with things like Copilot, but then also things like you know, putting our information into proprietary large language models that they can then query and use for analytics specifically related to our customer information, our portfolios, our business. So that's that's kinda fundamental, and maybe a lot of people are doing that. But then what we're looking at is a multi pronged approach on how we how we go after this. I think if you just look at modernizing what you do in technology or in operations or revenue generating parts of an organization? Just simply say, we wanna put in AI. AI is gonna solve everything. It's not. What we're looking at is a way to say how do we go to major parts of the organization understand what the pain points are that don't make it easy or simple or fast or efficient for our people and our customers. And to fix those, sometimes with just better process, sometimes with eliminating manual process. And then more and more with AI. And it's a combination of being intelligent around that. So we're going to major departments and groups like loan operations and you know, secondary markets and deposit operations and those areas to modernize those using AI and other tactics. We're also asking everybody in our organization to be knowledgeable about just doing things better and more efficient whether it's using AI or you know, not using AI. And then thirdly, you know, we're going to create a dedicated team that is thinking about how over the next three to five years we create an AI native bank. What does that mean? What does that look like? We have the innovative history here. And technology that that was born out of our founders. And we're constantly thinking about how to do that better. And so you'll see more and more use cases, tangible use cases from us over time as we start to build out what that means to be an AI native bank. Tim: Got it. That that was great. Thank you. If if I get one more question, kind of a follow-up on the credit discussion. I I think Michael mentioned you know, we're not seeing any kind of spikes in the provision expense Is that you know, what what should we expect going forward in terms of provision if credit continues to gradually improve over the course of the year like it has over the last few months? Should provision be stable? Can it moderate a little bit further, or is this kind of where it's gonna stay? Walt Phifer: I'll start. Hey. Hey, Tim. It's Walt. I'll jump in too, and then you might can add on. I think if you think about stabilizing credit trends, I think one thing you have to remember with us was being a high growth bank. You know, that growth and CECL typically don't get along real well. So, you know, growth will continue to drive our provision expense along with our portfolio trends as well. But I think, you know, kind of what you've seen over the last three quarters is a really good view of kind of, like, stabilizing, you know or kind of stabilizing portfolio with stabilizing credit trends, and that should give you kind of a broad view of what you could expect kinda going forward, you know, assuming the same level of growth. Tim: Yeah. That that's fair fair point of provision. So I guess we should think about maybe the reserve percentage staying about level. Walt Phifer: Yeah. That's that's that's about right. Tim: Got it. Alright. Well, thank you. Operator: Your next question is from Billy Young from TD Cowen. Line is now open. Billy Young: Good morning, guys. How are you? Walt Phifer: Morning, Billy. Billy Young: Just a question on your business checking initiatives. Given the strong momentum in your comments and the strong performance you had over the past year. Do you have any updated thoughts about how we should think about the funding mix looking out over the next year or two given, you know, the the increased growth in NIB? Walt Phifer: Yes. I'll start there, Billy. I think the you know, we've been able to get to about 4% of our noninterest bearing deposits as as I mentioned earlier. You know, ultimately, our aspirational goal over just like kind of, you know, BJ mentioned with Live Oak Express is over time to get up towards in that 15% of our deposit base, like, again, that's not gonna happen next year. I think we saw 2% of non interest bearing a year ago, 4% this year. I think that trajectory makes sense. You know, as we kinda move into, into 2026. If you just think about know, leveraging that, you know, that growth rate? Billy Young: Got it. Thank you. That's helpful. And then just a couple of housekeeping items on the decision to hold on to more of your gain on sale loans. Just did you size up how much the benefit was to the margin or NII from holding on to the higher held for sale loans this quarter? And then also, did you use this opportunity to maybe portfolio some more in production? In 4Q? Walt Phifer: Yeah. I'll jump in on that, Billy. The benefit for NII of about $60 million of HFS given our our spreads and our margins is you know, likely in the call it, 1.8 to $2.5 million range. A year. Sorry. Yeah. That that's correct. Divide that by four, that kinda gives you so not overly material for Q4 itself. You know, as far as portfolioing, I don't think that's what what we'll likely do. I mean, I've always you know, kind of aspire to get to the point where we're building any kind of we used to call a treasure chest, but essentially, it's a it's a portfolio of held for sale. We are loans that we can sell at any given point, gives us some good momentum going into into Q1. So we'll likely monetize you know, that additional $60 million here in In Q1, and then that gives us some flexibility for reloads that we originate in Q1. To then kinda get a give us a headstart into Q2 and so forth. Billy Young: Got it. Thank you for taking my questions. Operator: Sure. Thanks, Billy. Operator: Thank you. There are no further questions at this time. I will now hand the callback over to Chip Mahan. Chairman and CEO. The closing remarks. Chip Mahan: See you next quarter. Thanks. Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
Operator: Good morning, everyone, and welcome to the FB Financial Fourth Quarter 2025 Earnings Call. Please note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mike Orcutt, with FB Financial. Please go ahead. Good morning, welcome to FB Financial Corporation's Fourth Quarter 2025 Earnings Conference Call. Mike Orcutt: Hosting the call today from FB Financial are Christopher T. Holmes, President and Chief Executive Officer, and Michael M. Mettee, Chief Operating and Financial Officer. Please note, FB Financial's earnings release and supplemental financial information, and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risks, uncertainties, and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC rules. A presentation of the most directly comparable GAAP financial measure and a reconciliation of non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information, and this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would like to now turn the presentation over to Mr. Christopher T. Holmes, FB Financial's President and CEO. Christopher T. Holmes: Alright. Thank you very much, Mike. Thank you to everyone for joining us on the call this morning and for your interest in FB Financial. For the quarter, we reported EPS of $1.07 and adjusted EPS of $1.16. We've grown our tangible book value excluding the impact of AOCI at a compound annual growth rate of 11.6% since we became a public company with our IPO. This quarter, our pretax, pre-provision net revenue was $71.1 million, or $77.1 million on an adjusted basis. Earnings were led by net interest income of $150.6 million, a net interest margin of 3.98%, and low credit costs in the quarter. Adjusted returns were solid, reporting a return on average assets of 1.4% or 1.51% on an adjusted basis, and a return on average tangible common equity of 14.4% or 15.9% on an adjusted basis. For the year, we reported EPS of $2.45 and an adjusted EPS of $3.99. Our balance sheet grew through the acquisition of Southern States Bank and was complemented by organic growth in our key businesses and geographies. All in, loans held for investment grew 29% and deposits were up 25% year over year. As I reflect back on 2025, and think forward into 2026, there are two key themes that stand out to me. The first of those is growth, both in our financial assets, but also in our capabilities. This comes in the form of talented new teammates. During the past year, we executed on an acquisition in record time. We grew our talent base by adding new associates across the company, and we reorganized leadership responsibilities in various areas to optimize our organization. We expect to see these actions pay off in 2026 and beyond through enhanced customer experience, contributions to our strong and inviting company culture, and ultimately continuing our history of outstanding growth. The second area is we're generating earnings and financial returns that meet my expectations as the CEO of the company and as a shareholder with high expectations. This year and particularly this quarter, our bottom line results were where they need to be with adjusted returns of about 1.5% on assets and approximately 16% on tangible common equity, and that's with a TCE ratio of almost 10%. These profitability results are within the range of expectations we set for ourselves. Our results for organic growth in loans and deposits were the only real notable area of underperformance in 2025, which comes from a combination of economic conditions, some distractions from the acquisition, and some related organizational changes. As we look into 2026, we're very excited about the prospect for strong growth opportunities, both organically and otherwise. We did accomplish a lot during the year, which reinforces the strength and determination of our team and franchise. I'm pleased with our results, proud of the team, and I'm very bullish on the year ahead. So while I could use some additional time today to give you my perspective on a multitude of other topics like the regulatory environment, views on M&A, and our myriad of metrics and goals that we set for ourselves in 2026, I'm simply going to reiterate our top priority for the year ahead, which is to cement our focus on the customer. Through this simple action, we'll deepen relationships, we'll provide better products and service, and we'll acquire more new associates and customers. It's that focus that's going to allow us to grow the business. Very simply, that's going to be our winning formula in 2026. So with that, I'd like to turn the call over to our Chief Financial and Operating Officer, Michael M. Mettee. Michael? Michael M. Mettee: Thank you, Chris, and good morning, everyone. I'll pick up right where Chris left off. Over the past year, we've laid a solid foundation that positions us to accelerate into a period of significant opportunity. We've acquired and converted Southern States, which added approximately 20% to our size. We've seen market disruption in our geographies, which has created opportunity in our markets. And we've added talent in key areas of our company. So as we move into 2026, we really couldn't be more excited about the year ahead. Turning to our results for the quarter and for the full year, net income on a reported basis for the quarter was $57 million or $61.5 million on an adjusted basis. For the year, we delivered net income of $122.6 million and adjusted net income of just over $200 million. Our net interest margin for the quarter came in at 3.98%, which is a three basis point expansion over the third quarter. Even with the Fed rate cuts and lower loan yields, we were able to manage our liability side of the balance sheet to expand margin, namely through deposit repricing and benefits realized on our third quarter sub-debt and trust preferred payoff. Non-interest income improved in the quarter as we saw stronger swap fees in investment services revenue along with benefits from non-recurring items which we've detailed in our supplement. On the expense side, fourth quarter non-interest expense came in at $107.6 million or $100.4 million on an adjusted basis. Included in the reported results is roughly $4.6 million in merger and integration expenses which should largely conclude by the end of the first quarter of 2026. In our adjusted non-interest expense, we had an additional $3 million in performance-based incentive expense, and roughly $1.2 million in higher franchise tax expense. We also had higher than expected year-end increases related to the share repurchase transaction, which I'll detail in a bit, technology costs, and other professional services totaling about $1.5 million that are not run-rate expenses. All in, our banking core non-interest expense totaled $88 million for the quarter, and $298 million for the full year. Looking at credit, our reported provision expense was lighter this quarter at $1.2 million due to low charge-offs and minimal changes in modeled reserves. Non-performing assets ticked up slightly this quarter with higher past dues in some of our consumer portfolios and our optional Ginnie Mae repurchase portfolio, but loss content remains low as annualized net charge-offs totaled only five basis points in the quarter. Overall, our credit outlook remains stable for our portfolios and geographies. All in, our allowance for loan losses settled at $186 million or 1.5% of our loans held for investment. Looking at the balance sheet, you'll see loan growth of $86 million for the quarter and total deposit growth of $97 million, both roughly 3% on an annualized basis. In the fourth quarter, we experienced a pickup in late quarter payoff activity, which reduced our loan growth by about half. This activity was spread across several loan categories, but was mostly pronounced in our C&I and CRE buckets. As Chris mentioned earlier, these organic growth levels for the quarter are below what we expect and what we've historically delivered. However, when I look at average balances for the quarter, we show annualized 6% loan growth and 7% deposit growth. And for the year, we're pleased to have grown the company 29% on loans and approximately 25% on deposits. New production trends remain competitive, both on rate and structure with new loan yields priced around 6.75% for the quarter and new deposit costs around 3% for the quarter. Even with softer organic growth during the fourth quarter, we believe the wind is at our backs and our sails are up. The company has significant opportunity to grow market share organically as we continue to bring new relationships to the bank. With that, you should expect us to return to our normal high single-digit growth rate in 2026. As it pertains to capital, I want to highlight the large stock repurchase transaction that we executed in the quarter. In total, we repurchased just over 1.7 million shares, representing about 3% of the company. The transaction was with our largest shareholder, the estate of the late Mr. Jim Ayers, which allowed the estate to diversify its holdings and gain some liquidity while also allowing the company to deploy excess capital in a beneficial way. We are proud to participate in this transaction with other large institutional investors, and this investment in ourselves demonstrates our belief in our franchise and our growing business. As we move into 2026, we expect our net interest margin exclusive of loan accretion to land between 3.78% and 3.83% in the first quarter and on a full-year basis consistent with where we are today, and that assumes a rate cut baked into our forecast for 2026. We would then expect the benefit from loan accretion to add an additional 15 basis points or so, and that's exclusive of any accelerated accretion that might pull through. In banking, we're expecting to see fee income grow in the upper single-digit range as we continue to grow our customer base, add product offerings, and deepen relationships with our current customers. On expenses, I'll reiterate the full-year guide that we gave last quarter as we expect banking expense to land between $325 million and $335 million, which puts our efficiency ratio in the low 50s for the full year and at 50% by year-end 2026. This guide is run-rate only and would not include any investments made in revenue producers or market expansion. From a balance sheet standpoint, we're sticking with a mid to high single-digit loan growth in core customer deposit growth in that same mid to high single digits that we've spoken about for the full year 2026. So as I conclude, I want to thank the team for their work this year and I look forward to a prosperous 2026. With that, I'll turn the call back over to Chris. Christopher T. Holmes: Alright. Thanks for the color, Michael, and thanks again to everybody for joining us on the call this morning and your interest in FB Financial. And operator, at this time, we'll open the line for questions. Operator: Once again, that is star and then one. Our first question today comes from Brett Rabatin from Hobby Group. Please go ahead with your question. Anya Palsh: This is Anya Palsh. I'm asking questions on behalf of Brett. So he was wondering if management anticipates any additional share repurchases from the Ayers estate. Christopher T. Holmes: Yeah. That is a good question. And we do not actually anticipate that. And so, the conversation we've had is that we do not anticipate that. That does not mean just like any of us that folks will change their mind, but all the conversations we've had, we do not anticipate that. Anya Palsh: Okay. Thank you. And another question that I have is, do you guys think mortgage banking is on the right path, or does the platform need any additional tweaking? Michael M. Mettee: Hey, Anya. Good morning. This is Michael. Yeah. Actually, mortgage had a really good year. And if you think about where we were two years ago in the mortgage environment, versus today, '26 versus 2025 versus '23, we originated the same amount of volume, but the contribution went from a negative to a nice positive number. So they're definitely on the right track. You know, tweaks to the platform, I would say, just like on the banking side, we are open for business, looking for revenue producers that can continue to expand our relationships and bring core customers to the bank. So, we're pleased with mortgage and expect big things from them. Christopher T. Holmes: Yeah. And I would just add in terms of tweaks, let's say we're always tweaking. Whether that's more as Michael said, we're tweaking things every day. But in terms of the basic structure and the elements of what we have in that business, we're actually quite pleased with it. And when we look at '26, that is a potential for it's a very positive potential for overperformance, I would say. As Mike said, this year it actually went from a negative to a positive. And depending on what happens in the world and what happens in the market, that's an area that could be a bright spot for us based on what we have put in our expectations for this year. Anya Palsh: Okay. Thank you. And, you know, what do you guys, what does management think about the current M&A climate? And is there any optimism on additional deals? Christopher T. Holmes: So climate-wise, I would say, climate-wise, a lot of conversations going on out there. I think at every level, that's just an industry comment, it's not specific to us, but I'd say there's a lot of things happening out there. People evaluating strategically what the future holds for them. When we think about us, specifically, we'll continue to evaluate our opportunities. In prepared remarks, one of the things I talked about is really our customer focus. We have to maintain that and we have to make sure that that's at the top of our priority list and for our objectives for the year. But as we get opportunities, which we do, we have conversations and we get opportunities, we'll continue to evaluate those. And if the right one comes along, certainly, we would be in a position to act on it. The Southern States combination that we did in 2025 was very positive. We feel like all the way around, they always do cause some distraction from your normal operating environment. And so we weigh that anytime we're considering a transaction. And so when it's worth it, then we're going to be in a place to take advantage of it. Anya Palsh: Sounds good. Thank you. Appreciate the answers. Christopher T. Holmes: Sure. Thank you. Give Brett our best. Operator: Our next question comes from Russell Gunther from Stephens. Please go ahead with your question. Russell Gunther: Hey, good morning, guys. Christopher T. Holmes: Hey, Russell. Russell Gunther: Morning, Chris. Morning, Michael. On the loan growth front, so you called out the elevated pay downs and how they impacted this quarter. Would be helpful just to quick level set where those levels compared to last quarter. And then as a follow-up, you guys tend to position yourselves as a high single-digit to low double-digit grower. It sounds like you're guiding to high single digits for this year. Maybe if you could just kind of walk us through the asset class and geographic loan leaders and just whether or not that assumes that level of growth can happen with the players on the field today versus incremental hires. Michael M. Mettee: Yeah. So I would say, Russell, in the fourth quarter, payoffs were a bit elevated, especially at the latter part of the quarter. Chris would let us all go home on December 24. We probably would be having a different point-to-point conversation. But you work full year, so that last week of the year is where we saw a lot of the payoffs come. You know, every company has ebbs and flows. Right? Every company faces payoffs. So that's just part of business. That's just something you have to do. But on a percentage basis, it was elevated in the fourth quarter. That being said, we're going to pay off in the first quarter this year and second quarter this year. And so expect to grow through it as a company. Our growth forecast is not predicated on hiring new people. It's the team we have in place with the relationship managers and bankers that we have. We would expect those to grow that high single-digit range without adding another person. And where can I come from? Yeah. We came into Asheville, North Carolina last year. They're off to a good start. You know, Tuscaloosa, Alabama, smaller market, but had a really strong year. But every market, especially in our metro areas, have a lot of in-migration and growth opportunities. And then in our more community markets, expect to continue to grow market share on both sides of the balance sheet. And we're focused on growing deposits and loans, not just the loan side. Then asset class, look, we pride ourselves on being a community bank. So that means we serve all asset classes. And so we're not saying, hey. You can only grow one or the other. But we want to be full service to our clients. So I'd expect that to be broad-based. Christopher T. Holmes: Yeah. So Russell, okay. If I can just make a couple of comments and I want to reiterate two things. Two or three things Michael said or amplify them. He is right. If we were to stop the world in motion there and not have the last week of the quarter, we'd have been north of 5% in terms of loan growth, actually six-ish, and if you compare average to average, you would see that in our numbers. Point to point was one thing, but we don't get obsessive over that because we feel pretty good about the run rate right where it is. You asked about can it happen with current players? I think that's an important part of kind of how we project ourselves for the future and how we budget. We budget current players, and we budget very normal activity. We don't budget things like, we certainly don't budget acquisitions. We do not budget bringing over big teams. And so it's current player activity. And Michael, he also made a statement in his prepared remarks, our expense side is the same. Our expense side is also current players with a very, I'll say, normal measured growth rate versus having the big moves in there on either the revenue or expense side. So I think that's important. And then on geographies, there's one other thing I would say is Nashville approaches half of our loans in deposit base. And so that becomes an important part of that picture for 2026 and beyond. That's either, you know, so that becomes probably the biggest part of that. And as you know, we've had some changes there. We continue to be actually really bullish headed into '26 on that part of our geography. Russell Gunther: That's really helpful. Thank you both. And then, my last question would be on the expense front. So, it would be helpful to get a sense for how the 4Q run rate shapes up. Michael, I think you called out 1.5 million of non-run-rate expenses. But please, correct me if I misheard that. And then as a follow-up, last quarter, you mentioned the willingness to kind of toss that expense guide out the window if you think you can hire commercial lenders the way you'd like. So I was just curious if any of that, you know, materialized in this fourth quarter result. And have any changes been made to the comp structure in order to be able to kind of help attract the type of talent you'd like to get or that might shake loose? Michael M. Mettee: Yes. Thanks, Russell. Just to clarify on the expense base, there was $3 million that was performance-based related to long-term and incentive, which is equity, which is really a peer comp analysis. So that resulted in, you know, Chris mentioned our returns. It's a return-based compensation model, and as we saw our returns continue to perform at a higher level, that's what drove that. So that's not necessarily reoccurring because we should be in line with where we expect our performance shares to pay out on a go-forward. And then franchise tax, which was another thing I called out, $1.2 million, we should that shouldn't be reoccurring as well. And then the other piece, we did the share repurchase transaction and had some professional services fees in there, which I said was non-run-rate. So if I looked at $88 million on the banking side outside of merger and integration costs, and I'd say, you know, $5 or $6 million of that was not what I would call run-rate, but it was expense. It hit in the fourth quarter, and that's really why we reiterated our guide for '26 is that we gave last quarter. We don't see those as continuous. Although, would love to have yes, it was we outperform on a return basis if our performance shares go up, then actually a good problem for everybody, I think. So the other piece you mentioned throwing out the expense guide out the window. I like how you put that. I don't know that that's how I said it. But, you know, I think about it in two buckets, really. We have our normal course of business, as Chris mentioned, or you said, players and seats. And that goes for the entire company. Yeah. We've got to maintain discipline and create operating leverage. And so we'll continue to do that. We do recognize that as opportunities come, there's an expense outlay that occurs, and so, yeah, we're certainly willing to do that for the right people, the right teams. We don't hire just to hire. Also recognize that it's a very fluid environment, and all of our people get recruited as well. And so we play offense and defense. I'm a college football guy, so it's a little bit like, you know, the transfer portal. You gotta make sure you got your team recruiting all the time, internal and external. And so we actively do that. And then ads, yeah, we added a couple of key people during the quarter. We're really excited about those. And we expect that to continue for the long term. But really, all that's just heating up, and it's, yeah, it's a full-time responsibility to make sure that we're recruiting the right people for FB Financial. Christopher T. Holmes: Yep. I think excellently put all the way around, Michael. I want to add two things. There's a lot of disruption in a lot of places, not just our markets, all around the country. And I think what that creates, you know, even if you look at comments made on earnings calls so far this cycle, you've seen banks get pretty bold and say, hey. I'm coming after you. To some of the regional banks. You've seen others talk about their hiring goals and that kind of thing. So I would, and so you have to realize we have a lot of people coming into our markets in Middle Tennessee, East Tennessee, Georgia, Alabama, and so that what that does is, you know, they're just recruiting anybody and everybody. And so your people are getting calls, and our people are getting calls. And we say this internally, and I'm certainly saying it on this call. We don't want any of our people underpaid, and so we will make sure that they're all fairly compensated. And if they're not, we want to correct that. And so, as Mike said, that's part of us just making sure we're taking care of our folks. And then when it comes to those A players that may be available out in the market, we will not miss the opportunity because of comp. Okay? We can compete with anybody from the largest bank on the planet to the smallest community bank that we can compete with. And so, we feel very strong about our position there. So if you and if that's the case and you take that off the table, it really comes down to culture, where the company is headed, and how they feel that they can take care of their customers and compete. And that's where we think we, over the long term, we're gonna win. So that's how we do it. Russell Gunther: That's great, guys. Thank you for all the help and for taking my question. Operator: Our next question comes from Will Jones from KBW. Please go ahead with your question. Will Jones: Yes. Hey, great. Good morning, guys. Punching for Catherine here. Maybe I just wanted to stick along the same lines. Like a lot has been made about some of the M&A that is out there and what that could mean for the talent acquisition front as well as the client acquisition front. But I wanted to ask you guys, you know, we're talking about how big this opportunity is, but you guys are seeing it and living it every day on the ground. Is that opportunity, you know, is it out there, you know, right now? Is it, you know, is the, are you actively seeing, you know, this big opportunity we're talking about in hiring in terms of just your boots on the ground there? Christopher T. Holmes: Yeah. Good morning, Will. It's Chris. You know, I think these things, and I don't want to point to anything specific, so I'll point I'll look in the mirror. Okay. Remember, we did a transaction in 2025, and again, it just creates a lot of disruption for your own company, but also for others, and it creates a lot of activity. And I think all that depends on a lot of things. You know, how quickly the transaction closes, what the communication is during all that period, when conversion actually takes place, conversions become a big deal. But actually, the most important part of a transaction is integration. Because that's, and sometimes folks confuse conversion and integration. Integration starts from the second, actually, it starts before you make the announcement. Because, you know, teams are working together and you see how that goes. You then make an announcement, and you then go through all this period of, frankly, changes to how people do business. And, you know, all of us approach that a little differently, I would tell you. Some folks, especially if they're the lead acquirer, they say, yeah. Let me tell you how you do business now. And some folks don't like that and they'll go somewhere else. Our approach tends to be a best approach. We evaluate how both companies do business and we end up adopting some of both. And we also end up adopting, we take an approach of what we call a best athlete approach, and we take folks from both companies depending on what works best for the whole. And so again, I'm telling you all that to tell you, it is not, there is, it's so much more art than science. All of that's going on in a lot of places right now. And so it evolves over time. Sometimes there's an immediate exodus of people because they just go, this is not gonna work. Okay? Or it's not gonna work for me. Other times, there's never an exodus of people, and I'd say most commonly, there's a slow drip. And so all of those are going on with multiple transactions. And we're out there playing in that sandbox. But again, our approach is, hey. Make sure we have the right culture, make sure that people know our long-term plan and that this is a great place to be. And make sure that they can take care of their clients. That's, that is the most, I'd say, important thing. And so I wish I could give you a little something a little more formulaic that could work its way into an EPS model, but all of that's going on, and depending on who you're talking about, you know, I would say there's a couple of big transactions going on in our market. And I think that the two different bigger transactions are taking different approaches. Michael M. Mettee: Yeah. And, Will, this is Michael. You know, to your point on disruption, and Chris mentioned some other calls. You know, one of the markets that's been called out, and some of it's Huntsville, Alabama. And if you look at Huntsville, bankers, there hasn't been necessarily M&A that's driven, but banker disruption has been on fire for six months. And, you know, we look up in the fourth quarter and we're really excited about the team we have in Huntsville right now. Yeah. And so, but there's, and amongst banks, I mean, I don't, you know, write this in stone, but there's, we have 50 or 60 bankers that moved between banks in the past six months. And we look at our team and we see the opportunity there. We're super excited about them. Relatively new, but very experienced market bankers. So not even M&A related. It's just opportunity related. And so that's, it's happening in and all around us. And we think we're poised to, are well-positioned to be successful with that. Will Jones: That's great. Thank you both. That's all very helpful content. I think we're all just trying to contextualize what we're talking euphorically about this hiring opportunity that exists and just wanted to see if maybe there's an immediacy to it or from your lens that it might take a little time to get there. So I appreciate that context. Michael M. Mettee: And, Michael, maybe for you, I will just, sorry. Not to interrupt you, but I think the answer to that is both. There is immediacy, but we're not just thinking about the next two weeks. Right? Yeah. This is a three, five, seven-year kind of opportunity with all this going on. And so, you know, these things take a little bit of time. So to answer both, it's probably not what you're looking for. Christopher T. Holmes: But Michael, I was gonna say exactly the same thing. They enter both, and I would say this, is what folks, what tends to be what helps FBK is folks view us as having a very long runway. And they view us as being able to, they view us as having a really bright path forward. And so that helps us and we play the long game there. So we're much more interested in, hey, we're gonna be here. We're gonna play the long game, and we think that's gonna be a winning formula. So it is both. Will Jones: Okay. That's very helpful. I appreciate you guys contextualizing that for us. Michael, maybe one for you on the margin. It's great to see the higher NIM this quarter. You guys seem to consistently outperform where you guys expect the margin to be. And then we have a little bit of higher guide and it's really just been a large function of you guys, you know, good managers of deposit costs. But as we enter kind of a '26 period where we expect growth to pick up even from where we are today, what do you think just incremental deposit betas will look like? And what kind of leverage do you feel like you still have to manage deposit costs over the course of next year? Michael M. Mettee: Yeah. Well, that's a really good question. Yeah. We feel good about the margin guide and the growth opportunity. I will say that mid to high single-digit growth at a 3.80 kind of core margin. However, as you mentioned, you know, as people come in entrance, you know, sometimes, when you hire people or not sometimes, a lot of times, to bring over relationships, you gotta start with bringing over a customer and it's probably paying above market for deposit costs and then you earn their business every time and we fully expect that our bankers can do that and will do it. So, and of course, I'm sure our competitors do as well. So, more people coming into our markets, you know, paying higher costs. I personally get flyers from a lot of large banks, you know, twice a week or mail offering things that are pretty exorbitant. So we do realize it's out there. Really comes down to the customer experience and relationship long term. And earning that business, and that's what we're focused on. So you could see both on the loan and deposit side, some margin compression if things get really, really, kind of dicey or competitive out there. But I think so far, everybody's pretty focused on everybody meeting competitive wise as well. You know, kind of lowering cost as rates go down. I will say this too, though, Will, because this is counterintuitive to maybe a lot of other institutions. Yeah. We want to be a fair value proposition to our customers. We want to earn, Chris mentioned the long game. We're thinking, yeah, years and decades. And so we're not trying to get everybody to zero cost deposit. We want to be fair. We want them to have their money here. We want it to be their entire family, their business, everybody. And so, we expect that on both sides of the balance sheet. We have fair loan yield. We won't be the lowest loan pricing either. But we want to take care of our customers. And so, you know, our deposit cost does run a little bit higher than some others. And our loan yields run a little bit higher. And so, we think that's the fair thing for the customer and for the company and for the shareholders. So that's kind of a different approach probably. Will Jones: Yes. Just maybe expectations on what incremental deposit betas will look like in this kind of competitive market you're describing? Michael M. Mettee: Yes. I mean, think if you're still looking at that 55%, 60% range, which is where it's been. I think on interest-bearing, but we'll see how, you know, treasuries are up. Right? A lot of external noise to the banking system that could put pressure on money moving back into some of those US treasury money market funds, which could impact that. But we've been pretty consistently able to move down deposit cost with rate cuts. That being said, we only think there's gonna be one or so where we sit today. Will Jones: Yeah. Okay. Good stuff. Maybe just lastly for me, Chris, we talked a little bit about just the appetite for what incremental M&A will look like and you mentioned for the right opportunity. You guys would keep your eyes and ears open. What could you just frame what that opportunity would look like maybe as you think about the right size, the right geography, just what you would look for in an M&A transaction today? Christopher T. Holmes: Yeah. So geographically, we're gonna be looking around the Southeast and the Carolinas even into Virginia, which is a contiguous state for us from where we are today. And not far at all geographically. So Carolinas, Virginia, Georgia, Alabama, some things that could even get down into the northern part of Florida would all be the types of places we would be looking. We would prefer, okay, not necessarily have to be contiguous to some of our existing geography. And here's an example of what I mean by that. I mentioned Virginia. Hampton Roads, Virginia is actually quite a long way from us and so that would be less interesting for us than, let's say, Western Virginia, they are the places like, I don't know, I'm hesitant to name the towns. So I'm a little hesitant to get too specific. But you can understand what I mean by, you know, jumping over big parts of geography is generally not what we're looking for. We like for it to be a little closer to our existing but in all of those locations. So I would think of more kind of Western Virginia, but, you know, the Carolinas certainly of interest. Georgia, Alabama, all of our existing Southeastern, let's say, geography. And then, you know, we like banks that we generally aren't looking for things that we have to fix in a significant way. We like companies that perform well. Asset-wise or size of the institution. We love things that are, call it anywhere from a couple of billion in assets all the way up to, you know, 6 or 7 even billion in assets. So we would, we love, that's a description of what we target. There are some cases where we may go smaller than that on the asset side. If it's a market that we're particularly interested in and we like what they do in that market, so there are cases where we go small in that. Asset-wise. Will Jones: Okay. That's great color, Chris. I appreciate it, guys. Thanks for the questions and congrats on a great year. Christopher T. Holmes: Thanks, Will. Thank you so much, Will. Operator: Our next question comes from Steve Moss from Raymond James. Please go ahead with your question. Thomas: Hey, guys. This is Thomas on for Steve. Could you just talk maybe about the loan pipeline and client sentiment broadly? How is client confidence these days? And what is their appetite for investment? Michael M. Mettee: Yeah, Tom. Good morning. It's Michael. Yes. Actually, the pipeline is pretty strong. I think we've been saying that we've been seeing strong pipelines. There's some deals that pushed into '26 from '25. And so I'd reiterate that they've been strong. Clients, I think a lot of the noise that happened maybe early last year that limited some of that early growth is past all the noise is still out there. I think that they're just operating in a way that, hey. It's kind of new norm, and we're excited about the future and investments occurring. We're seeing a lot of existing clients start new projects or deals, and a lot of times, they're able to take their older stuff to the permanent market if it's multifamily or real estate-based. And C&I activities picking up. So, really actually pretty positive operating environment business-wise. Thomas: Okay, great. Appreciate that color. And just one more for me. Last quarter, I know you guys indicated that loan growth would largely be governed by core deposit growth. And it looks like maybe core deposit growth was a little challenged in the fourth quarter. I saw you took on some brokered. Can you maybe talk about your core deposit growth outlook for 2026 and maybe the strategy that's gonna get you there? Michael M. Mettee: Yeah. With core deposit growth always a focus for us, you know, we've got a lot of funding capabilities that you, that we would exercise in kind of the shorter term if need be. I'd say actually when I think about core, it goes back to a comment I made a little bit earlier that sometimes you bring over customers and the intent is to turn them into relationships, is another word for core. And a lot of times, you know, if that didn't materialize ever, you know, some period of time, you know, and they're higher cost, we'll just go ahead and say, hey, maybe we're not the place for you. And so, that's where you can see deposit movement in and out of the balance sheet and that's a continuous process. Brokered small number for us, you know, 4% or so, balances. We do make sure that we have funding in place if need be. And I think from a perspective of how we're gonna do it in '26, I do think it gets back to what Chris said in his comments is, you know, the focus on the customer, customer experience, making sure we have the right treasury management, platform and products, as we go, I'll call more upstream a little bit opportunities, you know, that kind of middle market commercial client, a lot of opportunity there. But even, you know, half our business is consumer as well. And so, retail network, we've got to reignite the focus on our client there. And we're in the process of that and just really adding and activating relationships. So it's broad-based. You can't point to just a single thing. Because we're in a lot of these different businesses and so a lot of opportunity in our geographies. Thomas: Okay. Got it. Thanks for taking my questions and congrats on a good year. Michael M. Mettee: Thanks, Tom. I appreciate it, Tom. Bye. Operator: And at this time, we'll be ending today's question and answer session. I'd like to turn the floor back over to Christopher T. Holmes for any closing remarks. Christopher T. Holmes: Alright. Thank you so much again. We appreciate everybody joining us on the call. And we're glad to have had a good year. We're looking forward to 2026. And so thank you all and reach out directly if we need to give you more information. Operator: And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Welcome, everyone. The Texas Capital Bancshares, Inc. Full Year and Q4 2025 Earnings Call will begin shortly. To ask a question, please press star followed by one on your telephone keypad. Thank you. Hello, everyone, and thank you for joining the Texas Capital Bancshares, Inc. Full Year and Q4 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I will now hand over to Jocelyn Kukulka from Texas Capital Bancshares to begin. Please go ahead. Jocelyn Kukulka: Good morning, and thank you for joining us for Texas Capital Bancshares' Fourth Quarter 2025 Earnings Conference Call. I'm Jocelyn Kukulka, of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share, and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-Ks, and subsequent filings with the SEC. We will refer to slides during today's presentation which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A. I'll now turn the call over to Rob for opening remarks. Rob Holmes: Thank you for joining us today. 2025 was a defining year in this firm's history. In the third quarter, we achieved our stated financial targets, marking completion of our transformation and delivering the largest organic profitability improvement of any commercial bank exceeding $20 billion in assets over the past two decades. We reinforced this achievement in the fourth quarter with a 1.2% ROAA, demonstrating that our third quarter performance was not an anomaly but instead reflects firm-wide client obsession, unwavering commitment to operational excellence, and a balance sheet and business model increasingly centered on the high-value client segments that we are uniquely positioned to serve. Full-year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024 and signals a fundamental improvement of our earnings power. The result of disciplined execution, strategic investments, conservative portfolio management, and sustained operational leverage. Our comprehensive 2025 results validate this trajectory. Record adjusted total revenue of $1.3 billion. Record adjusted net income to common stockholders of $314 million. Record adjusted earnings per share of $6.8. Record adjusted pre-provision net revenue of $489 million. Record fee income of $192 million from strategic areas of focus. Equally important, we achieved record tangible common equity to tangible assets of 10.56% and record tangible book value per share of $75.25. Metrics that underscore both the quality of our earnings and the prudence of our capital allocation strategy. Our disciplined capital allocation process remains focused solely on driving long-term shareholder value. We continue to bias capital towards franchise accretive client segments, evidenced by commercial loan growth of $1.1 billion or 10%. And interest-bearing deposits excluding brokered and indexed, increased $1.7 billion or 10% year over year. During periods of market dislocation in 2025, we opportunistically repurchased 2.2 million shares, or 4.9% of prior year shares outstanding, and approximately 114% of prior month tangible book value per share. Since 2020, we repurchased 14.6% of our starting shares outstanding at a weighted average price of $64.33 per share, while adding 340 basis points to our peer-leading tangible common equity to tangible assets ratio. These achievements demonstrate a fundamentally stronger business model, one positioned to deliver consistent, industry-leading returns and sustainable value creation for shareholders. Having established a strong foundation, our strategic focus now shifts to consistent execution and realizing the full potential of our investments. Our infrastructure, talent, and platforms are designed for scale, enabling us to handle significantly higher volumes and revenue while maintaining disciplined expense management. A defining driver of our improved profitability is the diversification and growth of our fee income streams. Fee income areas of focus generated $192 million in 2025, with substantial growth opportunity ahead. These businesses are differentiated in the market, capital efficient, and provide revenue stability across economic cycles. Focused investment in product capabilities, technology platforms, and talent will drive fee income as a percentage of total revenue higher, further enhancing our return profile and reducing earnings volatility. Transformation over the past several years has fundamentally repositioned Texas Capital as a scalable, high-performing franchise. This positions us in a new phase of consistent execution and compounding returns. The combination of balance sheet growth, operating leverage, and fee income expansion creates multiple paths to enhance profitability and sustainable shareholder value creation. Our focus is clear: execute with discipline, scale with intention, and deliver consistent superior returns. Our strategy, platform, talent, and momentum position us to achieve these objectives. Thank you for your continued interest in and support of Texas Capital. I'll turn it over to Matt for details on the financial results. Matt Scurlock: Thanks, Rob, and good morning. Starting on Slide five. Fourth quarter results capped a record year with broad-based improvements across all key metrics. Our increasingly durable business model, uniquely positioned to deliver high-quality client outcomes, is translating into sustainably strong financial performance that we knew was possible when this transformation began. For the second consecutive quarter, adjusted return on average assets exceeded our legacy 1.1% target, reaching 1.2% in Q4. The 2025 delivered 1.25% return on average assets, while full-year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024. A testament to the strategic repositioning we've executed since September 2021. Over year quarterly revenue increased 15% to $327.5 million as a resilient net interest margin, strong fee generation, and improved expense productivity supported the second consecutive quarter of pre-provision net revenue at or near all-time highs. Full-year adjusted total revenue reached $1.26 billion, the highest in firm history, up 13% year over year. This reflects 14% growth in net interest income to $1.03 billion and 9% growth in adjusted fee-based revenue to $229 million, marking the third consecutive year of record fee income and underscoring the durability, diversification, and scale potential embedded in our current platform. Full-year adjusted noninterest expense increased modestly by 4% to $768.9 million, consistent with our full-year guidance, demonstrating our proven ability to effectively support investment and growth capabilities while delivering continued operating model improvements. Quarterly adjusted noninterest expense decreased 2% or $4.2 million to $186.4 million, benefiting from continued expense realignment and regular accrual adjustments that resulted in outperformance relative to the guide. Taken together, full-year adjusted PPNR increased $119 million or 32% to $489 million, a record high for the firm. This quarter's provision expense of $11 million resulted from $10.7 million of net charge-offs on a relatively flat linked quarter total loan balance. With our continued view of the uncertain macroeconomic environment, which remains decidedly more conservative than consensus expectations, full-year provision expense as a percentage of average LHI, excluding mortgage finance, came in at 31 basis points, the low end of our prior 2025 full-year guidance. Supported by year-over-year improvements in portfolio quality metrics. Adjusted net income to common at $94.6 million for the quarter or $2.8 per share increased 45% year over year, while full-year adjusted net income accounted for $313.8 million or $6.8 per share improved 53% over adjusted 2024 levels. This financial progress continues to be supported by a disciplined capital management program contributed to 13.4% year-over-year growth in tangible book value per share to $75.25, an all-time high for the firm. Our balance sheet metrics continue to reflect both operational strength and financial resilience, with ending period cash balances of 7% of total assets and cash and securities of 22%, in line with year-end targeted ratios. Focus routines on target client acquisition are delivering risk-appropriate and return-accretive loan portfolio expansion. The commercial loan balance is expanding $254 million or 8% annualized during the quarter. Total gross LHI increased $1.6 billion or 7% year over year to $24.1 billion, with growth driven predominantly by commercial loan balances, increased $1.1 billion or 10% year over year to $12.3 billion. As expected, real estate loans declined $31 million quarter over quarter, as payoffs and paydowns outpaced construction fundings and new term originations in the fourth quarter. The full-year average commercial real estate loan balances did increase modestly year over year. Our expectation is for commercial real estate payoffs to continue into 2026, with full-year average balances down approximately 10% year over year. Our portfolio composition remains weighted to conservatively leverage multifamily, further characterized by strong sponsorship and high-quality markets. Average mortgage finance loans increased 8% linked quarter to $5.9 billion, driven by strong industry demand, our clients' preference for our offerings, and what is an increasing holistic relationship. And modestly increasing dwell times. Average mortgage finance loans grew 12% for the full year, slightly outpacing guidance. Given unpredictability and rate expectations, we remain cautious on our outlook for average mortgage finance balances going into 2026. Estimates from professional forecasters suggest total market originations to increase by 16% to $2.3 trillion in 2026, compared to our internal estimates of approximately 15% increase in full-year average balances should the rate outlook remain intact. As we contemplate potentially higher volumes in the mortgage finance business, it is important to note the material changes in this offering over the previous few years. In addition to the significant credit risk and capital benefits of the approximately 59% of existing balances now in the well-discussed enhanced credit structures, over 75% of current mortgage warehouse clients are now open with our broker-dealer. Nearly all maintain treasury relationships with the firm, which collectively drives significantly improved risk-adjusted returns should the industry realize anticipated 2026 growth. Full-year deposit growth of $1.2 billion or 5% was driven predominantly by our continued ability to effectively leverage growth in core relationships, to serve the entirety of our clients' cash management needs, partially offset by our continued programmatic reduction in mortgage finance deposits. Trends are evidenced in part by our sustainability to effectively grow client interest-bearing deposits, which when excluding multiyear contraction and index deposits are up $1.7 billion or 10% year over year, while also effectively managing deposit betas, which are 67% cycle to date inclusive of the mid-December cut. The quarter, ending noninterest-bearing deposits excluding mortgage finance increased 8% or $233 million. Average noninterest-bearing deposits excluding mortgage finance remaining flat at 13% of total deposits linked quarter. Period-end mortgage finance noninterest-bearing deposit balances decreased $963 million quarter over quarter as escrow balances related to tax payments begin remittance in late November, and run through January, before beginning to predictably rebuild over the course of the year. For the quarter, average mortgage finance deposits were 85% of average mortgage finance loans, down from 90% in the prior quarter and 107% in Q4 of last year. We expect the mortgage finance self-funding ratio to remain near these levels in the first quarter, with potential for further improvement expected during the seasonally strong spring and summer months. The cost of interest-bearing deposits declined 29 basis points linked quarter to 3.47%, and 85 basis points from 2024. Accounting for realized beta on the December cut, we expect cumulative beta to be in the low seventies by the end of the first quarter assuming no Fed actions during Q1. Our model earnings at risk increased modestly this quarter, with current and prospective balance sheet positioning continuing to reflect the business model that is intentionally more resilient to changes in market rates. Despite short-term rates declining approximately 100 basis points during 2025, we delivered 14% full-year net interest income growth, 13% total revenue growth, and a 45 basis point year-over-year increase in net interest margin. This resilience is in part the result of disciplined duration management and acknowledge of our improved ability to deliver returns through cycle. During Q4, $250 million in swaps matured at a 3.4% receive rate. Replace this with $1 billion in receive fixed over swaps executed at 3.41%. Additional $400 million in swaps at a 3.32% received rate became effective early Q1. Looking ahead, we will continue disciplined use of our securities and swap book appropriately augment rates following generation, embedded in our current business model. Quarterly net interest margin declined nine basis points and net interest income decreased $4.3 million reflecting timing differences related to lower interest rates on our super weighted loan portfolio relative Fed fund driven deposit cost reductions realized in the quarter. The benefit of reduced deposit costs will be more fully reflected in January's financials. Year-over-year quarterly net interest margin expanded 45 basis points, driven primarily by favorable deposit betas and structural improvements in portfolio efficiency, including a reduction in our mortgage finance self-funding ratio from 107% to 85%. Fourth quarter adjusted noninterest expense increased 8% relative to the same quarter last year, primarily driven by higher salaries and benefits expense aligned with investment in our areas of focus. As a reminder, first quarter noninterest expense is expected to be elevated due to annual accrual resets and seasonal payroll and compensation expense. Full-year adjusted noninterest income grew 8% to $229 million, a record for the firm. Fee income from our areas of focus continues to differentiate our client positioning and strengthen our revenue profile. Treasury product fees again delivered industry-leading growth, increasing 24% for the full year. This growth reflects robust client acquisition and 12% gross P times V expansion, both significantly outpacing industry benchmarks and demonstrating our competitive advantage in getting the primary operating relationship with our target clients. Investment banking achieved substantial scale expansion, with transaction volumes across capital markets, capital solutions, and syndications climbing nearly 40% year over year. While average capital markets deal sizes contracted relative to 2024, this material increase in volume underscores our deepening market penetration and the expanding nature of relationships across the target client universe. Total notional bank capital arranged increased 20% this year, positioning us as the number two ranked arranger for traditional middle market loan syndications nationwide. This ranking reflects our market leadership and a core client segment. and ours. While highlighting our ability to provide client financing solutions that best fit both their balance sheet Texas Capital Securities delivered noteworthy traction as well. With 2025 volume increasing 45% year over year. Together, these results validate our focus on building diversified, scalable revenue streams while deepening our primary operating relationships with middle market and corporate clients. Total allowance for credit loss, including off-balance sheet reserves of $333 million, remains near our all-time high. Which when excluding the impact of mortgage finance allowance and related loan balances were relatively flat linked quarter, at 1.82% of total LHI. The top decile among the peer group. Net charge-offs for the quarter were $10.7 million or 18 basis points of LHI, related to several previously identified credits in the commercial portfolio. Positive grade migration trends over the first March of the year resulted in an 11% reduction year over year in criticized loans. During the fourth quarter, select commercial real estate multifamily credits migrated from past to special mention. These projects and lease up continue to require ongoing rental concessions to gain or maintain occupancy. Impacting net operating income in spite of material project specific equity and sponsorship support. Capital levels remain at or near the top of the industry. CET1 finished the quarter at 12.1% with full-year improvement 75 basis points, reflecting strong earnings generation, and disciplined capital management. Tangible common equity to tangible assets increased 58 basis points for the full year. A significant driver of capital strength is our mortgage finance enhanced credit structures. By quarter end, approximately 59% of the mortgage finance loan had migrated into these structures. Bringing the blended risk weighting to 57%. This improvement is equivalent to generating over $275 million of regulatory capital. With client dialogue suggesting an additional five to 10% of funded balances could migrate over the next two quarters. Further enhancing both credit positioning and return on allocated capital. During the quarter, we purchased approximately 1.4 million shares $125 million at a weighted average price of $86.76 per share. Representing a 117% of prior month's tangible book value. Full-year share repurchases totaled 2.25 million shares or $184 million, equivalent to 4.9% of prior year share outstanding. Finally, tangible common equity tangible assets finished at 10.6% ranked first amongst the largest banks in the country. While tangible book value per share increased 13.44% year over year to $75.25. The fifth consecutive record quarter for the firm. Looking ahead to 2026, our outlook reflects continued realized scale from multiyear platform investments. We anticipate total revenue growth in the mid to high single-digit range. Driven by industry-leading client adoption and continued growth in our fee income areas of focus. With full-year noninterest revenue expected to reach $265 to $290 million, anticipated noninterest expense growth in the mid-single digits reflects increased compensation expense tied to improved performance. Target expansion into fine client coverage areas, and platform investments meant to expand upon best-in-class client execution, further enhancing our operating resilience, supporting future enhancements to structural profitability. Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we are moderating our full-year provision outlook to 35 to 40 basis points of average LHI excluding mortgage finance. Taken together, this outlook reflects another year of positive operating leverage and meaningful earnings growth. Operator, we'd like to now open the call for questions. Thank you. Operator: When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Woody Lay from KBW. Woody Lay: Good morning, Lucas. One wanted to start on the investment banking and trading outlook and specifically the investment banking pipeline, I believe in 2025, you know, deals kinda got pushed to year-end just given some of the tariff volatility over the first half of the year. So how does the pipeline look entering 2026? And how do you think about pacing of investment banking fees relative to the back half of the year? Rob Holmes: Woody. Let me just give you a little facts on the investment bank performance in '25. We arranged about $30 billion of debt across term loan B, high yield, and private placement. And then on top of that, about $19 billion in lead less indications in the bank market. So we ranged about $49 billion of debt for our clients, which is very impressive. Broad new client penetration and leadership in the segment. IB transaction volume was up about 40%. The fees were much more granular. So people like you and others would suggest that's a healthy, better earning stream. Equities, we participated in more transactions than we had forecasted. And even though some got pushed, and sales and trading is past $330 billion of notional trades since the opening of the business. That's up about 45% since last year. So there's broad growth. We're starting to see repeat refinancings. Remember, we just really got into this business in earnest, like, three years ago. And so now you're starting to see the repeat of a client that came onto the platform three years ago, which will add to the earnings going forward. I would say that what you are really focused on in terms of things that got pushed was more in the M&A space and equity space. And we are seeing, and we do expect to see that pull through and pipelines remain very healthy. But it's very broad now. Public finance, best we can tell our public finance desk has grown for a de novo public finance desk faster than any public finance desk that we can find. And the synergies in the investment bank across commercial banking and corporate banking is proved to be very, very strong. Like, just the example, stay on public finance. Have a government, not-for-profit segment in corporate. Well, before we had Pug Finance, all we could really do lend to them short term and do the treasury. And now we can lend to them short term. We can do the treasury. We can do financings for them as well in the public markets. So it's working as anticipated. And we remain very, very optimistic and proud of the business. Matt Scurlock: What did the fee income from treasury wealth and investment banking top? $50 million for the second consecutive quarter which when you compare that to the $47.4 million of total fees for the full year 2020 from those three categories, so it's just how much progress we've made since announcing the transformation. Full-year guide for noninterest income is to increase 15 to 25% to $265 million to $290 million which is underpinned by investment banking fees of $160 million to $175 million. And if you just think about Q1 outlook as for stable linked quarter performance. So total noninterest income is $60 million to $65 million investment banking $35 million to $40 million which to Rob's comment, expectation of continued platform maturity and integration all the hires and capabilities that we've built over the last twelve to eighteen months. Driving positive trajectory both in fee income and investment banking as we move through the year. Rob Holmes: And I would just add one more first. It didn't happen in the fourth quarter. It happened this quarter, Woody, but we did lead our first sole managed lead left equity deal. Which we think is a first for a Texas-based firm for any period that we've been went back and found. So, really, really excited about the business. Woody Lay: That's great to hear. That's really, great color. I appreciate that all. Next, I just wanted to hit on capital and a little bit of a two-part question. First, just you were pretty active on the buyback front in the fourth quarter. Was that a reflection of the elevated CRE paydowns freed up some capital? And then the second question is, you know, you reiterated the CET one guide of over 11%. You know, you've been price sensitive on the buyback. Historically, stocks now trading well above where you bought in the fourth quarter. How do you think about additional buybacks from here? Matt Scurlock: Yeah. We're pushing CET one up 75 basis points to 12.13% while growing loans $1.6 billion or 7%, buying back 5% of the company for 114% of prior month tangible, and billing tangible book value per share by 13.44%. We're obviously pretty pleased with how we utilize shareholders' capital for their benefit in 2025. We're highly focused on doing it again in '26. And to your point, I think we have a lot of options at our disposal. The published strategic objective of being financially resilient to market and rate cycles for us is a core is paramount. And while we think we have significant capital in excess of internally observers profile Rob said repeatedly that carrying sector-leading tangible common to tangible assets is a raw material contributor to our ability to attract the right type of clients. That's gonna benefit the shareholder over time and is an advantage that we're currently unwilling to give up. I would say as the profitability continues to improve, the resources available support items on the capital menu also expands. So if you're trading at 1.3 times tangible, take the 2026 and 2027. Consensus estimates for ROE buying back today suggests that you're purchasing it book value in two and a half years. Which could certainly make sense for us given our internal view of forward earnings trajectory and then an ability to generate both book equity and regulatory capital. Rob Holmes: I think also what if we could to really focus well, I think humbly, we proved it pretty good allocators of capital over these over the past several years. With that Matt just outlined. But we also continue to drive structural improvements in the platform. So if you remember, we talked about the SPEs structure and mortgage finance. We have the majority of our mortgage finance sector clients in that structure now. 77% or over 70% of those clients are open with the dealer. We do treasury with basically a 100% of those clients. But when you move those clients, the sophisticated best of class clients to the SPE structure, you go from the risk weighting of a 100% down to sub 30% now on average, which clearly is a better model and releases capital. And, we're not gonna we'll forever try to drive efficiencies both in cost, but also capital in the businesses that we have to firm. Woody Lay: Alright. That's all for me. Thanks for taking my questions. Thanks. Operator: Thank you. Our next question comes from Michael Rose from Raymond James. Michael, your line is now open. Please go ahead. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Maybe just on the expense outlook. I think you mentioned, obviously, some wage inflation clearly and some hiring efforts. Can you just talk about some of the areas where you're looking to kind of incrementally add? Is it on the lender front? Has it continued to build out the capital markets platform to is it all of the above? Just trying to get a better breakdown of how we should think about that mid-single-digit expense guidance as we move forward. Matt Scurlock: You bet, Michael. We are highly focused on leveraging the material previous material investments that we've made by expanding capabilities and adding targeted coverage with the 2026 expense guide continue to heavily feature growth in salaries and benefits with select increase in technology. We now have a, we think, a multiyear pattern of effectively improving the productivity of the expense base through the deployment of technology solutions which we anticipate is only gonna accelerate as we more fully adopt AI across the franchise. I would call out this expected seasonality in the expense base, which will increase at a higher percentage this year just given the larger portion of total salaries and benefits that's currently tied to stop. So the current guide does anticipate Q1 noninterest expense between $210 million and $215 million with about $18 million of seasonal comp and benefits, the expense and then another $10 million from the combination of incentive comp reset late quarter merit increases and full quarter impact of late year hires. As you exit Q1, we think about salaries and benefits around $105 million a quarter and then other noninterest expense in that $75 million or so a quarter range. And then importantly, the mid-single-digit expense guide is sufficient to cover the current revenue expectations and the composition inclusive of the fee growth. Do you wanna add on that, Rob? Rob Holmes: I guess the only thing the last thing I would say as we as we change the mix of investment, to a higher mix front office, in terms of expense mix with salaries and benefits. That's been a long journey. We continue to do that. But the revenue synergy today that we get from an incremental front office hire, is dramatically more. So remember, you know, Matt talked about this a lot, Michael. We talked about it with you a lot. When we're building these businesses, we had to build the back, the middle, and front office. The back and middle are substantially complete as we discussed a lot. So we add somebody to the front line the return on that hire is much greater. Which is reflected in everything that Matt said. Michael Rose: Great. I appreciate the color. Maybe just as my follow-up. Can you just talk about the opportunities? I know you're not going want to talk about loan growth figures per se, but high single-digit commercial loan growth, CRE down a little bit. There's obviously been some market some mergers in and around your markets. Can you just talk about and then you obviously have hired a lot of lenders, right, as you've kind of upgraded the staff. Is there any reason to think that the loan growth LHI momentum again, I'm not asking for a target. But that wouldn't continue against kind of a more, in theory, favorable backdrop some of the, momentum that you have just on the hiring front that you've made already then just a more conducive loan market? Thanks. Matt Scurlock: Mike, I think a lot of the trends that you seen in the 2025 should really continue into 'twenty six with strong C and I and more finance growth offsetting contracting commercial real estate balances. So that we noted in the prepared remarks, the guide contemplates a $2.3 trillion mortgage origination market, which sits on top of a 6.3% thirty-year fixed-rate mortgage. Which for us would drive about a 15% increase in full-year average mortgage finance balances. As Rob just noted, it's obviously a completely different mortgage finance offering than the legacy warehouse we've had at TCPI. 59% of these loans are in the enhanced credit structure, which have the average risk weighting of 28%. 80% of these clients are both the dealer, nearly all of them take advantage of our treasury products. We which suggested any realized pickup in one to four family originations is gonna generate significantly higher and more diversified per unit risk-adjusted return for us this year. We also think we'll have another record year of client acquisition in the C and I focused offerings, which should be enough to offset continued balance reductions in CRE, which in our view should be pretty expected given multiyear pullback in originations really across all property types. I think all those things together, Michael, would support another year of mid to high single-digit growth in gross LHI. Rob Holmes: Yeah. And, Michael, there the reason I said you know, when we first started, I said loan growth doesn't matter. Was is because we knew loan growth would come if we had the right clients left in. And we also knew that I mean, like like we just talked about, we ranged you know, $30 billion of term loan B high yield and private placement debt for clients that wasn't bank debt, which helped the client and was a great risk management tool for us. And then also, as as we mentioned, we're number two in the country in middle market, lead left bank syndication leads. Well, there's a lot of banks out there that would just kept that exposure. Which we don't think is the right decision for the client, but it's certainly not the right decision for us from a risk management perspective. So we're not trying to maximize loan growth. We're trying to provide the clients with the right solutions and keep really good credit discipline. And have a great client outcome. So that's why we said what we said before. Loan growth does matter. But it's going to come. In spite of our prudent risk management because of our client acquisition and client selection. Matt Scurlock: Another way just to think about that client acquisition Michael, is mean, commitments for us in the C and I space. Linked quarter, we're up over 25%. So we continue to drive low double-digit growth in C and I balances and our last quarter, think we grew commitments 18, but we grew commitments percent year over year and again those are up to 25% linked quarter. A lot of client activity showing up on platform. Michael Rose: Okay. So a lot of momentum, to continue. Thanks for all the color, guys. Appreciate. Rob Holmes: Sure. Operator: Thank you. Our next question is from Casey Haire from Autonomous Research. Your line is now open. Please go ahead. Jackson Singleton: Hi. Good morning. This is Jackson Singleton on for Casey Hare. I was wondering if you could just provide some more color into recent credit trends and maybe help us kinda understand what factors drove the increased in the provision guide year over year? Matt Scurlock: Yeah. We did experience modest linked quarter increase in special mention loans, which as we noted in the comments was tied exclusively to a handful of multifamily properties. That are experiencing net income net operating income pressure just given required rental concessions to maintain target occupancy levels? These are extremely high-quality sponsors that are in historically strong Texas markets, which we think over time are gonna benefit from the limited new supply and increased level of absorption. I would say, importantly, the ratio of criticized loans to LHI as we exited the year marked the best level since 2021. With really strong credit metrics generally across all categories. We've had a 35 to 40 basis point guide, years ago, moved it to 30 to 35 basis points this year, came in obviously at the low end of the guide and we're certainly a group that wants to operate from a position of financial resilience to felt it prudent to move to 35 to 40, again, consistent with things we've done in the recent past. Jackson Singleton: Got it. Okay. Thank you for that. And then just for my follow-up, just a NIM question. Can you help us think about the drivers for 1Q and then maybe any sort of range you could help for our modeling? Matt Scurlock: Yeah. I think two fifty to two fifty five for one q on NII. Flattish margins, so somewhere in the mid threes. That's with one month average SOFR down about 27 basis points. If you think about the mortgage finance business in Q1, stay at the 85% self-funding ratio on $4.8 billion average balance. Again, with 27 basis point reduction in average one month SOFR quarter over quarter, that should push the yield on the mortgage finance business down to three eighty five or three ninety or so. So those are probably the factors that I would incorporate. The other comment that I'd make is we're 67% recycled beta inclusive of the December cut. Once all those pricing actions are passed through the deposit base, you're somewhere in the low seventies, probably by the end of January. For the full-year outlook, we've been pretty noting our expectation that straight deposit betas were going to moderate. So any incremental cuts in '26 the guide would incorporate a 60% interest-bearing deposit paid up. Which is obviously also what we'd now have in our earnings at risk down 100 scenarios. Jackson Singleton: Got it. Okay. Great. Thanks for taking my questions. Matt Scurlock: You bet. Thank you. Operator: Our next question is from Anthony Elian from JPMorgan. Anthony Elian: Hey. Hey, Matt. On mortgage finance, I'm curious what specifically drove the sequential increase in 4Q average balances. Was there any pickup in refi activity in, in that business? Matt Scurlock: Rates were lower than had incorporated in the Outlook, which it did drive a pickup in aggregate originations in inclusive of refi. Then you had slightly slightly longer dwell times as well, Tony, which supported those average balances. Anthony Elian: Okay. And then my follow-up on credit, can you give us more color on what drove the increase in special mention? Know you called out the multifamily credits, but why did this surface now? And do you expect some sort of resolution on those credits? Thank you. Matt Scurlock: Yeah. You bet. So it's a $100 million. We $205 million $250 million, excuse me, of special mission commercial real estate on a 5 and a half billion dollar portfolio. That we've experienced, I wanna say, $5 million of charge-offs on in the last thirty-six months. So we like to be proactive in communicating with you guys any potential downgrades or realized downgrades and as I noted in the previous question, simply a handful of Central Texas based multifamily properties where you had significant new product come online. That the market is working to absorb. Many of these properties offer rental concessions to bring folks into the apartment complex and they had to those for another year longer than they originally anticipated. We grade based on cash flow, Tony, not appraised value. Which is why we sometimes have more sensitivity and downgrades than peers. So that rental concession is pressuring their net operating income and resulted in us moving it to special mention. So we feel very well reserved against these properties. They're clients that we do a lot of business with. Well structured with significant equity. There's no, in our view, pending wave. So if you look further upstream in the credit, scale or the credit grades, watch list was essentially flat. So there's nothing sitting behind this other than these properties that we've identified. Rob Holmes: I would say just to say, I think Matt three years ago, was ahead of all the bank peers pointing out that we were gonna have a small wave of provision increase in commercial real estate for a number of factors but we didn't we did not anticipate any real credit problems. We had worked through them. And that's exactly what happened, and I think this is very akin to that. Just to add what Matt said, I mean, we're in the top decile of firms since we started in and reserves added. And we're at an all-time high of reserves in the history of the firm at 1.82% excluding mortgage finance. So just think the percentages are high because the numbers are so small. Anthony Elian: Great. Thank you. Operator: Thank you. Our next question comes from Janet Lee from TD Cowen. Line is now open, Janet. Please go ahead. Janet Lee: Good morning. For to clarify, on NIM, so mid three thirty range for '26. If I were to think about the direction of travel for NIM beyond that point, can you sustain flattish NIM from there given mean despite rates coming down, a potential improvement in self mortgage self-funding ratio. I guess that would looks like you know, considering your $265 to $290 million fee income range for '26. Your NII could be, you know, very low single-digit growth to almost mid-single-digit growth there depending on where that lands. So I wanted to get some color. Matt Scurlock: Yeah. I think given some pretty good detail on expectations for deposit repricing, self-funding, the only component of the liability base we haven't described as expectations commercial noninterest bearing. Which we continue to experience and anticipate record new client acquisition with a lot of those economics showing up in treasury product fees. Which we've grown over 20% for multiple quarters now and delivered north of 10% growth in p times v for the last five years. We think about their contribution to overall deposit balance portfolio mix to stay around that 13% level. So, obviously, deposits are going to grow, commercial NIV will grow, but their percentage stay relatively static. Given some good hopefully, some good insights into how we think about the loan portfolio. We'll continue to invest cash flows from the securities book. We added about a billion 1 of securities last year at five and a half percent sold almost $300 million at 3%. So nice sequential picture of 80 basis points of improvement and the securities portfolio yields a nice sequential impact. To margin there. The hedge book today should cost us about $10 million pretax NII. In 2026. We are a little higher than we traditionally wanted to operate. On earnings at risk in a down one hundred. So you will see us selectively add to the swap book moving through 2026. We're much more active. The spread obviously changes. Depending on the curve, but we're much more active today. When we see the negative spread between two-year and one month. So for inside of 30 basis points, which as of yesterday, we were sitting there. So you'll see us add some swaps. I think all that together should give you a pretty good sense for how we're thinking about margin moving into 2026. And then just to reiterate, perhaps counterintuitively, all the all the work that we've done as a firm to reduce our reliance on margin NII as a sole contributor to earnings is perhaps again counterintuitively actually really supporting NII and margin because we're relevant to these clients across a wide range of products and services. They're generally less price sensitive. And then just the final comment there, Janet, I mean, we've shown an ability to deliver increasing net interest revenue and PPNR in a wide range of interest rate environments. Including delivering 14% increase in NII, 13% increase in revenue, and 32% increase in PPNR, with rates on average down 100 basis points this year relative to last year. Rob Holmes: Only thing I'd to reiterate is what Matt said at the end, because I think it's I just wanna make sure everybody got it. I think it's it's a key to the strategy. The clients are less price sensitive on rate when you're adding value a lot of different ways and you're relevant to your client with quality client coverage and proactive ideas and execution on other fronts. Become much less price oriented on deposits. So just wanna make sure like, I think all the lines of business are contributing to that improvement in them. Janet Lee: Got it. And just one follow-up for me. Appreciate the comments around commercial real estate payoffs and balances coming down 10% year over year. That commentary seems somewhat different from most of the banks that are beginning to see CRE balances inflecting or stabilizing. Is it just a function of your appetite to not grow CRE originate CRE loans as much or your CRE is more tilted towards construction? How what is the underlying factor there? Matt Scurlock: Honestly, Jan, we're somewhat perplexed by that industry trend. I mean, volumes have been at historic lows for multiple years. There's a lot of capital in the space. And by the space, meaning financial services where folks are looking to deploy into loan growth. As a primary way to drive earnings. That obviously is gonna push down spread on high-quality transactions, which is a shop that's really focused on through cycle return on equity with the right clients. We have no desire to go chase lower spread. So our view is that it's just gonna take a couple of years for the market to chew through the supply that's coming online. And ultimately to correct and see new originations maybe in 2728. We do not anticipate growth in commercial real estate this year, again, not a byproduct of us devoting less focus, intensity, or resource into space, but mostly just because of the market dynamic where there's just not product coming online. Rob Holmes: Also, I think it's an indicator of a very healthy commercial real estate portfolio with regularly scheduled payoffs. Janet Lee: Got it. Thank you. Operator: Thank you. Our next question comes from Matt Olney from Stephens. Matt Olney: Hey, thanks. Good morning. Question for Rob. Since you achieved and exceeded those legacy ROAA targets in 2025, I heard you mention the focus now becomes recognizing the full potential of the recent investment. So we'd love to appreciate what this full potential at full scale look like as far as the operating metrics at the bank longer term. Thanks. Rob Holmes: Matt, great question. Obviously, we're not gonna give multiyear guidance. I'll tell you that the platform is the synergy of the platform the talent we've been able to recruit, the talent we've been able to maintain, the pipelines, and the platforms even working in a better coordinated synergistic way than even I could have hoped for. Supported by a really good investment and historical technology improved operating efficiency, improved operating risk and controls, which I you know, and we talked about the credit portfolio and the discernment there. I feel really, really good about the future. And, we're very optimistic. We look. We've got a lot we got a lot to do. What I would say is the theme of this year is execute and scale. We've got we just gotta execute. We've got all the parts and services we need. We've got the majority of the banker roles filled that we need. We just need to execute. There is so much investment that hasn't reached scale in the platform. But if we could beat these profitability levels, with that investment already in the platform, which is proven will work, with record client acquisition every year. We just gotta execute and scale. That's it. Which really derisks totally derisks the investment thesis. Matt Olney: Okay. Appreciate the, the color, Rob. And then as a follow-up, going back to the capital discussion, we've already talked about the buyback and the enhanced credit structure. It does look like on capital, you have a few instruments that either mature or become callable here. Pretty quickly. So we'd love to get your know, preliminary thoughts around these instruments and any any plans you may have as far as some of these debt instruments? Thanks. Matt Scurlock: Thanks, Matt. We've got a ton of optionality in the capital base and we'll look to behave accordingly in Q1 when some of these instruments become callable. Matt Olney: Okay. Appreciate it. Thanks. Matt Scurlock: Thanks, Matt. Operator: Our next question comes from Jon Arfstrom from RBC. Jon Arfstrom: Thanks. Good morning. Rob Holmes: Good morning, John. Jon Arfstrom: Hey. Rob, just to follow-up on Olney's question. You'd use the term subscale on some of your businesses. What are the top few areas where you feel like you're the most subscale, where you've already made the investments, where are the opportunities? Rob Holmes: Seven trading, equity, public finance, treasury, I don't think any of our businesses are at scale yet. Like, not one. Mean, business banking is not at scale. So you know, we're this is just the prefaces of what this firm can do. Matt's gonna get mad at me and we hang up because he's gonna say I was too optimistic, but there's literally not a business approaching scale. You know, we've done our first lead left equity deal. We have one of the best equity teams on this platform. If you look at their historical body of work. Our public finance team I'm super proud of. Our sales and trading like, it I could keep I'm gonna get in trouble also because I didn't name everybody. I don't know of a sub business on the platform that's at scale. Which I think is great. And then we've proven to be we're really improving our operating risk and we're really improving our ability to syndicate risk you know, being number two in the country, We're not we don't need to we're in the risk business, but we don't need to take risk and hit returns. Like a lot of pure banks need to do. Jon Arfstrom: Okay to turn the heat up on that a little bit. That's okay. The other thing I wanted to ask about it's kind of a related, but you you guys have this relationship management return hurdle exercise. And I know it's been around for a while, but as the business has evolved and you we just said things were immature, but as the business has matured, how was that evolved and how has that allowed you to maybe keep clients around with less of an ask than maybe you did two or three years ago? Rob Holmes: Yeah. It's thank you, John. It's I think it's it's evolved to being from an exercise to being part of our culture. So when we commit capital for a client, it's the relationship management exercise you talked about is balance sheet committee. The heads with LLPs are on that. The head of risk are on that. Madison's at a lot. Remember, everybody every LOB is fighting for the same amount of finite capital. And so if they're gonna vote to deploy that capital, it's then it's good for the farm, and we have the right current ROE for loan only, but also for the relationship as a whole. Both in a downgrade scenario with the credit, and when you do that, you have other lines of business signing up to support that client. So over 90% of the loans we've done since we started have other lines of other business tied to it when we onboard it. Treasury is probably the most, about 90%. But you have private wealth signing up to do business with them or private banking. And then if you have a banker leave or something, which every bank does, people retire or what have you, you have like, four or five touch points with that client. So the client's been institutionalized. It's not a banker relationship. It's an institutional relationship. So which I think makes the client much more valuable in the current state and a go-forward state to the firm. And we're bringing more value to the client, so it's a win-win. Jon Arfstrom: Okay. Thank you very much, guys. Rob Holmes: Thank you. Operator: Currently have no further questions, and I would like to hand back to Rob Holmes for any closing remarks. Rob Holmes: I just wanna thank all the employees of Texas Capital for another very solid quarter. I look forward to a great '26. Thanks, everyone. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Second Quarter Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during this call, please press 0, and someone will help you. At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir. George Price: Thanks, Rob, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thanks for joining us this morning. We're providing presentation slides, so let's move to slide two. There will be statements in this call that do not address historical fact and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's filings. Our safe harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include a discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's go to slide three, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John? John Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year 2026 results as well as our updated fiscal 2026 guidance. With me this morning is Jeff McLaughlin, our Chief Financial Officer. Slide four, please. I'd like to start the call by reiterating our strategy, why CACI is a company that no longer fits within traditional industry labels, and how we are expanding the limits of national security. You've heard us say many times that strategy is a place we come from. Our strategy defines where we are going, what we are building, and how we are executing with discipline and consistency. We serve seven markets. We possess decades of mission knowledge so we truly understand what our customers need. Within these markets, we focus on enduring national security priorities with narrow deep funding streams. We differentiate ourselves by delivering software-defined technology to address critical needs with the speed, agility, and efficiency our customers demand. We invest ahead of customer needs, showing them the art of the possible, exactly what the current administration is asking for. We've been doing this for years. The market is coming to where we already are. Through deliberate actions, informed investments, and flexible and opportunistic capital deployment, we have expanded our technology portfolio to nearly 60% of total revenue. Over the long term, expect technology to continue to increase as a percentage of revenue and support margin expansion. I will share some additional information about two areas of our technology portfolio later in my remarks. Our results and accomplishments clearly demonstrate that CACI is not the company we were ten years or even five years ago. We are continuing to evolve. That's why you see us competing and winning against a wider range of competitors, including defense primes and defense tech companies. It's why we're delivering consistent financial performance despite a dynamic and sometimes uncertain environment. And it's why we are confident we will continue to drive long-term shareholder value. Slide five, please. Speaking of performance, our strong second quarter results are another example of the success of our strategy and execution. We delivered free cash flow of $138 million, driven by revenue growth of 6%, and an EBITDA margin of 11.8%. We won $1.4 billion of awards, representing a book-to-bill of 0.65 times for the quarter, 1.4 times for the first half, and 1.3 times on a trailing twelve-month basis. As a result of our strong first-half performance, increased visibility, and the continued momentum of the business, we are raising our fiscal 2026 guidance. Slide six, please. Within technology, we have built a leading position in electronic warfare, which alone represents about $2 billion in revenue. We have also established CACI as an industry leader in agile software development and software modernization, part of our enterprise technology portfolio. And we recently announced a fantastic acquisition, ARCA, which represents the latest step in our technology-driven portfolio evolution and the execution of our space market strategy. These are all areas of significant and enduring investment by our customers, which support long-term growth for CACI. I'll spend some time talking about EW and enterprise technology. Our software-defined capabilities in electronic warfare illustrate how our strategy and technology-driven evolution are driving our performance. It's a critical warfighting domain and an area where we position CACI as a leader by investing ahead of need and delivering differentiated software-defined technology. We've known for years that virtually everything with a power button emits a signal. And today, we are seeing the significance of this in conflicts around the globe and how it's impacting our customers' priorities and their budgets. We've developed and deployed proven technology that allows warfighters to sense, identify, locate, and defeat these signals. Whether through targeted non-kinetic effects or by tipping and queuing other systems for kinetic ones. Our software-defined approach provides increased speed, flexibility, lethality, and the ability to adapt as threats evolve. Exactly what's needed on the battlefields abroad and in defense of the homeland. We won a number of programs of record with the Army and the Navy, rapidly developing, delivering, and fielding our EW technology. And based on that success, we see growing demand for other services, including the Air Force. An important benefit of our software-defined approach to EW is our ability to quickly adapt to new mission requirements, accelerate delivery of new capabilities, and sell commercially to alternative acquisition models such as OTAs. We previously highlighted Merlin and RMT, our latest counter-UAS and counter-space systems, as two examples of this concept. And customers are responding positively to these proactive investments, deploying a Merlin demo unit to the southern border, and placing the first production order for RMT. We've been saying for years that software would be the enabler of greater speed, agility, efficiency, and lethality, and we are proving it by rapidly addressing an expanding set of missions. This is a repeatable process. These successes are a clear validation of our strategy and differentiation. And they position us well for additional opportunities and growth in the coming years. Slide seven, please. Enterprise technology is another area where CACI is strategically positioned well ahead of market demand. The current administration has made modernization a clear priority to drive efficiency, transparency, and operational improvement as well as enhanced security. We've been focused on this for many years, investing in commercial agile software development methodologies and building differentiated capabilities that are driving measurable results and significant value for our customers. That's why we've won the three largest agile software development programs in the federal government. A great example is our work with Customs and Border Protection. We're not just modernizing software. We're delivering transformational efficiency. Nearly 200% increase in software releases over the last five years, like-for-like cost reduction, and exceptional software quality. We're also bringing new AI software capabilities to CBP to help secure our borders, including AI-based object tracking technology that we initially developed for the intelligence community. This cross-pollination of innovation is a direct result of our strategic focus and investment approach. Slide eight, please. We continue to see a constructive macro environment and good demand signals from our customers. While post-shutdown activity is still a bit uneven in the near term, our strategy has positioned CACI exceptionally well to outperform in this environment. As you know, 90% of our revenue comes from national security customers, and we are seeing reconciliation funds starting to flow to several areas of our business. As a result of our strong performance and continued business momentum, we are raising our fiscal year 2026 guidance. We now expect free cash flow of at least $725 million, revenue growth of nearly 8% to 10%, and an EBITDA margin in the 11.7% to 11.8% range. Finally, looking at our three-year financial targets, we expect to exceed the $1.6 billion free cash flow target even after normalizing for the benefit from the changes to R&D capitalization from the one big beautiful bill. As for our revenue and EBITDA margin targets, we are highly confident in our ability to hit the high end if not exceed them. And I should note that none of our projections include any benefit from our planned acquisition of Arca. With that, I'll turn the call over to Jeff. Jeffrey MacLauchlan: Thank you, John, and good morning, everyone. Please turn to Slide nine. As John mentioned, we're pleased with our second quarter performance despite the lengthy government shutdown. Our revenue and awards generally reflect the modest shutdown disruption we expected, while our strong margin and cash flow highlight the enduring differentiated elements of our business enabled by our strategy and the deliberate actions that we've taken. In the second quarter, we generated revenue of $2.2 billion, representing 5.7% year-over-year growth, of which 4.5% was organic. While we saw some lingering impacts from the shutdown that impacted program timing and delayed some government material purchases in Q2, our confidence in raising our fiscal '26 guidance reinforced the broader strength that we're seeing. EBITDA margin of 11.8% in the quarter represents a year-over-year increase of 70 basis points. This performance was driven primarily by strong program execution, timing of some higher-margin software-defined technology deliveries, and overall mix. Second quarter adjusted diluted earnings per share of $6.81 were 14% higher than a year ago. Greater operating income along with a lower share count more than offset higher interest expense and a higher income tax provision. Finally, free cash flow was $138 million for the quarter, driven by our strong profitability and increasing cash generation from working capital management. Day sales outstanding or DSO were fifty-seven days. Slide 10, please. Our leverage at the end of Q2 is 2.4 times net debt to trailing twelve-month EBITDA. We intentionally allowed leverage to drift slightly below our target range in anticipation of the acquisition of Arca. As we announced in the call a month ago, we expect leverage to increase to 4.3 times once the acquisition closes. I'll remind you, though, as I did on that call, that we have a strong track record of successfully quickly delevering after major acquisitions. Which is illustrated by our historical leverage we provide in the appendix. This underscores our consistent financial performance, disciplined approach to capital deployment, and our demonstrated access to capital. In fact, we expect leverage to return to the low threes within six quarters of closing ARCA. Based on the strong cash flow characteristics of the combined business. The acquisition of ARPA is just the latest example of our flexible and opportunistic capital deployment strategy and the evolution of our technology portfolio. Which position CACI to deliver long-term growth and free cash flow per share and additional shareholder value. Slide 11, please. We're pleased to be increasing our fiscal twenty-six guidance across all metrics. We now expect revenue to be between $9.3 billion and $9.5 billion. This represents total growth of 7.8% to 10.1%, which includes slightly less than two points of growth from acquisitions. We're increasing our fiscal twenty-six EBITDA margin to be in the 11.7% to 11.8% range. Underscoring our strong execution and continued evolving portfolio. As a result of our higher revenue and EBITDA margin outlook, we are also increasing our FY 'twenty-six adjusted net income guidance to be between $630 million and $645 million. This yields an attendant increase in adjusted EPS to between $28.25 and $28.92 per share, representing growth of 7% to 9% despite last year's unusually low tax rate. And finally, we're increasing our free cash flow guidance to at least $725 million. As we consistently say, we see free cash flow per share as the ultimate value creation metric. Our FY '26 guidance now implies a 65% growth in free cash flow per share. To assist you with your modeling, I'll note that for Q3 revenue, we're comfortable with the current consensus estimate. And we expect second-half EBITDA margin to be consistent with what we saw in the first half. As John mentioned, our guidance does not include any assumptions for 12, please. Turning to forward indicators, all metrics provide good long-term visibility into the strength of our business. Our second-quarter book-to-bill of 0.65 times and our trailing twelve-month book-to-bill of 1.3 times reflect good performance in the marketplace, even with the protracted government shutdown and slow rebound in award decisions. The weighted average duration of our awards in Q2 was over six years. Our backlog of $33 billion increased 3% from a year ago, and our funded backlog increased 7% for the same period. For fiscal year twenty-six, we now expect 95% of our revenue to come from existing programs, with 3% coming from recompetes and 2% from new business. Progress on these metrics reflects our successful business development and operational performance and yields confidence in our higher expectations for the year. In terms of pipeline, we have $6 billion of bids under evaluation. Over 70% of which are for new business to CACI. We expect to submit another $20 billion in bids over the next two quarters, with over 70% of those being for new business. In summary, we delivered strong results in the second quarter and continue to demonstrate our differentiated position in the marketplace. We are winning and executing high-value enduring work that supports long-term growth, increased free cash flow per share, and additional shareholder value. And with that, I'll turn the call back over to Jonathan. John Mengucci: Thank you, Jeff. Let's go to Slide 13, please. In closing, I want to emphasize that our continued strong results are not by accident, but rather the direct results of our deliberate strategy execution. We built CACI to be resilient and differentiated, delivering strong performance despite the sometimes challenging macro dynamics. That's what happens when you focus on expanding the limits of national security. For us, this isn't just a phrase. It describes our relentless focus on anticipating tomorrow's challenges, in developing solutions to stay ahead of our customers' needs, not just meet them. What truly differentiates CACI is our ability to shape the future rather than simply respond to it. We don't wait for RFPs. We proactively show our customers what's possible through strategic investments and innovation. This approach allows us to be disciplined in our shop selection, shaping opportunities where we know we can win. As we look ahead, we remain confident in our ability to execute our strategy and deliver on our financial commitments. The momentum of our business, our healthy pipeline, and our strong first-half performance enable us to raise our fiscal 2026 guidance across all metrics. And with the pending addition of ARCA, we're further enhancing our position in a critical space domain that will drive additional growth and shareholder value. As is always the case, our success is driven by our 26,000 employees who are ever vigilant in expanding the limits of national security. To everyone on the CACI team, I'm extremely proud of what you do every day for our company and our nation. And to shareholders, I thank you for your continued support of CACI. For that, Rob, let's open the call for questions. Operator: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Gavin Parsons from UBS. Your line is open. Gavin Parsons: Good morning, You have Maximo on line. John Mengucci: Ah, good morning. Gavin Parsons: Yeah. So in light of recent developments around the world, I wanted to ask at a higher level what higher US military op tempo means for CACI specifically? And how that changes the opportunity set in front of you. John Mengucci: Yeah. Thanks. Terrific opening question. Look. Today's op tempo is extremely good for CACI because it requires much of what traditional companies, frankly, don't traditionally do. Our customers are demanding mission technology at the speed of mission. So we can talk about Exquisite EW, differentiating rogue drones from friendly ones and mitigating risk. I like to say welcome to EW. Enemy changes their tactics and their technological footprint, welcome to EW. Getting 20 helos in and out of a country without any issue, welcome to EW. We, frankly, do EW better and more strategically and more surgically than anyone. So what does the AppTempo demand? A few things. One would be resiliency. I look at our solutions. They're software-defined. They share a common baseline with a multitude of other sensors. What that really means is when one sensor anywhere detects a new signal, all of its features and how to mitigate that signal is sent across a broad network of already deployed sensors. The out combo demand speed We've been really clear that we build enhancements and mitigations almost instantaneously. It demands optionality. So whether you're looking at handhelds, backpack, mobile, fixed, short-range, long-range solutions, they all come with a common software baseline. And what the customer absolutely demands is it has to have some type of optionality that allows them to acquire commercially under FAR part 12. So to us, think of Optempo, quick response, build in delivery, provide your customers your best tech, provides investors with increased shareholder value, commercial terms, commercial investment model, commercial margins. You know, at the end of the day, we're doing a lot of what commercial companies do. And we deliver EBITDA as well. Great. Gavin Parsons: Thank you very much. And then it looks like the pipeline of submitted bids remains a little low. Exiting the quarter, but that you know, the expected bid number filled up pretty nicely in the quarter. Can you talk a little bit about how you're expecting things to flow through that pipeline and what the cadence of conversion might look like as we move through the rest of the year? John Mengucci: Yeah. You're connecting those dots the same way we do, Gavin. The you know, one of the implications of the protracted shutdown that is a little less obvious. You could see the awards obviously, but what you can't see is sort of the slower level of activity in ramping back up. And I think the length of the shutdown combined with the ending of it leading into the holidays put some amount of acquisition processes sort of behind the curve. We do see that filling back up. We feel that, getting back on pace and we you know, and that's visible, I think, in the pipeline. You see what we plan to submit over the next hundred and eighty days. We obviously, for competitive reasons, aren't gonna comment on any particular opportunities or, you know, or make any predictions about win rate or anything like that. But you can look at our historical performance on those metrics that we provide regularly on a consistent basis over a number of years, and you can draw your own conclusions from that. Gavin Parsons: Great. Thank you all. Operator: Thanks. You bet. Your next question comes from the line of Peter Arment from Baird. Your line is open. Peter Arment: Yeah. Good morning, John and Jeff, George. Nice results. John Mengucci: Hey. Thanks. Peter Arment: John, could you maybe give us an update? You recently had a protest that you won. I think it was last Friday. It was a big award that you won in August. Maybe how should we think about kind of the timing of that and just maybe any color you wanna give around the protest? Thanks. John Mengucci: Yeah. Sure. So as you mentioned, the JTMS protest was virtually denied last week. So we are in the process of starting to ramp up on that program. We've already had very detailed meetings with our customer during the protest period. You would imagine we were ready for go as soon as this was announced. It is a longer-term technology program, so that's gonna wrap up over an extended period of time. So I think it'd be more of a benefit to growth in 2728, but you would clearly given the timing of the protest decision, that's gonna help us drive our fourth-quarter revenue number which I know you'll all be watching. You know, it's a ten-year, $1.6 billion job. It's gonna be task order based. And that's which is very, very standard. And, look, we're extremely pleased. We're gonna take the off-the-shelf software platform. We're gonna use SAP. Which is a strong OEM. We're gonna take fast-paced solutions. We're gonna use our agile software, our agile solution factory. And our agile software development processes and I would expect, Peter, the JATMS is gonna consolidate a large number of disparate legacy systems, which falls directly in line with some of the EOs that we've read. And we have a couple of other protests out there, still. We're looking for them to resolve by the end of this month, and we'll be sure to advise all of our investors in that effort. Peter Arment: That's great color. Thanks, John. And just as a quick follow-up, you talked about reconciliation funding starting to flow. Could you just maybe and then there's been a lot of activity behind the scenes on Golden Dome. How do you see that kind of impacting, as you think about, you know, the second half of this year, but also the setup for '27. Thanks, John. John Mengucci: Yeah. Thanks, Peter. Look. We're we have our eyes on ride reconciliation funding, and I know there was a lot of talk. You know, is that gonna be early in '26, like, in '26? Is it total into '27? I think at the end of the day, the answer is yes to all three. You know, for us, we're seeing border security programs being positively impacted, by seeing reconciliation funds starting. I did share something in my prepared remarks about taking some intel AI-based technology. That was a, you know, quote, unquote, plus up using record reconciliation. Funds. You're gonna see a lot of that in the counter UAS area. We're always seeing already seen in indications of that. Space programs, we've been called on to look at modernizing a lot of the critical space force infrastructure, so we're working on that. I think I believe there was an EO out around modernization of Department of War Financial and Logistics System. Ties directly to that EO. We are seeing reconciliation funds show up there. And then as this sort of relates to Golden Dome, we are seeing the number of intelligence programs receive additional funding around left of launch. Because that provides the ultimate situational when you're looking to protect this nation in a golden dome scenario. So, you know, we have included a range of outcomes in our updated guidance, your left goalpost, clearly a smaller amount of funding. The right goal post more funding. But, look, at the end of the day, anytime somebody wants to add a $150 billion to a market that this company is doing extremely well in, it's a constructive macro environment overall. It really just doubles down on the strong demand signals that a company like us can make great use of. So thank you for those questions. Peter Arment: Appreciate the color. Thanks. Yep. John Mengucci: Yep. Operator: Your next question comes from the line of Colin Canfield from Cantor. Your line is open. Colin Canfield: Hey. Thank you for the questions. John Mengucci: Sure. Colin Canfield: We should be starting out with the federal acquisition regulation. You mentioned it before, John. Just talk us through kind of where are we at in terms of the reforms of the FAR and how should we expect both the magnitude and timing in terms of impact on any kind of we'll call it, CACI cost plus exposure? John Mengucci: Yeah. I mean, we're pretty much in line with the acquisition reform. There's a large number of deals out there, and there's a large amount of print around, you know, driving from cost plus to firm fixed price and know, are we gonna completely move from FAR part 15 to FAR part 12? Or we're gonna talk elements of 12 into 15? Go 12. I mean, there's a whole bunch of different avenues. What I like about what has come out and what's great for this company is that there's a new recognition of exactly what FAR part 12 is. Right? I mean, I think you're seeing that tied to OTAs. Look. At the end of the day, I think in items that are not highly specific but could be born by our own corporate investments and taken to the government in an 80% solution manner and then do some development work, you know, co-development with the government funds in our funds. That offer that into a long run of production. I mean, I think that's the ultimate best way. We're seeing other long-term cost plus programs. Right, Colin? Those are trying to be moved into some different investment models, which is great. You know, we don't possess any of those. So we're still doing some cost plus work, but make no mistake. This company was intentionally built to have a FAR part 12 commercial part of our business and a FAR part 15. We're able to provide customers either and or both. And, it's really driven the $2 billion of electronic warfare that we've been talking about. So we are very well poised to support where the government's going. TLS manpack outstanding example. Even RMT, even though it wasn't a specific OTA, they had a lot of investment on our part. That then led to a larger production order. So I think probably the third or fourth inning of acquisition or reform. But for this company, I believe that our results are shown that we're well aligned, and we're gonna drive even greater growth as we go forward. Colin Canfield: Colin, I'd add to John's point. We really are finding our rhythm here on OTAs. We've seen two and a half times the level of OTA contracting in the last two years that we saw in the previous five years. So it's really a mechanism that we and our customers are well aware of and taking advantage of. John Mengucci: Got it. No. I appreciate that color. And then moving over to Arca, maybe talk through kind of how you think about the scalability of the intelligent like, the related intelligence services that you might gain or kind of grow over time thanks to the acquisition of Bandberry? Optics business? Essentially, like, beyond just manufacturing work, I think back to when you first bought us Photonics and essentially utilizing the space-based hardware to inform the intelligence business? You know, maybe just talk through kind of how you think about that earnings algorithm and then the scalability of it. And where there's any kind of roadblocks that we should think about in terms of, like, data conflicts and the like. John Mengucci: Okay. I'm gonna unpack that one, Colin. Look. Let me just start off by saying that I'll share what we can share. We're going to hold a lot of discussions around financials and backlog and the like until we get that across the finish line and we close. But it suffices to say that it's great for us to be able to share what we see in this company and in the business. They are a leading developer and supplier of scents and scents making tape. Capabilities. Make no mistake. They were involved in just about every critical national security mission. What I liked about it similar to this company, they're at the forefront of technology developments. And they've been there since the Cold War. So these capabilities are not new. How they have to deliver is not new. The architectures that ARCA delivers into literally have acquisition plans that go out as far as planning goes to around 2040. They are right in the middle of long-term growth funding streams for both DOD and classified NRO space budgets. They're focused on the fastest growing parts of the market. Their laser warning systems are equipment of record on every platform which they deliver. They and they're talking about the Danbury business to your other set of questions. Extremely high technical barriers to entry. It's an environment of constant capability and upgrades. Their contract portfolio, combined with their outstanding record of execution even in fixed price environments, does distinguish them with their cost customers. You know, when I looked at this business and we've been studying it for quite a long time, the folks at BlackRock continue to invest in this business. Blackstone. Sorry. Continued to invest in this business. They continue to understand that the national security world needed an asset like ARCA so they didn't hold it for five years. They grew it, and they invested in it. What I like about them is they invest ahead of need. They innovate and execute with agility. They deliver predictability given cost and schedule focus. So they are well set up to the earlier question around acquisition reform. They are well understanding of cost plus versus firm fixed price. They do have a tremendous backlog that we'll be able to talk about when we get, you know, hopefully, as we get to the end of our third quarter. And we shouldn't ignore the sense-making part of their business. You know, that's a lot of work that they do similar to us, in an agile software development manner. They work on parts of the intelligence data. We work on other parts. They do some things that we don't do. We do some similar things. But, you know, they have differentiated capabilities. They have long-duration contracts. They're involved in very critical national security programs. Nothing speaks larger than this company doubling down again in the space market than this acquisition. I know it drives our leverage, you know, up to four three and such. We have the right buy-down mechanism. At the end of the day, you make bold investments to drive bold growth. And that's what this acquisition is about. And this is why we're very involved in the space market and driving future growth there. Appreciate the questions. Operator: Thank you. Your next question comes from the line of Seth Seifman from JPMorgan Chase. Your line is open. Rocco Barbero: Good morning. This is Rocco on for Seth. John Mengucci: Morning, Rocco. Rocco Barbero: Morning. Digging in more on Peter's question, how are you thinking about CACI's addressable market from the reconciliation bill both for CUAS in general and Merlin more specifically? And how are you thinking about that market growth in the coming years? John Mengucci: Yeah. I knew as soon as I shared the way $2 billion slice of revenue in EW, we'll be all looking for growth rates. You know, news flash are probably not gonna share what we see. But look. The reconciliation funding will do a lot in the EW area because, as you all know, we consider counter UAS being part of our EW market. It's probably worth spending just, you know, twenty seconds on why we answer questions like this, like that. Okay? If we provide a cyber effect to mitigate a dangerous drone, is that cyber, or is that counter UAS? Answer is it's all EW. So that's why we lump this, in one area. Because we share software baselines. We share talent. We share technology solutions. So the reconciliation dollars is a, you know, tens of billions of dollars to our addressable market. We continually assess that as many on this call know. We're looking at about a $300 billion TAM. We're nine, you know, roughly $9.4 billion company. So plenty more room to grow. And even though that reconciliation funding is driving that, the world of counter UAS is going to completely explode beyond what the record reconciliation funding needs. We're involved in the national market marketplace. You mentioned Merlin. We've done some outstanding work there. But it suffices to say in the counter UAS area, there's no less than about 25 acquisition organizations that have stood up and actually brought some of my notes. There's eight within DOD. Six within DHS. You've got DOT via FAA. Department of Justice, Department of Energy, Department of State, and, you know, Department Elemental B. So there's a lot of folks out there. The acquisition infrastructure is just getting set. We're actively engaging to expand our presence specifically with GYNA four zero one. DHS, and then Golden Dome. So there's a great spend looking to be done here, and we are extremely well positioned. Rocco Barbero: Great. Thanks. Rocco Barbero: Then are there any specific items to call out in the civil business? News over the last year plus has been pretty negative about the demand environment, and yet CACI is growing in the mid-teens on average over the period. Jeffrey MacLauchlan: Yeah. Those that's really dominated by our CBP work, DHS work, and the ramp-up on NASA end caps. So it's a little different flavor of civil than you may see in some others, really driven by DHS and NASA. John Mengucci: Great. Thanks, Ash. Rocco Barbero: Yeah. Thanks, Malcolm. Operator: Next question comes from the line of Scott Mikus from Melius Research. Line is open. Scott Mikus: Morning, John and Jeff. John Mengucci: Morning. Scott Mikus: A quick question. With all the acquisitions you've made over the past fourteen years and the announced deal of Arca, tend to find that you're shifting more away from services and you're here more becoming defense electronic suppliers, in particular, L3 Harris. Just given that the government is actually taking an ownership stake, L3's missile solutions business, you think that puts CACI and L3 Harris's other competitors at a disadvantage when competing for work with the Pentagon given that the government owns a will own a stake in L3 Harris? John Mengucci: Yeah. So, awesome question. Look. We see what's going on, and we read about all of those various engagements. But at the end of the day, we're seeing outstanding demand for our technology that we deliver. We're able to meet that demand. We continue to execute our business well. We continue to invest ahead of need and have access to capital we need to enhance our delivery capabilities. See, what makes us different is that we got in the market at a time where we expected that because of one of the earlier questions, because of the OpTempo, and because of the need to not only protect other countries under nations and our interest abroad, but also defend our nation that it was going to require. The fact that we would ourselves begin to invest ahead of customer needs. So we are one of those companies. We have a, you know, NAICS, GICS, whatever code you wanna call it, that makes us a government service company. But, you know, it's been a number of years since you all asked me what my bench strength is. It's been a number of years since you asked me what my direct labor numbers were. Because we're not that company. So I enjoy being compared against others. Who are trying to make changes to adjust. Okay? Those are changes you make because change has been presented. We've actually built this company purpose-built. In this last instantiation of CACI to be in seven markets with strong funding streams that drive shareholder value year-over-year growth regardless if the government shutdown or not, regardless of reconciliation budgets are slightly behind plans, K. We're not a quarter-to-quarter company. We're a year-to-year, and we're gonna be a decade-to-decade company. We are exactly driving this business and measuring ourselves to make sure we are providing eye-watering technology to Department of Warning Intelligence Community, that's what makes acquisitions like SA Photonics so important and LGS. And Mastodon and Arca and others that is driving where this company goes. So really appreciate that question. There's a lot of other things that are going on within this marketplace. We focus on what we can control. And we like to think that we've got an outstanding strategy that moves along with the times. And I think if you've been a shareholder in this company in the last ten to twelve years, you've been quite excited by the way we have navigated different funding forces and moving this company from delivering people to delivering enterprise and mission tech. So thanks for that question. Scott Mikus: Okay. And then just a quick question. I wanted to follow-up on Merlin. I don't know if I missed this earlier in the call. But are there any ITAR restrictions or obstacles that would prevent you from selling that internationally? John Mengucci: No. The actual system itself, no. There's a software load which has different ways to mitigate specific threats. And as you would imagine, like any weapons system, there are software and hardware provisos of what the US government allows all of us in the defense technology space to be able to deliver. So there will be some software proposals with that. But when it comes to defending this homeland, which is what Merlin was specifically built for, there are no issues of what we can do in The US between finding and providing exquisite non-kinetic effects to remove this entire drone layer threat to the homeland. Scott Mikus: Okay. Got it. Thanks for taking the questions. John Mengucci: Yeah. Thanks so much. Sure. Operator: Your next question comes from the line of Tobey Sommer from Truist Securities. Line is open. Tobey Sommer: Thank you. I'm wondering if you anticipate another strong year of defense spending growth in 'twenty-seven. The present articulated a relatively large indication and wondering what your thoughts are on the matter. John Mengucci: Yeah. Toby, thanks. Look. I did read the fiscal year twenty-seven tweet of $1.5 trillion. You know, a little extra color, I believe it's supported by SAS and Haas. But I'm not clear whether it has the support of the appropriators. I think we've got a little bit of time to see this one play out. And I also think that's pretty it's still early, so we'll have to wait and see what comes from the government fiscal year '27 president's budget request. From what I understand, it'll be a little bit later this year because he usually tags along when the state of the union announcement is, so we may see it a few weeks off. But, look, I've often said, this company, where I don't focus on the budget top line, either way, our $300 billion TAM for a $9.4 billion company then we have plenty of room to grow. We have shown that when budgets have decreased, and when they've increased. I think we're in the right markets, the right capabilities. Right customer sets. And at the end of the day, in the national security realm, if the threats present themselves, I've never seen this nation not invest to protect us either abroad or at home. Tobey Sommer: Thanks, John. My follow-up would be the of the large marquee contract wins that the company has won over the last maybe few or handful of years. How much incremental program ramp remains in front of the company to help support future growth? Jeffrey MacLauchlan: Yeah. That's no small amount. I mean, some of the recent contract programs that we've won we've talked about the fact that the changing profile is such that the early phases of the program are really focused on designing and developing the balance of the program. And so that has led to slower ramp-ups. And in fact, we're still seeing growth in ITAS. Earlier in this call, we talked about the fact we pointed out the growing NASA end caps activity. Even though those winds were, you know, still a couple of years ago. So if you think back to the ramp profiles that I talked about in our investor day I guess, a year ago now, there were three or four sort of standard profiles and most of our longer-term wins have been the profile where we don't really sort of reach our max until we're, you know, good three or four years into the program. So we still have wins from the last several years that are still ramping up. John Mengucci: Yeah. Toby, I'd also add. Perfect example of that would be spectral. Right? You know, we're in our third year, I believe, on spectral. We have just recently done all the paperwork and testing that we needed to submit. That would lead to a milestone c decision. So and that is one that once we receive that, that allows us to get into low-rate initial production, which then starts to ramp. Spectral. So just one of many examples. Tobey Sommer: Exactly. Right. Thank you very much. Bye. Bye. Operator: Your next question comes from the line of Jonathan Siegmann from Stifel. Your line is open. Jonathan Siegmann: Good morning, John, Jeff, and George. Thanks for taking my question. John Mengucci: Yeah. Good morning. Jonathan Siegmann: Sure, John. Hey. So I thought margins are definitely a good news for the quarter, and the second time that it's really beating your expectations. Maybe for you, Jeff, can you talk a little bit about what the drivers are? We noticed there are indirect costs or third quarter in a row less than 21% of revenues, just any one-time things to consider or how to think about the upside here? Thank you. Jeffrey MacLauchlan: Yes. Thanks, John. There's a couple of things going on in here. We talked a little bit about mix. We continue to see favorable acceleration in the technology part of the business. Which clearly has positive margin implications. Also noticed the indirect cost number. We're in our fourth year now of doing something that's pretty hard to do, which is reducing indirect cost as a percentage of running the business, while we're in a strong growth mode. Organizations have a natural impulse to grow indirect cost in times of accelerating business activity and we have been really hyper-focused on making sure that, you know, we don't do that. So in absolute dollars, while there is some modest occasional increase, that's in spots that's consistent with what we talk about often, John has a lot to say about investing at a need. We're certainly not giving any of those things short shrift. We're investing where we need to invest but at the same time, we're resisting the impulse to just sort of let the infrastructure grow as the top line grows. So both the technology revenue component acceleration and the management of the cost structure are both strong drivers of the margin performance that you see. Jonathan Siegmann: Thank you. And then maybe if I could flip one more for John. We you know, recently, we've seen some unexpected displeasure with dividends and buybacks. By the government for among the contractors. So the majority of the industry prioritizes that, and CACI has only done opportunistic buybacks and prioritized M&A. The question is, you know, the Pentagon clearly is not supportive of large-scale consolidation. But how does the Pentagon react to the acquisition that Dale at CACI does? Thank you. John Mengucci: Yeah. I mean, I haven't heard a lot about any blocking us to continue to do smart acquisitions that support the national security infrastructure, which at the same time then as a product of doing that, drive shareholder value. Look, we've read the EO, and we are supporting it. We believe we're in line with it. We have strong exit. We deliver where we're asked to deliver. We continue to invest ahead of need for probably seven years is where we've been. On that model. You know, as there's been a lot of talk about to some of the larger players, you know, divest. Do we unwind the current div we have today? I don't see that. Reaching us on the unwind piece. Should that happen, we're a buyer of capability and customer relationships that continue to drive us forward in these seven markets. And if that were to happen and it were to become much more specific, you know, is that an opportunity for us to look at, you know, pieces of other businesses that may have a better fit here that allows them to transform the parts of their business that are strongly far part 15 and get into more of an agile commercial model so we can address the nation's needs better, then it, then that would be additional M&A opportunities for us. But you know, I don't see anything that we're doing today that's in conflict with that EO, and we'll continue to watch where that one goes. Thanks, Sean. Thank you. Thank you. Operator: Your next question comes from the line of Mariana Perez Mora from Bank of America. Thank you so much. Good morning, gentlemen. Mariana Perez Mora: Good morning, Rana. Mariana Perez Mora: So my first question is gonna be around the Department of War wanting to hire more technical talent. They have telegraphed that in the past, but then through this Advana transformation, memo they put out a couple of weeks ago. They also mentioned that they wanna hire more technical talent. What does that do about CACI? Like, do you see any pressure to any, like, FTE type of roles, or how are you thinking about that? John Mengucci: Yeah. Thanks, Mariana. Yeah. I think it's January 12 was on that one came out. You know, when we look at the Advanta Park program, I think it's in three different teams and just, like, a war data platform team, the applications for the war data, and then financial management team. You know? We look at that as a great opportunity on the financial management team. It is if I read the language correctly, it has a lot to do with financial and acquisition. Readiness systems and spend this drive to drive a clean FOIA 27 defense working capital fund and clean FY '29, you know, pan agency audit, really big on financial modernization. We've got great examples with both the Air Force and US Marine Corps, and then we're already passing major audits. So for us, you know, on that pillar, that one reads well. On the war data platform team and the apps, already do that. Across the federal government. Today. On the hiring piece, it's not a risk to us. We actually deliver technology in low in those areas. We don't provide FTEs. There may be other government services companies that do, but we're not one of them. We're out there delivering outcomes to customers in those spaces, and which is why we don't track just pure FTE deployment. So and this isn't the first time the government's looked to, you know, to quote, unquote, in-source or bring that kind of work in-house, but, you know, that's a good question for them to answer. But it just doesn't so we don't see any threat. From those from that EO. Mariana Perez Mora: Thank you so much. And one more joint to assess potential risks. And you I think you have done through the prepared remarks and the questions a really good job explaining why you're well positioned to commercial terms, fixed price, OTA. That on the other side, do you see any risk for any of your existing early-stage programs to get canceled or a stop work order or anything, kind of like a stop and realign, redesign in order to have that contract or that program be more commercial in terms of, like, 80% type of capability, but, also, being able to be, like, higher volumes, ramp up faster or even cheaper. Like, do you see that risk in any early-stage programs? John Mengucci: Yeah. No. I mean, I don't see any risk. In fact, I like the opportunity of what the government has taken a look at. You know, we one example yes, two examples. One would be customs and border patrol. Our legal program, and one might be TLS Manpack. If you look at Beagle, we approached the customer and asked them, why you're buying 400 FTEs when you should be paying a fixed rate for every new upgrade to every app? That, you have. So we were ahead of government's thinking on that and worked with a tremendously creative acquisition folks at DHS within customs and border to actually put that program in place, and that's driven to other customers, you know, NASA and CAPS. Transcom, JEDMS. They're not buying people. They're actually putting orders in place to actually deliver our outcomes. On the TLS Manpack one, look. That was a job that was owned by a major defense contractor. And we went and we approached the army, with a concept of let's an OTA in place. Let's do some development work. And then let's take our 80% solution and see where you can go with that. So, you know, those are both examples of not the government coming to us and asking us to change what we're currently doing. We actually approached them, or we were in with them on TLS Manpack. So the OTA model does work. You have to be willing to invest upfront. You have to have mission knowledge and you have to have something that the government absolutely needs and wants. And that differentiates us, you know, every day, including Sundays. The one thing we need to understand about OTAs that we're gonna see as the government moves more towards that. You're gonna see smaller initial awards for the development work but it's gonna lead to a faster, larger production value of awards. So when I think about and I wouldn't call it risk marion, but when I think about how we look at businesses like ours, you know, we're used to know, nailing down multibillion-dollar awards. In the pure technology areas. But much sooner than that, we'll see that actual source production award come out. That's what you saw with, TLS Manpack, a $1 million initial award and a $500 million production contract. Jeffrey MacLauchlan: Yeah. The size will not correlate with the strategic significance. Mariana Perez Mora: Thank you so much for the color. Jeffrey MacLauchlan: Yeah. You bet. Operator: Your next question comes from the line of John Godin from Citigroup. Your line is open. John Godin: Morning, John. Thanks for fitting me in here. Where customers gonna do FAR part 12 the initial awards are gonna be a million to 5 or to 7 million. John Godin: I wanted to ask about margin. You know, the margin performance has been very strong. Of course, there's been some mix in there. You know, this isn't about sort of new multiyear guidance. You know, and, obviously, Arca kind of will change the margin outcome. But just bigger picture, wanted to dialogue about where margins could go. If we look at recent incremental margins, they would suggest it could go a lot higher. What are some of the puts and takes as we think about margin from here? You've done a tremendous job the last few years. Getting margins higher. I'm just curious if that trend can continue. Jeffrey MacLauchlan: Yes. John, I think you've heard us may have heard us talk about this before, but this is really for us maybe somewhat not intuitively a free cash flow question. The decisions that we make, you know, our North Star is free cash flow. So if we have the opportunity to invest in a way that accelerates the top line and maintains margin, we'll generally select that over expanding the margin. Because we're generating free cash flow. So it's really about dollars and free cash flow generation. And we're in the happy position of seeing a pretty opportunity-rich environment and plenty of opportunities to invest. And I think as we're starting to see the fruits of the accelerating technology content along with the management of the cost structure that I talked about a few questions ago, I think we actually have plenty of opportunities to invest and maintain or modestly expand the margin but more importantly and more excitingly, have opportunities to further accelerate our free cash flow generation. John Godin: Perfect. That gives me a great sense. Appreciate it. Jeffrey MacLauchlan: You bet. Thanks, John. Operator: And your last question today comes from the line of Sheila Kahyaoglu from Jefferies. Line is open. Sheila Kahyaoglu: Good morning, guys, and great quarter. John Mengucci: Hey, Sheila. Good morning. Sheila Kahyaoglu: Guys are morning, expand upon John's last question. As we think about margins, Duffy just gave a bunch of long-term thoughts. That's super helpful. Maybe a little bit more on the long term. Like, do you think you know, this is the new margin range for CACI, and how much further can it go? And then maybe short term, you mentioned some disruption to material purchases due to the shutdown. How do we think about that mix factoring into the second half margin? Jeffrey MacLauchlan: The material purchases are not I mean, they're a fact, obviously. They're we saw them, and it was a contributor. Not as big an issue as the mix in terms of waiting. You will see some growth. We do expect to see some growth in the material content year over half over half, but it won't significantly impact. It's considered in our guidance. It won't significantly impact the margin expectations that we've communicated to you. If that gets to your question. Sheila Kahyaoglu: Yep. Perfect. Thank you so much. John Mengucci: You bet. Operator: And that concludes our question and answer session. I will now turn the call back over to John Mengucci for some final closing remarks. John Mengucci: Alright. Well, thanks, Rob, and thank you for your help on today's call. We want to thank everyone who dialed in or listened to the webcast for their participation. That many of you will have follow-up questions. Jeff and George Price and Jim Sullivan are available after today's call. Please stay healthy, and all my best to you and your families. This concludes our call. Thank you, and have a great day. Operator: Concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Northern Trust Corporation Fourth Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead. Jennifer Childe: Thank you, operator, and good morning, everyone. Welcome to Northern Trust Fourth Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our fourth quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This January 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through February 22. Northern Trust disclaims any continuing of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements in the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael O’Grady. Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2025 earnings call. Turning to Slide four, in 2025, we made significant progress executing on our One Northern Trust strategy, delivering strong and improving financial performance and providing solid momentum going into 2026. In the fourth quarter, compared to the prior year, trust fees grew 7%, net interest income increased 14%, and revenue was up 9%, excluding notables. For the sixth consecutive quarter, we delivered positive trust fee and total operating leverage while continuing to invest meaningfully in the business. Excluding notables, pretax margin expanded to 33% and EPS grew 19%. For the full year, revenue rose 7% and expenses grew 5%, delivering over two points of operating leverage and a 30% pretax margin, 14.8% return on equity, and 17% EPS growth, all excluding notables. We returned $1.9 billion to shareholders in 2025, including a record $1.3 billion of share repurchases, which reduced share count by 5%. These results reflect strong market conditions and demonstrate the strength of our One Northern Trust strategy, which serves as our roadmap to becoming a consistently high-performing company that delivers meaningful value for clients, partners, and shareholders. Turning to Slide five, we've made significant strides across each of our strategic pillars, starting with optimize growth. We advanced several initiatives at both the enterprise and business unit levels, resulting in deepened client relationships and expanded market share in key areas. We broadened our private markets footprint across the enterprise and further enhanced our capital markets and banking penetration, which now contributes more than one-third of enterprise revenue. These firm-wide efforts improve collaboration across our businesses, allowing us to bring the full capabilities of Northern Trust to our clients while accelerating the pace of product development and innovation. Turning to productivity, we initiated significant changes to enhance and scale our operations. Our client-centric capability operating model provides a unified and consistent way of working across the company, standardizing core processes, increasing spans of control, reducing organizational layers, and empowering the broad adoption of AI-driven automation inclusive of our AI platform NT Byron. For example, the chief operating officer's organization, which encompasses more than half of our workforce, increased managerial spans of control by over 35%, while reducing management layers by over 20%. This is improving speed, accountability, and efficiency across the firm, creating a leaner, more agile operating structure and fostering enhanced collaboration. Our accelerated deployment of AI across high-volume activities, such as digitizing documents and automating manual tasks, is driving efficiency gains while improving quality and consistency across key workflows. Overall, we increased productivity savings last year representing more than 4% of our expense base. We strategically reinvested these savings into growth and resiliency initiatives, fueling our future performance. For 2026, we plan to raise our productivity target by 10%, supported by maturing initiatives, further structural and workforce improvements, and broader AI deployment. On resiliency, we strengthened the firm's risk technology and operational foundations. We advanced cybersecurity, upgraded our data environment, expanded cloud adoption, modernized key software platforms, and enhanced core risk and control processes. These initiatives help future-proof the company. Turning to our business unit performance, starting with wealth management on Slide six. We delivered strong momentum in the fourth quarter, particularly in our upper-tier segments, continuing to deepen our leadership position in global family office and the ultra-high-net-worth market. GFO achieved record new business in 2025, surpassing last year's high watermark with strong contributions from both domestic and international markets, the latter up 15%. Last year, we launched Family Office Solutions, extending our world-class GFO platform to families with more than $100 million in net worth, to serve as their outsourced family office. FOS exceeded its goals for clients and assets last year, and we're scaling this proven model across all markets. Together, GFO and FOS position us exceptionally well to meet the needs of the most complex segment of the market. Another area of focus is talent. In 2025, we unified sales across GFO and the regions, strengthened coverage models, and enhanced pipeline rigor and win rate expectations. We will continue to invest in high-performing, growth-oriented front office talent while sharpening incentives around new client acquisition and organic growth. The third area of focus is expanding our suite of investment solutions. Alternatives remain a key priority in 2025, as we more than doubled the number of funds launched on the platform and tripled assets raised, broadening client choice across strategies. We also made the fund launch and distribution process more scalable, which will support a faster cadence in 2026, including our first evergreen fund. Finally, we will enhance our client acquisition strategies across segments, geographies, and channels, including deeper engagement with centers of influence and intensified digital engagement initiatives to generate more high-quality leads. Across each of these areas, we are simplifying processes, upgrading platforms, and applying AI to reduce friction in service delivery. These steps will enhance both the client and partner experience and strengthen wealth management growth. Turning to Asset Servicing on Slide seven. Overall, we ended the year with improved organic growth and profitability, driven by our strategic focus on scalable growth in core product areas. Capital markets performed particularly well in 2025, ending the year with robust FX trading and integrated trading solutions activity in the fourth quarter. Private markets were another highlight, with wind-related revenue up 18% over the prior year, further solidifying our leading position with global hedge fund managers and UK LTAS. We will build on the success in 2026 by further scaling core fund administration and depository services while increasing cross-sell of capital markets activities. Led by our industry-leading front office solutions offering, which continues to be a key differentiator, we will further expand our global asset owner franchise, building on the over 100 new mandates in 2025. Finally, we will sharpen our focus on selectively enhancing the products and services we offer, such as growing ETF servicing in the US, expanding European transactional banking, and building out our digital asset capabilities. Asset servicing enters the year with solid tailwinds and a clear path to accelerate profitable growth. Turning to Asset Management on Slide eight. NTAM delivered another solid year and is well-positioned to continue executing on its growth initiatives. Liquidity was particularly strong, with the fourth quarter marking the twelfth consecutive quarter of positive flows, and liquidity AUM reaching nearly $340 billion. We continue to broaden our successful liquidity franchise by leveraging digital capabilities, including introducing a tokenized share class of one of our money market funds. Building on last year's strong alternatives fundraising, we will continue to expand our product capabilities and strengthen distribution across wealth and institutional channels. On the product innovation front, we maintained a high-velocity cadence last year, doubling product launches year over year, including 11 new ETFs, meaningful expansion of our SMA fixed income suite, and the rollout of multiple custom solutions across alternatives. NTAM will maintain an elevated new product base and work closely with Northern Trust Wealth Management to co-develop tailored solutions, building on the first-of-their-kind distributing ladder ETFs introduced in 2025. Direct indexing and customized SMAs remain areas of strong client demand, supported by $5 billion of net organic flows in our tax-advantaged equity suite in 2025. We will extend this momentum through the launch of a long-short tax-advantaged equity strategy and expanded customized fixed income SMAs, reinforcing our position as a top-three industry provider. Together, these priorities strengthen our growth trajectory, deepen our client engagement, and expand our ability to deliver differentiated high-demand investment solutions. Turning to Slide nine. The execution of our One Northern Trust strategy over the last two years is translating into improved financial performance. Productivity and expense discipline are driving positive operating leverage, reducing our expense to trust fee ratio, and improving pretax margin levels. While ROE has been at the high end of our target range, and EPS have grown at a double-digit pace for the past two years. Turning to Slide 10, as we move forward, we're doing so with a clear vision, good momentum, and a resolute commitment to consistently deliver on our strategic pillars, producing financial performance that rewards shareholders. With the goal of generating attractive returns on capital and double-digit EPS growth through cycles, we have the conviction to boost two of our medium-term financial targets. In addition to targeting expense to trust fees below 110%, we're now targeting a pretax margin of 33% and return on equity in the mid-teens. To wrap up, this progress is only possible as a result of the exceptional efforts of my fellow Northern Trust colleagues. I want to thank them for their commitment to delivering for our stakeholders. With that, David will take you through our fourth quarter and full-year financial results. David W. Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2025 earnings call. Let's discuss the financial results of the quarter starting on Slide twelve. This morning, we reported fourth quarter net income of $466 million, earnings per share of $2.42, and our return on average common equity was 15.4%. Our fourth quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 140 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust, investment, and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 7% increase compared to last year. Net interest income on an FTE basis was up 10% sequentially, to $654 million, a new record, and up 14% from a year ago. Our assets under custody and administration were up 3% sequentially and up 11% compared to the prior year. Our assets under management were up 2% sequentially and up 12% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded an $8 million release of the credit reserve in the fourth quarter, largely reflecting refinements to factors used to estimate losses for the C and I portfolio. Our effective tax rate was 26.5% in the fourth quarter, up three ten basis points over the prior year's rate, largely as a result of higher tax impacts from international operations. We expect the effective tax rate in 2026 to be approximately 26 to 26.5%. Our results included $69 million in net unfavorable notable items, including $19 million in expenses associated with our Visa swaps, recognized within other operating income, $59 million in severance-related expense primarily recognized within compensation expense, and a $10 million release of our FDIC special assessment reserve recognized within our other operating expense. Relative to the prior year period and excluding notable items, revenue was up 9%, expenses were up 5%, our pretax margin was up 250 basis points to 33.2%, we generated over four points of positive operating leverage, earnings per share increased 19%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on Slide 13. Wealth management had a good quarter with strength in both GFO and the regions. GFO won three of its largest wins of the year in the quarter. Priority markets delivered their best overall quarter of the year, and the regions posted their best quarter for flows. Assets under management for our wealth management clients were $507 billion at quarter end, up 13% year over year. We saw healthy incremental flows late in the quarter, including $5 billion within GFO. Trust investment and other servicing fees for wealth management clients were $578 million, up 6% year over year, primarily due to strong equity markets as the favorable flows occurred late in the quarter. Trust fees within the regions were up 5% year over year in the quarter and were up 6% for the full year, with strength mostly attributable to favorable equity markets as strong advisory fee growth was mostly offset by continued product pressure. Within GFO, trust fees were up 6% in the fourth quarter relative to the prior year, showing healthy improvement from the third quarter's more muted performance. They were up 5% for the full year. Wealth management average deposits were up 5% sequentially, reflecting year-end portfolio repositioning coupled with new business momentum. Average loans were down 4%, reflecting the repayment of a large GFO loan. Including severance charges of $15.2 million, wealth management's pretax profit decreased 3% over the prior year period's record levels, and the pretax margin contracted by 300 basis points to 38.9%. Excluding these charges, the pretax margin was down 120 basis points. Moving to asset servicing results on Slide 14. Our asset servicing business also had a very strong finish to the year. Transaction volumes accelerated, capital markets activities were robust, while new business generation continued to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17.4 trillion at quarter end, reflecting an 11% year over year increase. Asset servicing fees totaled $730 million, reflecting an 8% increase over the prior year. Custody and fund administration fees were $496 million, up 9% year over year, reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 12% over the prior year. Investment management fees in asset servicing were $166 million, up 6% year over year, largely due to favorable markets. Asset servicing average deposits increased 3% sequentially, reflecting normal seasonal patterns, and were up 6% year over year. Loan volume increased 6% from third quarter levels but remained down 8% year over year, albeit off a small base. Asset servicing pretax profit grew 23% over the prior year or 40% excluding severance charges. The pretax margin expanded two ten basis points year over year to 25.5%, an increase of five fifty basis points excluding severance. The segment level margin benefited from the NII associated with the seasonally strong deposit levels, the pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, which translated to a pretax margin on our new business that was above 30%, as well as our efforts to streamline our operations. Moving to Slide 15, and our balance sheet and net interest income trends. Average earning assets were up 3% on a linked quarter basis, as higher deposits drove an increase in cash held at the Fed and other central banks and in our securities portfolio. We issued $1.25 billion in new debt in November, $500 million in senior and $750 million in sub debt. The debt was swapped to floating and proceeds were invested in floating rate securities at a positive carry. As a result, the fixed percentage of the securities portfolio dropped to 52% from 54% in the third quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to 1.48 at the end of the quarter, and the duration of our total balance sheet continued to be under one year. Average deposits were $119.8 billion, up 3% compared to third quarter levels, reflecting normal seasonality. Deposits performed largely as expected throughout the quarter, but we saw a higher than usual surge in the last two weeks. We expect deposit levels to normalize in the first quarter. Within the deposit base, interest-bearing deposits increased 2% sequentially and noninterest-bearing deposits increased by 10%, climbing to 15% of the overall mix. Net interest income on an FTE basis was $654 million, up 10% sequentially, up 14% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, a greater proportion of noninterest-bearing deposits, and the ongoing impact from deposit pricing actions we've taken outside of rate cuts. Our net interest margin increased sequentially to 1.81%, reflecting the favorable deposit pricing actions taken coupled with a more favorable deposit mix shift. Turning to our expenses on Slide 16. Expenses increased 9% year over year in the fourth quarter, but excluding the notables listed on the slide, they were up 5% over the prior year. Excluding both notables and unfavorable currency movements, expenses were up just 3.8% in the quarter and 4.3% for the full year. This translated to an expense to trust fee ratio of 110.8% excluding notables, and our sixth consecutive quarter of year over year improvement. Turning to Slide 17 and our full year results. Including notable items listed on the slide, full year revenue decreased 2% and EPS declined by 11%. Our ROE was 14.4%, and we returned 111% of our earnings to shareholders. Relative to 2024, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 60 basis points. Our full year results included $69 million in net unfavorable notable items, all reported in the fourth quarter. 2024 results included $536 million in net favorable notables recorded in quarters one through three, including an $878 million gain related to the Visa B share monetization. Excluding notable items in both periods, 2025 revenue was up 7%, expenses were up 4.9%, or 4.3% excluding unfavorable currency impacts. Our pretax margin was up 160 basis points to 30%. We delivered over 200 basis points of positive operating leverage, and earnings per share increased 17%. Turning to slide 18, our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.6%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 7.8%, down 20 basis points from the prior quarter driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available for sales securities was $401 million. For the fourth quarter, we returned $522 million to common shareholders through cash dividends of $152 million and stock repurchases of $370 million. For the full year, we returned $1.9 billion, including a record $1.3 billion in share repurchases. This reflected a 113% payout ratio in the fourth quarter and 111% for the full year. Turning to our guidance on Slide 19. As I've been signaling, we're moving away from an expense growth target instead focusing on positive operating leverage, which is our North Star. We want to maintain the flexibility to opportunistically invest in growth initiatives when top-line growth is more favorable and dampen expense growth when the market environment is more muted. But generally speaking, I can assure you that the direction of travel for expense growth will be down. As shown on the slide, we now expect full-year 2026 NII to grow by low to mid-single digits over the prior year, which is up from our previous guidance. This assumes current market implied forward curves and relatively stable deposit mix. We expect to generate more than 100 basis points of positive operating leverage and we expect to return more than 100% of our earnings to shareholders. And with that, operator, please open the line for questions. Operator: Thank you. If you're dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up in order to allow everyone an opportunity to ask a question again. Press star 1 to ask a question. And our first question is going to come from Brennan Hawken from BMO Capital Markets. Brennan Hawken: Good morning. Thank you for taking my questions. Good morning. Michael O’Grady: Hi. Brennan Hawken: Hi, Mike. Really encouraging to see the targets moved higher on the medium term. And actually, looks like really some encouraging ambition in the targets. Can you speak to your conviction in driving change across the organization? And like when you think the timing of some of this traction could start to come through in the financial results? Michael O’Grady: So I would say, Brennan, that we have a high level of conviction that we're seeing the change transmit through the entire company. I talked about in my comments there just the fact that this is an effort on the part of all of our employees, all of our partners to do this. And I think you're seeing, you know, what I think I'll call the early days of the results from a financial perspective. And that to the extent we continue to maintain that conviction and execute on the strategy, we'll continue to see consistently high performance like we did this quarter. That's why we had the confidence to move the targets up in the medium term, which we look at as kind of a three to five-year time frame. And if you just think about, you know, what Dave has said even for the year that we're in right now, trying to generate more positive, operating leverage, you know, that will take us in the direction towards those targets. Brennan Hawken: Right. Okay. Thank you for the timing around that. And definitely really encouraging to see it. I it was great. Maybe one on the balance sheet. So the deposit cost trends were encouraging here in the quarter. Can you speak to what drove the lower cost on the IB side? We saw the net the NIBs, the noninterest-bearing balances move higher, but sometimes that's seasonal. So you spoke to I think, stable deposits in the outlook. For the NII, does that mean that that include maybe the IB composition normalizing and how sustainable is the ability to drive down the interest-bearing deposit costs? Thanks. David W. Fox: Yeah. So there's a lot to unpack in that question. I would say generally speaking, fourth quarter growth in NIB particularly, I think had a lot of definitely seasonal, but also keep in mind that the government was closed for forty-three days during the quarter. And I do think there was some cash stockpiling during that period because of the lack of economic data. So I think it may have been a little inflated because of that. And going forward, into Q1, you should expect the seasonality of that to fall. Too soon to say when and how. Usually, it happens sort of after audit season when they when the funded admin companies decide that they've spent all their money for that particular quarter. So it will normalize at some point during Q1. I would just say that Q4 is definitely not a jumping-off point. For NII going forward into Q1. It will Q1 will definitely be lower in terms of total NII. In terms of the deposit pricing, we continue to spend a lot of time through our liquidity solutions efforts to look at our deposit pricing. We still have a lot of tools in our tool shed to continue to lower that going forward. We also had in the quarter, though, some expensive wholesale funding that rolled off, and we need to replace it. And so because of that more stability there, we're able to bring down our deposit cost accordingly. Brennan Hawken: Okay. Thanks for that color, Dave. David W. Fox: Sure. Operator: And our next question is going to come from Ebrahim Poonawala from Bank of America. Ebrahim Poonawala: Hey. Good morning. Michael O’Grady: Morning. Ebrahim Poonawala: I guess, maybe Paul, if you could just start on the fee growth side. And just talk to us, I appreciate you don't want to sort of pin down the guidance if we assume a relatively sort of a steady state macro backdrop, one, what does that imply for fee growth this year? And then you and just talk to us in terms of, like, one or two areas you think drives trends. You talked about GFO ending 25 on a strong note. Would love to get some color around sort of the two or three drivers of growth that you are seeing on the fee side. For 2026? Thank you. David W. Fox: Yeah. So, you know, the way we look at '26 and we just finished our planning period, is if the market conditions as are you as the way you described, we would think that we would be around mid-single digits in revenue growth. And trust fee and revenue growth, maybe revenue growth a bit higher, but around mid-single digits. And that would also give you an implication in terms of where we wanna solve for our expense growth for the year as well. So that's sort of how we're thinking about it going into '26. You know, in terms of the fee growth, you know, as you know, in GFO, the business there can be very lumpy. And when you win, you usually win very large amounts. And so the traction win rate in GFO really picked up in Q3. And because of the quarter lag, you saw a lot of it in Q4. We even had additional inflows in GFO of another $5 billion, and Q4, which you're going to see primarily in Q1. So that's driving a lot of the growth. The other thing I would say, and Mike can comment on this as well is the traction we're getting in the ultra-high-net-worth segment around from the front of or the family office solutions. Which really we're finding our win rate and our traction and our backlog in that particular area of the $100 million plus that don't have a family office. Has really picked up considerably. Michael O’Grady: Yeah. And I would just add beyond wealth management that in the asset servicing business, again, with our strategy focused on moving upmarket, just meaning some of the larger more complex asset owners, where we had the success in the wins, in 2025. You know, some of those are being onboarded now. So you'll see some of the strength in the fee growth, in '26, and that's both in The Americas, but also, UK and more broadly. And on the asset management front, you know, we've, as you've heard, continued to have strong flows in liquidity. And in many respects, that's been offset from a flow perspective by outflows on the index side. To the extent that that slows down, that drag goes away, and we still have the strength and liquidity, know, that'll add a boost on the asset management front. Ebrahim Poonawala: Got it. And just maybe just sticking with asset management, you know, this leadership changes eighteen months ago. You we've seen the results in terms of the targets. When we think about on a go-forward basis, the capital position that you have where the stock's trading, are there opportunities in asset management to bolster that business inorganically? Via tuck-in deals or something larger? Just give us a sense of how you're thinking about that business over the next year or two. Thank you. Sure. Michael O’Grady: Yeah. So and as you heard in my opening comments there, the strategy is pretty focused, in asset management. And so, know, looking to continue to execute on that. From an organic perspective. To the extent that we can accelerate it, with inorganic opportunities, whether that's acquisitions or partnerships, we're certainly open and looking to do that. If you think about where those might be, on the capability side, you know, you've heard about the success we've had in alternatives, but it is an area that continues to grow. And so that's an area that we certainly look at ways to increase our exposure there. And then on the other side, opportunities to expand our distribution. You know, the majority of, NTM product is distributed through the partners in the business through wealth management and through the asset servicing side and quite well. But anything we can do to expand to know, third-party intermediary, which we do, but it's right now a smaller portion than we'd like to see long term. Operator: And our next question is going to come from Michael Mayo from Wells Fargo. Michael Mayo: Hi. What is it about now that gives you the confidence to increase your pretax return targets? And three to five years, I guess, that would be what, somewhere between 2029 and 2031 if I'm reading that correctly. Michael O’Grady: Yeah. And Mike, I would say it's a few things. And they're aligned with strategy and with what we're seeing. So the from the first perspective is we've talked about optimized growth. And we've talked about it now for a few years here. And the whole point on that was focusing on scalable growth focusing on profitable growth. And that has a couple dynamics. One is just the mix overall for the company. So the emphasis on growing the wealth management business faster and asset management and those two businesses have higher margins. So just the mix shift that we'd like to see as we grow those businesses. And then even within asset servicing, focusing on, again, scalable opportunities, and where we've built out our capabilities. In those specialized areas or segments. Where we have the scale to not only compete effectively but do so in a profitable way. So we're seeing that work. So that's the first thing I'll say. They that gives us confidence as we go forward. The second is around productivity. You know, again, you heard me mention our productivity for 2025 was about 4% of our expense base. And this year, you know, we bumped that up. It's gonna be know, closer to 5%. And a lot of that is because of the impact we're seeing of AI. It lends itself to a lot of our activities. Across the company, but I would say particularly in asset servicing and in the COO organization. So that makes the business more scalable is what we're seeing. Long way to go. But that's why, you know, I'll say that three to five-year time frame makes sense. To see that. And then the third is on returns. We have a strong capital position. We always wanna have a strong capital position. You know? So we feel good about the level that we're at. And as you saw, we purchased repurchased more than 100% of our net income this year. Dave mentioned we'll be, you know, somewhere in that neighborhood next year or excuse me, 2026. So that is a demonstration of just the level of capital we think we need in the business. But, also, I would say, the clarity and stability on the capital regime and regulations around that also gives us more confidence in that level. So you put that together and also just trying to raise the bar to make sure that we're doing everything we can to meet the financial expectations of our shareholders. And, there's still the lingering question about Wood Northern combined with another bank. I assume your board saw these revised targets, approved that. So I guess that puts a fork in the idea of you doing anything other than this organic growth you know Yeah. To the into the medium term. And but if you can confirm that, but also as far as you pursuing acquisitions, I mean, seeing some of your peers do some smaller deal. Deals. Sure. So as we've said consistent, we have to earn our independence. And so, yes, that involves having strong financial performance like that. And so that is absolutely our strategy and our intention. And as always, you know, the board also takes its fiduciary duties very seriously and has to always consider, you know, what would be best, for our stakeholders and for our shareholders. So that is absolutely the plan. And, yes, to your point, you know, we'll look at acquisitions. We do look at acquisitions. But we're primarily focused on organic growth and generating these types of results. If we see opportunities that we think can help in those areas that I mentioned, along the strategy, that's when we look to deploy capital. Or we think we can get an attractive return on it. Will help us further, meet those targets. Operator: And our next question is going to come from Steven Chubak from Wolfe Research. Steven Chubak: Hi, good morning, and thanks for taking my questions. Michael O’Grady: Sure. Good morning. Steven Chubak: So maybe to start just on the expense to trust fee ratio. When we think about the in margins that are contemplated in the medium-term guidance, given some of the enhanced focus on improved profitability at what expense to trust ratio are you underwriting new business today? And does the mid-single-digit revenue growth that's contemplated in the guide for earnings this coming year, assume any revenue attrition from shedding less profitable business? Just trying to gauge how the enhanced focus on profitability might impact some of that through the cycle revenue growth. Michael O’Grady: So the answer to the first part of your question is, yes. When we price new business, we absolutely look at that expense to trust fee ratio. But that's at a, I'll call it, high level. Just meaning that it really depends on the nature of the business as to what the right expense to trust fee ratio is. So you can just imagine, you know, certain relationships, the fee portion of that relationship is going to be, you know, higher or lower relative to other businesses, other relationships that you're looking to price. So that's one, you know, important factor. Second is it gets broken down even further as to the types of expenses as a percentage of those fees. So it's very much, you know, the expense of trust fee we use is the broader metric. It breaks down much further by business, by product, and by client type on that front. And I would just say that to the second part of your question, yes. We continually look at client profitability. That's something that we view as a part of good relationship management. It's something where, you know, we don't wanna have relationships that are not value-generating for both partners, meaning ourselves and our clients. And we look to, you know, address those relationships in a way that we can get improved profitability as opposed to just necessarily exiting relationships. But from time to time, if it's not aligned, that's when we have to take those types of actions. I wouldn't say there's anything, you know, dramatic in there, but it is just something we do on a continual basis. Steven Chubak: That's great. And for my follow-up, just on the NII and maybe the NIM outlook more specifically, NIM in the quarter reached a post GF high. You guys have been very focused on optimizing the balance sheet. Was hoping you could unpack as we think about the glide path towards a 33% margin, how much of that is a function of continued benefit from rate tailwinds versus volume? Just trying to gauge what's gonna how you're thinking about sustainable NII growth over the next couple of years, so beyond 2026? David W. Fox: Yeah. So a couple of things. The NIM in the quarter, of course, was artificially boosted by about three points because of the FTE true-up that we did. So think more high high one seventies than one eighty one. The second thing would be that as we go forward, we have a lot of levers we can pull both on the asset and the liability side. And we don't see a lot of compression in the NIM until we get to much lower interest rates. And so from our perspective, we think during the course at least of 26, would never wanna do an estimate of 27 at this point. But in '26, we think we can keep the NIM pretty stable during the course of the year in the January. And that's how we're looking at it going forward. So obviously, deposit growth something that we're looking at. Quite carefully and in particular in the wealth management business. There is an effort going on to get our loan to deposit ratio higher within that business. And so from that perspective, we're trying to drive more deposit growth, but we're also looking at both sides, asset and liability side, to make sure we have offsetting measures. And we really feel like we have a lot we can still do I would also tell you to keep in mind that a lot of deposit pricing actions that we took we took in the middle to the end of last year. And so we haven't lapped those yet. So as we go into the first and second quarters, it gives us more confidence around our NII guide, and our ability to continue to kinda grow that line going forward. Operator: And our next question is going to come from Betsy Graseck from Morgan Stanley. Betsy Graseck: Thank you. Just one follow-up on the deposit question here. I know you indicated there was a bit of a boost in the quarter with the government shutdown. And when I look at the balance sheet, it looks like most of that boost came from non-US offices and interest-bearing. I just anticipate that the q q increase that we got there around $7 billion comes out over the course of the quarter. As you've been discussing, it's gonna take some time to flow out. Is that the level about that you see as being unusually high from the government shutdown. David W. Fox: No. I mean, I think the increase in the noninterest bearing was around 3 I do think there was a lot of new business as well that we grow with new business, but I think there was also some cash hoarding as I mentioned previously, because of the lack of economic data. So I wouldn't take out the entire $7 billion. A lot of that was just normal growth that we would have in the quarter. Betsy Graseck: Okay. Perfect. And then follow-up question here is on the buyback. You indicate, you know, over a 100% payout ratio. And I just wanted to understand, what's the governor on the buyback? Which capital ratios are you thinking about with regard to how high and how long you let that over a 100% ride? Thank you. David W. Fox: Yeah. It's a good question. And, you know, the variables the number of variables in that decision are many. It's regulatory capital. It's earnings power. It's ROE, loan growth, dividends, m and a. You go through the entire menu of what you're looking at, and then share price obviously has a role. But at the end of the day, if we feel there's an opportunity to reinvest in the business, that's also compelling. But right now, we feel as if we'll have that ability going forward into 2026 sort of the same way we did in 2027. That's how we're looking at it. Operator: And our next question is gonna come from Glenn Schorr from Evercore. Glenn Schorr: Let's start with an easy one. FX trading was strong, better than peers. In the text, you talk about lower FX swap activity on your part. Could we just break down what's what's you driven versus client driven and just so we can get our expectations going forward? Thanks. David W. Fox: Yeah. So, obviously, volatility and volumes will help us quite a bit in the quarter, but we also added quite a few new clients. And one of the things we don't talk about a lot as it relates to foreign exchange flows is the integrated trading solutions business or the outsourced business we have in both FX and brokerage. And we've seen a much greater adoption as clients start to realize that they can offload middle and back office functions on an agency basis to us. As a result of that, we get more flows because of it. So the growth in that ITS business has really been strong and continues to be strong. So I would say it's a combination of volume, I'd also say it's also a lot to do with the traction we've gotten in our integrated solutions business and outsourcing going forward. Michael O’Grady: And just to add to that, Glenn, that level of activity that Dave's talking about, is more consistent than what comes through the FX line there because of that swap activity. And so this quarter, just the nature of the swap activity, I resulted in more of that showing up in the FX line and less in NII. Even though know, the actual level of activity was not that much greater than the previous quarters. Glenn Schorr: Okay. I don't wanna put words in your mouth, but does that mean this quarter is as good as we got as a jumping-off point? David W. Fox: But, know, obviously, dependent on the markets. Yeah. I mean, volatility is gonna play a huge role there. I do think it's gonna steadily tick up because of the additional clients we're bringing in. So I would just say that in that business generally, there is more traction than just waiting around for clients to make a decision around their hedging. There's proactive sourcing of new business going on as well. Operator: And our next question is gonna come from Kenneth Michael Usdin from Autonomous Research. Kenneth Michael Usdin: Hi. Good morning, guys. This is Bob Chetzalin in for Ken. Sure. How are you guys talking about growing the wealth and asset businesses, which helps the PTM. How do you guys just think about the split between the two businesses? Do you still envision high twenties for the asset servicing while wealth grows at current? PTM margins? Michael O’Grady: Yeah. So I would say that with the asset servicing business, it had a good quarter from a margin perspective, but there's still more work that needs to be done in order to get it consistently at the level of margins that we expect for that business in the high 20s. And with the wealth management business, it already has very attractive margins. We're looking to grow that business faster. And, you know, to the extent that that came at some margin dilution, if it if you will, that would be okay if we were getting the growth that's creating more value, on that side. So it's you know, in the right range, but not something where we operate that business in order to just maintain high margins. Bob Chetzalin: Got it. And just in terms of just organic growth trends, within each business, what was the organic growth rate for this quarter? And how do you envision that to pick up over the next few years? Any color on that would be great. Michael O’Grady: Sure. So within the wealth management business, the organic growth rate was somewhere in the for the year which is also consistent with the quarter, kind of the 1% to 2% range. As Dave talked about earlier, there are different parts of the business that are growing faster or slower within that. So a GFO, for example, is at a higher organic growth rate. The business the ultra-high-net-worth, so think about families with a net worth above $10 million. Growing faster. And then also, the advisory, component of what we do. Has a higher organic growth rate right now, whereas the product portion, of the fee has been flat. And so as we go forward, we expect that combination, to increase. And that's why the strategies that I talked about are focused on that. Asset servicing, it had strong organic growth rate in fourth quarter. You know, closer to kind of 2%, 3%. And as we've talked about before, very focused on making sure that that's scalable profitable growth for us. So it's at an attractive level for us, at this point. Operator: And our next question is going to come from David Charles Smith from Truist Securities. David Charles Smith: Good morning. I was wondering if you'd help us frame out how the degree of operating leverage might move depending on the revenue backdrop I think this past year, for example, you did about 7% revenue growth and got closer to 200 points of operating leverage. You know, if the revenue environment ends up being similar next year, you know, is that 200 basis points, like, plus or minus a decent way to think about how you might, you know, keep the expense growth moving. And on the flip side, you know, how you know, painful would the revenue environment have to be for you to feel like you would be better served going below a point of operating leverage in order to keep all the investments that you still wanna make for the longer-term health of the business? Michael O’Grady: Yeah. I think the way I would have you guys this year focus on the expense line in particular and then the operating leverage that comes out of that is the fact that our planning process this year is a little bit different than it was last year. In that, we start with productivity. We don't start with, I got this much last year in expenses, and I'm gonna increase it by x or y. We start with productivity. And then we look at that number relative to the investments we wanna make during the course of the year. And that implies an expense growth rate. And you kinda go back and forth that until you sort of land where you think you should land. And so from our perspective, keeping that 1% is critical. In any environment. And the idea is from my perspective, not to be attached to a particular expense growth number but to know that we have the discipline built in in the muscle memory developed within the company to flex up or flex down if we need to. We don't wanna starve our businesses of growth opportunities. And right now, we're seeing a lot of really interesting growth opportunities organically within the company. And so to the extent that the environment lets us do that, we wanna maintain the one point of operating leverage, but at the same time, be able to invest in those businesses. So we don't sell for one, two, three, four. We sell for greater than one. Right? And so and then we look at every quarter in terms of the relative investments we wanna make, and we balance that against know, what we're seeing in the following quarter as well. David Charles Smith: Okay. I mean, just in your base case, though, if you're doing about five points of efficiency, and net expenses are growing something like 4%, you know, of those 9% of, like, gross expense growth approximately, could you break it down for us how much of that would be volume and revenue related versus new investments to grow the bank? David W. Fox: Well and obviously, a large part of our expense base is compensation. Right? And then it's gonna be our technology spending. If you look at equipment and software as an example of that, you know, depreciation is two-thirds of that. So when you think a little bit about the additional investment we're gonna be making in the course of the year, a lot of that is gonna be growth investment. Right, from the business perspective. So that's really what I'm talking about is the growth investment. So if we're able to free anything up, during the course of the year, it's going to go towards the business growth. Not towards the, you know, the operate the bank growth, for example. We feel like we've got a very good handle on our tech expenses, on our modernization expenses at this point. So that additional dollar flow would go into those growth levers. Operator: And our next question is going to come from Gerard Cassidy from RBC Capital Markets. Gerard Cassidy: Thank you. Hi, Mike. Hi, Dave. Michael O’Grady: Good morning. David W. Fox: Good morning. Gerard Cassidy: At the risk of being called a commotion again like I was on one of your peer calls earlier in the week. Can you guys the setup for yourselves, your peers, the banking industry is very positive. Going into 2026. And you know, we always are looking at, you know, both the positives and risks. Can you share with us, aside from the geopolitical environment that we're all dealing with, what when you look around corners, what are you guys watching for? Is that know, you gotta make sure we don't get surprised by as we as 2026 unfolds. Michael O’Grady: Sure. So as you know, Gerard, that can be either incredibly complex, or relatively simple. And I would say we look around all the corners as best we can. We worry about everything. But if you boil your question down to, okay, what can have a very negative impact on the environment, which to your point right now is very positive, certainly, on one front, if interest rates change dramatically, that is more difficult for us and for other financial institutions to adjust. You know, we've seen that in the past. When interest rates go up 500 basis points in a year, that is a challenge to the financial models of financial institutions. So that can be up. Certainly, one direction, it creates big issues. And also down. When you think about the impact on zero rates, when you have waivers on money market funds, things like that. That's where, like, big impact second, obviously, is the market. You know, much of what we do is priced on AUM levels, AUC levels, AUA levels that are based on the market. And a lot of our growth that we've had this year is based on those strong market levels. So anything that obviously causes the markets to go down, almost like regardless of what it is, is concerning, and we'll have a big financial impact to us. Then the last thing I would just say is you have challenging operational environments. Just given the nature of our business. The pandemic is certainly an example of that. Where it's extreme and how you have to be able to operate the business to continue to provide the services to your clients. And once again, hard to predict those. We try to do a lot. To prepare for them, to anticipate them, and you've seen in the last few years, invest to be able to deal with those types of environments as well. So trying to do everything we can. Can't predict it, but, you know, hope for the best. Gerard Cassidy: No. Very helpful. I appreciate the insights, Mike. Thank you. Michael O’Grady: Sure. Operator: And there are no further questions in the queue at this time. I'd like to turn the conference back to Jennifer Childe for any additional or closing remarks. Jennifer Childe: Thanks for joining us, and we look forward to speaking with you again soon. Operator: And this concludes today's call. We appreciate your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the GE Aerospace Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations team. Please proceed. Blaire Shoor: Thanks, Liz. Welcome to GE Aerospace's Fourth Quarter and Full Year 2025 Earnings Call. I'm joined by Chairman and CEO Larry Culp and CFO Rahul Ghai. Larry Culp: Thanks, Blaire, and good morning, everyone. I'd like to begin with our purpose. We invent the future of flight, lift people up, and bring them home safely. Right now, nearly 1 million people are in flight with our technology under wing, connecting people and goods worldwide. We play a vital role in powering the warfighters who defend freedom. While we work to deliver for our customers today, we're also inventing technology that will propel the industry forward tomorrow. Our purpose is our call to action. I could not be prouder of what our team achieved in 2025, but also how we got there—with our culture of respect for people, being customer-driven, and continuous improvement. Turning to our results on slide four, 2025 was an outstanding year for GE Aerospace. We made operational progress, delivered on our financial commitments, and continued to invest in our future. The fourth quarter was a strong finish to the year. Orders were up 74%, reflecting continued robust demand for our services and equipment. Revenue increased 20% with double-digit growth in both segments. EPS was up 19% to $1.57 and free cash flow grew 15%. For the full year, we drove substantial improvement across all key metrics. Orders were up 32%, Revenue increased 21%, operating profit grew $1.8 billion, and free cash flow was up $1.5 billion. In CES, orders were up 35% and revenue grew 24%, including services orders up 27% and revenue up 26%. This supported our profit growing 26% to $8.9 billion. In DPT, orders increased 19% and revenue was up 11% with increased deliveries in defense. Profit increased 22% to $1.3 billion. Our performance reflects the impact of flight debt, driving incremental gains that compounded into meaningful improvements. This enables us to accelerate output to deliver on our roughly $190 billion backlog, which is up nearly $20 billion over the last year. We are also investing to improve time on wing and reduce the cost of ownership to deliver value to our customers, supporting growth today, tomorrow, and into the future. I want to thank the entire GE Aerospace team, our suppliers, and our customers who put their trust in us. Looking to 2026, we're poised for another year of substantial revenue, EPS, and cash growth. Demand remains robust with 2025 orders up 32% and continued backlog growth, supporting our expectation for revenue to be up low double digits including commercial services up mid-teens. We expect operating profit of $9.85 billion to $10.25 billion, up a billion dollars at the midpoint. This translates to EPS of $7.10 to $7.40, up nearly 15% at the midpoint. And we expect to generate $8 billion to $8.4 billion of free cash flow with conversion remaining well above 100%. This outlook builds on the progress we made in '24 and '25. We expect to deliver mid-teens revenue growth between '24 and '26 compounded and $10 billion of profit in '26 two years earlier than our outlook has been. We continue to convert this into cash, expecting to generate more than $20 billion of cash between '24 and '26 to reinvest in our future, including in US manufacturing to support both our commercial and defense customers. GE Aerospace is an exceptional franchise, servicing and growing the industry's most extensive installed base of 80,000 engines. As we further embed flight deck, we'll unlock greater value for our customers and shareholders. Turning to Slide six, in their first year, our technology and operations, or T&O, team made a meaningful impact. We partnered more effectively with our suppliers, resulting in material input from our priority suppliers growing over 40% year over year in 2025 and up double digits sequentially in the fourth quarter, both translating to higher outputs. While we're making progress, we know our customers need more from us. To further accelerate our progress in 2026, we're expanding CES to include T&O, now led by Mohammad Ali. Integrating our product line, engineering, and supply chain teams will improve our end-to-end engine life cycle management. We're also elevating our customer-facing teams, led by Jason Tonich, now reporting directly to me, aligned with our customer-driven approach. These changes will enable greater cross-functional problem-solving, agility, and alignment to deliver for our customers. I also want to take a moment to thank Russell Stokes, who announced he'll retire from GE Aerospace in July after 29 years of service. His continuous improvement mindset and passion for developing leaders helped build this world-class business. Russell was one of the first leaders I met here at GE. He's been a critical partner over the last seven years. We wish him nothing but success in his next chapter. These changes, along with flight deck, will further support growth in deliveries in '26. Across our MRO network, we're removing waste to improve shop visit output and turnaround times. For example, we're converting from batch to flow production, which supported LEAP, CFM56, and GE90 turnaround times, improving over 10% year over year in the fourth quarter. Additionally, at our Wales facility, CFM56 turnaround time improved by 20%, and at Selma, we sustained turnaround times below 80 days. This enabled us to deliver our highest LEAP shop visit output of the year. With the LEAP installed base expected to roughly triple between '24 and '30, we're expanding capacity across our global MRO network to support aftermarket demand. In 2025, we added MTU Dallas as our sixth premier MRO partner supporting third-party shop visit growth, now representing around 15% of total LEAP shop visits. We're dedicating approximately $500 million of our more than $1 billion of investment in MRO to LEAP. This includes expanding several MRO sites, including Malaysia, Selma, and Dallas, and a new on-wing support facility in Dubai. We expect these investments will roughly double LEAP's internal capacity. Taken together, these actions drove meaningful progress in services and equipment output in 2025. CES services revenue increased 26% with internal shop visit revenue up 24%, including LEAP internal shop visit volume up 27%. Spare parts revenue grew more than 25%. Deliveries across commercial and defense increased 26% for the year, including a strong finish with 8% sequential growth in the fourth quarter. Commercial units increased 25%, including LEAP up 28%, exceeding 1,800 units, a record output for the program. And defense engine deliveries increased 30%. While 2025 marked a year of progress, we know there's more to do to meet customer demand. And I'm confident we'll deliver. Turning to slide seven, one of the behaviors that guides us is to be customer-driven in all that we do. We're leveraging over 2.3 billion flight hours and nearly $3 billion in annual R&D to drive meaningful improvement for our customers. Our focus remains on delivering mature levels of time on wing and lowering costs of ownership. In November, the GE NX fleet leader, equipped with the upgraded HBT blade, which has improved time on wing over two and a half times in hot and harsh environments, achieved a new milestone surpassing 4,000 cycles. Informed by our progress with the GE NX, the LEAP 1A durability kit will improve time on wing by more than two times, matching our industry-leading CFM56 performance. This is now incorporated in all LEAP 1A new engine deliveries and shop visits, with nearly 1,500 kits shipped since certification. In addition to improved durability, we're also expanding our LEAP repair catalog, which will lower costs of ownership and improve turnaround times. In '25, LEAP parts certified for repair increased 20%, and we expect continued growth in '26. Combined with our progress on delivery, we're actively working to meet customer expectations on LEAP. At the same time, utilization of our mature engines remains robust. CFM56 is the most widely owned and operated engine in commercial aviation. With retirements in '25 consistent with '24 levels, the third-party MRO ecosystem provides customers with optionality for servicing their fleets, supporting higher asset values, and lowering costs of ownership. We continue to strengthen MRO access to OEM materials to support further CFM56 longevity. Last quarter, for example, we reached a materials agreement with EFTIA Aviation to support the service of its growing fleet of CFM56 engines. We're also progressing the next generation of engines. We recently completed a ground test campaign demonstrating our first hybrid-electric narrow-body engine architecture. This first-of-its-kind propulsion milestone demonstrates systems integration, advancing the technology from concept to practical, scalable application. As we deliver greater customer value and advanced breakthrough technologies, we're growing our backlog. At the Dubai Air Show, we recorded over 500 engine wins across narrow bodies and wide bodies. Including Riyadh Air's commitment for 120 LEAP 1A engines and fly Dubai's selection of 60 GE NX engines. Additionally, Pegasus Airlines committed to up to 300 LEAP 1B engines to power its future Boeing 737-10 fleet. And we're honored that Delta, a new GE NX customer, selected us to power and service their new fleet of 30 Boeing 787s. In defense, Indestin Aeronautics ordered 113 F404 engines for the Tejas fighter jets. Demonstrating our position as a trusted partner for allied fighter programs. Overall, we're driving progress, improving field performance, turnaround times, and advancing future propulsion technologies. We're well-positioned to strengthen our leadership across both the commercial and defense sectors in 2026. Rahul, over to you. Rahul Ghai: Larry, thank you, and good morning, everyone. We closed out 2025 with another strong quarter. Fourth quarter orders were up 74%, with CES up 76% and DPT up 61%. Revenue was up 20%, led by CES Services, up 31%. Operating profit was $2.3 billion, up 14%. Service volume, productivity, and price were partially offset by the impact of lower spare engine ratio, OE growth, including 9x shipments and investments. Margins, as per prior guidance, were down 90 basis points to 19.2%. EPS was $1.57, up 19% from increased operating profit, a lower tax rate, and a reduced share count. Free cash flow was $1.8 billion, up 15%, largely driven by higher earnings with over 100% conversion. For the year, our results exceeded the high end of our guidance on all key metrics. Orders were up 32%, with commercial services orders up 27% and total equipment up 48%. Revenue increased 21% from commercial services, which was up 26% and higher deliveries of both commercial and defense units. Operating profit increased 25% to $9.1 billion, with margins expanding 70 basis points to 21.4% as commercial services volume and price offset OE growth and investments. EPS increased 38% to $6.37. Free cash flow grew 24% or $1.5 billion to $7.7 billion, with conversion over 110%, driven by earnings growth and continued contract asset favorability, which was partially offset by inventory growth to support continued output increases in 2026. Overall, very strong performance for GE Aerospace, positioning us well for 2026. Turning to our segments, starting with CES. In the fourth quarter, orders were up 76%, with services up 18% and equipment more than doubling. Revenue increased 24%, with services up 31%. Internal shop visit revenue grew 30%, from higher volume and increased work scopes. Spare parts sales were up over 25% as improved material availability supported increased output. Equipment grew 7%, with engine deliveries up 40%, including LEAP up 49%. This more than offset a decline in spare engine ratio due to the timing of back-end-loaded spare engine deliveries in 2024. For the year, spare engine ratio was lower than '24 as planned. Profit was $2.3 billion, up 5% from higher services volume with improved margins, price, and favorable mix. This was partially offset by the impact of lower spare engine ratio, higher installed shipments, including NINEX, and an increase in R&D. As expected, margins were down 420 basis points to 24%. For the year, CES delivered outstanding results, with orders growing 35% and services revenue and engine output both up roughly 25%. This supported profit growing 26% to $8.9 billion, with margins expanding 40 basis points to 26.6% from services growth, productivity, and price. Moving to DPT, orders were up 61%, with defense book-to-bill above two. Revenue grew 13%, with defense and systems revenue up 2%. Defense units were down 7% due to a difficult compare, which was more than offset by price and customer mix. Sequentially, this was the third consecutive quarter of strong defense engine shipments, with full-year deliveries up 30%. Propulsion and additive technologies grew 33%, led by higher commercial and military volume at Avio. Profit was up 5% from volume, favorable mix, and price, partially offset by investments and inflation. Margins were down 70 basis points to 8.9%. DPT also had a solid year, with orders up 19% and defense book-to-bill at 1.5, with backlog now at $21 billion, up nearly $3 billion. Improved output reported revenue growing 11%, profit was $1.3 billion, with margins up 110 basis points to 12.3% from volume, mix, and price. Going deeper into the drivers of our 38% EPS growth for the year, growth in operating profit drove $1.32 or 75% of the improvement in EPS, with the increased profit in CES and DPT partially offset by higher corporate cost and eliminations. Corporate cost was roughly $570 million, up about $170 million due to lower interest income. Eliminations were about $530 million, up approximately $70 million. Lower tax rate, a reduction in share count, and interest expense accounted for an additional 46¢ of EPS growth. Tax rate was down three points for the year, primarily from the benefits of long-term tax planning projects. Share count reduced by $26 million. Turning to Slide 12, we're updating our segment reporting to reflect the organizational changes announced last week. Importantly, there is no change to total company metrics. Aero derivative engines, which were previously reported in CES, will be included with DPT to drive greater supply chain alignment with the marine and mobility business. As a result, roughly $1.4 billion of revenue and a couple hundred million of profit will move from CES to DPT. With the expansion of CES to include T&O, we are also transitioning the cost of remaining sites and external engineering revenue to their respective businesses. This results in a small change to corporate cost and eliminations. The resegmentation impact is reflected in the 2025 segment financials on the left side of the page. We've also included a preliminary bridge in the appendix and plan to provide recast segment financials for first-quarter earnings. Turning to guidance, starting with CES, we expect mid-teens revenue growth, including services up mid-teens. This includes internal shop visit revenue and spare parts revenue, both up mid-teens from low double-digit engine removals combined with higher work scopes and price. LEAP internal shop visits are expected to grow 25%. We expect equipment up mid- to high-teens, including LEAP deliveries up 15% with higher growth from wide-body programs. We expect $9.6 billion to $9.9 billion of profit, up about $1.2 billion at the midpoint. This reflects the benefit of services growth and price, which is partially offset by OE growth, including NINEX, a lower spare engine ratio, and continued investments. In DPT, we expect mid-to-high single-digit revenue growth and profit of $1.55 billion to $1.65 billion. Higher deliveries will be partially offset by inflation, mix, and investments. Corporate costs and eliminations are up year over year to $1.2 billion to $1.3 billion from lower interest income, AI investments, and higher eliminations from internal BAT growth. In total, we expect low double-digit revenue growth for the company, with profit in the range of $9.85 billion to $10.25 billion, up $1 billion or more than 10% at the midpoint. Further unpacking the drivers of EPS and free cash flow growth, we expect EPS in the range of $7.10 to $7.40, up nearly 15% at the midpoint. About 85% of the improvement will be from higher operating profit. The balance will be from a marginal improvement in the tax rate to below 17% and a reduction of 18 million shares from our previously completed and announced capital allocation actions. Interest expense is expected to be roughly $900 million. We expect to generate $8 billion to $8.4 billion of free cash flow, primarily from higher earnings. Working capital and AD&A combined will be a source year-over-year from slower inventory growth. We continue to expect CapEx at roughly 3% of sales. Overall, we expect another year of conversion solidly above 100%. Taken together, GE Aerospace is poised for another year of solid growth ahead. Larry Culp: Rahul, thank you. 2025 was another outstanding year. Our sustained competitive advantages support our in our leadership positions across both commercial and defense. With the industry's largest fleet of 80,000 engines and growing, we've accumulated over 2.3 billion flight hours. This experience keeps us close to our customers through decade-long life cycles, building enduring relationships, and making us the partner of choice. This field experience combined with our nearly $3 billion in annual R&D investments allows us to drive continuous improvement across our services and products, enhancing time on wing and lowering the cost of ownership. As a result, across our narrow body, wide body regional defense platforms, we offer the best performing products under wing. Our world-class engineering teams develop next-gen technology to improve durability, efficiency, and turnaround times, along with advanced defense capabilities. Through flight deck, we're turning strategy into results with a focus on safety, quality, delivery, and cost, always in that order. Stepping back, the GE Aerospace team is focused and ready for what's ahead. In 2026, we're well positioned to deliver for our customers and shareholders, and I'm confident in our trajectory. With that, Blaire, let's go to questions. Blaire Shoor: Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so that we can get to as many as possible. Liz, can you please open the line? Operator: Ladies and gentlemen, if you wish to ask a question, if you wish to withdraw your question or your question has already been answered, please press 11 again. Our first question comes from John Godden of Citigroup. Your line is now open. John Godden: I was hoping you could elaborate a bit on the commercial aftermarket backdrop. Obviously, it was a great services quarter with revenue growth accelerating versus the quarter, so I'm just curious to what extent this momentum has carried through to start the year. And if you could just unpack some of the assumptions underlying the mid-teen services growth guidance for 2026. Is there any room there to outperform if recent momentum continues? Larry Culp: Well, John, good morning. Thanks for getting us started. I would say we haven't seen anything here at the beginning of the year that gives us pause relative to the tailwinds, the momentum that you referenced continuing. We've all seen Delta and United out since last week, I think, talking confidently about 2026. So when you couple their outlook, the fact that we come into the year with a $190 billion backlog, we know our share of cycles with LEAP in particular in the narrow body segment being up and the opportunities to leverage that underlying unit volume in the aftermarket with both expanded workscopes in both narrow and wide body as well as price, we feel like we have another very strong commercial services year supporting the aftermarket. Again, I think we've commented in the prepared remarks at a rate that should be up mid-teens. Will we be able to do better than that? We're certainly going to aim to do that. But as we talk through the course of 2025, we're not particularly concerned about the demand environment. It's really all about our ability to move spare parts out to third parties to complete our own shop visits. While we were pleased with the sequential and the year-over-year numbers that we cited in the fourth quarter, there's much more to do here in 2026. It's a bit of what undergirds the organizational move that we announced. To the extent that we can continue to make progress, and we think we will, perhaps not in line with the 40% bump we saw from our prior suppliers last year on a full-year basis, I think we'll be able to satisfy that demand better than we did in 2025. Rahul Ghai: Yeah. Just a couple of things, John, welcome to our call here. Just as we said in our prepared remarks, we expect both shop visits and spare parts to be up kind of the same range as mid-teens as the overall services growth. On spare parts first, our delinquency when we ended 2025 was up 50% over where we ended 2024. So as Larry mentioned, strong demand environment. As you think about the spare parts growth, it's gonna be primarily driven by narrow body. That's coming as the LEAP external channel continues to grow, and more than 15% of the LEAP shop visits are now performed by a third-party channel partner. CFM56 continues to be strong as well. Larry mentioned in his prepared remarks about how we ended 2025 retirements, which were similar to 2024. As we think about 2026, we expect retirements to be in the 2% range. Our prior expectations were in the 2% to 3% range, so trending a little bit better, and that puts CFM shop visits in the 2,300 to 2,400 range between 2026 and 2028. External demand environment looks good. We're expecting double-digit removals this year from engines that have already flown. Plus, the work scope continues to increase a little bit of price. All of that leads to that 15% growth that we mentioned on shop visit. Overall, we feel good about the services outlook for 2026. Operator: The next question comes from Myles Walton with Wolfe Research. Your line is now open. Myles Walton: Good morning. Larry Culp: Good morning, Myles. Myles Walton: I was wondering about the LEAP breakeven or LEAP profitability on the original equipment side. Are we crossing the root count of profit or breakeven in '26 still? Larry, you must be feeling a lot better about the trajectory to get output on a LEAP to 2,500 by 2028. What, if anything, is required from investment within the supply chain, not the MRO network, but more the OE side of the supply chain still to get to where manufacturers want the production rates? Larry Culp: Well, Myles, from a NewMake perspective, and as you know, the supply chain supports new make and also the aftermarket. No one can really isolate the new make demand and invest for that without being mindful of the aftermarket demand as well. I think we have improved over the course of 2025 our visibility further out and deeper into the supply chain, further out timewise, and deeper into the supply chain with respect to readiness to satisfy our needs to serve both the airlines and the airframers. There will be capital investment in various places. I'll let different suppliers and different commodity categories speak to their own plans. But I think we're confident that as we move forward here through the rest of the decade, we'll be able to satisfy what the airlines need in the aftermarket and what the airframers are looking to do for the airlines as well, right from a new delivery, from a modernization and expansion perspective. But there's work to do. Again, I don't think we're gonna be up 40% every year, not that we have to, but I feel very good that with the body of work we put in 2025, we're poised to step up again with the supply base, be it process improvement, be it capital expansion, and the like, to keep pace with these considerable tailwinds that we're all fortunately exposed to. Rahul Ghai: And, Myles, to answer your question on the LEAP profitability, yes, we expect LEAP OE to be profitable in 2026 as per our prior plans. Operator: The next question comes from Douglas Harnett with Bernstein. Your line is now open. Douglas Harnett: Good morning. Thank you. Larry Culp: Good morning, Doug. Douglas Harnett: You talked about the improvement in turnaround times across the board, like LEAP, CFM56, GE90, by about 10%. For LEAP, I can see that, but CFM56 and GE90 are very mature engines. Is this turnaround time improvement for both internal and third-party shop visits? What levers enable you to do that? How should we see that improvement reflected in financials since CFM56 is largely time and materials and GE90, you'd be on CSAs, I would assume. Larry Culp: Doug, it's an internally oriented number. We watch turnaround time closely at every one of our shops across platforms across the network. The way I think about turnaround time improvement, it's really driven by two things: one, material availability, and two, efficient execution of our standard work on the shop floor. We've talked a lot about supply chain. You've written about it as well. To the extent that we are getting not only more from our suppliers but getting what we get in a more predictable way, the teams on the shop floor are better able to execute and bring down turnaround times. We talked about a 40% year-over-year improvement from our priority suppliers. Those suppliers delivering at a 90% plus level to their commitments takes a lot of noise out of the system. That is an unlock for us. I think to take full advantage of the process improvements by way of flight deck that we've laid in the various shops. It's not equally spread across every shop, but those turnaround times that you see improve in the fourth quarter, for example, really is a combination of better input materials and better execution. How does that show up in the financials? Well, we should be getting more shop visits completed in terms of the top line, but we also believe it's a considerable productivity unlock. If a team on the floor has to stop a shop visit, if they are idle waiting for a part delivery, that's obviously unproductive time. If they have everything they need from induction to certification, we will see and have seen early signs of real productivity bumps there as well. Operator: The next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Good morning. Rahul, can you quantify what the GE9X headwind ended up being in 2025? What is the incremental profit headwind from NINEX in 2026? If you could comment on the quarterly earnings cadence at CES in '26 as well, that would be helpful. The question is around 9x losses and earnings cadence. Thank you. Rahul Ghai: Scott, on 9x, our losses ended. We said a couple of hundred million dollars of losses in 2025, and we landed right about there, so right in line with our expectations. For '26, as we previously said, we are gonna ship more engines in '26, and the volume continues to grow. With that, our losses on the 9x programs will double year over year. Our current guidance for '26 incorporates those losses getting to that level, so all consistent with what we said previously. On the first quarter, let me just elevate the question a little bit, Scott, and just kind of speak to the total company here, including CES. First, we expect a solid start to the year. Our output started out slow last year in the first quarter, so we expect our engine and shop visit output to grow substantially here in the first quarter. That will drive our revenue growth, and we expect at the total company level high teens revenue growth for the company. Both CES and DPT expect above their respective full-year guides. For CES, we ended 2025 with 27% orders growth, so we're entering '26 with a strong backlog. About 85% of the spare parts that we need to ship in the first quarter are already in the backlog. We had a CMR charge in the first quarter of last year that we're not expecting to repeat. It'll be a strong start for us in our services business, and commercial equipment output is expected to be strong. That'll drive revenue growth. First quarter last year was our strongest spare engine shipment quarter, so there'll be some year-over-year impact due to that. Still, it'll be a strong revenue performance despite that. There will be 9x shipments here in the first quarter as well, which we did not have in '25, and DPT, they're on a good run here on sequential performance, and expect that to continue, driving revenue growth for the DPT segment. Switching to profit, expect that profit to be up year over year growth primarily from the services growth and absence of the CMR charge offsetting the higher deliveries and the 9x shipments. However, because of the lower spare engine ratio and 9x shipments, our total margins for the business will be kind of in line to slightly better or marginally better here versus where we ended 2025. Free cash flow, we expect certain payments here in the first quarter, will be down year over year, but overall, thinking about revenue and profit, we expect to get out of the gate strong. Operator: The next question comes from Sheila Kahyaoglu with Jefferies. Good morning, Larry, Rahul. Sheila Kahyaoglu: Maybe, Rahu, since you were just speaking about CES profit guidance for '26, if you could walk through margins at the midpoint, it implies margins are flat. I know you gave a few pieces on the GE9X headwind, how are you thinking about shipments there? What are you seeing offset the goodness to help overcome some of the mix issues you're facing with equipment growth outpacing services, 9x headwind, as you mentioned, spares ratio, and LEAP growing double digits while CFM is flat? How do we think about that? Rahul Ghai: I think, Sheila, you kind of outlined some of the key drivers here in the math. The margin story at the CES level is exactly the way you said it. Strong services growth, with 3 and a half billion dollars expected in services revenue growth in '26 that drops through at a healthy clip despite LEAP being a bigger share of growth, still, expect strong drop through from services revenue improvement year over year. OEM shipments are increasing, spare engine ratio gradually comes down as we expect it to, as time passes on. And then NINEX shipments and with R&D coming in as well. Those are the big drivers for CES margins here in 2026. The margins ended up better than expected during October guidance. Margins about 70 basis points better than what thought in October. So, despite that, expect margins to be flattish in 2026. Feel good about trajectory. Operator: The next question comes from Seth Seifman with JPMorgan. Seth Seifman: Hey, thanks very much, and good morning, everyone. Larry Culp: Morning, Seth. Seth Seifman: Maybe just to continue along that line of questioning, as we think about the headwinds accumulating from a mix perspective in CES and then look out beyond '26, how should we think about margin trajectory there with LEAP OE becoming profitable, LEAP aftermarket continuing to become more profitable, but maybe OE aftermarket mix headwinds and more 9x? I'm getting to, like, a 26.6% in CES for '26. So, kind of where do we think about that going directionally in the years beyond? Larry Culp: I think you captured some of the headwinds we've talked about not only for '26 but for '28. It's important to recognize that when we spun, thought to be at a $10 billion operating profit level two years from here. We're able to hit that milestone, and will hit it at the midpoint here in 2026. There are many things outweighing the headwinds as we continue to grow the install base. With suppliers grow the installed base at a low to mid-single-digit level, and get the full benefit of utilization in term volume, work scopes, and price. The commercial services business is the engine that drives profit growth. LEAP is better as we go forward and will look to have NINE do the same. Despite progress in defense, with 11% top-line operating profit up over 20%, we have opportunity to deliver on the $11.5 billion operating profit targeted for 2028. Potentially do better. Serve airlines, ramp with airframers to help modernization and expansion. Support warfighters fully. Rahul Ghai: Seth, if add a couple of things, back in July when we gave 2028 guidance, expected around 21% margins in '28. We got there last year, jumping off higher point. Margin profile maintained into 2026. Spoke about CFM56 goodness, retirements trending low, shop visits expected in the 2,300 to 2,400 range, maybe better than previously thought. LEAP service profitability continues to improve, external channel repairs to grow, incremental shop visits drive productivity in LEAP services. Wide body program, especially GE90, no retirements expected. All that looks toward 2028, improved margin profile. Operator: The next question comes from Ron Epstein with Bank of America. Ron, are you there? Ron Epstein: Hey. Can you hear me? Sorry about that. Rahul Ghai: No problem, Ron. Ron Epstein: Good morning, guys. Larry Culp: Good morning. Ron Epstein: So, yeah, a lot's been asked already, but back to prepared remarks, mentioned spending $3 billion a year on R&D, a big number. Can you elaborate on spending, investments being made? Larry Culp: Ryan, I'd say it's where anticipated it to be. Customer experience improvement on ramping engines, like LEAP, with improvements like the durability kit. Nine X coming under wing with the triple seven X. Programs EIS or ramping are the first order. Additionally, investing in future flight. RISE program, technology development, not product development but spends big chunk of annual spend, coupled with some defense next-gen programs, contributing to meaningful portion of R&D. NEX with the 2.3 billion flight hour experience base positions us well to shape future of flight. Balance of 2026-28 rests on protecting and expanding R&D envelope, key for innovation and technology. Operator: The next question comes from Gavin Parsons of UBS. Gavin Parsons: Thank you. Good morning. Larry Culp: Good morning, Gavin. Gavin Parsons: You guys talked about CFM56 retirements trending lower than expected, 2%, despite successful LEAP deliveries. Expecting that to pick up to 3% or 4%, what's changed, still expecting shop visit peak in '27? Thank you. Larry Culp: Gavin, it's really more of a demand function, keeping CFM56 powered planes in flight as airlines need them. Retirements in 2025 ended up at about 1.6%, in line with 2024, balance '26 a little better, expecting slightly better at 2% compared to two to 3% range given in July. From shop visit perspective, ranges 2,300 to 2,400 through 2028 sets better expectations. Expect no big decline come 2030. Floating better utilization with demand leading to subdued retirements, meaning CFM56 strong longer. Operator: The next question comes from Noah Poponak with Goldman Sachs. Noah Poponak: Hey, good morning, everybody. Rahul Ghai: Morning, Noah. Noah Poponak: Could you elaborate on the agreement announced with Eptai? Rahu, on free cash flow, this year flirting with what provided for 2028. Anything abnormally high in '26, fade away, bridge 26 to 28? Larry Culp: On Eptai agreement, third-party aftermarket seen as a strength, want maximum optionality how fleets serviced, both supporting asset values and lowering cost of ownership—foundation for agreement. Rahul Ghai: On cash flow, Noah, nothing abnormal in 26. Last year inventory growth was a challenge, added a billion-dollar inventory. Supply chain improving, but not there entirely, so investment made to continually increase output. For '26 expect less contract asset favorability this is getting offset here with slower inventory growth. Total working capital AD&A last year was a half a billion net headwind, expect slightly less this year. It's not a bad given low double-digit revenue growth. Really nothing abnormal coming into the cash number and more opportunity on inventory as we get out. Maybe less on contract assets, all in line with what was communicated before. Blaire Shoor: Liz, we have time for one last question. Operator: This question comes from Gautam Khanna with TD Cowen. Gautam Khanna: Hey, thank you. Good morning. Congrats to Mohammad and Russell. Customer behavior in the aftermarket, any change anticipated on overhauls scope, on wide-body engines or CFM56, any pricing pushback, discontinuity compared to recent times? Larry Culp: Nothing stands out frankly. Demand environment post-pandemic robust, with airlines wanting maximum fleet support. Talked about supply chain and flight deck over last years. CFM56's stability, demand leading toward some expanded workscopes. Satisfaction without compromising safety and quality is the reasonable ask, one committed to delivering new year. Blaire Shoor: Larry, any final comments to wrap the call? Larry Culp: Blaire, thank you. The hour flew there. Thank you, everyone.
Operator: Ladies and gentlemen, welcome to the S&T Bancorp Fourth Quarter and Full Year 2025 Conference Call. After the management remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star then the number one on your telephone keypad to raise your hand and enter the queue. Now I'd like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead. Mark Kochvar: Thank you, and good afternoon, everyone, and thank you for participating in today's earnings call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the fourth quarter and full year 2025 earnings release as well as this earnings supplement slide deck can be obtained by clicking on the materials button in the lower right section of your screen. This will open up a panel on the right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbankcorp.com. With me today are Chris McComish, S&T's CEO, and David Antolik, S&T's President. I would now like to turn the program over to Chris. Chris? Chris McComish: Great. Thank you, Mark, and good afternoon, everybody. Thank you for joining us on the call. I'm gonna begin my comments on page three. We certainly appreciate the analysts being here, and we look forward to your questions. Before we discuss Q4 specifically, I'd like to take a few minutes to discuss and wrap up 2025. Overall, we moved forward through 2025 very well, producing returns, building record levels of capital, with increased momentum while receiving external recognition for both our financial performance as well as our high levels of employee engagement. For the year, we produced $3.49 a share, just under $135 million of net income, with a 3.9% net interest margin. Loan growth was over 4%, and customer deposit growth was just under 3%, while expenses were well controlled. Asset quality for the full year was well managed at 18 basis points of net charge-offs, while the ACL declined 16 basis points year-over-year, reflecting three straight years of overall improved asset quality. You know, none of these results would have happened without the commitment of almost 1,300 S&T employees or some of the most engaged and talented employees in our company. For those that are listening on the call, we thank you for your hard work and your engagement. We're using these numbers and results of yours. You should be very proud. Turning to the quarter, our $34 million in net income equates to 89¢ per share, down slightly from Q3. Our return metrics were again strong, highlighted by a 1.37% ROA. Additionally, our NIM rose to 3.99%, up six basis points on a linked quarter basis, which is the best performance we've seen since 2023, as is our 1.95% PPNR up six basis points quarter over quarter. Asset quality for the quarter was mixed due to higher charge-offs associated with some NPA resolutions while the ACL declined eight basis points due to specific reserve releases and an overall reduction in CNC assets. Dave will provide more details here in a few minutes. Moving to page four, loan growth was just under $100 million for the quarter at 4.5%, led by commercial banking with both growth in our C&I portfolio as well as our CRE line of business. Customer deposit growth was just under $60 million at 2.9%, and the quality of our deposit mix remains very strong with DDAs representing 27% of total balances. Before I turn it over to Dave Antolik to provide more details on the balance sheet and credit, I wanted to bring to your attention the other announcement that we made this morning announcing our new $100 million share repurchase authorization that was approved by our board of directors yesterday. Given the robust capital levels of the company, we are fortunate to be able to have an authorization of this size available to us. Our capital levels give us the ability to repurchase shares should the market warrant it, while not in any way impeding our ability to consider other opportunities including M&A. With that, I'll turn it over to Dave, and I look forward to your questions. David Antolik: Well, thank you, Chris. And as Chris mentioned, the loan growth of the quarter was driven primarily by commercial with C&I and CRE balances growing by $53 million and $34 million respectively. C&I growth was a result of an increase in revolving balances and new customer acquisition. Q4 was a particularly active quarter for our asset-based lending group, who onboarded several new names. Categories of C&I growth include retail, utilities, and service. Our CRE growth was entirely driven by construction funding in the quarter. We continue to see demand for construction facilities for multifamily, warehouse, storage, and industrial asset classes. These loans typically fund over twelve to eighteen months, move to our permanent CRE portfolio, and frequently move on to nonrecourse funding sources. Supporting growth in the coming quarters, our unused commercial construction commitments increased by $78 million quarter over quarter. As a result of the strong funding in Q4, our pipelines reduced slightly heading into Q1, and our focus is on rebuilding. This activity is consistent with our historical experiences. Regarding loan growth guidance for 2026, we believe that mid-single-digit growth is achievable while maintaining our asset quality profile. We expect loan growth to primarily come from C&I, where we've seen improved activity from investments we've made in team leadership and banker talent, along with CRE. We've demonstrated a long-standing ability to develop deep customer relationships in support of growth. We are also forecasting continued consumer home equity growth, which is focused on complementing our deposit franchise customers. If I can now direct your attention to slide six of the presentation, which provides additional details on our asset quality performance in Q4. Starting with the allowance for credit losses, we recognized a reduction relative to gross loans from 1.23% to 1.15% quarter over quarter, primarily the result of two factors. First, a reduction in specific reserves related to problem loan resolution. Second, a reduction in criticized and classified loans of $30 million or 13% in Q4. This reduction in criticized and classified loans at year-end 2025 represents our third consecutive year of successfully reducing loans in these categories. Over that period, the three-year period, we have reduced total CNC loans by 50%. It is also a reflection of our focus on asset quality as a key driver of financial performance, robust portfolio management, and an aggressive approach to problem loan resolution. As a result of aggressively addressing problem loans, we were able to fully resolve loans totaling $29 million during the quarter. These resolutions contributed to increased charges of $11 million or 54 basis points annualized in the quarter. In addition, we recognized new NPL formations that caused overall NPAs to increase by $6 million from 62 to 69 basis points. We have appropriately reserved for these loans and have resolution strategies in place. Although an increase relative to Q3 and 2025, this level of NPLs remains at a very manageable level. Looking forward, we anticipate full-year 2026 asset quality results to perform similarly to what we saw in 2025, with a focus on reducing NPLs and maintaining the lower level of CNC loans that I discussed earlier in my comments. I'll now turn the call over to Mark. Mark? Mark Kochvar: Thanks, Dave. Fourth quarter net interest income improved by $1.8 million or just under 2% compared to the third quarter. That was mostly driven by the margin expansion of six basis points. The margin improvement came from an 11 basis point decrease in the cost of funds, and that was offset by a modest decrease in earning asset yields of about three basis points. We have been able to successfully reduce exception rates and regular rates on non-maturity deposits as the Fed has reduced short-term rates. CD rates have been somewhat more sticky but are still coming down. We continue to expect that our more neutral interest rate risk management position and pricing discipline will mitigate any rate down impact, both what has happened and what is expected in 2026. Tailwinds from our maturing received fixed swap portfolio, security, and fixed loan repricing, some limited CD repricing all contribute to these tailwinds. If we look into 2026, we expect relative stability in the net interest margin, in the mid to high 3.9% range, with net interest income growth coming from earning asset growth. Next slide. Noninterest income increased by $500,000 in the fourth quarter with small improvements in our major customer fee categories. The increase in other is timing-related, primarily to the letter of credit activity. Our expectations for fees in 2026 remain at approximately $13 to $14 million per quarter. Expenses were in line in Q4, up by $800,000 compared to the third quarter. The largest variance was in salaries and benefits. Within that, medical costs were higher and also salaries due to some hiring. Marketing was impacted by the timing of some promotions. We expect to manage our 2026 noninterest expense year over year to around 3%, which implies a quarterly run rate of approximately $58 million. Lastly, on capital, the TCE ratio decreased by 29 basis points this quarter due to the share repurchases completed in the fourth quarter. We repurchased just over 948,000 shares at an average price of $33.82, a total of $36.2 million. Our regulatory ratios continue to be very strong with significant excess capital. Even if we complete the $100 million repurchase program announced today, we are comfortable that we will have more than sufficient capital to position us well both for the environment and to enable us to take advantage of inorganic or organic growth opportunities. Thanks very much. At this time, I'd like to turn the call back over to the operator to provide instructions for questions. Operator: Thank you. The floor is now open for questions. If you like to withdraw your question at any time, please press 1 again. Please hold while we poll for questions. Your first question comes from the line of Justin Crowley with Piper Sandler. Your line is open. Justin Crowley: Hey. Good afternoon, everyone. Hi, Hi. Just want to start on loan growth for the quarter. You know, it didn't really deviate from how you folks framed expectations previously, but bigger picture, curious, is there anything specific that you'd point to that that's maybe holding you back from that ramping to say you know, a mid to high single digit pace, something more along those lines? Maybe once discussed. You know, is that a function of the demand side of the equation or is there a desired pricing component to that? What, if anything, would you speak to there? David Antolik: Yeah. Justin, it's Dave Antolik. I think that it is not necessarily on the demand side. It's, you know, making sure that the asset quality of the onboarded new customers meet our criteria to maintain the lower levels of CNCs. Some of it is, you know, we're adding to staff. We're adding bankers. We plan on doing that throughout the year. So making sure that we have adequate coverage in all of our markets and all of our segments. I think about the C&I growth and, as I mentioned, the ABL activity. There were certainly bright spots in Q4. That's relatively new. So there are some tailwinds to help us grow and hopefully get to a higher rate of growth in terms of our loan. Chris McComish: Justin, it's Chris. The other thing I would add is we do think, you know, about the overall state of the economy. And things are picking up in positive, but we don't want to be out there predicting something that's dramatically higher than what you see from a GDP growth rate standpoint or what we believe organically is available in the markets that we serve. Dave touched on it too. You know, our desire is to continue to grow teams and bankers in the field. Our leadership in the field knows that there are no constraints around adding more folks to the team, and that we'll continue to do that. But we're trying to give you our best estimate based upon all of those factors. Justin Crowley: Okay. And you mentioned in terms of or both of you mentioned sort of the hiring efforts and, you know, maybe it's a mix, but you know, how focused is that on the C&I side of things? Is that kind of the top priority in terms of looking to add new talent? David Antolik: Yes. I would call that our number one priority in terms of moving ourselves forward and accelerating growth in the commercial space. And it's not just C&I, Justin. It's both CRE and C&I. You know, we're doing an awful lot of work in our business banking space as well. So focus those teams on deposit gathering and developing new relationships. So it's across the board, you know, in the fight for talent, we think we have a really good story to tell. We'll be able to acquire and add to the teams in order to support growth. Justin Crowley: Okay. That's helpful. And I guess pivoting, you know, just one on the margin. You know, was pleasantly surprised with the expansion you saw this quarter, and it looked like some nice moves lower in deposit costs. You know, I think the last update you gave, you're referring to some of the competitive pressures on the funding side. That had been maybe a little stronger than initially expected. So curious how that has been trending as we now move through the first quarter. And, you know, I guess, how that sort of informs the mid to high three nine, guide on margin here looking forward? David Antolik: Yeah. I think with the as the Fed moved lower, you know, we've seen the competitors a little bit slower than we anticipated, but bring rates down. So we're working within that framework and are pretty confident that we can hold these levels on the NIM. Chris McComish: Justin, if you think about the quarter itself and when rates dropped, I would say the competitive intensity around rates was higher early in Q4, than as we moved through Q4. And, you know, subsequent drop in rates. The market rates kind of went with it a little bit faster. I think it's a bit harder for people to cross, for example, four on CDs. You know, that dip below four on CD, that short six CD rate took a little bit longer than we had thought would happen. But we're through that, things seem to be moving a little bit better. Justin Crowley: Okay. And then maybe just M&A. You know, I know we've talked a lot about it, but just curious for Chris, maybe an update there, you know, where things stand, just sort of the pace of conversations you're having, if there's any or has been any shift in preference or bias as to what geography or geographies you know, you might be leaning toward or where you're seeing the most active discussions. Chris McComish: No. Nothing significant. Just that we've talked about over the past couple of months. We are in active dialogue across the geographies. And we continue to make it a priority for us. But we also want to do, you know, do the things that we have most direct control over, and those are the things that we're doing every day. So still lots of interest, lots of conversations. You know, reiterating something I said earlier. This stock repurchase authorization that we have, and we're very fortunate to be able to, you know, kind of walk and chew gum at the same time. That we can potentially, if the market avails itself, to the repurchase authorization, that's great. At the same time, it doesn't inhibit us at all from an M&A standpoint. Justin Crowley: Okay. Perfect. Great. I appreciate everything. Chris McComish: Okay. Thank you. Thanks. Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open. Daniel Tamayo: Thank you. Hey, Danny. Good afternoon. Chris McComish: Yeah. Hey, guys. Maybe we start on the loan growth side, but as it relates to the funding, mid-single digits not guiding to better than that, but sounds like it could be a good year for loan growth. Loan deposit ratio now over 100%, I believe. So just curious if you expect to be able to kind of fully fund that loan growth with deposits or if you're going to be using alternative sources, just outlook on the deposit growth, if you will. David Antolik: Yeah. Sure. What we're forecasting is our ability to fund that internally through deposit growth. We saw a really strong Q4 in terms of customer deposit growth, particularly in the consumer space. Was offset a little bit by some activity with some large commercial depositors that we consider more anomalous than anything. So I think that with the focus and the investments that we've made in technology, people, campaigning, we're really focused on driving core deposit growth, and we think we can achieve balanced loan and deposit growth trajectory. Chris McComish: Danny, it's Chris. If you'd be able to show you the Teams incentive plan, you would see very clearly where the importance of deposit growth and funding our asset growth through continued expansion of customer relationships. So we know in order to match profitable growth, the funding needs to come from the continued growth in our already strong core deposit franchise, and that's a key focus for all of us in all lines of business. Daniel Tamayo: Okay. And on the cost side, I suppose, I mean, this is kind of related to that as well as your commentary earlier about repricing the current deposits. What do you have in terms of implied or assumed deposit betas in margin guide? David Antolik: Well, I mean, we have maybe in our plan, we have a couple more cuts sort of built in. I mean, it's complicated because there's, you know, on the asset side, things are moving the other way. But on the deposit side, the betas are probably in the 30 range overall. Daniel Tamayo: Okay. Alright. Great. And then, I guess, one last one for you, Chris. You talked about the M&A, and you obviously have this buyback announcement. From a capital perspective, but you know, you're obviously just under $10 billion. You've been able to kind of flatten out the asset growth over the last few quarters. You know, I'm modeling in. I think you talked about last quarter likely crossing $10 billion next year. But is there a way or a desire to potentially keep that under $10 billion through next year and push the Durbin hit out a year? Chris McComish: Yeah. At this point, Danny, we're not thinking that way. We believe that we'll know, our Durbin hit is relatively small at $6 to $7 million. There's certainly some things that you could do, you know, Mark and the team do. But our focus right now is to continue to grow and show some reasonable growth. You know, if we end up with, you know, 5% loan growth for the year, 6%, you know, in that range, you're talking about $500 million worth of loan growth, and that would put us kind of meaningfully over the $10 billion. And then we have, you know, the good part of 2027 to work through that. So our focus is to continue to and recognize that, you know, that's a potential headwind, but it's also something that we're gonna we can also celebrate because it's been talked about for too long to stay around that level. Daniel Tamayo: Understood and agreed. We're all looking forward to not talking about that anymore. Chris McComish: Think about it, Danny. The call would be ten minutes shorter. Daniel Tamayo: I'll scratch that off my question for next time. Alright, guys. That's all I have. Thanks a lot. David Antolik: Thank you. Operator: Next question comes from the line of Kelly Motta with KBW. Line is open. Charlie: This is Charlie on for Kelly. Thanks for taking my questions, guys. Chris McComish: Sure. Charlie: Just to hit on asset quality quickly, can you provide more color on the specific resolution of the NPAs that drove kind of the $11 million in charge-offs? And whether that relates to the two CRE and one C&I credit you guys identified last quarter? David Antolik: Yep. Yep. Just got that. And you directly related to those previously identified and talked about credits. We were able to bring those to resolution, recognize the charge, reduce specific reserves as a result. We also had, as I mentioned, formation in the quarter. That were both C&I and CRE. And we appropriately reserved for those. And we have resolution strategies in place for those credits as well. And, yeah, I want to reemphasize the importance of the progress we've made in terms of the criticizing classified reductions over the last three years. So if you think about, you know, we talk a lot about loan pipeline and where's growth going. You know, that CNC bucket is the pipeline for future charges and NPLs. So having reduced that by 50% over the last three years, reduces the amount of problem loans coming into the funnel, that could potentially lead to further deterioration or charges within our book. So that's why we feel good about being able to say, hey. Look. Asset quality in 2026 is not going to perform any worse than 2025. And our focus on reducing NPAs and the feeder pipeline of CNCs has taken hold and it's really our focus. Charlie: That's helpful. Thank you. And then turning to expenses, it seems like growth is gonna be expected to be strong, and you guys saw 4% expense growth this year. Is that kind of a fair run rate in the years ahead? I know you mentioned adding talent in the C&I and CRE verticals and made investments already. Just if you could speak to initiatives ahead and maybe secondly, if there's room on the efficiency ratio or it's, like, mid-fifties a good sustainable place to operate from? Thank you. David Antolik: Sure. I'll start at the last one. I think mid-50s is the place to look for the efficiency ratio to be. On the expense side, we don't think we have a lot of infrastructure build. We've invested a lot over the last few years on the staffing side for a lot of our support areas. So the FTE growth that we expect in this year and really for a couple of years after that will be mostly production-related. So that limits the overall increase on the salary benefit side. So we're working with about a 3% year-over-year expense increase. So, you know, we're pretty confident that we could hold to that going into this year. Charlie: That's great. Thank you. I'll step back. Thanks for taking my questions. Chris McComish: Thank you, Charlie. Operator: Your next question comes from the line of Matthew Breese with Stephens. Your line is open. Matthew Breese: Hey, good afternoon. Chris McComish: Hi, Matt. David Antolik: Hey, Matt. Matthew Breese: Few more questions for me. You know, first, loans this quarter held up a bit better than what I was expecting. And so I'm curious what the roll-on yields are versus roll-off today and maybe what are your expectations for back book repricing in 2026? David Antolik: We're still getting a little bit of positive on the fixed side. You know, we're also getting benefit from this received swap book that we have. So that's been helping a lot to support the lack of declines on the asset side. Although that tailwind, if you will, starts to diminish as we get farther into the year. You know, so by the end of the fourth quarter, a lot of that will be gone. The replacement yields are not all that different on the floating side. I mean, they're just kind of coming off and going on, but we are still picking up, you know, maybe 25 basis points on other more fixed products net. Matthew Breese: And do you have the maturities for fixed asset repricing or fixed loan repricing in '26? David Antolik: Say tower bets? Yeah. But we have about a billion or so that we have to replace every year. Some of that will be our prepayments and not and also amortize it. Loans. So kind of a mix of that is that the It's a mix of fix and flow. Yeah. Matthew Breese: Got it. Okay. And then do you have the updated cost of funds either at or cost deposits either at year-end or more recently? One of the things I was looking at, you know, CD costs, just look a little elevated here at $3.86. I'm assuming there's quite a bit of downside as we think about, you know, rate cuts, additional rate cuts, and the maturity schedule there. What CD cost could be a year from now? David Antolik: Yep. So they have, like, a monthly margin, you know, from December that gets us a little bit closer. And for that period, our CDs were about at a $3.82. And overall deposits were about a $2.50. Matthew Breese: $2.50 for interest-bearing. David Antolik: Yes. Yeah. That doesn't include DDA. It's just Yeah. Matthew Breese: Okay. Okay. Thank you. I guess the last one for me, a lot of the questions have been exhausted, you know, for Community Bank, what are you doing, or what are you using for AI tools at this point? How are you using them and as we look ahead, whether it's a year or five years, you know, how do you think those tools might impact your P&L? Chris McComish: Yeah. Obviously, you know, in some of these areas, things are early days, but in other areas, it's, you know, it's work that is really important to our company. I think about in the area of BSA, AML compliance, and some of the fraud protection that occurs in our company every day relative to primarily to our deposit book and, you know, anomalies that are happening within commercial and consumer deposit relationships. So all of that information that's coming to our financial intelligence group is AI-driven. And alerts are created. And it has been a big factor in our ability to, you know, find potential fraud and make sure that we're stopping things before they actually happen. And it's, you know, it's millions of dollars of savings that we see on a quarterly and annual basis. Around potential things, all coming from you would consider some sort of AI alert. We're also thinking about, you know, generally, you know, compliance consumer compliance, and the ability to use AI there. Within our commercial bank, the underwriting and portfolio management infrastructure that we have has increasing levels of AI support to do things like auto spreading of financial statements. You know, support for it will continue to mature. Will be support around underwriting for originations as well as portfolio management. We're also using it to enhance our communication. You know, just this month, some of the work that we're doing in communicating to our board, we're running through some AI tools to help us communicate more effectively. So it's a lot of kind of some experimentation. Obviously, there's a big level of risk management associated with it. This is our information that we have to protect. And we have to make sure that it's not, you know, not available elsewhere. So we're working on that. You know, we've got a working group that thinks about these things, but you know, it'll continue to evolve, and it is a priority for us. You know, we talked about expense growth in the year and, you know, the commitment that we have is, you know, all FTE growth people expense growth will come in customer-facing and revenue-producing roles. We believe that, you know, back-office support and those sorts of things should be able to be held flat. And that's kind of a forcing mechanism to make sure that we're looking at opportunities that, you know, from a technology standpoint. Matthew Breese: How far away are we from, you know, you said millions of savings. You know? How far away are we from that actually impacting guidance and your outlook? Chris McComish: Well, a long way. You know, again, it's still early days. When I'm talking about millions of savings, these are, you know, fraud alerts that are protecting, you know, protecting our customers from potential losses that could have occurred otherwise. So as it relates to significant increases in operating expenses, I've, you know, we got a ways to go, I think. Matthew Breese: Yes. I'll leave it there. Thank you very much for all that. Appreciate it. David Antolik: Sure. Operator: Your next question comes from the line of Dave Bishop with Hoste Group. Your line is open. David Bishop: Yes, thank you. Good afternoon. Chris McComish: Hey. David Bishop: Quick question for you. Most of my questions have been asked and answered, but in terms of origination, loan production this quarter versus payoffs, just curious, maybe how those compare to fourth quarter to the back in the third quarters? Thanks. David Antolik: Yeah. Fourth quarter was robust. Originations were strong in Q4. We did have elevated payoffs in Q4 that talked about the, you know, the kind of the construction cycle. A lot of those loans were refinanced out of the bank in Q4. You know, it had led to some pipeline burn that we're actively rebuilding now and would hope to, you know, regain our momentum. And as we add additional bankers incrementally add to what our experience has been over the past year or two. So we, in total, need to originate somewhere around a billion and a half to a billion 7. And in total new loans each year to drive a, you know, five to 7% net loan growth number. David Bishop: Got it. And in terms of the targeted banker assets here, any geographies burning a hole in your pocket more than others as you budget out this year? David Antolik: Yeah. We're, you know, we're agnostic relative to the geography. You know, we want we know we need to add to the C&I teams. CRE, we're pretty well heeled in terms of the legacy market. But if we can find an additional banker who can help us grow, we're gonna hire them. As Chris mentioned, the focus of the leads of both the commercial real estate and C&I groups, our ABL group, is to add additional bankers in order to further enhance customer acquisition and that, hopefully, that translates into additional loan and more specific deposit growth. So it might be treasury management officers. It could be CRE bankers. It could be C&I bankers. You know, we're looking to grow all facets of our commercial teams and the products that they offer. David Bishop: Great. Thank you for that color. Operator: Your next question comes from the line of Daniel Karthaus with Janney Montgomery Scott. Your line is open. Daniel Karthaus: Hey. Good afternoon, guys. Chris McComish: Hey, Dan. David Antolik: Hey, Dan. Daniel Karthaus: Just, most of my questions have been asked and answered, but maybe could you provide a little bit of color as to competitive factors on the deposit side, given your goal to fund loan growth with deposits. Are the markets that you operate, are they behaving rationally right now, or how would you kind of describe those? Chris McComish: Yeah. We talked a little bit about that earlier. I would say that, you know, early in Q4 as rates started coming down in that 4% number was out there when you're talking about the CD book. There was some pressure from competitors to what I would call key, you know, hold on what I have. And offer, you know, an elevated rate. We were a little surprised that folks kind of reacted as slowly as they did. And I think particularly in the month of October, maybe even into early November. But second half of the quarter, things became more rational. You know, we don't aggressively post and advertise aggressive rates in the market, generally speaking. We operate with what I would call a very responsive exception pricing process that kind of combines the ability for our team leaders in the field to make decisions with the proper level of oversight between Mark's teams and Dave's teams. And that has worked really well for us, both in the ability to attract new deposits as well as to retain things from a competitive standpoint. So we feel, you know, optimistic about our ability to respond to the information that we're getting, to make decisions around and that's a big reason why we believe we should be growing deposits at least at the rate that we're projecting our loan growth. Daniel Karthaus: Excellent. Got it. Great. So I have for right now. I'll step back. Thanks. David Antolik: Thank you, Dan. Operator: And with no further questions in queue, I'd like to turn the call over to Chief Executive Officer, Chris McComish, for closing remarks. Chris McComish: Well, listen. Thanks all for being on the call with us. And we appreciate your engagement and your guidance. Be safe out there. There's a lot of nasty weather coming in various parts of the Midwest in particular. But we look forward to a successful 2026. We're certainly very proud of 2025. Look forward to moving forward. So have a great rest of the day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Hello, and welcome to Banc of California's Fourth Quarter 2025 Earnings Conference Call. I will now turn it over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead. Ann DeVries: Good morning, and thank you for joining Banc of California's fourth quarter earnings call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations to these measures and additional required information are available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would also like to remind everyone today's call will include forward-looking statements, including statements about our targets, goals, strategies, and outlook for 2026 and beyond, which are subject to risks, uncertainties, and other factors outside of our control, and actual results may differ materially. For a discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation, as well as the Risk Factors section of our most recent 10-Ks. Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer, and Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared. Jared Wolff: Thanks, Ann, and good morning, everyone. I have a prepared script here, but let me go off script for a minute. This was a really great quarter and end to the year. I really could not be more pleased with the execution of our team. As you all know, we spent 2024 integrating the merger that was completed at the end of '23. So 2025 was supposed to be business as usual. Well, in my view, there really was nothing usual about what we did in 2025. It really represented very strong performance by our teams on both sides of the balance sheet. Solid credit management, great expense controls, and we did a great job bringing new high-quality relationships to the bank. Our production these last several quarters has been particularly good. As I frequently say, we try to move the ball down the field each quarter, and sometimes it is a lot of plays that work. Other times, it is just a long pass that gets us there. But at least this quarter, it felt like we played a ton of offense. Our time of possession was very long, and we strung together a lot of good plays. In my view, we did this very well throughout all of '25, expanding our core earnings power and profitability, strengthening our balance sheet, and creating a ton of value for our shareholders. Let me highlight a few of our many accomplishments for the full year of '25. Our loan production disbursements were $9.6 billion, up 31% from '24. We added nearly 2,500 new NIB deposit accounts and nearly $530 million of new NIB deposit balances, getting us close to that 30% NIB as a percent of total deposits. Our margin expanded 30 basis points driven by a 47 basis point decline in deposit costs. Expenses came down 7% year over year, and our adjusted efficiency ratio dropped nearly 900 basis points. Our adjusted pretax pre-provision grew 39%, and adjusted EPS of $1.35 was up 69% year over year. We had tangible book value per share growth of 11%, including a pretty substantial growth in tangible book value per share in the fourth quarter. Importantly, we returned significant capital to our shareholders by repurchasing 13.6 million shares or 8% of our common stock outstanding at a weighted average price of $13.59, far below where it is trading today as we all know. If we turn to the specifics of the fourth quarter, our Q4 earnings per share grew 11% sequentially to $0.42, reflecting strong positive operating leverage and great momentum across our core earning drivers. During the quarter, we grew pretax pre-provision income by 10% and generated annualized loan and non-interest-bearing deposit growth of 15% and 11%, respectively. We also achieved double-digit return on average tangible common equity of 10.75%, an increase of 319 basis points since the start of the year. This quarter, like the complete 2025 year, as I said, there was nothing usual about it. I think our teams did a phenomenal job. Q4 core deposit trends were very positive as we saw a continuation of the strong growth in non-interest-bearing deposit balances that we had in Q3. For '25 as a whole, we achieved 10.5% annualized growth in NIB deposits, which was broad-based across our businesses, attributable to both new accounts as well as average balance growth. This growth reflects the continued success of our relationship-driven deposit strategy and our ability to attract and deepen very high-quality client relationships. Loan production and disbursements were very strong in Q4, at $2.7 billion, up 32% quarter over quarter, resulting in total loan growth of 15% annualized. As we said in our materials, loan growth was heavily weighted toward the end of Q4 and actually had a very limited impact on fourth-quarter financial results. The late-quarter loan growth positions us very well for earnings expansion in 2026 and beyond. Unfunded new commitments also grew significantly, up 90% quarter over quarter to $1.7 billion, providing an additional tailwind for further balance sheet growth. Loan growth during the quarter was driven by C&I generally, as well as in venture, equipment finance, warehouse, fund finance, and our lender finance businesses. We saw strong production from all of our business, including construction, life tech, and mini firm financing. We also continue to complement our origination activity with selective single-family loan purchases. Our pipelines remain strong, and we expect loan production activity to remain healthy in '26 across all of our business units. As we sit here today, so far in the quarter, deposit activity has continued to remain strong, and our pipelines look very, very good. We will see where we end the quarter, but as of right now, things look very, very good. The average rate on new production in the quarter remained healthy at 6.83%, well above the rate of loans that have been maturing. We expect to continue benefiting from the remixing of our balance sheet as our higher-rate loan production more than offsets maturities of lower-yielding loans. We continue to see positive trends in credit quality as well, with most credit metrics improving during the quarter. Importantly, nonperforming and special mention loan balances each decreased 9% quarter over quarter. Classified loan balances increased partially driven by a nearly $50 million CRE loan due to a delay in the closing of the loan. That closing actually happened yesterday. Excluding this loan, the adjusted classified loan ratio would have declined 17 basis points quarter over quarter to 3%. As I mentioned, the loan paid off yesterday. Our delinquency rate increased during the quarter due to two loans totaling $36 million, which became current in January. Excluding these loans, the adjusted delinquency ratio would have declined about one basis point to 66 basis points. Our coverage ratios were stable with our allowance for credit losses at 1.12% of total loans and our economic coverage ratio at 1.62%. We believe our reserve coverage remains appropriate, reflecting both loan growth and portfolio mix as net charge-offs remained very minimal in the quarter. Our strong Q4 and full-year results underscore the strength of our franchise and our consistent execution across the organization by a truly phenomenal team that we have here. The momentum we achieved is broad-based, spanning both loan and deposit growth, margin expansion, positive operating leverage, credit performance, and obviously generated a fair amount of capital. Our team is firing on all cylinders, and we believe we are very well positioned to continue delivering consistent, high-quality earnings growth and long-term value for our shareholders in '26 and beyond. Let me turn it over to Joe, who is going to talk about some of the details and give some comments on what we expect for 2026. Then I will come back with some comments, and we will go to questions. Joe? Joe Kauder: Thank you, Jared. For the fourth quarter, we reported net income available to shareholders of $67.4 million or $0.42 per diluted share, which was up 11% from $0.38 per diluted share in the third quarter. Net interest income of $251.4 million was down modestly from the prior quarter. The benefit of lower deposit cost was muted by the timing of our loan growth occurring late in the quarter. Lower loan income in Q4 was also driven by the impact of rate cuts on floating rate loans and lower accretion income, which was elevated in Q3 due to loan prepayments. The fourth-quarter loan growth had minimal impact on Q4 financial results; we expect this growth to be a tailwind. Net interest income in Q1. A full quarter impact of the strong loan growth we had in Q4 represents about $13 million in loan interest income before any associated funding costs. As we look ahead, we expect 2026 full-year net interest income to increase 10 to 12% from 2025. Our net interest margin in Q4 was 3.2%, while our spot NIM at December 31 was 3.22%, which is up four basis points from the September 30 spot NIM of 3.18%, driven mainly by lower cost of deposit. We expect NIM to expand throughout the year as margin expansion should come from both sides of the balance sheet. We expect to continue to drive deposit costs lower, and our loan production continues to originate at rates higher than loans expected to pay off. We do not assume any additional Fed rate cuts in our outlook. The average yield on loans declined to 5.83% versus the Q3 loan yield of 6.05% and versus the September 30 spot yield of 5.9%, which normalizes for the elevated accretion income and rate cut that we had in the third quarter. The Q4 loan yield reflects the impact of the two Fed rate cuts on the rates for new production and on our floating rate loan portfolio, which has grown to 39% of total loans. Spot loan yield at the end of Q4 was 5.75%. As a reminder, our strong loan growth had minimal impact on net interest income and yields in Q4 given the late timing of when those loans came on. As a result, we expect to see a more pronounced benefit to our results as we move into '26 and beyond. Total loan balances of $25.2 billion were up 15% on an annualized basis for the quarter and 6% for the year. Total average loan balances were essentially flat quarter over quarter given the timing of the loan growth. In '26, we expect full-year loan growth in mid-single digits, dependent upon broader economic conditions. For now, we expect that growth to be broad-based across all our C&I and real estate lending areas that meet our credit criteria. Deposit trends were generally favorable with a continuation of strong NIB balance growth in the quarter. We temporarily increased short-term broker deposits during the quarter to support our strong late-quarter loan growth. The cost of deposits declined 19 basis points quarter over quarter to 1.89%, driven by growth in non-interest-bearing deposits combined with the benefit of Fed rate cuts. We remain disciplined around our deposit pricing, achieving a 60% beta on interest-bearing deposits following the recent rate cuts. The spot cost of deposits at the end of Q4 was 1.81%. Looking ahead into '26, we are forecasting another good year of deposit growth in the mid-single digits. The interest rate sensitivity of our balance sheet net interest income remains largely neutral. Although the proportion of floating rate loans has increased, the net interest income impact is largely neutral when adjusting for deposit repricing betas. From a total earnings perspective, we remain liability sensitive due to the impact of rate-sensitive ECR costs on HOA deposits, which are reflected in non-interest expense. Should rate cuts occur, every 25 basis points currently represents about $6 million of ECR pretax savings. We expect fixed-rate asset repricing to continue to benefit net interest margin as we remix the balance sheet with higher quality and higher-yielding loans. We have $2.5 billion of total loans maturing or resetting over the next year, with a weighted average coupon rate of 4.7%, which is way below our Q4 average rate on new production of 6.83%. Our multifamily portfolio, which represents about a quarter of our loan portfolio, has approximately $3.2 billion repricing or maturing over the next 2.5 years at a weighted average rate that offers significant repricing upside. Non-interest income of $41.6 million was up 21% sequentially driven by gain on the sale of a lease residual, as well as higher market-sensitive income. Commissions and fees income increased 16% year over year, primarily due to our stronger loan production. While non-interest income can be lumpy at times, we still expect a normal run rate for non-interest income of about $11 to $12 million per month. Non-interest expense of $180.6 million declined 3% from the prior quarter, largely due to lower compensation expense from hitting tax and benefit accrual limits and the other adjustments, a reversal from a prior quarter FDIC special assessment expense of around $2 million, and lower customer-related expenses related to the impact of the Q3 Fed rate cut. As a result, our adjusted efficiency ratio improved to 55.6%, down 266 basis points from the prior quarter. We remain focused on managing expenses prudently while continuing to invest selectively in talent and technology to support long-term growth. In 2026, we are targeting full-year expenses to increase 3 to 3.5% from 2025. Note that for Q1, we expect lower customer-related expenses as the impact of Q4 rate cuts flow through. Also, the first quarter typically includes some seasonality around resets of compensation expense accruals, so expenses in Q1 will be seasonally higher in a few categories. Provision expense of $12.5 million was largely driven by the strong loan portfolio growth and updates to risk rating. We maintained our allowance for credit losses at 1.12% of total loans, and net charge-offs were minimal. As Jared mentioned earlier, overall credit performance trends were mostly positive. We are very pleased with the strong progress we made in 2025, scaling our franchise and delivering positive operating leverage while protecting our balance sheet and generating significant returns to our shareholders. In 2026, we are projecting pretax, pre-provision income to grow 20 to 25%, reflecting our ability to drive earnings growth while maintaining disciplined expense management. As we continue into 2026, we believe we are well-positioned to continue building on our momentum and delivering high-quality, consistent results. With that, I will turn the call back over to Jared. Jared Wolff: Thank you, Joe. Q4 was a strong finish to a great year for Banc of California. As we look ahead, we believe we are in a superior position to continue building on this momentum, and we have meaningful tailwinds to help accelerate our growth in '26 and beyond. The consistency of our results, the strength of our balance sheet, the momentum in our business, and the quality of our people reinforce our confidence in the path ahead. Our focus remains on growing high-quality, consistent, and sustainable earnings. We plan to achieve this by continuing to scale our franchise, maintaining disciplined expense management while investing in technology and talent to support long-term growth, as Joe mentioned, protecting the balance sheet through prudent risk management, and deploying capital strategically to drive long-term value. Our markets and niche businesses offer compelling opportunities as we continue to capitalize on the dislocation in the California banking landscape and beyond. Recent bank M&A activity has provided further disruption in our markets, with good opportunities to attract new clients and talent. Our relationship-driven approach and best-in-class franchise continue to resonate with clients, and our teams are executing at a very high level. Our fourth-quarter loan-to-deposit growth reflects the talent of our teams and positions us well for further earning growth as we continue in 2026. I am excited about the opportunity ahead, and I want to thank our talented employees who accomplished so much in '25 and set the stage for a successful '26. I am incredibly proud of our team's hard work and dedication and look forward to all the great accomplishments we can achieve together in '26. With that, operator, let's go ahead and open up the line for questions. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from David Feaster with Jefferies. Please go ahead. David Feaster: So wanted to sort it out on net interest income and the net. The guide you gave does not include rate cuts. Just curious about the NIM trajectory as well as NII, what could happen if the Fed does cut rates? Jared Wolff: So I will start and then let Joe jump in. You know, typically, our margin expands a couple of basis points every quarter. It is three to four basis points a quarter. Sometimes it jumps a little bit more. You get some accelerated accretion or something like that. We think that is kind of a reasonable guide for that. In terms of what happens if rates get cut, we do believe that our margin would expand a little bit faster. Joe, what do you want to comment on that? Joe Kauder: Yeah. So, you know, I think we said earlier in the call that, you know, a 25 basis point cut gives us $6 million annually in lower ECR cost. But I agree with Jared. It is, you know, when we do our, you know, technical ALM calculation, we come out to be neutral, and that is what we believe we are in our pure net interest income. We are neutral. However, when you have rate cuts, you know, you also tend to have, a lot of times, improved economic activity. You have more things that are happening to your balance sheet that are advantageous to banks. So I think we would benefit a little bit from our net interest margin from lower rates. David Feaster: Great. And in terms of your deposit beta, can you comment on what your expectation is with another couple of cuts? Jared Wolff: We have achieved in excess of 50% beta, I think, every single quarter. It is hard to maintain that momentum. We obviously started from a much higher place. But I think we are also very good at managing our deposits on a very granular basis. So my expectations for the time being are that we would achieve a 50% deposit beta. Until, you know, and hopefully outperform that. And until we modify it, that is kind of what our expectation is. Hopefully, we get into, you know, high fifties, low sixties. David Feaster: Great. Thank you. Jared Wolff: Thank you, David. The next question comes from Matthew Clark with Piper Sandler. Please go ahead. Matthew Clark: Hey. Good morning, guys. Just want to clarify some of your guidance on the NII growth for the year of 10 to 12%. Is that including accretion or is that excluding accretion? Joe Kauder: Matthew, that includes accretion, but we just do not really have it is just basically the baseline accretion. It is very little if any, any accelerated accretion. Matthew Clark: Okay. Jared Wolff: We have not had it. We really have not had any. Matthew, just to stay on that for a second, it has been one of those things that just has not shown up, and it is going to show up because we have all these loans that are going to mature, and so it is going to force itself on the balance sheet, and it is going to be a great kind of annuity for our shareholders when it happens. It just has not been happening. And it has got to eventually. And so, when that happens, it will be a good. Matthew Clark: Yep. Good. Okay. Great. And then within the PPNR growth guide of 20 to 25%, can you just clarify the base that you are using for fee income and non-interest expense just to make sure we are on the same page because there are. Joe Kauder: Yeah. The base is the year-end 2025 results. Matthew Clark: So it is off the fourth quarter? The fourth quarter run rate or it is off the full year? Joe Kauder: Full year. Twenty-five. Matthew Clark: Full year. Okay. But in terms of dollars, I do not know if you have it off hand. We can follow up. But just curious what base you are using in terms of dollars for fees and expenses. Because there are nonrecurring items, obviously. Joe Kauder: Maybe we take that offline and do that in the follow-up call, Matt. Matthew Clark: Okay. Okay. Then just on the loan growth this quarter, pretty broad-based. Maybe first, just if you could quantify the amount of single-family purchases you did in the quarter and whether or not you plan to do some within that mid-single-digit growth guide for the year. And I guess in terms of the stronger growth this quarter, what may have changed in the market? Joe Kauder: So we just. Jared Wolff: Let me go ahead, Joe. Joe Kauder: I was just going to say so, you know, on a net basis, SFR has increased about $216 million. I think the purchases were a little bit north of $250 million, and then we had some runoff as well. So Jared, I am. Jared Wolff: Yeah. That was right. And we expect to continue SFR for a while. We want that portfolio is doing really, really well. The prepayment speeds are much lower than what we model. And so the returns have been very good with really limited credit noise at all. These are very strong loans. And we are fortunate to have access to them, and our team does a great job sourcing them. So. Jared Wolff: And we buy a lot of them off our warehouse lines with our clients. And so it is a very good program that we have. And our balance of SFR, which are fixed-rate thirty-year fixed-rate, most of them, are mostly owner-occupied as opposed to investor. And they are well distributed geographically throughout California. So it is in some ways, it is a hedge to other floating rate portfolios that we have. And so we like that portfolio for that reason. So we will try to continue it in moderation. It probably will continue to grow a little bit, Matthew. In terms of loan growth overall, you know, our teams have just been hitting the streets. And have done a really good job being out in front of clients, and pipelines take a while to build. And, you know, the last the end of the year, it kind of came together really, really well. And, some you cannot really control the timing. So it was a lot of we saw the pipeline in Q4. We were not sure when it was going to hit, and it really a lot of it hit pretty late. And then some stuff picked up in the beginning of this year. So it seems just broad-based, and our teams are doing a really, really good job. Matthew Clark: Okay. Great. Thank you. Jared Wolff: Thank you. The next question comes from Christopher McGratty with KBW. Please go ahead. Christopher McGratty: Great. Thanks. Jared, on the expense growth, the three, three and a half, you have made a couple of points in the remarks about investing in technology. I am wondering if you could just unpack it a little bit. Whether you think this is kind of a 2026 little bit of a push, or is this kind of a new rate of investments required? Jared Wolff: Yeah. So, you know, just let me say as a starting point for you and I have talked about this, but maybe others might find it interesting. I mean, we are a growth company at this point. And we are spending to support the growth that we have in our company. It is very positive in my view. Like, we are not going to spend we are going to keep expanding earnings, and earnings are going to grow hopefully pretty fast. But we are going to make sure that we have the right infrastructure to give this company the talent and the technology that we need to do it the right way. We are getting benefits from AI. We have deployed AI across the company in a couple of different ways. And I have challenged our team to manage to that and figure out where we can deploy it better. We do not think about it as a way to shrink our employee base. We think about it as a way to maybe slow the growth of employment and also to redeploy our employees to do things that are more upskilled. And so, AI is something that we are leaning into. In terms of technology projects overall, there are a couple that I think will be ongoing. You know, one is, just back end and workflow technology, whether it is in Encino or Salesforce or less Salesforce, but more Encino and we have, you know, ServiceNow and some other things. We have a project to improve our data, a major project in the company where we are looking at how to, you know, optimize the data that we have and streamline it and make sure that it is organized in a way that our employees can self-serve around it. And build reports and, you know, kind of know what is coming ahead. So that is a really important project for us, including kind of our back-office finance modernization as a project. We are investing in our payments business. We continue to do that. Although that is a smaller portion of spend. We have our HOA platform, which we are investing in to make sure that it is, you know, really a top-tier platform that we have in Smart Street so we can really serve our clients well. And other client-facing technology. So there are a number of things, Chris, that are kind of here, but we all think that there is a good return on them. Some of them are back-office and some of them are client-facing. Christopher McGratty: Got it. Understood. Thank you. And my follow-up with Jared just on the medium-term targets. Any updated thoughts now that you are making a lot of progress towards them? Any timing updated what needs to happen to get that bridge rectified a bit. Thanks. Jared Wolff: Sure. Yeah. Without putting a specific date on anything, we obviously liked the progress that we made in the fourth quarter on our return on tangible common, which was a pretty big clip up. It does not stay steady, so it will back up a little bit, and then it will move forward again. Q1, I think it probably drops a little bit, and then it moves back up as we get through the year. But we are making really, really good progress. And, I mean, if you look at how much we are clipping intangible book value quarter over quarter, that is one of the things I think that people also do not really focus on is how much extra tangible book value we are putting on the table every quarter, which feels really good. I am not going to put a date out there, Chris, for that, but we have line of sight into our targets. We feel very, very good about them. Christopher McGratty: Awesome. And then maybe, Joe, just to clarify two quick ones. The FDIC benefit, you can give us $2 million, and then any help on the tax rate going forward? Joe Kauder: Yeah. So $2 million is about what the FDIC benefit was in the fourth quarter. And then I 20, you know, 24 and a half, 25 per probably 25% is a good tax rate. Going forward. Christopher McGratty: Alright. Thank you. Jared Wolff: Hey, Chris. Also, you know, on kind of our profitability targets, the one thing that people should also remember is we have preferred stock. That is a $40 million tax on the common. It is, you know, $10 million a quarter that comes out before we pay the common after tax. That matures next year. And so pretax, you know, it is a pretty big number. And after tax, it represents before you figure out what the funding cost would be to replace it, it is over $0.20 a share. $0.20. And so of earnings. And so, it should be, you know, maybe it is $0.16 or $0.17 of earnings that paying off that preferred stock is going to contribute to our company. In 2027. Which we feel really good about. So that is going to be an accelerant along with a whole bunch of other things. Christopher McGratty: Okay. So that is definitely coming out next year is what your message on the price. Yeah. It matures. Joe Kauder: Yep. It matures in We a couple of I think it is September 27. Jared Wolff: Immature. Yep. Joe Kauder: Yeah. So we have already planned for how we are going to handle that. Preferred stock, and, you know, there are a lot of ways we could take it out but it is going to be it is expensive. It is seven and three-quarters, and so you know, we have much lower ways to fund that. So even if you put a three and a half percent funding cost on it, you are saving four and a half plus percent and that contributes, you know, $0.20, $0.15 to $0.20 to earnings. Christopher McGratty: That is helpful. Thanks, sir. Joe Kauder: Yep. Operator: Next question comes from Ben Gerlinger with Citi. Please go ahead. Ben Gerlinger: Hey, wanted to double-check. I know we talked through the guidance here on NII, since no cuts. Is that fair to say the same thing as well for the expense growth of three to three to Is that that implies no cut? Jared Wolff: Yeah. Yeah. We do have no cut we have no cuts in our forecast. In any of our forecast numbers. Joe Kauder: But what the expense guidance does pick up is that the cuts that occurred in the fourth quarter do not benefit us until the first quarter. Of '26. So, yes, it does not matter. Yeah. Your HOA cost is going to be lower than one q, which should be obviously the fourth quarter cost. I am just thinking, like, if there is a cut in June or something, that is not contemplated in the in the fours, expense guide. No. Not contemplated. Ben Gerlinger: Correct. Not contemplated at all. Ben Gerlinger: Got it. Okay. So it is going to be a little downside there. In terms of just the longer-term strategic it seems like you, like you said, Jared, you went from defense to a lot more offense in '25. When you think about '25 or '25 going into '26, the hirings that you have made and kind of personnel and balance sheet cleanup, it has been pretty tremendous throughout the year of '25. Is there anything on '26 that it really has not even left the starting blocks yet, or is it momentum that from things we currently see today and then just continuing that game plan? Jared Wolff: I think it is more momentum. You know, I would love to point to something that says, god. This is low-hanging fruit. We have not even grabbed it yet. Know, I think that preferred stock is probably a good example. But in terms of kind of our core operations and what we are doing, Ben, it is just blocking and tackling and building on the know, our marketing team has done a superb job. We had a client we have a client that is in Vegas, and he was out here I am just sharing this as an anecdote. He was out here for a Laker game for his son. And he is, like, driving to downtown. And his wife takes a photo of our new building downtown, and he says, god. That is great signage. And I am like, have not even moved in yet, and our sign is already up. And then he is driving the next day to Orange County because he is going to Newport. He sees our building on the 405, and then he sees three billboards on the most trafficked highway in the country. For Banc of California. He is driving our name is out there a lot. And that is representative of all of our markets, not just Southern California. And so we are really capitalizing on that. You know, I like to say that our marketing and branding opens the door before we get to the building. It allows our teams to show up. People know who they are. They know the bank. They know the reputation of the bank. And it helps, I guess, grease the opportunity for us to be successful with clients. It gets us in the door for sure. But our team is the one that has to do the hard work of talking to the clients about the opportunity that they have here versus where they are. And why we can deliver a better solution in a more reliable way in a cost-effective way. And it takes really talented people to do that well. We keep hiring them. And we do plan to do significant hiring in '26. To support our teams, both in the front office and the back office, and that is going to continue to, I guess, support the momentum that we have then. It is more momentum than, you know, kind of finding an opportunity that we have not really latched onto yet. Operator: Was there a follow-up, Mr. Gerlinger? Ben Gerlinger: No. That is good. Thank you. Jared Wolff: Thank you. Thanks, Ben. The next question comes from Andrew Terrell with Stephens. Please go ahead. Andrew Terrell: Hey. Good morning. Jared Wolff: Morning. Andrew Terrell: I was hoping just to go back to expenses quickly. Do you have the or you have a quantified the amount of benefit you guys got this quarter from the lower tax or benefit accrual? In compensation? Joe Kauder: Yeah. It was probably around $5 million for the quarter. 4 to $5 million. Dollars Okay. Andrew Terrell: Great. And I guess just overall on expenses, I am trying to kind of bridge Can I clear I am going to clarify that? I am going to say that that is when we look when we look out to the first quarter. That is how much I think it is going to when we reset into the first quarter, that is the kind of the change that you are going to see. Andrew Terrell: Got it. Yep. Okay. That is helpful. Yeah. And I am I guess I am just overall trying to bridge the gap for the, you know, the three and a half percent growth off of $735 million was the baseline, the 2025 reported. At kind of the midpoint, that is, you know, $190 million a quarter in expense in 2026, but you have got, you know, a little bit of headwind from the comp picking up, but you will get the benefit back on ECR cost that should drop in the first quarter as well. So I guess I am just trying to get a sense of what is driving the kind of lift that they expenses into 2026. Jared Wolff: Well, we continue to remain conservative. And I think one of the things that we did and Joe and the team did a really good job of last year, is guide conservatively. And have the opportunity to have some things that come up to make sure that we do not get caught. And then, you know, if things do not come in and our teams manage their budgets well, we come in lower. One of the successes that we had last year was we actually distributed we decentralized some of our expense management. I gave to all of our business unit functional leaders their own budgets, and said, you guys manage your budgets. I am not I am going to stop approving everything. And so they did that really, really well. They have the authority to hire who they need to hire to move the company forward. And so there is some of it that we are letting people do. So part of our guide in being conservative is that we are going to let our teams do what they think is right because they did a great job last year. It comes in higher a single quarter, it is going to show up in a benefit later in the year. And we are comfortable with that. So we feel like we are in a really good spot, and part of this is, you know, less science and more.
Operator: Thank you for standing by, and welcome to the Sandfire Resources December 2025 Quarterly Report. [Operator Instructions] I would now like to hand the conference over to Mr. Brendan Harris, Chief Executive Officer and Managing Director. Brendan Harris: Good morning, everyone, and welcome to our quarterly call. Our executive team is here with me today for the Q&A as always. But before we start, I'd like to acknowledge the traditional custodians of the land on which we stand, the Whadjuk People of the Noongar Nation as well as the First Nations peoples of the lands on which Sandfire conducts its business. We pay our respects to their elders and leaders, past, present and emerging. I'd also like to acknowledge that today's National Day of Mourning in Australia for the victims of the Bondi Beach terrorist attack. Our thoughts and prayers are also with our Spanish team and the local community following the tragic train accident that occurred when 2 trains collided between Madrid and Huelva on Sunday. As we always do, let's start with safety. We finished the period with a group TRIF of 1.3, down from the 1.4 reported at the end of September. While a pleasing outcome, we must continue to learn from every injury and high potential incident to further raise awareness of the risks in our workplace and strengthen our control environment. More broadly, in the first half of the year, group copper equivalent production of 72,100 tonnes, representing 46% of the midpoint of our unchanged annual guidance range of 157,000 tonnes with volumes now expected to be incrementally more weighted to the second half. All other key annual guidance metrics such as underlying operating costs and capital expenditure remain unchanged. Notwithstanding I might add the significant benefit we're now seeing flow through to our C1 costs from the sharp increase in byproduct prices. Of course, this outlook reflects a strong forecast improvement in performance at Motheo in the second half, which I know Jason is looking forward to discussing with you. Having been forced to bring forward and complete planned maintenance ahead of schedule following the premature failure of an OEM specification grade in the SAG mill, we expect an uplift in Motheo throughput rate in the second half. While the improvement plan that our team and key contractor have in place is expected to deliver an increase in the availability of mobile fleet servicing our open-pit mines. This will, of course, support the transition into higher-grade ore at both T3 and A4, which has been further derisked by the early completion of the dewatering program that followed the extreme weather event of FY '25 and our decision to fast track the relocation of mobile equipment to A4 in the first half to ramp up deferred waste stripping. We believe this decision has also derisked our plans for FY '27, recognizing the importance of A4 and its higher-grade ore. I should also note that all ore mined at A4 during the second quarter was stockpiled adjacent to the pit with the delivery of its high-grade ore to the processing facilities ROM stockpile only now ramping up. Collectively, it's these key drivers that underpin our confidence in the 61,000 tonnes of copper equivalent production forecast for Motheo in FY '26. When thinking about cash flow and costs, you may have also noticed that only 3 concentrate shipments sailed from Walvis Bay in the second quarter with the planned fourth shipment having since departed in early January. Turning to MATSA. Its first half was far less eventful as the complex delivered copper equivalent production of 46,400 tonnes, representing 48% of the midpoint of its annual guidance range. This robust start to the year was underpinned by an increase in higher-grade polymetallic ore feed in the second quarter, which coincided with an improvement in flotation recoveries. An incremental uplift in metal production is expected at MATSA in the second half with a further increase in high-value polymetallic ore being mined within the Western extension of Aguas Teñidas. More broadly, we pride ourselves on getting the basics right and ensuring our operational teams are not distracted. In this context, I'm pleased to say that our underlying operating costs at both MATSA and Motheo remain, yet again, well aligned with annual guidance at $87 and $43 per tonne of ore processed, respectively. And as we've said before, we expect the UOC at Motheo to increase slightly in the second half as the proportion of higher-grade A4 ore feed rises given additional haulage and handling requirements. From a strategic perspective, we invested $5 million in regional and another $5 million in near mine and extension exploration programs in the Iberian Pyrite and Kalahari Copper Belts, and we expect our investment in regional exploration in the Motheo hub to accelerate following the recommencement of drilling activity in December 2025. During the quarter, we also signed a binding term sheet with Havilah Resources that provides a pathway to earn an 80% interest in the Kalkaroo copper-gold project and establish a strategic alliance to explore the highly prospective Curnamona Province in South Australia. These agreements create a wonderful opportunity to replicate our successful entry into the Kalahari Copper Belts. And since announcing the transaction, I'm also pleased to say we've made strong progress working with the Havilah team to advance the definitive transaction agreements ahead of their shareholder vote scheduled for the 6th of February. That brings me to the fully permitted Black Butte project. The recently announced results of the prefeasibility study for the Johnny Lee deposit and updated Mineral Resources estimate for Lowry confirmed the economic case for the development of a high-grade underground mine underpinned by a leading approach to sustainable mining practices. Importantly, this study, which derived post-tax NPV of circa $100 million at a copper price significantly lower than spot, only considered the Johnny Lee deposit with the satellite Lowry deposit, which would be accessed, I might add, from the same decline, providing a low-risk and low capital cost opportunity to materially extend mine life. As flagged, we've since commenced a review of the project's fit within the group's global portfolio, which will primarily consider the materiality of the opportunity within the context of Sandfire's own significant growth since the group made its original investment in the project in FY '15. So bringing this together, we have the talented people with proven exploration, operating and development credentials. We have high-quality operations. We're producing a preferred suite of commodities, and we're in a strong financial position. We generated unaudited group sales revenue of $344 million for underlying EBITDA of $167 million in the December quarter at a margin of just under 50%. And having achieved our targeted balance sheet position with net cash of $13 million at 31 December, we're perfectly positioned to fund the various commitments associated with our planned move into South Australia, including the AUD 31.5 million cash payment payable upon satisfaction of all conditions precedent and initial AUD 15 million cash payment that will kick start the proposed exploration strategic alliance with Havilah. It is an exciting time for our company. Let's go to questions. Thank you. Operator: [Operator Instructions] The first question comes from Levi Spry with UBS. Levi Spry: Straight on to the Black Butte news. So can you expand a little on the considerations here? So maybe some goalposts around hurdles, timing of these processes that are underway? Brendan Harris: Look, thanks, Levi, and happy new year to you and everyone on the call. I think the critical message that we want to get across here is that as we'd expected, the prefeasibility study, again, which doesn't contemplate Lowry, but of course, when we think about the project, it's pivotal to the NPV certainly showed a strong economic case. An economic case that if you start to build in prices that some of the market commentators are referring to shows the leverage of this project, given its scale and given its grade. And I also note, it's a fully permitted project. But you'll notice the reference that I made to the review. And I've talked about the fact that we would undertake such a review for many months as we approach the completion of the PFS. That review is primarily considering the entry and the logic venturing North America, building a project in North America, given the scale of the opportunity in reference to Sandfire's own at scale, recognizing the growth of the company in recent times and hence, the reference to materiality. We are absolutely convinced that this is a project that will get built. With regards to the timing, I don't want to go into the elements too much. I'm very respectful of the fact as I need to be that we are an 87% shareholder in a publicly listed company. And so having now formally confirmed that we are undertaking that assessment, I'm not going to go too much further other than to imagine we look at all alternatives with respect to the future. And what I would like to add, however, is I would expect that by the time we report our financial results for the full year, so circa August, that we will certainly be in a position to provide much more clarity in respect of that process. Thanks, Levi. Levi Spry: Yes, good. And so just one more on that, though. So just so I understand the impact -- potential impact of Lowry, like what sort of quantum could it have on the 30-odd tonnes of production? Brendan Harris: So it's not so much a capacity issue. I think we've mentioned a few times in the past. This is a fully permitted project. And I think it's fair to say that that's been a healthy but onerous process. I don't think anyone is contemplating changing the configuration with respect to the project that would necessitate different approvals. It's really around life extension, Levi, remembering that the initial life that's defined in the PFS is around 8 years. As I mentioned, Lowry is particularly interesting because it effectively is a continuation of the ore body, which really means its development across into another area of the ore body. And that comes at very, very low capital cost, particularly when you think that the plant and equipment will already be in place. So it wouldn't surprise you that the potential impact on net present value relative to the $100 million that was flagged in Sandfire America's release based on $4.70 a pound copper can increase significantly once that's taken into account. So I hope that helps. Levi Spry: Yes. Got it. And last one. So net cash you've got there, what happens now? So there doesn't seem to be any material CapEx on the horizon. Kalkaroo is a little bit out. Maybe this is not there. So can you give us a bit of some goalposts around how you're thinking about that in the context of your franking credit balance? Brendan Harris: Yes, sure. Levi, I think, first and foremost, no change to how we think. But I'll pass to Megan, and then I might just wrap up with a few thoughts. Megan Jansen: Thanks, Brendan, and Levi. So yes, very pleasing with the net cash position we've reported unaudited of $13 million at the end of December. So we've managed to reduce net debt by $301 million over the past 12 months. And I think achieving the rapid degearing that we have, albeit in a generally slightly lower price environment than what we've seen in recent months. I think that's a real credit to our operations team and that continued disciplined approach. And so as you noted, yes, we've got that net cash number. Important to note that doesn't yet include upcoming payments in connection with the proposed transaction with Havilah. So AUD 31.5 million payment upon completion of the transaction and a further AUD 15 million payment in relation to the initial phase of the exploration strategic alliance. And I think no change in terms of what we said before in terms of our approach and returning excess cash to shareholders. But we've been very deliberate in framing that as only when we have cash on the books, i.e., not prospectively. Brendan Harris: Yes. I think the one thing just to wrap that up, we've also said that we're not going to get to $1 of net cash and then distribute funds to move ourselves back into the negative side of the ledger. And as Megan said, I think, therefore, we just commend people to really take into account those commitments because effectively, they're just around the corner. Should conditions precedent be met on the 6th of February for the proposed Kalkaroo transaction, those payments come through. So we think about our net cash balance at 31 December very much in that context. Of course, as we look to the full year, if the prices are maintained as they are, and on that respect, your guess is as good as mine. We clearly find ourselves in a very, very strong net cash position and then that'd be obviously, I think, quite a different level of focus and discussion. Operator: Your next question comes from Kaan Peker with RBC. Kaan Peker: First question on Motheo. As you mentioned that weighting of 46-54. Just trying to understand the confidence around that and how that doesn't shift further to the right, particularly around Motheo and then the fleet availability, haulage intensity at A4. I know you mentioned the fast-tracking of mobile equipment. Maybe if you can provide a bit more on that. And then also the A4 mechanics, just the grade uplift into the second half and how quickly that feeds into the plant? Brendan Harris: Yes. Thanks, Kaan, and I appreciate the question. I think perhaps before I hand to Jason, we recognize that mining has variability. And I've often talked about standard deviations, error bands and so on. We started the year circa 6 months ago, suggesting we'd have a ratio of 48:52. We're sitting here at 46:54. So we've seen an incremental shift in that. I think the difference here compared to prior years in the past is we probably had more to make up at MATSA, where, in some cases, in an underground mine, you typically have less degrees of freedom. This year, for the first time, Motheo has arguably had a softer start than we would have anticipated, but we understand why. And therefore, as I mentioned, we have a high degree of confidence in the outlook. Of course, assuming there's no other unintended outcomes last year, we, for instance, had a once in a 200-plus year rain event. So we're certainly assuming that doesn't repeat. But I think before I pass to Jason to talk about the confidence in the outlook, it's probably quite nuanced. But one of the things that's really important to understand that with the dewatering having been completed at A4 ahead of what we'd assume when we spoke to you last -- in the last quarterly update, we actually proactively moved fleet back towards A4 more quickly to derisk the outlook for A4 not only in the second half but into next year. It was subsequent to that, that we started seeing lower fleet availability at T3. And so in effect, that exacerbated the outcome because we've moved that fleet. Of course, we don't make decisions for the short term. We think about maximizing value and trying to derisk that outlook as much as we can. And so we make that decision every day of the week. And it has put us in a very good position but not only giving us confidence in the back end for A4 and increasing confidence, but I think more importantly, from my perspective, also setting us up very well for FY '27. So maybe, Jason, you can -- because I think the grades in the SAG mill are also worth mentioning because that's not -- we're not the only party to have been impacted by this, if you like, floor in the foundry and the casting process. And so I think it's worth touching on that and the fact that's behind us and some of the other elements as we look forward. Jason Grace: Well, thanks, Kaan. And look, building on Brendan's commentary there as well. If we look at the last quarter, there's 2 key factors that really affected Motheo metal production. So Brendan touched on it there, we'll start with the grades. And if you look at the quarter, overall ore processed tonnes is about 7% below our 5% -- our 5.6 million tonne per annum annualized processing rate. So that's solely due to the premature wearing and -- of grades. Now we know that, that is related to our casting issue, right, related to OEM grades, which is supplied by the OEM. Now that OEM uses multiple foundries, right, to actually cast these grades. And during our routine inspections as we went through the quarter, we noticed that it was premature wear or accelerated wear in specific positions on each of the grades. So we could actually see lines running across the grades where we saw accelerated wear or additional wear through there as well. Once we started talking further with the OEM, they, as Brendan alluded to, had identified that the other customers had similar issues, and that related to a specific foundry. So they've informed us that they've stopped using that particular foundry. And the new grades that we now currently have in at the moment were actually cast by the original foundry that the OEM has been using in the long term, and they've had no issues with. So a short answer to that one is that issue is behind us. We've been working well with the OEMs. There were additional issues around -- so those grades were originally planned to be replaced in Q3. We've had to do that in Q2. But the time it took to actually replace those was probably about 3 days beyond what we had planned from the original shutdown for the purpose as well. Brendan Harris: Mainly because you're forced to react. And as I understand it, Jason, just to be really clear, with the new grades in, you're now seeing good performance, very good performance. And I think the other critical issue there is that -- therefore, we're not only confident. We know it's not related to changing characteristics of the ore, grind, hardness, those features. It's a specific fault in the casting process associated with one specific foundry. Jason Grace: Correct. And if you like, we took the opportunity during these shutdowns to do full mill relines. So where we are confident at the moment is that we are set up now to have a very strong ore processing performance there for the second half. So we've taken our major shut for the year, and that's behind us, and we've got a really good run throughout the remainder of FY '26. So if we look at the second key factor there, and that relates to lower grade presented to the plant and the root cause of that is lower fleet availability and particularly face positions that we achieved during the quarter related to overall mining performance. So if you look at it and where we are probably more sensitive to that in the last quarter than other times is that we're making a transition between Stage 2 and T3 and Stage 3 and T3, where the Stage 3 is currently taking over as being our major ore source coming out of T3, and at the same time, we're coming down on the ore body or the main part of the ore body at A4, right. Now if we look at fleet availability. So during the last -- probably the last 6 months, we've been undertaking or the contractor has been undertaking planned shutdowns, so midlife rebuilds on some of our key pieces of equipment and most notably on our trucks and drills. So if we look at it during the quarter, we had, during that time, 3 trucks out for most of the quarter, planned -- on planned downtime for engine replacements. So given the age of that equipment, they're hitting the -- about the middle of their life at the moment. So we do need to do that work. That work was known. But you put that in conjunction with our transition between Stage 2 and Stage 3, right? We are sensitive to impacts on face position. And if I direct everyone to Appendix A, you will note on there that we mined from T3 around about 700,000 tonnes of high-grade ore for the quarter, right, that relates to that transition. And hence, we're overall a lower grade or slightly lower grade than we expected for the quarter. Now looking forward. And now as I said, we've been working with the contractor on managing this period, which was known. We've had a very good response from the contractor. We've got very good attention. We have additional resources on site from both OEM and also elsewhere within the contractors group. And we're comfortable that the contract is making very good inroads. And particularly with our truck fleet, we're seeing significant improvements in that overall availability even as we speak now in January. So looking forward, there's no doubt that we'll come through this, and this is something that we've dealt with before with contractors. We're coming through this. And the other thing is that we have all of that ore and higher-grade ore sitting in Stage 3 and at A4 sitting in front of us for the rest of the year. Brendan Harris: I think, Jason, maybe just last point. I think we probably labored the point a little too much perhaps between the 2 of us, but I just observed that this isn't the first time that we've had temporary issues with availability. I think I'm sure every mine you've worked in from time to time, you've got to shift focus and bring attention to bear. During commissioning, we had exactly this issue. The top levels of management of both companies got very much focused on it. And we very quickly managed to arrest it. And as Jason said, we have teeth in the contract such that if in the event that we don't get the natural uplift coming from, if you like, we'll call it an intervention, we actually can call on additional equipment at the contractor's cost. So it's -- we feel very confident that we have numerous ways to get to where we need to be, Kaan. Kaan Peker: Very detailed. I appreciate it. Just on -- just one follow-up on that, the additional fleet that could be deployed at the contractor's cost. What's the trigger for that? And why can't that be used currently? Brendan Harris: I'll pass to Jason because I'm sure he'd want to make a comment, but we have a very good relationship, and it is a partnership. So you don't do those things lightly. But it's important that we understand that those things can be done and would be done if it needed to. Jason? Jason Grace: The trigger in that short answer to that, Kaan, is 3 months of underperformance below target in terms of total material moved. There are some other triggers in their result, but that's the one that's relevant for this. Yes. Operator: Your next question comes from Paul Young with Goldman Sachs. Paul Young: A really good summary on -- views on Black Butte and Motheo, so it answered most of my questions, but just -- not to labor on it, but just on the discharge grade at the SAG mill. Just Jason, were they originally from an OEM producing in China? Or are they from the traditional sort of German Scandinavian production facilities. Just trying to understand the quality and where that can happen again. Jason Grace: Yes. It was from an OEM -- so we source them through the OEMs. So that foundry was outside of China. So we do make sure, particularly both of our sites that we don't cut corners in terms of quality on a lot of our key components. So short answer, the information that we received from the OEM was, however, was a new foundry that they had been using. So they had not been using that foundry longer term, and they've given us the feedback as well that they've since stopped using that foundry. Paul Young: And then maybe switching to provisional pricing and hedging. I know you hedge your -- maybe a question to Megan. I know you hedge your QP tonnes that are outstanding. And hence, we don't see -- haven't seen the PP -- positive PP impact we're seeing for, say, per se, some of the larger copper producers globally. And I know you provided your historic QP hedging. Just curious around that -- I presume that program is continuing and you're hedging forward sales for this quarter and next quarter? Brendan Harris: Yes. I think -- and I'll pass to Megan. But I think in simple terms, Paul, the way you should think about it is our team will sell a parcel of concentrate. And so that contained copper is priced, as you know, at a specific quotational price, whether that be N+1 to N+5 depending on the specific customer, timing and other circumstances. And what we do is then we make sure that we use the forward curve to effectively lock that in. So there is no risk of major working capital variations. And it works -- it actually works very well for us, and it was particularly important when the company was in a position where it was carrying significantly more debt. And maybe I'll just pass to Megan to explain how it really plays out in practice because the only differential, therefore, relates to the shape of the curve. And of course, in recent times, been pretty flat. Maybe to you, Megan. Megan Jansen: Yes. Thanks, Paul. So Brendan described it perfectly well. So we need to continue with our QP hedging program. That's not before sales. It's only generally post the concentrate being loaded. And that's really just to protect on working capital volatility, such that we -- the price we invoice that provisionally is not at risk through to settlement of the shipment. So we will continue with that. As Brendan touched on, what that price looks like will be very much dependent upon the shape of the curve and the coincident settlement mark, N+1 or N+2, depending on how the contracts fall. In terms of the previous MATSA hedging program, which was in relation to forward sales, that was required under the previous MATSA debt facility. On Page 9, we do touch on that hedging program during the quarter. So our last parcel of copper sales was completed during the month, and that will settle in January. And so what that means is that both MATSA and Motheo, we're not -- we're effectively unhedged in terms of our forward sales. It's just a QP that we continue to execute really to protect on that working capital front, Paul. Paul Young: Yes. That's great. And just lastly, to sneak a third one in for Jason, just on the exploration. Thanks for continuing to, first of all, provide that information on the spend and details on exploration. Jason, just on a question on MATSA and the exploration drive, which you're commencing in 3Q. Can you just run through the program there on how long that's going to take to construct and then when the drilling would start post that? Jason Grace: Yes. We should finish that fairly close to the start of Q4 and then spend most of the Q4 drilling out of that area. So we have noted in there, we've been doing a lot of drilling particularly around Olivo. So that's a high priority for us in the short term. And we have seen some slow extensions and they're proving that up because that gives us a lot of additional ore, particularly -- it derisked the plan a lot having Olivo available as soon as possible and opened up so we can use that production in the short term. Brendan Harris: Just gives you more places, which we've talked a lot about. Paul Young: Yes, it's a very short exploration, right. That's good. Okay. I'll pass it on. Jason Grace: It's less than 70 meters. Operator: Your next question comes from Mitch Ryan with Jefferies. Mitch Ryan: Staying on the exploration spend, actually, just you've increased investment at Motheo, specifically to almost double the amount of drill meters there. Can you just talk to what drill results you've seen to date and exploration results you've seen specifically around A1 that are sort of giving you confidence to spend that and accelerate that spend? Brendan Harris: Yes. Look, very much in short, you can imagine, we've got to be very careful selectively talking about drill results under the dual code. So what I can tell you more broadly is that we obviously completed the prior A1 drilling program, and there's been a lot of work underway studying that to obviously put us in a position to declare a reserve towards the end of this year, this financial year. What we had identified through that process is the prevalence of some high-grade material in the hinge at depth. And so what we felt was we needed to go in and test that and test not only for repetition, but continuity along strike. And we're seeing encouraging results is probably the best way to describe it, which is why we're putting more meters into the ground. The A1 story hasn't really changed. I think I've said before that the main objective there is to try and identify a reserve that's somewhere in the order of, call it, from a scale perspective, half a year to 1 year of throughput capacity. It provides the pathway to open up the north and hopefully provide a pathway then to access, in the future, additional satellite deposits that we're obviously actively exploring for. Mitch Ryan: And my second question, you called out the enactment of updated regulations in Botswana in October. You've just given back some of the low priority drill targets. But then you said approvals are yet to be finalized. Can you just help me understand what those changes are and what approvals are outstanding at this point in time? Brendan Harris: Yes. No change to what we've said before. We just have -- I mean, you can imagine, we've got a very large tenure holding that we've been bringing back into line with the revised, if you like, legislation. We've done that proactively. We've done that through prioritizing, obviously, on the basis of what we see as prospectivity. And a large part of that is down in the Aqua area, which we've talked to you about before, which is not, call it, the traditional Kalahari Copper Belt. And I think the way to think about it is when we say approvals, it's really ongoing renewals, which we have high degree of confidence in. Jason Grace: The reference to those approvals are effectively their relinquishments, and those need to be processed and approved by the Mines Department in Botswana. So that's effectively it. Brendan Harris: So process really on both sides of relinquishment and renewals. But I'd say the relationship that we enjoy with government is continuing to prove to be very strong. Operator: Your next question comes from Adam Baker with Macquarie. Adam Baker: Just first call we've had since your announcement of the binding term sheet with Havilah and I understand that Havilah shareholders are yet to approve the deal. But just broadly speaking, wondering if you could touch on the attributes which attracted you to the Kalkaroo project. Brendan Harris: Yes. Look, I'm probably not going to say too much until we move through the process of their general meeting and the vote. Obviously, that's a key part of the CPs. And maybe it's just a -- it's worth noting for you that there's a really limited number of CPs. Clearly, the first one is a simple majority vote in favor of the transaction at the general meeting. It's us getting the necessary confidence that various titles will be transferable and approved, mainly at the government level at the appropriate time, which really relates to the second stage payment should we move forward with that, which obviously we're hoping we would. And then the last one is really just signing the definitive transaction agreements, which, as I said, are very well advanced now, as you might expect. If we think more broadly, there's a range of reasons that Kalkaroo was clearly at the top of our list at least of opportunities that we wanted to pursue. We like the team. This is a group of people that have been exploring in the Curnamona Province for decades. They know the ground. And they have, obviously, within that, done a lot of work around the Kalkaroo project itself, the opportunity that presents itself, and we had through dialogue with our people, I said earlier in my speech, the talented people engaged heavily. We've had people look at the core, built our own block models, formed a view on the geology and formed a view of the opportunity. But I think before we even go there, there are very few hundred million tonne reserves available today that have 0.83% copper equivalent grade with a strip ratio that's significantly lower than Motheo, 0.5% contained copper, close to 0.5 gram gold. And that reserve, I might add, was based on prices substantially below where we are today. I think numbers around $9,600 a tonne copper and $2,900 an ounce gold. So clearly, the strike length over 3.5 kilometers, our understanding of the geology, we believe that when you look at the resource of closer to 250 million tonnes, there's obviously a lot of opportunity there. We do think, however, that the way that we've, if you like, worked with Havilah to create that staged payment structure that allows us with success to get, if you like, an 80% interest in the Kalkaroo project is the right way to do these things for our shareholders. It recognizes that the project is well advanced, but there are risks, risks that we can work through in the prefeasibility study phase. And of course, very much sort of ties in with the way I described the strategy, which would look to bring in low dollar cost options for the portfolio. So clearly, we're looking forward to the shareholders approving the transaction by way of a simple majority. I would expect that being the case, we'll talk much more about it at the half year. Irrespective, there's a lot of work to do. There's particularly a lot of work to do over the next 2 years. You can imagine, given that stage gate process, we will run the PFS in many aspects towards a FID type level such that the big things that potentially can derail you, we have a very high degree of confidence in so that we can then move through an accelerated process towards ultimate development, again, with confidence. But clearly, we wouldn't be doing this if we didn't think it had the potential to deliver a very, very significant net present value to our shareholders, but also at a very, very attractive internal rate of return. Adam Baker: Makes sense. We look forward to further updates once Havilah shareholders approve it. Operator: [Operator Instructions] Your next question comes from Hamish Wiltshire with Jefferies. Hamish Wiltshire: Apologies. That must have been my finger on the table. Sorry about that. Brendan Harris: That's good. Thank you. Operator: There are no further questions at this time. I'll now hand back to Mr. Harris for closing remarks. Brendan Harris: Fantastic. Look, I know it's a really busy day. We keep doing it, too. A number of companies reporting, large and small. We wish you well. Good luck with that. Your interest is always deeply appreciated. As I mentioned, we think we're in a very strong position as an organization. The company has transformed dramatically over the last number of years. We're very focused operationally. Our people are focused, as I mentioned, on the basics. And critically for us, that means delivering on our second half commitments. We look forward to talking with you all about that more when we present our half year results and obviously, when we see many of you as we get out on the road. So good luck this year. Stay safe, and we'll see you soon. Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Mobileye Fourth Quarter and Full Year 2025 Earnings Call. At this time, all participants are on a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves. Mister Galves, please go ahead. Dan Galves: Thank you, Donna. Hello, everyone. Welcome to Mobileye Global Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call for the period ending December 27, 2025. Please note that today's discussion contains forward-looking statements based on the environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today, as usual, are Professor Amnon Shashua, Mobileye's CEO and President, Moran Shemesh, Mobileye's CFO, and Nimrod Nehushtan, Mobileye's EVP of Business Development and Strategy. And now I'll turn the call over to Amnon. Hello, everyone, and thank you for joining our earnings call. Amnon Shashua: As I look back on 2025, there are a number of meaningful positives to highlight, both for our company and the industry. In a very uncertain geopolitical environment, demand for our products came in higher than expected throughout 2025, demonstrating the resilience of the auto industry and our product offerings. Results were quite strong with revenue up 15%, adjusted operating profit up 45%, and operating cash flow up more than 50%. The industry began to clarify the structure and features of the generation of ADAS for mass market vehicles. Several forces are coming together here: demand for incremental safety, demand for convenience in the form of highway hands-off driving, and the need to consolidate the technology on a single ECU to keep the system's cost low. Mobileye's IQ6 high chip is very well positioned, and we won the first two major programs with two of the biggest fixed OEMs in the world. Waymo's commercialization provided a number of supporting proof points on consumer acceptance and demand for autonomous mobility services. This led to a major uptick in demand signals from transportation network companies and public transport groups, which led to an expansion of expected volume through our Volkswagen ecosystem to 100,000 units by 2033. We are now one year closer to the launch of our advanced product with the Volkswagen Group. We expect the first major public milestone to be the removal of the safety drivers in Moya's robotaxi fleet in 2026. We are implementing a unique first-think, slow-think structure to our advanced products that we believe accelerates both precision and scalability. This includes novel technologies like vision language, semantic action models, and artificial community intelligence. And finally, Mobileye took a decisive step to expand its footprint into the humanoid robotics field with the acquisition of Menti Robotics. Menti has achieved a fully vertically integrated, low-cost, highly capable robot that has a clear path to commercialization into the structured environment of industrial and logistics services field and with its distinctive technology to cater to unstructured environments like home use cases. Aside from our 2025 results, we detailed all of these areas in my CES talk on January 6. I encourage anyone with an interest in Mobileye or just physical AI in general to make sure to view that presentation. Turning to guidance, Moran will spend some time on it, but I'll address it briefly. We're encouraged by the volume growth we are expecting despite global auto production that's expected to be flattish again. And while we don't expect the volume levels of Q1 to be sustained throughout the year, it's a strong signal for the year, and order flows for Q1 have been rising for the last month or two. Turning to technology, at CES, I talked a bit about the debate around approach, specifically this concept of data in, command out, which is a false debate. Because no legitimate actors in our field are actually doing that. There's always a need for structure and architecture, and everyone's architectures have evolved given advancements in AI over the last few years, including ours. We introduced two new innovations that are accelerating our path to precision scalable autonomous vehicles. One is artificial community intelligence referred to as ACI. This is a simulation concept using a self-play reinforcement learning technique. That we are using to train our planning engine, also known as driving policy. This is the first-ever productization of a technique proposed in academic research. A strong motivation for ACI is that the sample complexity for planning is much higher than for perception, because the multi-agent nature of driving or actions that you take will impact the actions of other road users. Therefore, the amount of data one needs to collect could be unwieldy even for large data collection fleets. As a solution, we have created simulators that can achieve one billion hours of training overnight. Mobileye has unique advantages here since our REM maps, which cover much of the globe, can be used as a realistic and diverse baseline structure for training. The other advantage is we have developed sophisticated sim-to-wheel techniques that have the required understanding of the noise model of our perception engine when transferring the driving policy to the real world. That SIM to wheel technology is also very relevant to humanoid robotics, and will be a key area of technology sharing between Mobileye and Menti. We also introduced a fast-think, slow-think concept that utilizes specialized vision language models to provide contextual information and to address robustness to vehicle decision making. This is not necessarily about safety. It's more about understanding the semantics of complex scenes. For example, a scene where a policeman signaled the road they would like to take is blocked. The safety layer ensures that they won't hit the policeman. But we also need to understand the scene, figure out we shouldn't try to overtake the policeman, but rather we should either wait or take a different route. This is what slow thinking gives. Since this is not safety critical, the contextual information can be inputted into the system at a lower frequency than perception, which is typically analyzed at 10 frames per second. Structuring our architecture with fast-think and slow-think components saves compute and even brings the use of cloud-based compute into the picture. As a result, we can put a very sophisticated VLM on the in-car compute but call on much, much bigger VLMs in the cloud when the situation evolves. This has a very positive effect on the mean time between intervention metrics, but can also eventually lead to scalability benefits in terms of cars per teleoperator as the VLM can replace a human teleoperator in many cases. Turning briefly to our announced acquisition of Menti Robotics. Most of the AI that humans are using every day is in the digital world. The two main applications of AI in the physical world are autonomous vehicles and robotics. It makes sense for these two expressions of physical AI to be together because there's a great deal of technology overlap. Both extensively use computer vision and control, fast, slow thinking concepts, make heavy use of VLMs, and extensive simulator techniques. Menti itself, compared to other companies we evaluated, had a superior combination of strength, including a high level of vertical integration, a pure AI approach with the ability to demonstrate high-level capabilities with no teleoperation, a design strategy that results in an optimized cost versus usefulness ratio, and above all, a distinctive AI technique to do continuous on-the-job learning from passive demonstration. It's a really practical approach to capitalize on the most near-term industrial and logistics markets, then expand to more challenging markets over time. We believe access to Mobileye's tools, simulation, and data training infrastructure will accelerate Menti's development. And the number of technologies developed for robots, such as self-play simulation and think-to-real techniques, will also bolster Mobileye's AV development. Finally, there is potential for catalysts as we continue to demonstrate the strong capabilities of the Menti robot and execute on customer proof of concept work in the near term. I'll now turn the call over to Moran. Moran Shemesh: Thank you, Amnon, and thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurement. The primary screen is Mobileye's non-GAAP number, is amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017. We also exclude software communication. Our full year 2025 revenue of $1.9 billion slightly exceeded the high end of our prior guidance. Full-year revenue was up 15% year over year, compared to our original guidance of 6% growth at the midpoint. It was a very good year where a combination of minor selling global production trend IQ program launches, and higher than expected ADAS and supervision volumes from China OEM led to significant growth. Full-year adjusted operating income was $280 million, up 45% year over year. And margin was 15%, up about 300 basis points versus 2024. The fourth quarter included a nonrecurring expense of $7 million related to workforce efficiency initiatives we undertook in Q4. That expense was not part of our guidance as of the October earnings call. So if you exclude that, adjusted operating income would have also been slightly above the high end of the guidance. Like I said earlier, we saw consistent positives from our customers throughout 2025, and we've continued to see that over the last month or two during our 2026 planning process. 2025 IQ volume was 35.6 million across the full year, which was well above our original expectation of 32 to 34 million. We've seen a fairly consistent demand trend of 9 million units per quarter, with some minor fluctuations across quarters. For example, in 2025, Q2 and Q3 were higher than trend, Q1 and Q4 were a bit lower. One more point on Q4 before turning to the future. Modest upside to the higher end of our prior guidance was related to higher than expected supervision. IQ volume was consistent with the high end of our guidance of about 8.2 million. This level at the start of the quarter looked a bit below the demand trend as our customers desired to end the year within inventory. But the demand trend in Q4 ended up higher than we expected. As a result, we believe that inventory at our Tier one customers ended 2025 extremely low. We believe there is some level of adjusting safety stock that will occur in Q1 to get back to normal levels. We expect about 10 million IQ units shipped in Q1, which supports an outlook of approximately 19% year over year growth in the first quarter. After that, customer forecasts indicate a reversion to the trend of slightly above 9 million units per quarter. Turning to the full-year guidance. We are expecting revenue in the range of $1.9 billion to $1.98 billion, representing flattish to 5% growth. The midpoint of our guidance incorporates our IQ volume of slightly above 37 million units, which again consists of 10 million units in Q1. And an assumption of a bit over 9 million per quarter in the balance of the year. If we look specifically at our top 10 customers, we are assuming that their overall production is down 2% but our volume with those customers is up 6% at the midpoint. This includes about 700,000 units for a new OEM program that requires two IQ4 chips per car. That program is clearly a positive and will generate higher gross profit in dollars per vehicle. But since the second chip is overpriced relative to the first, it has an impact on overall ASP and gross margin. For Chinese OEM, we are expecting a decline of about half a million units compared to 2025, which was a bit above 3 million. We are encouraged by the significant growth in China OEM volume in 2025. It's aligned with their export volume growth, the area where our business is the strongest with those customers. We see no reason why that wouldn't continue into 2026, but prefer to remain conservative given we only have short-term visibility into order flow with China OEM. Gross margin will be down somewhat on a year-over-year basis, driven by continuation of IQ5 related cost savings. We discussed this on the October earnings call as an impact to 2025 that would continue through 2026 and then will gradually decline beginning in 2027. We also have modest vehicle mix headwind and the impact of the dual chip program mentioned above. Turning to operating expenses. 2025 ended up at $1.003 billion. This was slightly above our original budget of $995 million, accounted for by the nonrecurring termination-related bookings in Q4 mentioned above. In 2026, we are expecting around $1.1 billion or 10% growth. The underlying growth in OpEx is approximately 5%, consisting of normal salary and benefit inflation as well as additional infrastructure to support execution of the advanced products in 2026 and 2027. On top of that, we are including Menti R&D expenses. Finally, we are experiencing a FX headwind related to appreciation of the Israeli currency versus the US dollar. That meaningfully raises our headcount cost in dollar terms. This is being mostly offset by the workforce efficiency initiative noted above, but not completely. To conclude, we are almost one month into 2026 and continue to see positive demand signals from our customers on the core business. As Amnon discussed, we are also seeing very good execution progress ahead of a large number of advanced product launches over the coming one to two years, as well as accelerating momentum in customer demand for next-gen higher ASP ADAS and the transformative robot activity. Thank you, and we will now take your questions. Operator: Thank you. The floor is now open for questions. We do ask that you please limit yourself to one question and one follow-up to allow as many people the opportunity to ask as possible. Again, that's star one to register a question at this time. Our first question today is coming from George Gianarikas of Canaccord Genuity. Please go ahead. George Gianarikas: Hi, everyone. Thank you so much for taking my questions. I'd like to ask first maybe on your view on the competitive environment, particularly in light of some announcements at CES from NVIDIA and others? Just your view on what's happening in the advanced autonomous solution space. Thank you. Amnon Shashua: So I think that we have been we've obviously seen a lot more announcements and excitement around advanced solutions and autonomous driving in general. Also robotics. It was one of the key things at CES this year for everyone who attended. We still believe that we are closer to launching our dense products than other competitors, and this is one of our strongest advantages combined with the maturity of our technologies and the advances of our technologies. And we are, as we said, one year closer to launching a spectrum of products that spans from surround data supervision to a firm robotaxi. And starting from '26 and through 2027, we believe this will be a major transformation for kind of positioning Mobileye in the market. It's having proven products on the field. Right now, there is a lot of demos, a lot of referral technologies and emerging technologies, and there's some, we think, noise. And, maybe simplistic description of some of these technologies and how useful they could be for a reliable system. There is a recent announcement by NVIDIA, but their open-source model, Alfa Romeo, that they announced and supposedly given others the ability to I mean, we'll maybe, want to say a word about this, but we don't see that as something that changes kind of our positioning in the market. George Gianarikas: Thank you. And maybe I can ask a follow-up on Menti specifically. I mean, you mentioned yourself that there were a significant amount of startups and competitors at CES in the humanoid space. I'm just maybe a synopsis, a brief bullet point or two as to what the differentiation from Menti will be as you try to attack the marketplace and commercialize the product? Thank you. Amnon Shashua: I think the other startups mostly in China, but a lot of startups in the area of the humanoid. Many of the demonstrations that you see out there are teleoperated. Now to win this game, you need to have a fully autonomous control of the robot. From perception to action to understanding the theme, having an AI stack that can control the robot economically, and this is what Menti has been demonstrating quite consistently over the past year, year and a half. And as you see, as I show the number of clips, Menti is also fully vertically integrated with the design of the actuators, the gear, the AI itself, all the software components, the electronics, which is crucial if you want to have an end-to-end system. Another, I would say, distinctive element is the ability to do continuous learning. So Menti has developed an AI technology that allows the robot to passively view a human performing the task and imitate that task in a very, very short period of time without having any equipment, no VR goggles or special suits. Just passively observing a given performing the task. This is, I think, very important as we move from structured to unstructured environments like homes. So taking everything together, we have here a company that is both thinking practical about what is going to be the first domain launch, which is structured environments like fulfillment centers, assembly plants, retail. And also developing the technology for the next deployment for unstructured environments like home use. Fully vertically integrated, very strong in AI components, whether it's reinforcement learning, simulation, or simply very strong, very interesting overlap. It's not technology overlap with Mobileye. It can go both ways to synergies. So, overall, this is a very good step for Mobileye to take decisive steps towards owning physical AI in its full scope. Nimrod Nehushtan: If I may add to this, I think to kind of differentiate between the different actors, Menti is, as we know, probably the only western humanoid robot company that is actively engaging with customers on proof of concepts and pilots that involve pure AI operations with no remote operation. It shows something about the advancements of the use of robots in a setting that a customer is willing to evaluate and deploy in a kind of a non-sterile setting. Unlike maybe some hype videos that show something on a liquid clip, this is an actual testing environment. This is a different stage of maturity and having engagement with potential customers. And we believe that through integrating Mobileye's technologies, we have obviously strong strength in computer vision, in AI using cameras, and using sensor fusion, and designing face systems for safety and reliability and how to integrate systems in a very cost-efficient manner and efficient compute. All of these will help them even accelerate the progress they made so far. George Gianarikas: Thank you. Dan Galves: Thank you, George. Next question, please. Operator: Thank you. The next question is coming from Mark Delaney of Goldman Sachs. Please go ahead. Mark Delaney: Yes. Good morning and good afternoon. Thank you very much for taking questions. For Surround ADAS, the company has already reported on some strong momentum. You spoke about the two big OEMs that have already committed and given series production awards. As you look at the opportunity set for 2026, could you give a bit more details on the number of OEMs you're engaged with for surround ADAS and how many might be able to convert into awards this year? Nimrod Nehushtan: So I think the important point about Surround ADAS is that this is the product that addresses a very clear pain point for customers. And for OEMs, I mean. In the sense that it simplifies the system. It reduces cost. It provides advanced functionality it needs. Future regulation. It ticks most of the boxes that OEMs want to tick for the high-volume vehicle segment in the, you know, the upcoming years. Therefore, you know, the first OEM that we announced with Volkswagen was kind of a starting a trend that created a flywheel effect of more and more OEMs being interested. Now having announced the second design win with, you know, two out of the top six OEMs in the planet in major markets adopting this and launching this in a few years. This has definitely created a stronger realization amongst other OEMs that this has to happen for them also. At least to some degree. We've seen an increase in the amount of engagements we have. I don't want to predict timing and, you know, in quantities, but we're definitely encouraged by the increase in different engagements we have with multiple OEMs across our customer base. And we also believe that we have inherent advantages for this product category because it requires a very reliable system performance, you know, very high safety standards, advanced functionalities like, you know, hands-free driving in primary and so on, but also be extremely cost-efficient. And just to give you some sense, these two programs we won are going to be integrated in the kind of a standard fit across the highest volume vehicle categories for these two OEMs. So every dollar counts. And the implications for the OEMs to adopt this product means how much conviction they have that they need such a product for, you know, it's not a balloon project in a small amount of vehicles, you know, that if fails and, you know, nothing happened. If this project is delayed, for example, this is obviously affecting the entire vehicle portfolio. So it shows about the confidence that Mobileye, how much conviction they have in this product. And it's definitely an encouraging sign. Mark Delaney: Thanks. My other question was on Menti. Given the announcement and engagements that you've had with potential future customers and industry participants, can you help us better understand to what extent it's catalyzed additional interest in partnering with Menti Robotics, including opportunities to have your humanoid robots in factory and commercial environments to gather data? And, you know, as you think about that 2028 commercialization target you shared at CES, how important is that data collection and gathering for hitting that time frame? Thank you. Nimrod Nehushtan: I think it's a very interesting question. We've had since two weeks since the announcement at CES, and we have received the reach out from a significant number of customers asking about our interest and readiness to support on-site pilot and concepts and kind of starting from our industrialization partners that want to contribute in manufacturing and components because they understand we do the full robot. Starting from that and really, you know, trying to attract us to work with them for manufacturing and for all of our industrial partners, whether it's tier one, OEMs, and others that want to see how they can, you know, work with Mobileye integrating robots into their logistics centers, warehouses, manufacturing lines. The need is definitely there, and for them, it made perfect sense. I think one of the encouraging signs that we've seen is that already at CES, we've had meetings with OEMs. And in most of these meetings, it came up as, you know, let's take a follow-up and schedule when we can actually talk about a plan to deploy this in our environment. I think that the fact that Mobileye comes out of this business and they trust the, you know, the standards of the company. And that they have a need for longer-term, you know, finding solutions for human labor is becoming a bigger and bigger problem for them. Especially in developed countries, this gives them an easier path to evaluate a new technology with a partner they trust. As opposed to working with a startup, you know, in humanoids that, you know, who knows what you can get from them and whether or not they can deliver. And, definitely, we're leveraging these relationships. So we definitely think of this as an area to continue to develop in the next few months. Amnon Shashua: Thank you. Dan Galves: Thank you, Mark. Next question, please. Operator: Our next question is coming from Chris McNally of Evercore ISI. Please go ahead. John Zager: Good morning. This is John Zager on for Chris McNally. Thanks for taking the questions. Amnon, you've made this sandwich analogy for ADAS and AV demand. Basically, with high demand for a surround at the low end. Or drive at the high end. If we could focus on just drive for the time being, you guys announced VW Moya, one of the two big partners, Marubeni and an unnamed OEM. But the forecast is for a fleet of 100,000 AVs by 2033, obviously, a bit of a ways away. So my question, can we get a sense for what the near-term demand for your drive system might be for just, like, the next two to three years, 2027-2028? Or on phase one for a growing, on the growing list of cities? Amnon Shashua: Well, we announced together with Moya six cities to expand to six cities in 2027, and that includes Los Angeles, together with Uber. We have another high-volume program with the Holland that will come six months later, have also its expansion. As the CEO of ADM T on stage mentioned that they foresee about 100,000 vehicles in the next eight years. The exact numbers of the rollout will depend on the success of 2027. And deployment of the first six cities. But we are talking about thousands of vehicles at this point. Nimrod Nehushtan: Just to add to this, I think, you know, it's maybe somewhat challenging to understand what it means, 100,000, because it sounds like a big number. I think what we're taking away from this, what it means is that Volkswagen has in place the manufacturing capacity to produce as many vehicles as needed. The 100,000, if we're successful in 2026 and '27, and then in '28, which we have high confidence in our chances. That 100,000 can also be a small number in hindsight. The manufacturing capacity they have and the funding they've, you know, pulled into this in the past few years to build everything needed to produce robotaxis in scale eventually, it's Volkswagen. So they can produce 10,000 per year, 50,000 per year, 75,000 per year. When the demand will be there. And the demand from, you know, from mobility operators, CNCs, municipalities is far greater than, you know, tens of thousands per year globally. Once the technology gets to this maturity level and allows quick economic and geographic expansion, which, you know, we believe we have clear advantages in. Then, you know, the numbers will the demand will not be a problem. And we have a partner that can scale and give the supply the best extent possible. John Zager: Understood. And just should we think about, like, the volume for a phase one launch? And, like, should that be, like, a thousand to, like, 1,500, like, Waymo in San Francisco? Nimrod Nehushtan: Think of it as a few hundreds of vehicles per city as a good testing as a good measuring stick. You know, just also seeing how Waymo rollout that roughly the numbers they've had. In some cities, it's 200. Some cities, it's close to 500. That's a sufficient number to kind of facilitate for the mobility demand in that city and also to build a meaningful business. And that's also roughly what we're planning. John Zager: And thanks, John. Just one last follow-up. Do the AV customers pay for anything before the purchase of the $45,000 drive content, like R&D in advance? Or do you get any protection if their volumes are less than planned? Nimrod Nehushtan: Without going into the details of our contract, we are receiving we're delivering samples and engineering samples throughout the year. There's an engineering budget that covers the direct engineering cost and development cost. So there is definitely a good amount of investment well before the commercialization. So we do I think we have high confidence in our chances of getting to driverless, I think we're not that concerned about the downside potential. John Zager: Okay. Thank you so much. Operator: Please go ahead. Thank you. The next question is coming from Joseph Spak of UBS. Joseph Spak: Thanks. Hello, everyone. Just to maybe talk about a couple of, you know, more near-term things. You know, obviously, memory has become a larger issue and concern in the automotive industry. And I know or I believe you don't really buy a lot of that memory directly, but, clearly, it is used in the modules at your tier one customers to assemble to sort of ship on to the OEMs. So I'm just curious, you know, what you're hearing from your customers and the supply chain as to and whether this is really a pricing issue? Is it an availability issue? Is there any sort of volume risk embedded in your outlook? And because if it's even if it's a pricing issue, I guess, you see any risk of decontenting? Nimrod Nehushtan: So, as you said, Joe, we're not, let's say the exposure that we have is not direct because we're not purchasing a lot of these units. It's mostly indirect through the fact that our tier one customers are purchasing memory components. We've been doing in the past few months, and we have been actively working on this I think, well, before it was public knowledge that this dynamic is developing. Is to create kind of maximizing our supply of these components and working with multiple vendors. Ensure that we have enough flexibility to kind of mitigate the direct cost impact from specific vendors. And that we will be able to ensure that vehicle manufacturing will not be impacted by these fluctuations. And we haven't I think that, like we did last year, our forecast for this year is maybe opting for the conservative side. You can see the difference between Q1 and other quarters. It does bake in some level of, you know, understanding that there is some volatility in the industry, so we wanted to be on the more conservative side. But we haven't seen any, like, let's say, direct evidence or indication that there is an imminent change to volume as a consequence. But we will keep close monitoring on this as it develops, and we're doing everything in our powers with our tier one partners to create the availability of these components. Joseph Spak: Okay. Thank you. The second question, just on you know, you mentioned some of the appreciation of the shekel, and I know you get very helpful exposure in your 10 Qs on what a change in that currency can do to your cost base. But I believe also, like, at this time, a year ago or, you know, earlier in '25, you made a comment on one of the calls about how a lot of the costs on the shekel were hedged. So did something change with the hedging strategy? Like, maybe you could just sort of update us on sort of why it's a little bit maybe more of an issue now than you thought a year ago. Moran Shemesh: Yeah. So I will start with 2025. So we have a hedging plan that basically, you know, caused that we can meet our OpEx expectation for 2025. So for example, for this 2025, the rate that we had in our financials was, like, 5 or 6% favorable than the average market rate. So and these are, you know, transactions that we made in the beginning of 2025. But as the appreciation of the shekel continues, into 2026, and we're talking about, I think, 10 or 12% in the last year, we still have hedging in place for 2026, so we are more than 50% hedged on our payroll expenses at a favorable rate. But the risk is obviously heavier as deterioration, you know, gets bigger. But we still can't into account in our guidance. So we took into account some, you know, further hedging, but it will be at a less favorable rate. The fact that we are already more than 50% hedged. I think we're in a good place in terms of the rate, but it's still the year-on-year impact because it's a significant impact. It's worth mentioning. Joseph Spak: Okay. Thank you. That's helpful. Appreciate it. Amnon Shashua: Thank you, Joe. Thank you. Next question, please. Operator: The next question is coming from Aaron Rakers of Wells Fargo. Please go ahead. Aaron Rakers: Yes. Thanks for taking the question. I want to kind of double click on the Porsche and VW and the Audi kind of programs. I'm curious as you kind of thought about your guidance for this year, I think the initial expectation was maybe early volumes on Porsche. Late this year. Just me an update on where we stand on some of those programs and how we should think about volumes appreciating that, I think, 2026 in the past has been more characterized as an execution year. Amnon Shashua: Right. 2026 is an execution year. The supervision on Porsche and Audi should start in Q1 next year, Q1, May 2027. There was some pushback of deadlines unrelated to 2027. Do I have something more? Nimrod Nehushtan: Okay. And just to say that you didn't really change the plans of the project. It's just a one-month change between December 2026 to February 2027. So it's not really material. And we think made clear in previous calls as well that we do not expect meaningful volumes in these programs in 2026. Aaron Rakers: Right. Appreciate that. And then as a quick follow-up, in the prepared comments, you talked about inventory levels that your customers, your major OEMs being fairly lean. I know you've guided 10 million IQ units this quarter. I'm just curious, can you kind of go a little bit deeper on what you're seeing as far as the inventory levels your customers are holding? And do you expect any replenishment when you gave the unit expectation for this year? Or is it more lean inventories continue? I'm just curious to how you kind of bake that into your guidance. Thank you. Moran Shemesh: Yes. So I think for what we're seeing I mentioned it also in the remarks, we are seeing increased demand in terms of order flow 2025 and then higher than expectation, 2026 is, you know, constantly increasing in terms of production. But what happened specifically in Q4 was also that the order the orders were relatively low in the first place. As December is a slow month in ordering. It's a short month with holidays, etcetera. It was low, and then production level came up even higher. So it basically means that, you know, we believe the inventory levels that our customers are, you know, not reaching their inventory target at the end of 2025. So they are tighter than usual, and had some impact on Q1. But, again, we're also seeing very good demand. The 2026 production levels are going up. But, yeah, Q1 does have some impact. Of Q4 low volume combined with heavier or bigger demand. Aaron Rakers: Yep. Thank you. Amnon Shashua: Thank you, Aaron. Operator: Thank you. The next question is coming from Edison Yu of Deutsche Bank. Please go ahead. Edison Yu: Hi, thank you for taking our questions. I want to follow-up on Menti. Can you give us a sense of what are the next steps with some of these customers you're talking with? I know you mentioned proof of concept. Are you going to basically ship maybe a few units? And then if that turns out well, you'll ship, you know, 30, 40 and then much more. How do we think about those kind of next steps to commercialization? Amnon Shashua: I believe that 2026 is going to be maybe high tens of units in terms of the POC. 2027 should be more, and 2028 should be even further. 2027 to go up until the into production with the production partner. So 2026 is tens of units. What we would like also is to have in addition to the POCs, also, to produce small units for the sake of Mobileye to start experimenting with the robots not only Menti themselves. But, again, it's going to be a high double-digit number of robots in 2026. Nimrod Nehushtan: And just maybe just to add from the viewpoint of the customers in these pilots, the purpose is to start with a smaller amount of robots that perform specific tasks that they're kind of outlining, and you just go to the logistics center, for example, and there are a few shelves with boxes, and human beings today are moving boxes according to their, you know, their instructions and so forth. And basically, they want to see how robots can perform over a certain period of time, what's the precision, you know, reliability, durability, maintenance, and so on? And, you know, gradually afterwards, expand this to more and more tasks and in larger volumes. You know, we are talking about companies that employ tens of thousands of employees today in these types of positions. So I think, again, going to be a question of supply, and that's why it's so important to have a manufacturing partner, as Amnon said, that already in '27 is able to produce robots in a serious production manner, which is important both for cost and also for scale of volume. Edison Yu: Understood. Appreciate the color. A follow-up on Robotaxi. Obviously, a lot of excitement coming out of CES. Has your view on owning more of the, should we say, ecosystem change at all? And that's just in the context of you obviously have a lot of parties involved. Could that kind of hinder the speed of deployment or some of the logistical aspects? And obviously, would require capital, but I think that's not that big of an issue anymore. Thanks. Amnon Shashua: I think the current arrangement we have with Volkswagen and Moya is really optimized for the speed of the volume of the deployment. So going right now more vertically integrated is not going to increase the volume of the deployment. This is something perhaps to be considered towards the end of the decade or further than that. I think what we have in place is really optimal to where Mobileye is at. Mobileye will be producing the self-driving system as a tier one, taking responsibility not only for the electronics, but also for the sensors, of course, the software stack and all the validation. And the revenue per vehicle plus recurring revenue per mile is very, very attractive. The focus is execution now. Edison Yu: Thank you very much. Amnon Shashua: Thank you, Edison. Operator: Thank you. The next question is coming from Tom Narayan of RBC Capital Markets. Please go ahead. Tom Narayan: Thanks a lot, guys. The first one I have is on the '26, I guess, adjusted operating expenses. I think you guys said it's up $100 million. And I know that FX was mentioned, some other issues. But then the one that I'm wondering if that's the biggest piece of it. Is the Menti R&D or maybe it's consolidating Menti if it's operating at a loss. Just curious how we should think about the OpEx going higher, what's really, you know, the biggest driver of that? Then I've got a follow-up. Moran Shemesh: Yeah. Okay. So I think I've mentioned that we have incorporated Menti R&D into our guidance. So the guidance includes in terms of operating expenses, mainly 5% of regular inflation, enhancement or something then. And the additional portion is the Menti R&D. So these are the significant two items. I also mentioned we have also a headwind from the FX rate, but that is mostly offset by the efficiencies initiatives we did in Q4. Hope that answered your question. Amnon Shashua: Just to follow-up. I mean, I think that's pretty clear. But just to follow-up, like, you know, we do expect to have normal OpEx inflation per year of around 5%. This relates to, you know, salary and benefit inflation as well as kind of additional infrastructure to support the AV activities and the advanced product activities. That's normal. On top of that, this year, we are assuming consolidation of the Menti R&D expenses. We talked about that as somewhere in the, you know, lower single digits, but, you know, probably think, you know, towards, you know, 4% type of thing. And additionally, we do have this FX headwind, which is mostly offset by the workforce initiative we did in the fourth quarter, but not completely. So that should give you a decent walk from 2025 to 2026. Nimrod Nehushtan: Yeah. I think you described it quite accurately. Amnon Shashua: But take into account that, also, growing in terms of being a tier one in a tier one net position with our programs with Porsche and Audi and drive. And sometimes you need to make adjustments in terms of increasing the headcount. Again, this is nonmaterial compared to the overall OpEx of the product. But it adds a few percentage. So take the walk through that you mentioned was quite accurate. And accurate, you know, view percentage of growth that we need to account for when we are taking a tier one position and investing heavily into the future. So two years ago, now we calculated our OpEx growth, but we cannot be precise to the single percent in an area which is experiencing rapid growth. Tom Narayan: Got it. And for a follow-up on Menti, and this I know this is very early to this question. But, I mean, look. We're seeing the market reaction to the potential news out of, you know, from Hyundai with Boston Dynamics and the credit that Hyundai is getting. Is this something you guys might think about in the maybe the distant future? I don't know about trying to crystallize the value? Right now, there's so much appetite where, you know, the capital market certainly. This something you could consider, I mean, monetizing Menti in some way? Or do you believe that, you know, together and is a combined entity that, you know, that's how you kind of view the business? Amnon Shashua: Well, I think that the market is taking some time to internalize the use of the acquisition. Or the use of Mobileye entering into humanoid. I do believe that in some, you know, near future, this would create the dividend the like of what happened between Hyundai and Boston Dynamics. Now Menti has all the potential to make big steps forward, has demonstrated quite a mature technology. As the clips that I have shown and the clips that they have on their website. And then together with Mobileye, they can make rapid steps forward. Now whether we're going to see this dividend in a month or whether we're going to see this in a year, I don't know. But it has the potential to catalyze the same benefit that Hyundai is receiving from Samsung. Tom Narayan: Got it. Thank you. Dan Galves: Thanks, Tom. Operator: The next question is coming from Colin Rusch of Oppenheimer. Thanks so much, guys. Can you talk a little bit about the near-term pricing dynamics on IQ? Just curious, how much movement there really is as you see some of these larger volumes move through in the first part of the year and how we should think about that trending to the balance? Nimrod Nehushtan: So maybe if you refer to the IQ prices, but to make sure I'm volume. Volume or prices? I didn't get the question. Colin Rusch: I'm concerned about, you know, pricing, you know, as you ship the higher volume here and then, you know, how that the pricing trends for the balance of the year as you normalize that. Nimrod Nehushtan: Yep. So the pricing is every year is affected by the mix of IQs. And as you know, the IQs have different generations with different software features and software packages. This has somewhat of a different price, but overall, on average, there's no, let's say, meaningful change. The prices. There is a different mix this year compared to last year. Last year, as Moran said in her remarks, but we see higher volumes of IQ5 based ADAS product and IQ5 has somewhat of a higher cost, but still it's the best product with, you know, meaningful volumes this year compared to last year. So this does have some impact, but it's all natural mix. Moran Shemesh: And also the second chip that I mentioned, the second chip that I mentioned combined the fact that the second chip is a lower price than the first one. So it's higher gross profit per vehicle. But lower ASP. I think that the combined natural mix with Nimrod mentioned and the second chip impact is approximately, like, 80¢ or so. Year on year. Amnon Shashua: But just to clarify, this second chip or the card has two IQ4 chips, this is a one-off thing. It's not that we see a trend having two IQ chips in the car with one of the IQ chips with the at the discounted price. This is what we call a bridge. This is a bridge towards IQ6, IQ6 light. The carmaker wanted to meet a certain regulatory environment, that IQ4 alone could not meet. Therefore, a second IQ4 was added. But, again, this is a one-off. We don't expect it to be a trend. Colin Rusch: Okay. Perfect. Thanks, guys. And as you think about, you know, doing the driver out demonstration here later this year, you know, can you talk about the regulatory process and any bottlenecks or hurdles that are still remaining here, things that are of concern that you guys are focused on, getting ready, to do that demonstration. Amnon Shashua: Well, in the US, it's self-certification. We have stringent KPIs in terms of meantime between February. That we are meeting towards going driverless. Outside of the US, there's homologation. And as we mentioned together with Volkswagen, homologation will occur in 2027 outside of the US. Colin Rusch: But nothing on a regional basis or city that you guys are concerned about? Moran Shemesh: No. We see. And, actually, the homologation in Europe will have a stronger tailwind given that the vehicles are produced by Volkswagen level four vehicles, and our cooperation together with AT&T and Moya and both of them, will allow us to go to the homologation in a much easier way than if we were doing it alone. Nimrod Nehushtan: And this is a significant entry barrier to the European market. It involves a lot of activities and direct engagements with the regulatory bodies that we are, you know, already doing with Volkswagen. So getting this approval in '27, as Amnon mentioned, will also separate us in the European market from others. Dan Galves: It's an important point. And just to clarify on the timing of homologation, we're saying that it will be completed in 2027. And start in 2026. And the six cities, commercialized in 2027 that Volkswagen talked about includes some European cities, which is gonna require the homologation process to be completed. Colin Rusch: Thanks so much, guys. Appreciate the color there. Operator: Thank you. We are asking remaining analysts to please ask your question and your follow-up at the same time. Our next question is coming from Joshua Buchalter of TD Cowen. Please go ahead. Joshua Buchalter: Hey, guys. Thanks for taking my questions. Guess both at once. I guess to start, highlighted the potential for conversions on surround ADAS this year, but you haven't made the same comments about supervision and chauffeur. Are those, you know, maybe you can provide an update there. Are you guys, you know, deemphasizing that in your go-to-market and conversations with customers? And then for my follow-up that's, you know, on a completely unrelated topic, Amnon, you've touched on this in the CES presentation, but I was hoping you could provide some more details about, you know, specifically how your IQ roadmap is gonna accelerate Menti's time to market? And perhaps as important, how much software development is needed to move further into robotics, you know, given IQ's design specifically for autos. Thank you. Nimrod Nehushtan: So we have multiple engagements also on supervision chauffeur. So there's definitely an active engagement there with the market. To put things in perspective, our relationship with Volkswagen Group with the different brands on these products started maybe in 2021. And it took us a couple of years to kind of cross all the items that need that is needed. And we are also focused now on opportunities that have a meaningful business potential. As opposed to, you know, smaller scientific projects some OEMs are trying to explore. Maybe in some cases, it's in-house development data that they're doing, and they want to allocate one car in the future and see if it works. And we're trying to focus on opportunities that present significant volumes, multiple vehicle models, you know, with complete timelines so that we can, you know, we're we can scale the products. We're not looking for the, you know, first opportunity. We want to scale, and we have several of those. I don't want to predict timing, but we are encouraged by the activities there. Amnon Shashua: I think the enrollment period, if we field of it. Too early to talk about IQ chips on, you know, the robots. We think this is a longer-term, this is a longer horizon issue. Currently, the robots are based on NVIDIA chips, and we see that we're very proud of that relationship. And we see that going on for the near for the foreseeable future. Now when we go into really high-volume production where every cent counts, then I think IQ8, IQ9 could be quite relevant. But it's not in the foreseeable future. Joshua Buchalter: Okay. Thank you both. Operator: Thank you. We're showing time for one final questioner. Our last question is coming from Samik Chatterjee of JPMorgan. Please go ahead. MP: Hi. Thank you for taking my question. This is MP on for Samik Chatterjee. My first one would be, like, since you said that Porsche and Audi programs are now pushed out to Q1 2027, will drive or robotaxi be the biggest swing factor for 2026 revenues? And on that itself, like, updated thoughts on the monetization for Drive in terms of upfront revenues versus recurring consumption-based revenues? And for my follow-up, I wanted to ask on the second Surrounded Ads customer. You said that you there could be a potential decision for the second architecture with this customer. That's it. Thank you. Dan Galves: MP, the answer to your first question is that there we did not expect any meaningful impact from the advanced products in 2026. We've been saying that for the last several quarters. So there's no change related to what you did what you talked about. Nimrod Nehushtan: And we did not account for drive revenue in 2026 guidance. So there is no it's not in the guidance. Regarding the second question on the second design with the surround ADAS, in Q1. So if that happens, like, will that potentially double your pipeline with that customer? The discussions are obviously ongoing, and, you know, we are making good progress. And again, don't want to go into predicting time, but we continue to work on this, and it's progressing. MP: Thank you, MP. Operator: Thank you. At this time, I would like to turn the floor back over to Mr. Galves for closing comments. Dan Galves: Thanks, everyone, for tuning into our earnings call, and we'll talk to you next quarter. Thank you very much. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Faten Freiha: Good morning. This is Faten Freiha, VP of Investor Relations. Thank you for joining today's fourth quarter earnings call. To accompany this call, we posted a set of slides on our IR website, ir.mccormick.com. With me this morning are Brendan M. Foley, Chairman, President and CEO, and Marcos Gabriel, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or other factors. Please refer to our forward-looking statement on slide two for more information. I will now turn the discussion over to Brendan. Brendan M. Foley: Good morning, everyone, and thank you for joining us. McCormick & Company, Incorporated's performance in 2025 demonstrated the strength and resilience of our business. We delivered differentiated volume-led organic growth and share gains, powered by sustained momentum from investing in our brands, expanding distribution, and driving innovation across our business. We achieved solid profitability gains in the first half of the year. However, rising costs in the second half related to the dynamic global trade environment pressured gross margins. Despite these headwinds, our disciplined cost management and efficiency initiatives kept us on track. As a result, we realized operating income growth and margin expansion for the full year, all while continuing to invest to drive future growth. We are executing with focus and discipline on what we can control and staying agile as we navigate external challenges. Our strategy continues to position McCormick & Company, Incorporated for sustainable long-term value creation. Turning now to our results on slide four. In the fourth quarter, total organic sales increased by 2%, supported by growth in both consumer and flavor solutions. In global consumer, organic sales growth was driven by volume, which grew for the seventh consecutive quarter, as well as price contributions. In The Americas region, we delivered volume growth even as pricing actions took effect, with elasticities coming in broadly in line with our expectations. Volume performance in EMEA remained solid with continued benefits from price. In Asia Pacific, organic growth was supported by strong continued momentum in Australia and our China retail business. Importantly, we achieved the gradual full-year recovery in China consumer for the year as planned. Moving to flavor solutions. Volumes declined for the global segment. Our performance was impacted by customers' reset of inventory levels in Latin America, which we expect to be behind us in 2026. Volumes across the rest of the business were roughly flat and reflected softness in large CPG and branded food service customer volumes. These headwinds were mostly offset with growth from high-growth innovators, private label customers, and QSRs across The Americas and Asia Pacific. Turning to profitability. Fourth quarter gross margin was pressured by higher-than-expected inflation across our diverse basket of commodities, and we recognized more tariff costs than previously planned. It's important to note that pricing actions and CCI-driven productivity savings were delivered as planned. In addition, as expected, we continued to invest in the business, advancing our supply chain capabilities, innovation, and growth platforms. These investments continue to strengthen our foundation and reinforce our resilience, positioning us well for long-term success. Let's move to slide five. And let me highlight for the quarter some of the key areas of success. Across the global consumer segment, we have held or improved share across many core categories in key markets for the last six quarters. McCormick branded volume consumption growth continues to outpace the broader edible category in The US. In EMEA, unit and dollar consumption continue to outpace branded and private label fast-moving consumer goods or FMCG food. Let me provide some additional color starting with spices and seasonings. We drove strong volume growth across all the regions. In The US, we implemented pricing actions due to increased cost inflation. Elasticities as well as share performance were broadly in line with our expectations. Our performance in The US was supported by innovation, most notably with our newest lineup of holiday finishing sugars as well as growth in Gourmet Garden, our fresh convenience line. Importantly, our renovated McCormick Gourmet collection, highlighted by its countertop-worthy packaging, is now on shelf. As we transition the vast majority of the portfolio, velocities so far have exceeded our expectations. We anticipate continuing to benefit from this renovation in 2026. In Canada, we continue to grow overall share in dollars, units, and volume. In France and Poland, unit share growth in spices and seasonings are contributing meaningfully to EMEA's gains. Moving to recipe mixes. Performance in EMEA is strengthening. We drove unit and dollar share gains this past quarter as we expanded distribution with new customer wins in The UK. In hot sauce, we are achieving good results. In The US, for the fourth consecutive quarter, we continue to drive unit share gains fueled by investments in brand marketing and innovation. We continue to improve total distribution points or TDPs. In The Americas, we expanded TDPs with spices and seasonings driving the majority of the growth. Across our business, we continue to gain distribution in high-growth unmeasured channels like e-commerce, and we are expanding into social commerce in The US, a channel with significant growth opportunity. In flavor solutions, we continue to see strength in our technically insulated high-margin product category flavors. In flavors in The Americas, we are expanding and diversifying our customer base by winning both high-growth innovators and private label customers. We're also seeing strong momentum in reformulation projects with larger customers and outperforming the industry across key categories, including beverages and better-for-you snack seasonings. Turning to QSRs. In The Americas, QSR volume performance remained strong, driven by continued innovation. In the Asia Pacific region, specifically in China and Southeast Asia, our customers' new products and promotions continue to drive strong volume growth. In EMEA, QSR volume performance continues to stabilize. Let me now touch on some areas where we are seeing pressure. Starting with global consumer. In recipe mixes, our base business remains strong with continued consumer loyalty and growth across many product lines. Competitive activity in The US, particularly within the Mexican flavor category, tempered overall share performance. We expect these trends to gradually improve as we launch new innovation, expand distribution, and continue to build momentum behind our authentic Mexican brands like Cholula, supported by strong brand marketing investments. In mustard, where we have performed well for the majority of the year, in the fourth quarter, the category declined in dollars and units in The US. French's mustard trailed the category, and share performance was impacted by the timing of certain promotions, which we expect to normalize as we continue to execute on our plans in 2026. These include continued focus on innovation, increased brand marketing investments, expanding distribution, as well as strategic partnerships. Outside of The US and Canada, we continue to drive dollar and unit share gains in mustard for the fifth consecutive quarter. In EMEA, most notably in Poland, we drove unit and dollar share gains in mustard for the last three quarters. Moving to flavor solutions. In flavors, in The Americas and EMEA, some of our large CPG customers continue to experience softness in volumes within their own businesses. We expect these trends to stabilize as we continue to work with our customers on product innovation, as well as win new customers. In branded food service, foot traffic remains soft, which is impacting customer volumes. We continue to see growth in certain channels, particularly with non-commercial customers. This includes places of employment, hospitals, and colleges and universities. Now that we have covered the quarter, I would like to reflect on our performance for the fiscal year on Slide six. When we set our goals for 2025 last January, market conditions were very different. Although the external environment proved more challenging than anticipated, particularly with respect to cost pressures, we achieved many of our objectives, especially on the top line, and continue to strengthen the fundamentals of our business. I am proud of the results our teams delivered and the discipline with which we executed, even as the external landscape evolved. While we achieved our top line goals, our bottom line came under pressure. Inflation, commodity cost volatility, and the macro environment created incremental costs that impacted our margins. Despite this, we made deliberate choices to continue investing in our brands, capabilities, and people. Decisions that strengthen our long-term competitiveness and position us well for sustained growth. Our focus remains clear: sustaining our strong top line, strengthening profitability, delivering strong cash flow, investing in growth, funding shareholder returns through dividends, and further strengthening our balance sheet to position McCormick & Company, Incorporated for long-term success. A few highlights for the year. We delivered sales growth at the midpoint of our constant currency guidance, driven by positive volume. Our consumer segment delivered another year of industry-leading volume-led growth, up 2% for 2025, as we continue to expand and win in high-growth channels where consumers are increasingly shopping. Our flavor solutions segment continues to show resilience despite soft industry trends, reflecting the strength of our capabilities and customer partnerships. We continue to prioritize investment in our business while driving margin improvement, particularly in flavor solutions, where we made meaningful progress in expanding operating margins despite a challenging cost environment. We generated strong cash from operations and continued to delever, reducing our leverage ratio while also continuing to fund our growing dividends and capital investments. In terms of M&A, we further strengthened our global flavor leadership with the acquisition of a controlling interest in our long-standing joint venture, Pacoemer de Mexico. Lastly, at the end of 2025, our board of directors authorized a 7% increase in the quarterly dividend, marking the 102nd year of continuous dividend payments and 40 years of consecutive annual increases. This reinforces our recognition as a dividend aristocrat and reflects our long-standing commitment to returning cash to shareholders. Our performance reflects McCormick & Company, Incorporated's strength, resilience, and solid foundation. Beginning in 2024, we set a clear path for volume growth and have now delivered two years of consistent results. With our strong brands, effective strategies, and continued investment, we remain positioned to deliver sustainable growth and profitability. We have built momentum, and we intend to carry that forward into 2026. On slide seven, let me now share our current view on the state of the consumer and considerations for 2026. The environment across our key markets is marked by volatility and continued pressure from inflation, geopolitical and trade uncertainty, and the threat of rising unemployment. Overall consumer confidence remains low. Consumers, especially low to middle-income households, continue to make more frequent trips to the store while purchasing fewer units per trip, a trend that was evident at the start of the year and accelerated through the fourth quarter. In addition, consumers continue to stretch meals across multiple occasions and seek affordable ways to prepare fresh home-cooked meals. The consumer continues to show resilience by increasing their demand for value and behaviors that enable them to stretch their budget. These behaviors reinforce the importance of flavor in everyday cooking, with herbs and spices continuing to lead center store unit consumption. Health and wellness trends continue to gain momentum. Consumers are preparing healthier, more affordable meals at home while exploring new flavors and culinary creativity. Perimeter and scratch cooking categories are outperforming, while high-carb and high-sugar foods along with alcohol are declining. High-protein and better-for-you claims are driving purchase trends across retail and food service. In addition, convenience paired with flavor exploration remains an area where consumers are willing to pay more. E-commerce continues to accelerate, and social commerce is also reshaping how consumers discover and buy packaged goods, fueling momentum for emerging brands. The convergence of these enduring trends—health and wellness, affordability, flavor exploration, and convenience—underscores McCormick & Company, Incorporated's advantaged position in the marketplace. Our consumer portfolio meets consumer demand for home cooking and healthier meal preparation. At the same time, our flavor solutions business partners with large and emerging brand customers to deliver innovation and reformulation aligned with the same trends. We are winning across the food industry, from small emerging brands to large established players. And our success is not defined by any single segment or product category. Notably, recently issued USDA dietary guidelines for Americans again promoted herbs and spices as well as natural flavors as a healthy way to flavor nutrient-dense food, including proteins, vegetables, fruits, and healthy fats, to make them more appealing, further supporting the importance of our product categories. In terms of tariffs, recent reductions are a positive step from a cost standpoint. However, approximately 50% of the incremental tariffs on McCormick & Company, Incorporated items remain in place, and we continue to face related inflationary pressures. Our pricing actions have been surgical. We took pricing actions to offset inflation, but we have not fully passed through tariff costs, and we remain focused on partnering with our customers to meet consumers' demand for value, flavor, and quality. We are navigating inflationary pressures with strategies designed to best meet the needs of the consumer and maximize category growth. Our focus on the long-term health of the business, innovation, and execution continues to position McCormick & Company, Incorporated for sustained success in a dynamic marketplace. Before reviewing our growth plans, I'd like to briefly discuss our outlook. In 2026, our results are expected to benefit meaningfully from the McCormick de Mexico acquisition, which is driving significant contributions to both the top line and operating income. Additionally, the transaction is accretive to earnings per share. However, year-over-year earnings per share growth is reduced by the elimination of the 25% minority interest in McCormick de Mexico net income attributable to Grupo Herdes and several below-the-line items that are unfavorable relative to 2025, including a higher tax rate and increased interest expense. In our base business, we continue to drive underlying profitable growth through our strong execution. That said, we anticipate incremental costs associated with elevated inflation, including tariffs, continued digital investments, most notably related to our ongoing ERP implementation, along with the rebuilding of incentive compensation from 2025 to impact our profitability. We are partially offsetting these pressures through cost reduction efforts focused on restoring gross margin performance and enhancing overall productivity. These efforts are supported by our CCI programs, including SG&A streamlining. Importantly, our outlook for 2026 and beyond remains firmly supported by our proven strategies and disciplined execution of our growth plans. As we look beyond 2026, we expect the incremental costs impacting the year to remain on our base. Through our enhanced CCI programs and disciplined SG&A streamlining, we are well-positioned to manage these costs, maintain investment in growth, and deliver sustained profitability consistent with our long-term algorithm. As outlined on slide eight, our growth levers remain consistent: to drive growth through category management, brand marketing, innovation, proprietary technologies, and our differentiated customer engagement. These levers are supported and enhanced through data and analytics as we continue to accelerate our digital transformation. The strength of our base business continues across major markets and core categories. We have a number of initiatives in flight that will continue to support our performance for 2026 and beyond. We plan to address the details of our plans at CAGNY in February. To provide some perspective relative to 2025, we expect our consumer business to continue delivering volume growth, supported by higher pricing compared to last year. We expect distribution growth, accelerated innovation, and renovation across the portfolio, and increased brand marketing investments to drive higher purchase interest and velocity and support volume performance across our core categories. Importantly, we remain at the forefront of evolving consumer trends, delivering on the demand for flavor exploration, health and wellness, convenience, and value, while expanding our presence in high-growth channels where consumers are increasingly shopping. In flavor solutions, we anticipate stronger performance as we lap a challenging 2025 in terms of customer volumes. In flavors, our customer pipeline is very healthy across our customer segments. It has doubled relative to the prior year. We are leveraging expertise in regulatory, R&D, and product development to help customers navigate evolving regulations and meet growing health and wellness demands with innovation. And finally, in branded food service, we expect a gradual improvement as traffic trends improve. To wrap up, we remain confident in the long-term health of our business, our fundamentals, and in delivering on our plans to continue to drive industry-leading differentiated performance, supported by our broad and advantaged global portfolio anchored in high-growth categories that reinforce the strength and resilience of our business. Now before I turn it over to Marcos, I would like to comment on some recent changes to our board of directors. Maritza Montiel and Tony Vernon, who have each served as directors over the past decade, will be retiring from the board as of our annual shareholder meeting this April. I am grateful for their exceptional service and many contributions, which have significantly benefited McCormick & Company, Incorporated. We will miss them both. At the same time, I would like to welcome two new members to our board, Rick Dierker, President and CEO of Church and Dwight, and Gavin Hattersley, former President and CEO of Molson Coors. Both Rick and Gavin bring deep experience in the global consumer product industry, and I look forward to working with them and to the contributions they will bring to McCormick & Company, Incorporated. Now over to Marcos. Marcos Gabriel: Thank you, Brendan, and good morning, everyone. Let's start on slide 10 and review our top-line results for the quarter. Total organic sales grew 2% for the fourth quarter, driven by growth in both consumer and flavor solutions. Moving to our consumer segment on slide 11. Organic sales increased 3%, driven by price and volume. Our continued volume growth for the last seven quarters underscores our differentiation and ability to drive growth even in a consumer backdrop that remains challenging. Consumer organic sales in The Americas grew 3%, with 1% volume growth and 2% pricing. Pricing reflects the cost inflation-related pricing we implemented in September. Despite these pricing actions, volume growth was strong across core categories. The impact of elasticities overall was broadly in line with our expectations and is informing our plans for 2026. In EMEA, we grew consumer organic sales 3%, driven by a 1% increase in volume and a 2% contribution from pricing related to targeted actions taken as a result of increased commodity costs. We're pleased with the sustained volume growth for the eighth consecutive quarter in EMEA. Consumer organic sales in the Asia Pacific region increased by 2%. The increase was driven primarily by volume growth, as our growth in China was in line with our expectations. In addition, we delivered strong results outside of China, primarily in Australia. Turning to slide 12. Fourth quarter organic sales rose 1%, driven by a price contribution of 2%, partially offset by a volume decline of approximately 1%. In The Americas, flavor solutions organic sales increased 1%, reflecting a 3% price contribution partially offset by a 2% volume decline. Volumes for the quarter were impacted by the reset of some of our customers' inventory levels in Latin America, which we expect to be behind us in 2026. Underlying volume performance was flat, reflecting continuous softness in large CPG customers' volumes as well as softer foot traffic in branded food service, offset by growth with high-growth innovator and private label customers. In EMEA, organic sales decreased by 3%, including 2% from price and a 1% impact of lower volume, reflecting soft CPG customers' volumes. We're pleased to see that volumes remain stable in EMEA relative to recent trends. In the Asia Pacific region, flavor solutions organic sales increased 3%, with volume growth of 5% driven by QSR customer promotions and limited-time offers, partially offset by a price of 2%. Moving to slide 13. Adjusted gross profit margin declined 120 basis points in the fourth quarter due to higher commodity costs, tariffs, and costs to support increased capacity for future growth, partially offset by savings from our comprehensive continuous improvement program or CCI. Relative to our expectations, changes in tariff rules within the year contributed to higher-than-expected overall cost inflation in our broad basket of commodities. In addition, we recognized more tariffs in our cost of sales than previously planned. For the year, gross margin was down 60 basis points, reflecting the pressure from rising commodity costs and tariffs. As we look ahead, we expect to recover this margin compression in 2026. Selling, general, and administrative expenses or SG&A decreased 120 basis points relative to the fourth quarter of last year, driven by lower employee-related benefits expenses as well as CCI savings, including our SG&A streamlining initiatives, partially offset by increasing investments in brand marketing and technology. For the fiscal year, SG&A improved by 70 basis points compared to 2024. For the quarter, adjusted operating income increased by 3%, or 2% in constant currency. This increase was driven by improved SG&A, partially offset by gross margin and increased investments to drive growth. For the total company, we grew fiscal year 2025 adjusted operating income by 2%, or 3% in constant currency, and expanded adjusted operating margins by 10 basis points. Our performance in 2025 demonstrates our commitment to delivering healthy top-line growth and our agility in managing costs across the P&L to protect our profitability and to enable us to invest in growth. Our fourth quarter adjusted effective tax rate was 23.9%, compared to 25.4% in the prior year, as expected. For the full year, our adjusted tax rate was 21.5% compared to 20.5% in the prior year, driven by a greater level of favorable discrete tax items in the prior year. Our income from unconsolidated operations in the fourth quarter was flat, as expected. For the fiscal year, unconsolidated income decreased 3% as strong operational performance from McCormick de Mexico was more than offset by the unfavorable impact of foreign exchange rates. Turning to segment operational results on Slide 14. Adjusted operating income in the Consumer segment increased 1% for the fourth quarter, with minimal impact from currency. The increase was driven by sales growth and improved SG&A, partially offset by increased tariffs and commodity costs. For the year, adjusted operating income in the consumer segment declined by 1%, with minimal impact from currency. The decline in the consumer segment was driven by increased commodity costs and tariffs, which impacted the segment's gross margin, as well as continued growth investments. This was partially offset by improved SG&A driven by CCI and SG&A streamlining initiatives. In flavor solutions, adjusted operating income in the fourth quarter increased by 7%, or 6% in constant currency. For the fiscal year, flavor solutions operating income grew 9%, or 11% in constant currency, and operating margin expanded by 90 basis points, reflecting our continued focus on improving flavor solutions profitability. At the bottom line, as shown on slide 15, fourth quarter 2025 adjusted earnings per share was 86¢, an increase of 7% compared to the year-ago period, driven by increased adjusted operating income, improved interest expenses as we pay down debt, and a favorable tax rate. For the full year, adjusted earnings per share was $3, reflecting an increase of 2%, driven primarily by growth in adjusted operating income. On slide 16, we've summarized highlights for cash flow and balance sheet. We delivered another year of strong cash flow from operations, of $962 million. We returned $483 million of cash to shareholders through dividends and used $122 million for capital expenditures. Capital expenditures for the year were slightly below our plans due to the phasing of certain initiatives. Our investments include projects to increase capacity and capabilities to meet growing demand, advance our digital transformation, and optimize our cost structure. Our priority remains to have a balanced use of cash. This means funding investments to drive growth, returning a significant portion of cash to shareholders through dividends, and maintaining a strong balance sheet. We remain committed to a strong investment-grade rating. With another year of strong cash flow driven by profit and improved working capital initiatives, we successfully reduced our leverage ratio to below 2.7 times. Overall, results for 2025 reflected the strength of our business. On the top line, we delivered constant currency, volume-led, organic growth at the midpoint of our range, reflecting the continued focus on driving volumes and healthy sustainable sales momentum. While inflation and tariffs impacted our gross margin for the year, we effectively offset this impact through CCI and SG&A streamlining initiatives, all while continuing to invest for growth. As a result, adjusted operating income and earnings per share finished at the low end of our outlook, a solid outcome in light of the macro headwinds we faced. Importantly, we drove strong cash flow from operations for the year, paid down debt, and delevered, giving us ample flexibility to continue to invest in the business. Before turning to our outlook, let me provide an update on our tariff exposure mitigation plans on Slide 17. Since our last earnings call, our tariff exposure has been reduced by approximately 50%. Our total gross annualized tariff exposure is now approximately $70 million compared to $140 million we provided previously. As a result, we expect the incremental year-over-year cost impact of tariffs to be approximately $50 million in 2026. We plan to mitigate the vast majority of this impact with productivity savings across the P&L, alternative sourcing, supply chain initiatives, and, of course, leverage our revenue management capabilities, including surgical pricing. The reduction in tax rates is not expected to benefit the bottom line as some supply chain mitigation efforts have been adjusted in line with the new rates, and we are intentionally choosing to continue to invest in the business. Lastly, as you know, this is an evolving situation, and we'll continue to monitor how policies impact tariff rates and, therefore, our costs. Now let's turn to our 2026 financial outlook on slide 18. Our outlook reflects our continuing investments in key categories to sustain volumes and drive long-term profitable growth while appreciating the uncertainty of the consumer and macro environment, including global trade policies. In addition, this outlook reflects the contributions of our recent M&A transaction, the acquisition of a controlling interest in McCormick de Mexico. Turning to the details. First, current rates are expected to have a one-point positive impact on net sales, adjusted operating income, and adjusted earnings per share. At the top line, we expect organic net sales growth to range between 1-3%. Growth will be supported by sustained volumes growth, a higher contribution from pricing across both segments compared to the prior year. In our consumer segment, we anticipate some volume impact from price elasticity early in the year, followed by solid volume growth as the year progresses. In our flavor solutions segment, we expect the volumes to recover and deliver full-year volume growth for the segment. We expect the acquisition of McCormick de Mexico to contribute 11-13% for the top line, leading to total constant currency sales of 12-16%. Along with this top-line performance, we anticipate full-year gross margin expansion reflecting recovery from the compression experienced in 2025. This expansion reflects favorable impacts from product mix, cost savings from our CCI program, and margin accretion from McCormick de Mexico, partially offset by the anticipated impact of a mid-single-digit increase in cost inflation. In addition to our gross margin expansion, we expect SG&A benefits from cost savings to be offset by investments to drive volume growth, including brand marketing and digital investments, most notably ERP implementation, as well as a build-back in incentive compensation. In terms of our ERP implementation, we're still taking a phased rollout approach. We've made significant progress, and our deployments to date have been successful. To further minimize execution risk, we decided to consolidate the number of waves within the upcoming deployment phase, which moves forward our timeline. Overall, program costs remain unchanged. However, this refined execution plan shifts more expense into 2026 than originally planned. For the year, we expect our brand marketing spend to increase in the low to mid-teens as we continue to invest behind our brands and reflect brand marketing investments of McCormick de Mexico. As a result, our adjusted operating income is expected to grow 15-19% in constant currency. In terms of tax, we expect the adjusted effective tax rate to be approximately 24% for 2026 compared to 22% in 2025, where we benefited from a number of discrete tax items that are not expected to repeat in 2026, in addition to a higher tax rate in Mexico. Notably, we now expect an expense from unconsolidated operations in 2026, which reflects the elimination of the minority interest or 25% of McCormick de Mexico net income attributable to Grupo Herdes from our consolidated earnings. In addition, we expect net interest expense to increase compared to 2025, primarily due to the funding of the McCormick de Mexico transaction. Our 2026 adjusted earnings per share is projected to range from $3.05 to $3.13 on a reported dollar basis, reflecting benefits from operating income offset by unconsolidated expense, the impact of the increased tax rates relative to the prior year, and higher interest expense. Overall, we believe our outlook is balanced and gives us flexibility to continue to invest in the business while expanding margins. Moving to Slide 19, this slide summarizes the cost headwinds for 2026 and how we plan to offset them. Our guidance reflects a strong underlying base business performance and growth from acquisitions, with pressures from cost inflation, tariffs, and the review of incentive compensation that are expected to be offset through tariff mitigation plans, CCI initiatives, and SG&A streamlining. Our digital investments, most notably the refined ERP implementation plan, along with a higher tax rate, are impacting underlying growth but will become part of our base as we look beyond 2026. Importantly, we remain on track to sustain our volume momentum and drive strong top-line growth. Despite higher costs, we're investing strategically, executing with discipline, and driving efficiencies, enabling us to deliver strong operating income growth and sustain our differentiation. We are confident in our ability to deliver the 2026 outlook and in achieving our long-term objectives. Brendan M. Foley: Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on Slide 20. The long-term trends that fuel our attractive categories—consumer interest in healthy, flavorful cooking, flavor exploration, and trusted brands—are enduring trends. They continue to reinforce the relevance and resilience of our portfolio. In 2025, we drove differentiated volume growth and share gains across our core categories. Our results demonstrate that we are investing in the areas that drive the most value for consumers, customers, and shareholders. As we enter 2026, McCormick & Company, Incorporated is operating from a position of strength with a solid foundation and disciplined execution. Despite ongoing macro and cost headwinds, we remain positioned for sustainable profitable growth. Our 2026 outlook reflects continued top-line momentum, margin recovery, and strong operating profit growth, anchored by innovation, efficiency, and our acquisition of McCormick de Mexico. While global trade dynamics continue to drive cost inflation, we are leveraging our competitive advantages, productivity initiatives, and cost management discipline to mitigate these pressures, sustain volume growth, and fund our investments for the future. Looking beyond 2026, these incremental costs are expected to remain in our base. However, our enhanced CCI plans and SG&A streamlining discipline position us to manage these pressures effectively while sustaining investment and delivering growth in line with our long-term algorithm. Ultimately, we remain a global leader in flavor, driving growth that is both sustainable and differentiated. Finally, I want to recognize all McCormick & Company, Incorporated employees for their dedication and contributions. Your commitment and passion continue to drive our success. I'm confident that together, we will continue to deliver differentiated results and long-term shareholder value. Now for your questions. Marcos Gabriel: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press 1 from your telephone keypad. Brendan M. Foley: And a confirmation tone will indicate your line is in the question queue. Marcos Gabriel: You may press 2 if you'd like to remove your question from the queue. Faten Freiha: For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Operator: Thank you. And our first question is from the line of Andrew Lazar with Barclays. Please proceed with your questions. Andrew Lazar: Great. Thanks very much. Good morning, Brendan and Marcos. Marcos Gabriel: Good morning. Brendan M. Foley: Maybe to start, your '26 outlook is predicated on continued volume momentum. I was hoping you could talk a bit more about the key drivers underpinning your view. And in particular, maybe you can speak to expectations in consumer Americas just given recent scanner trends have decelerated a bit. I'm assuming on elasticity but perhaps you can clarify. Brendan M. Foley: Sure. Well, a couple of thoughts just I think in terms of top line. I think our guide for '26 reflects obviously both segments. Factors in obviously the uncertainty environment. But when we look at kind of the range that we're providing, I think everyone, consumer drives sort of the mid to high end of that range, and then, you know, flavor solutions probably the low to the mid end of that range. You know, overall, we expect pricing to contribute more to our growth rate than it did in 2025, we also expect to maintain volume growth for the year with, you know, volume growth in both segments. I might just speak maybe to each segment just to give a little bit more color on that. On consumer, we expect to continue delivering volume growth. It will have higher pricing, I think, compared to, you know, let's say, the last year. You know, we have driven volume over the last one and a half years, and it has been driven by a lot of our, you know, actions and plans and a number of things that obviously we've talked about in the past. And as I look to '26, a lot of those levers really remain in place. We'll continue to increase our A&P with really strong messaging, you know, that resonates. We'll continue to benefit from the innovation that we launched in '25. And those are things like the US Cholula expansion or McCormick, you know, innovation like finishing salts or the type of innovation that we've launched in EMEA behind air fryer seasonings. I think one of the positive things now, it got launched in, sort of towards the tail end of '25 and really started to hit the shelf. But this US gourmet relaunch, you know, McCormick gourmet, you know, we really think is driving a lot of positive velocities right now. And we like what we're seeing on shelf, and so that we'll get a full three quarters of the year on that innovation. And the whole price gap management plan also still remains in our base as it did, you know, in '25. Incremental to this, we're expanding distribution across our core categories. We'll continue to launch new innovation. And we'll also continue to renovate parts of the portfolio. And, you know, one of the ones I'm also excited about is we're gonna be, you know, relaunching our entire blends and seasonings line, and that's really quite exciting. So we like that that's another renovation that's gonna be coming out in '26. And then we're just gonna continue to sort of focus on these high-growth channels that we're seeing a lot of success in. And so, those are the things that are really driving, I think, and underpin and underwrite the consumer growth. In flavor solutions, you know, we expect to do better than we did in '25. We know '25 was impacted by large CPG customer volumes and being soft as well as in branded food service, but we do expect improvement particularly as we continue to grow with those high-growth innovators and private label customers. You know, we're acknowledging that we are lapping a difficult '25, so expect to do better. But we, you know, it's difficult to predict the level and pace of that improvement. So I still expect some lumpiness in this business as we've experienced in the past. But the things that give me, I think, more optimism, if you will, is just I'm encouraged by the scope of our innovation pipeline in that part of our business. It's really healthy across a lot of our customer segments. The reformulation projects are increasing, and we talked about that, you know, before, particularly with large CPG customers. And we're partnering with a lot of emerging brands and private label players, you know, to sort of really work on flavor there. And it's in exciting categories like protein-based beverages or fiber-based snacks or, you know, these are the types of health wellness trends that we're seeing, you know, getting a lot of activity. That gives us some reason for optimism. And our win rate on health and wellness briefs, you know, remains strong. So, you know, we have, I think, a realistically, you know, positive outlook. But we're also, you know, remembering what happened in '25 and not counting on all of that to, you know, sort of necessarily rebound back really strongly, but we do think it's gonna be positive improvement over the year. And it will be volume growth in both segments. Andrew Lazar: That's really helpful. And then just a very quick one for Marcos. Just anything to keep in mind on sort of the cadence of EPS growth as we think through the four quarters ahead? Just things discrete to keep in mind, whether it's year-over-year issues or things of that nature. Thank you. Marcos Gabriel: Yeah. So, in terms of the EPS, the test should follow the operating profit over the course. So, we'll see operating profit fluctuating over the next few quarters. OP growth will be in Q1 will not reflect the full quarter of McCormick de Mexico. So we'll be slightly below guidance. So if you think about it that way, earnings per share will follow that fluctuations of OP, and we should see a Q1 that will be in line. I would say, would meet the high end of our guidance range, but then you will build up as we progress over the next few quarters. Andrew Lazar: Thanks very much. Operator: Next question is from the line of Peter Galbo with Bank of America. Please proceed with your question. Peter Galbo: Hey. Good morning, guys. Thank you for taking the question. Marcos, I just wanted to ask a bit on the gross margin in particular just given some of the nuance of what happened in the quarter. I think it came in obviously below even your expectations. You've talked a bit about, you know, the core inflation components maybe being stickier even though we've had some tariff relief and, you know, the outlook for '26 kind of implies gross margin expansion. I think you said, you know, recovery. I didn't know if that meant full recovery of '25 into '26. But maybe you can put some more parameters just around how you all are thinking about the gross margin expansion for '26 relative to '25, again, in light of kind of it coming in light of your expectations in the fourth quarter? Marcos Gabriel: Yeah. Sure. Let me just explain the 2025 Q4 results, and then I'll go into 2026. So at a high level, if you would take a step back, the external environment continues to create volatility in terms of our commodity costs. And, you know, we continue to focus on the elements within our control. We deliver CCI, enhanced CCI even to offset the additional tariffs impact that we saw in the year. We executed on pricing in line with our plan, and we continue to, you know, grow volume in the consumer business in Q4 despite all the pricing actions that we've taken. More specifically to the drivers of the gross margin, you know, there's two main drivers. One is the indirect consequences of the tariff-related market pressures that we've been talking about over the last couple of quarters. And it actually accelerated in Q4 relative to Q3, which means that, you know, it was more than we expected, meaning that there was some more inflation coming through our P&L through the balance of the year. And then the second point is the direct impact of tariffs, which is about recognizing more of those tariffs inventory in our P&L than originally planned. So we had that had tariffs on it. You know, it's a bit of a product mix in Q4, and those got sold through it, and we saw the impact of that in that impact of the additional cost hitting our P&L in Q4. So the combination of the two elements is the broader commodity cost is impacting our gross margin plus the impact of tariffs were what changed versus our expectations as we went through the year. But also, I think it's important to mention that in Q4, Peter, in this time of volatility, we are focusing on managing the P&L holistically, not only the gross margin line. And that's where we drove a lot of SG&A savings. We had done a lot of, made a lot of progress in terms of SG&A over the last, you know, few quarters. Q4 was also a quarter in which we focused on streamlining SG&A while increasing investments to drive growth and remarketing and digital. So managing the P&L holistically and getting to the OP number that was, you know, in line with our expectations, meaning SG&A offsetting the gross margin piece. But obviously, you know, the gross margin is something that we want to recover. Our expectations going into 2026 is that we are expecting to recover the margin compression that we saw of 60 basis points in 2025, and we provided a qualitative guidance in terms of gross margin. As it is a bit difficult to be precise at this time, given the uncertainty that we are facing in the market and the microeconomics, it is a little bit difficult to be precise in terms of gross margins. So we provided that view. But at the end of the day, the focus will be on recovering the margin compression that we saw in 2025. Peter Galbo: Great. Okay. Thank you for that. And Brendan, maybe if I could ask just more directly on Slide 19, where you kind of have the bridge on base business to the guidance. The ERP, I know, has kind of been discussed in the past now with the and maybe you put a more concrete number around it. But I want to make sure I understood you clearly that you're accelerating the spend or some of the projects into '26. But then those costs are actually expected to remain in the base. So we don't really expect maybe not even any relief on that in '27. Maybe you can just clarify specifically around the ERP and how we should think about the phasing of projects in '26 and then how to think about it for '27 and beyond. Thanks very much. Brendan M. Foley: Peter, first, let me provide some just some broad perspective on sort of what we were communicating, I think, throughout the script, but also on Slide 19, and then I'll ask Marcos to speak more specifically to how to think about ERP beyond '26. You know, overall, broadly, as we kind of thought about the year for 2026, you know, our top priority was to really think about how we maintain sales momentum. That being a top priority, you know, in terms of having a very healthy top line. And we're balancing volume and price. And so and still, you know, achieving, you know, sort of healthy sales growth. And still invest in the business also at the same time. But in 2025 and 2026, you know, we certainly saw a lot more cost come into our P&L, whether it be through inflation or tariffs. Or in this case, we go to '26, you know, building back incentive compensation. And we're offsetting that with, you know, targeted pricing, productivity initiatives, cost savings initiatives, but we can't fully offset everything. It's so, you know, those are the elements that you see in that bridge, which were which are. Tax and ERP. But I would say that the fundamentals and the health of our business are doing really well. And we just need to work through this dynamic environment in terms of cost. Now in ERP, you know, we decided that as this program is going well and we are seeing success in a number of our go-lives already to date. As we assess sort of the next one, it just felt prudent for us to minimize the number of waves that we would have to go through. Marcos, do you want to add on top of that? Marcos Gabriel: Yeah. So we have been very successful in deploying our ERP implementation over the last couple of years. It's a lot of work, as you can imagine. We've taken a very integrated approach in terms of how we deploy the ERP. It's not only the ERP implementation team, but it is them working together with the business as well as the technology teams with strong support from our external partners. So that is going very well. You know, this, the programs, you learn, you adapt, and you evolve. And one of the things that we were considering over the last three to four months is really about, you know, the number of waves within the next deployment phase that we have. Whether we would, you know, actually compress the waves to minimize risks. And that happens because as you shorten the periods between dual operations between legacy systems and new systems, that minimizes data reconciliation interface risks. So that is the key element of compressing the phases. Which is, you know, you'll eliminate that interfaces between the two systems for a longer period of time. So by doing that, we believe we are further minimizing risk. But as we do that, we bring forward the timeline of development and preparedness into 2026. As this last go-live will take effect in early 2027. So as you do that, you shift costs into 2026. As, which is different than we had originally planned. Overall, costs for the program remain the same. But it's just a shifting timing of expenses between '27 and '26. Due to this change in the approach that we're taking. In 2027, you should see that cost moderating, and then we should see further moderation down into 2028. Peter Galbo: Great. Thank you very much. Operator: Our next question is from the line of Tom Palmer with JPMorgan. Please proceed with your questions. Tom Palmer: I wanted to follow-up on Pete's question and clarify on the unexpected inflation you noted in the fourth quarter, really with implications as we think about '26. I think you typically carry more than a quarter's worth of inventory on your balance sheet, and you did give the guidance a month into the quarter. So I'm trying to think through to what extent this added inflationary pressure that maybe had some impact in 4Q might be even more of a consideration as we start out 2026. And kind of in that context, any help on thinking through that mid-single-digit inflation and the cadence of it in the coming year? Thanks. Marcos Gabriel: So we exited the year at mid-single-digit inflation. If you think about Q4 versus the prior years, it was the highest quarter of inflation that we saw coming into our P&L. And that is a combination of tariffs, but also commodity costs more broadly. As you know, we have a broad basket of commodities and source from 80 countries, 17,000 ingredients. We have a broad basket, and we saw inflation in the core commodities, but also tariffs coming in. As well as packaging. We saw packaging as well up in Q4. So we're exiting at a high cost base. As you go into 2026, you know, despite the moderation of tariffs, we'll still see a mid-single-digit inflation hitting the P&L and our expectations into 2026. It could improve, but if it does improve, it will be later in the year. Right now, we're estimating that it's gonna continue to be at the same run rate of Q4 into 2026. Tom Palmer: Okay. Thank you for that. And then on the consumer segment, you noted the expectation for volume impact from price elasticity. But recovery subsequently. What drives the price elasticity in the first quarter? And is there anything maybe related to shipment timing when we think about 4Q that relates back to that? Thank you. Brendan M. Foley: Sure. As we think about the consumer business and as we go into Q1 and then we think about the rest of the year, we do expect an impact from elasticities in the first quarter. And I think one of the things that that assumption is really that we have some pricing that we, you know, put in place. Targeted and surgical. In 2025, but we also have additional pricing to come on, you know, beginning in February, which is a reflection of this inflation that we've been referring to as well as the, to some degree, you know, partly offsetting tariffs. And so we expect some of that elasticity impact to really hit, you know, more in the Q1 overall. I wouldn't be surprised if we see volumes either flat to slightly negative in Q1 as a result of that. However, we do expect to sort of then improve upon that as we go throughout the rest of the year, and that there's a transition period we're going through right now in Q1 where we're seeing more pricing come into the shelf just as you try to offset these costs. But then we also have other programs in order to, you know, sort of recognize the reduction in tariffs and everything else that starts to kind of, you know, find its way to, I think, our consumption profile going through the rest of the year. Starting in Q2. Tom Palmer: Okay. Thank you for that. Marcos Gabriel: Sure. Operator: Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your question. Alexia Howard: Thank you. Good morning, everybody. Marcos Gabriel: Morning. Brendan M. Foley: Morning. Alexia Howard: Can we just ask about the sort of you talked about the confidence that you have in the long-term objectives. On paper, you have a number of tailwinds. You're very on trend with consumer dynamics, interest in health and wellness and cooking from scratch, etcetera. The tariffs seem to be easing. Reformulation seems to be picking up. And yet, this seems I think we're now on year five where the earnings expectations are below your long-term algorithm. So I'm just trying to sort of square that away in thinking about what you said at the Investor Day in September, I think, in 2024 about the outlook for 2028. When might we expect to get back on algorithm, and are those 2028 goals still realistic from here? And then I have a follow-up. Brendan M. Foley: Sure. Well, Alexia, let me address the first one then. Thank you for the question. If you reflect back on the targets that we shared at Investor Day, that's reflected obviously, as we called out then, you know, our organic growth ambitions. And, you know, many of those targets were established before the onset of much of this uncertainty that we've been seeing from a global trade standpoint over the last, let's say, year. And also, it was established before the acquisition of McCormick de Mexico. Given everything that's kind of, you know, continued to sort of develop since Investor Day, you know, we are aligning our commentary to the long-term objectives, including organic growth and also accretive M&A. And I think from a sales perspective, we really feel pretty good about being able to hit those targets by 2028. From a top-line perspective. But we're also working very hard right now to offset the impact of what has been substantial incremental costs coming into our P&L over the course of 2025 and also as we look ahead to '26. And so a lot of our focus right now is on additional efforts to address these as quickly as we can. And our plan at CAGNY is to provide more color on, you know, how we look at the entire set of targets that we laid out. To make sure that we have, you know, illustrated sort of any adjustments in our pathway with regard to those targets, you know, set out at Investor Day. I just come back to from a top-line perspective, we feel really quite good and quite confident of our ability to hit those. But we gotta work through right now on a short-term basis, just really the amount of incremental cost activity that we're seeing in our P&L. We have to, you know, we'll provide you more perspective on how we look at that at CAGNY. Alexia Howard: Great. Thank you. Can I and a quick follow-up? On the reformulation activity, you've talked, I think, for much of the last year about how that's picking up particularly with private label and with some of your largest CPG clients. You still in investment phase on that because, obviously, you have to go through the process of actually figuring out how the innovation will the reformulation will work before you really get that revenue stream in the door once the product's launched. Is that expected to sort of pick up through the course of 2026? Brendan M. Foley: Yes. If I think I understand the context of your question, Alexia, and let me know if I didn't get it right, it's about, you know, from a development perspective, you know, how are we looking at reformulation activity in '26? But also, I think maybe your question also had to do with if you think about the commercialization of that development, you know, how might we think about that in '26? So if I look at sort of both ends of that question, from a development perspective, I do expect the development activity to continue to pick up. We've definitely seen that as we went through the course, especially the back half of '25. And we expect to see more of that come through in '26. And it is a reasonably, you know, sort of as we talked about before, a big tick up in our activity. I expect that to continue to, you know, increase overall. From a commercialization perspective, sort of, i.e., when it hits the market, I think that's a bit more delayed. I think, you know, late '26 is probably an early indicator when we start to expect to see that, but definitely more in '27 would be my expectation. Particularly as you think about maybe, you know, sort of large CPG customer type activity. At the same time, there's a lot of emerging brand activity going on, and they tend to move to shelf a little bit faster. Alexia Howard: Great. Thank you very much. I'll pass it on. Thank you. Operator: Next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your questions. Robert Moskow: Hi. Thanks. Brendan, I think Andrew Lazar asked about the Nielsen tracking data for spice and seasonings in The US. And, you know, some weakening sales growth share, you know, share shares are down. Both in our data, both in terms of volume and value. In the last twelve weeks. And I was hoping you could be a little more specific as to whether that reflects what you're seeing or not. And whether there's any implications as to what the sell-through was from your holiday shipments in the fourth quarter? Thanks. Brendan M. Foley: Sure. Well, there's a number of different variables in your question, so I'm going to try and make sure I address them all, Rob. First of all, I'm going to maybe hit the last point first, which is if I think about overall our inventory in the channel, meaning the comparison between our sales and our consumption in the fourth quarter, it is exactly really where we thought we think it should be, and we don't see any anomalies at this point. That would make us think that we have to, you know, speak to any differences that are unusual as we think about, you know, sort of the seasonality of our business. So, that component feels very much in line. Overall. When I think about just overall performance of the fourth quarter, you know, we saw a really very good holiday performance, especially when you look at our business in The Americas. You know, specifically, you know, we were certainly, you know, delivered very much on what we expect would happen both from a price and a volume standpoint. From a sales perspective. But as we think about consumption, we believe that we had, you know, reasonably good, you know, consumption performance. You know, I will say that there was a period there, so many things happen and change obviously in the news, but there was a period there where we saw broadly in the market a bit of a slowdown for probably a couple of weeks related to, you know, sort of the news regarding, you know, SNAP, you know, funding, etcetera. And there was a little bit of a contraction period that we saw there broadly. In grocery, in terms of total results. And so a little bit of a dip, but then things started to come back. As we got closer to the holiday season and we saw consumers really kind of purchase more closely to the holiday, which is reflective of sort of that budget, you know, sort of control behavior or that value-seeking behavior. And so we saw, you know, certainly that type of, you know, profile, if you will, in the holiday consumption, etcetera. As we go into Q1, you know, we still have to wait and see what that post-holiday consumption looks like in terms of do consumers kind of maintain that level, or do they, you know, moderate a little bit after, broadly, what was a successful holiday season. But, also, you know, keep in mind that we expect some price elasticity impact in there too. As we talked about, and we certainly see that coming through a little bit. The price elasticities are operating as expected. So that is nothing that has, at this point in time, let you know, leave us to think that we didn't really have a good handle on what that might be. As we go through Q1, as I mentioned on a previous question, we expect maybe a little bit more variability in terms of price elasticity impact because there is a little bit more pricing coming to shelf as we offset these costs that we're talking about. We are taking a very targeted surgical approach, you know, in our pricing. I mentioned a lot of things there, but I think I'm trying to get at the spirit of your question. Let me know if I did not. Robert Moskow: I think that's fine. Alright. Thank you, Brendan. Operator: The next question is from the line of Max Comfort with BNP Paribas. Please proceed with your questions. Max Comfort: Thanks for the question. First, just a housekeeping one on tariffs. So your gross annualized tariff exposure has fallen from $140 million as of last quarter to $70 million today. You also said you expect to book $50 million of incremental tariffs in FY '26. So my simple reading would suggest that this means you expect to book $70 million bricks. Now this would imply you only booked $20 million of gross tariffs in '25. However, I know last quarter, you said you expected to book $70 million of gross tariffs in '25. And it sounds like if anything, it came in higher than that number. So I was hoping you could just give us a bit of clarity. Tell us what was the final gross and net tariff number that you booked in FY '25? Marcos Gabriel: Yeah. Sure, Max. I appreciate this can create a bit of confusion, giving you so many numbers from last year into 2026. So, try to clarify that. So in 2025 first, starting with our last call, was a gross impact of $70 million. And we mitigated $50 million out of the 70 last year. So a net impact of $20 million in 2025. Going into 2026, the annualized number now is $70 million, coincidentally the same. As we have already absorbed $20 million in the base, the incremental growth year-on-year impact is $50 million. So that's our call, the $50 million. And if you look on slide 19, that is a 5% of incremental tariff impact that we're seeing now in '26 versus '25, and we plan to offset most of it as we go into 2026 with the same strategy that we had before, supply chain savings, procurement initiatives, as well as some surgical pricing that will take place next year. Max Comfort: Okay. But I also looked like on that slide that you're referencing that you're offsetting all the tariffs. So if the net impact was $20 million in '25, it looks like the net impact is going to zero in year-over-year terms in '26. Is that fair? Marcos Gabriel: Yeah. That's fair. Max Comfort: Okay. And then just actually one other housekeeping one. Just with regard to your response to Andrew on cadence for EPS throughout the year, it sounded like you were saying EPS cadence will follow operating profit cadence. And I thought you said that operating profit starts off slightly below the guidance in 1Q because you don't have a full quarter of Mexico, which makes sense. Then it also sounded like you said that 1Q EPS is at the mid to high end of the guidance range. So if that's true, why is that? And then I think you said it even builds further from there, which might mean you'd be, you know, towards the high end of guidance for the full year. So I'm assuming I misheard you that 1Q EPS is at the mid to high end of guidance, and maybe it's the low to mid end, but just hoping for more clarity there. Marcos Gabriel: So, yeah. So, it's a little bit of a between OP and EPS. So OP will be soft because of the McCormick de Mexico not being included fully in the base. EPS will be at the mid to high in Q1, and then it will normalize towards the range throughout the year as we said. So it's a Q1, a bit of a different equation between OP and EPS. But then it gets more aligned to the OP flow between Q2 and Q4. Max Comfort: Okay. Thanks very much. Marcos Gabriel: Thank you. Operator: Our final question is from the line of Scott Marks with Jefferies. Please proceed with your questions. Scott Marks: Hey. Good morning, all. Thanks so much for taking our questions. Brendan M. Foley: Sure. Scott Marks: Wanted to just ask a little bit just if we kind of take a step back and look around the world. I know you've made comments about some different regions today. Just wondering if you can share maybe a little bit more detail in terms of how you're thinking about different parts of the world, what is encouraging to you right now? Where do you see some challenges maybe? And just, you know, any thoughts you have on kind of growth profile in '26 in some of the different regions. Thanks. Brendan M. Foley: Certainly. And, you know, what I might do is not speak to The Americas first because it feels like we sort of tended to focus a little bit more on that and some of the questions that we got. I'll start with Asia Pacific. In fact, Marcos and I were just in China two weeks ago. So we've been in the region, and we'll go back out to the region here in a couple of weeks. And, you know, my outlook on Asia overall is I'll focus a little bit more on China and then the rest of that region. We, you know, when we look at '25, got that gradual growth and that we were, you know, out projecting that we would get. And so we feel pretty good about sort of performance, broadly in China. And we still see continued gradual improvement in that marketplace as we look to 2026. The parts of our business that are performing well there are broadly, you know, we feel like we're at continue, throughout the year. See strength in our retail grocery business there. Certainly good trends driven by increased distribution and stronger marketing across that business. We also see strength in the business that we have in the middle of China, which really focuses a lot on more, you know, Chinese cuisine in terms of food service, and catering and a little bit on retail shelves, and that business has been, you know, strengthening. As we, you know, take a look at going from '24 to '25 and then '25 to '26. Our QSR business there is also doing really well, and we see just a lot of strong consumption happening in that channel. The only part of that business that's been soft is really our food service business, which tends to serve the higher-end restaurant more western cuisine, that's been soft just due to a lot of, you know, different, you know, conditions in that marketplace. But overall, we expect China to be doing, you know, reasonably well in terms of slight gradual growth again in 2026. And in the rest of that region, we continue to see, you know, pretty good growth in Australia and in Southeast Asia. And we're still gonna continue to build our plan for India as we've talked about before. I look to EMEA, we continue to see, like The US and The Americas, continue to strengthen our consumer business. It will be volume growth, with some pricing, and that's consistent with what we saw in 2025. And obviously led by continued sort of, you know, all the things that we talk about. Stronger brand marketing, increased distribution, and also, you know, even in those high-growth channels like e-commerce, we see a lot of growth there right now overall in the EMEA consumer business. When I look at flavor solutions there, I do feel like we're going to have a stronger year than we did in 2025 because we just feel like the stabilization of that QSR marketplace, you know, starts to really, you know, show a little bit more improvement. I'm not counting on a lot, but I am counting on it being better than 2025. And that gives us some optimism in terms of that part of our, you know, our segment in EMEA. And then coming back to The Americas, just feel again, you know, a reasonable amount of optimism as you see in our guidance for sales. Both in the consumer business and also flavor solutions for the reasons that I mentioned on an earlier question. I just don't want to repeat all that, obviously. Because it would be redundant. But we feel some really strength there. And, you know, lastly, I'll wrap it up with Latin America and, you know, obviously, the McCormick de Mexico business, and we anticipate having a good year there too. Largely being driven by, obviously, that being the consumer segment. Scott Marks: Got it. Appreciate it. We'll pass it on. Thanks very much. Marcos Gabriel: Thank you. Operator: I have no further questions at this time. I'd like to turn the floor back over to management for closing comments. Faten Freiha: Thank you, and thanks, everyone, for joining today's call. If you have any further questions on today's information, please feel free to contact me. And this concludes this morning's conference call. Thank you.
Regina: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Old Republic International Corporation Fourth Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Joe Calabrese with MWW. Please go ahead. Joe Calabrese: Thank you, Regina. Good afternoon, everyone. And thank you for joining us for the Old Republic International Corporation conference call to discuss fourth quarter 2025 results. This morning, we distributed a copy of the press release and posted a separate financial supplement. Both of the documents are available on Old Republic's website at www.oldrepublic.com. Please be advised that this call may involve forward-looking statements as discussed in the press release dated January 22, 2026. Assumptions, uncertainties, and risks exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on the assumptions, uncertainties, and risks, please refer to the forward-looking statements discussion in the press release and the company's other recent SEC filings. We may also reference net income excluding net investment gains, or net operating income, a non-GAAP financial measure, in our remarks or in our responses to questions. GAAP reconciliations are included in the press release. Presenting on today's conference call will be Craig Richard Smiddy, President and CEO; Francis Joseph Sodaro, Chief Financial Officer; and Carolyn Jean Monroe, President and CEO of Baldwin Public National Title Insurance Group. Management will make some opening remarks, and then we'll open the line for your questions. At this time, I'd like to turn the call over to Craig. Please go ahead, sir. Craig Richard Smiddy: Alright, Joe. Thank you very much. Well, good afternoon, everyone, and welcome again to Old Republic International Corporation's fourth quarter and full year 2025 earnings. In the fourth quarter, we produced $236 million of consolidated pretax operating income compared to $285 million, and our consolidated combined ratio was 96% compared to 92.7%. For the full year, we produced $1 billion of consolidated pretax operating income, and our consolidated combined ratio was 94.7%. Some other information on 2025: our operating return on beginning equity was 14.1%, and growth in book value per share, including dividends, was 22%. We think this reflects our strong operating earnings, our higher investment valuations, and our sound capital management strategy. In the fourth quarter, specialty insurance grew net premiums earned by 8.3% over 2024, and for the full year, grew net premiums earned by 10.9%, and we eclipsed the $5 billion mark for the first time. In the fourth quarter, specialty produced $178 million of pretax operating income compared to $228 million, and specialty's combined ratio was 97.3% compared to 91.8%. For the full year, specialty produced $900 million of pretax operating income, another all-time high for us, and specialty's combined ratio was 93.2%. In the fourth quarter, title group premium and fees grew by 12.4% over 2024, and for the full year, title grew premium and fees by 9.1%. In the fourth quarter, title also produced $65 million of pretax operating income compared to $55.4 million, and title's combined ratio was 94% compared to 94.4%. For the full year, title produced $140 million of pretax operating income, and title's combined ratio was 97.6%. Our conservative reserving practices were slow to release prior year reserves, but we react very quickly to increased reserves. We continue to produce favorable prior year loss reserve development in both specialty insurance and title insurance, and Frank will give you a little more color around that topic. With that, Frank, I'll go ahead and turn the discussion over to you, and then please turn things back to me. I'll discuss specialty insurance, and then I'll turn things over to Carolyn, who'll discuss title, and then we'll wrap up and open it up for Q&A. So Frank? Francis Joseph Sodaro: Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income of $185 million for the quarter compared to $227 million last year. On a per-share basis, comparable quarter-over-quarter results were 74¢ compared to 90¢. Starting with investments, net investment income increased 7.9% in the quarter primarily as a result of higher yields on the bond portfolio and, to a lesser degree, a larger investment base. Our average reinvestment rate on corporate bonds acquired during the quarter was 4.6% compared to the average yield rolling off of about 4.2%. The total bond portfolio book yield stands at 4.75% compared to 4.5% at the end of last year. Now, given the portfolio actions taken over the last few years that allowed us to accelerate improvement in the bond portfolio yield, our return of capital initiatives, and the current interest rate environment, we expect net investment income growth to slow in 2026. Turning now to loss reserves, both specialty insurance and title insurance recognized favorable development in the quarter, leading to a 2.4 percentage point benefit in the consolidated loss ratio compared to 2.9 points last year. Within specialty insurance, workers' comp prior year reserve development was slightly unfavorable in the quarter, as strong favorable development throughout the book was offset by a prior year reserve increase related to a credit loss on a single large deductible program. Commercial auto, general liability, and property all had solid favorable development in the quarter. Now for the full year, the specialty insurance loss ratio had a benefit of 2.9 points from favorable development, and there were no large pockets of unfavorable development to report. We end the quarter with book value per share of $24.21, which inclusive of the regular and special dividends equated to an increase of 22% for the full year, resulting primarily from our strong operating earnings and higher investment valuations. In the quarter, we declared nearly $700 million in dividends and repurchased $56 million worth of our shares. This brings total capital return this year to just over $1 billion, and it leaves us about $850 million remaining in our current repurchase program. I'll now turn the call back over to Craig for a discussion of specialty insurance. Craig Richard Smiddy: Okay, Frank. Thanks for that summary. Specialty insurance net premiums written were up 6.1% in the quarter, with strong rate increases on commercial auto and general liability. We also had solid renewal retention ratios, new business writings, and increasing premium in our new specialty operating companies. As a matter of fact, these new companies contributed over $300 million in net premium written in 2025 and collectively delivered positive operating income. As I mentioned in my opening remarks, in the quarter, specialty insurance pretax operating income was $178 million, and the full year was $900 million. While the fourth quarter combined ratio was 97.3%, and the full year was 93.2%. The loss ratio for the quarter was 67.6%, and that included 2.2 percentage points of favorable prior year loss reserve development. And that compares to 64.1% in the fourth quarter last year, which included 2.4 points of favorable development. The full year loss ratio was 63.9%, including 2.9 points of favorable development. Moving to the expense ratio, for the quarter was 29.7% compared to 27.7% in the fourth quarter last year. The full year expense ratio was 29.3% in line with expectations. And our continued investment into specialty operating companies that we have recently launched, as well as in the technology modernization, data and analytics, and AI, does place some short-term strain on the expense ratio, but we're confident these investments will provide significant long-term upside potential. Turning to commercial auto, net premiums written grew 6.4% in the quarter while the loss ratio came in at 80% compared to 77.9% in the fourth quarter last year. As we noted in the release, we increased the current accident year loss ratio by three percentage points, which for the year added 12 percentage points for the quarter, I should say. This action is consistent with what we've regularly communicated, and that is that we reserve conservatively and we're quick to react to increases in loss trends that we are observing. And those loss trends for commercial auto are now coming in a bit higher than we were observing earlier in 2025. And as such, as noted in the release, rate increases accelerated in the fourth quarter to 16% for commercial auto. Again, this would be in line with our philosophy of loss trends that are commensurate with rate increases. Workers' comp net premiums written was 6% lower in the quarter while the loss ratio came in at 65.2% compared to 35.5% in the fourth quarter last year. The big difference here is that the vast majority in the fourth quarter of 2025 vis-a-vis the fourth quarter of 2024 is a significant difference in the level of prior year favorable development. Rate decreases in work comp were about 3% tier two in line with loss trends we're observing where severities remained very consistent and loss frequency continues its decline. So given positive wage trend that we apply our rates to, relatively stable severity trend, and a declining loss frequency trend, we think our rates remain adequate even with a small level of rate decreases. I'll also touch on property here. We had net premiums written of which increased 21% in the quarter, bringing the full year property writings to $750 million. The property loss ratio was 55% in the quarter, and that included some favorable prior year loss reserve development. It's of note that our property writings are diverse and often written on an E and S basis, particularly at our new specialty operating company. So we expect solid growth and profitability in specialty insurance to continue through 2026, reflecting the growing contributions from our new specialty operating companies and also reflecting our commitment to underwriting excellence within all of our specialty companies, including a keen focus on pricing discipline and cycle management. It's also noteworthy that our specialty portfolio is now more diversified than it's ever been, which also helps set us up to successfully manage market cycles. So I will now turn it over to you, Carolyn, to report on title insurance. Carolyn Jean Monroe: Thank you, Craig. Title reported premium and fee revenue for the quarter of $789 million. This represents an increase of 12% from the fourth quarter of last year. The fourth quarter was our strongest of the year and is a continuation of the market story that we have been reporting all year. Seeing strong activity in the commercial sector and softness in the residential market driven by persistent price and some affordability challenges. Still, premiums produced in our direct title operations were up 18% from this time last year. Our agency produced premiums were up 13% and made up 77% of our revenue during the quarter, which is consistent with the fourth quarter of last year. Commercial premiums increased this quarter and were 29% of our earned premiums compared to 23% in the fourth quarter of last year. For the year, our commercial premiums made up 26% of our earned premiums compared to 22% in 2024. Investment income was also up this quarter by nearly 12% compared to 2024, primarily from higher investment yields. Our combined ratio improved to 94% this quarter compared to 94.4% in the fourth quarter of last year. During the quarter, our continued expense management efforts and increased revenues resulted in a decrease in our operating expenses of 1.2% relative to premium and fees. Our loss ratio increased to 0.8%. Although prior policy years continued to develop favorably, the amount of favorable development in the fourth quarter this year was less than in 2024. Our pretax operating income this quarter was $66 million, compared to $55 million in the fourth quarter of last year. This 18% increase during the quarter brings our full year pretax income to $140 million for 2025. As we start 2026, the cornerstone of our business continues to be our title agents. We remain focused on providing our agents with the innovative technological solutions required to maintain a competitive edge. Operationally, we will continue our margin expansion efforts to ensure that our structure efficiently serves our agents. We remain focused on maximizing efficiencies and implementing the Qualia operating platform across the title operations during 2026, as well as continuing our initiatives to service the large commercial transactions we are seeing in the market. And thank you. And with that, I'll turn it back to Craig. Craig Richard Smiddy: Okay, Carolyn. Thank you. So that concludes our prepared remarks. And we will now open up the discussion to Q&A. And I'll either answer your question or I'll ask Frank or Carolyn to chime in and help me out. Regina: We will now begin the question and answer session. In order to ask a question, simply press star, followed by the number one on your telephone keypad. Again, that is star 1 for any questions. Our first question will come from the line of Gregory Peters with Raymond James. Please go ahead. Gregory Peters: Good afternoon, and happy New Year to everyone. Craig Richard Smiddy: Happy New Year, Greg. Gregory Peters: I guess starting at just the high level, you know, in the past, you've talked about sort of what you think the specialty insurance target combined ratios should look like over a course of a year, and I guess, in the context of understanding those moving pieces, can you kind of provide us some perspective of how you think the budgeting is coming along and where you think the combined ratio targets might be for 2026? Craig Richard Smiddy: Sure, Greg. Yeah. So, you know, ending the year at a combined ratio in specialty of 93.2% feels pretty good to us. We hopefully over time, be a bit better than that. But I think where we're at in the PNC cycle, that feels pretty good. And relative to next year, our plan is to produce something around the same level. You know, it depends by we have 20 different operating companies. Depending on the operating company, that varies. You know, if it's longer tail lines of business, it might be a little bit higher. If it's shorter tail lines of business, it's probably lower. So all the businesses have a unique plan, and they have targets that they set relative to those plans. So I would say 2026 looking for a very consistent year. Obviously, there's talk of pricing pressure in the marketplace. But we're going to maintain our discipline. As I mentioned in my opening comments, we're keenly focused on pricing discipline, underwriting discipline, every company is focused on combined ratio over top line. And even in our incentive compensation plans, when we have soft pockets of business where pricing is too aggressive in the marketplace, we will remove any kind of growth or retention goal and make compensation based on strictly on combined ratios. So it's all about bottom line for us, and that's really driven by the combined ratio. Gregory Peters: Great. I guess, you know, the other two questions I had on the specialty insurance side, you know, one is just going back to, you know, just some more background and what led to the higher loss pick. Because you said it wasn't reflected in yet in the paid claim data. So I'm just curious what you're seeing, and I do recognize your approach to case reserves and loss picks. So and then the other question I had, just so we just get them out on the table there for you is, I think, Frank, mentioned a credit loss on one of the large deductible programs. Just some background on that well. Craig Richard Smiddy: Sure, Greg. I'll take both of those. Yeah. So, you know, we start beginning of the year with what we believe to be a conservative loss pick. And from there, as we go through each week, we study what's happening with case reserves, and also what's happening with paid losses. And we take those into consideration, and look at what trend we think that that implies. We take a closer look at severity. We take a close look at frequency. And come up with an overall trend. So what we saw in commercial auto this year for the better part of the year was trends. We said, I think, on prior calls, we were saying trends in the low teens, and that we were obtaining rate increases that were at least commensurate with those trends. And that was the case. As we got toward the end of the year, while we did not notice any paid claim difference, we did notice that case reserves were higher. And, as we communicate, we're conservative. And if we see case reserves at a higher level, we'll react. We did that, I think, a couple years ago, same exact thing. Where trends all of a sudden moved a bit higher than what we were seeing earlier in the year. And, as such, trends now look to be rather than in the low teens, the mid-teens. And as such, the three percentage point increase to the accident year loss ratio. We'd rather be conservative and go with what we're seeing in case reserves as opposed to being relaxed and relying on paid losses. So, you know, I just point out it's not something we missed. It's and to give everyone a little more color around that, you know, loss trends move. They're volatile. We follow them regularly. You know? Like, daily, weekly, monthly, quarterly, and it's always a moving target. It's impossible to instantaneously know what today or tomorrow's loss trend is. No one has a crystal ball. And the best anyone can do is make a projection based on current observations, and that's exactly what we do. We make a projection based on what we're seeing, and that's it's usually a conservative projection. In this case, a conservative projection around what we saw in the movement between case reserves in the beginning of the year as opposed to case reserves more toward the end of the year. And just to underscore this a little bit more, when I make the statement that it's impossible to precisely and instantaneously know what your trend's gonna be, it takes time from the first notice of loss to the time that an adjuster is able to set ultimate case reserves. You know, at the time of first notice of loss, the ultimate number of bodily injuries, the severity of the injuries, whether or not there's attorney representation, are all things that are not usually immediately known, and it takes time for that to play out. And that's why it's impossible to instantaneously know what your severity is until you get that kind of information and the year progresses and it comes through in your case reserves. So hopefully, that provides a little more color around what we saw, how we reacted, and you know, it's really 100% consistent with what we've communicated to all of our investors and analysts. We observe higher loss trends, we immediately react by adjusting the loss ratio. And, as you saw in the fourth quarter, as I mentioned in my comments, we immediately react with rate. And rate increases in commercial auto accelerated. In the fourth quarter and now are upwards of 16% compared to I think we were at 14% last quarter. So and we'll keep doing exactly that. So I'll move on to your second question. Regarding the $17.5 million offset we had on workers' comp favorable development. And that came from, as we said in the release, a large deductible program where the losses from prior years had developed. And in this case, there was a credit risk exposure, so we ended up with insufficient collateral and on large deductible programs when that happens. That's something that then falls to us. And, accordingly, we have to put up the reserves ourselves. So that's what happened. In this quarter, and you've been following us long enough to know that those kind of losses are somewhat unique and certainly, in our forty, forty-five year history, that's a pretty big number for us relative to past experience. And 99 out of 100 times, we have enough collateral to take care of things even if losses do develop unfavorably in prior years. But in this one instance, there was insufficient collateral. Gregory Peters: Well, that's excellent detail. So it's appreciated. Mindful that others might be asking questions, so I just close out. Carolyn, if you could just provide your crystal ball view on what 2026 might look for the title business. I feel like your pick might be as good as anybody's out there. So just curious about your perspective on that. Carolyn Jean Monroe: Sure. You know, in all of kind of the research that we do from people that report on that, it's still showing that commercial should have about a 20% improvement over this year, which was a wonderful year for commercial. But, you know, they see a single-digit increase in residential for next year. Less than 10%. So somewhere there's it goes between 3-7% depending on who you look at. So I think it's going to be, you know, another year like this year. With some improvement, especially if commercial does improve like it did. So you know, we're looking forward to 2026. Gregory Peters: When you say next year, you and Craig, I'd presume you mean '26. Carolyn Jean Monroe: Yes. I do. Right. Craig Richard Smiddy: Right. Yep. Yeah. Perfect. Gregory Peters: Yeah. Craig Richard Smiddy: We're stuck in fourth quarter, full year '25, mode right now. Gregory Peters: Right. I assume so, but thanks for the answers. Craig Richard Smiddy: Thank you. Regina: Once again, for any questions, simply press 1 on your telephone keypad. Our next question will come from the line of Paul Newsome with Piper Sandler. Please go ahead. Paul Newsome: Good afternoon. Thanks for the call. Maybe just to follow-up on the case reserves, and I apologize if I missed this because I got a little technical issues myself during the call. The case reserve increases, were there any sort of geographic or patterns within the case reserve that stood out or would suggest other than just pure sort of overall loss trend? That might give us a hint as to what might be happening under the hood? Craig Richard Smiddy: Yeah. Paul, that's a great question. The one we and we've looked at it in great detail. I can't say geographically there's anything we've detected. But there are a few things we do know, and that is that the number of people making bodily injury claims relative to the number of accidents that we have is higher. And the percentage of bodily injury claims with attorney representation is higher. And the percentage of claims that end up in litigation is higher as well. So, you know, a bit of an opinion section here. And that is our view is that litigation system abuse is accounting for these increases and that includes the ongoing proliferation of attorney advertising where plaintiff attorneys are attempting to vilify insurance companies and you only need to turn on a television or drive down the interstate and see the billboards. And it's amazing. You know? The number of advertisements on television, on billboards, is just continuing to proliferate. And, to us, it's clear that plaintiff attorneys have come to the conclusion that there's a return on these investments. So I think, you know, there's industry studies out there from some good industry associations that we're part of. And they have are coming to the same conclusion. So those are the only observations. Again, you know, if you have an accident, and you have a property damage claim, we track both bodily injury and property damage, third-party property damage separately. Third-party property damage frequency isn't going up. But bodily injury frequency is going up. Well, how can that be other than just more people willing to make bodily injury claims? And, so you know, it again, it comes back to the only conclusion that we can come to is that this litigation system abuse and proliferation of attorney advertising continues to rear its head. And we'll have to see where it goes. But that is what we would attribute a good portion of this to. Paul Newsome: Were the trends any different? Like, you cited long haul trucking. Is the trends any different in other portions of what you do in commercial auto, obviously? Trucking is your big piece, but I think you do some other stuff as well. Was it just consistent across anything that had to do with commercial auto? Craig Richard Smiddy: Another great question. Because on our other commercial auto, other than long haul trucking, the trends are there, but they're not as pronounced as they are on long haul trucking. I think coming back to litigation abuse, you know, a lot of these plaintiff attorneys try to target trucking companies and vilify insurance trucking companies and insurance companies. And, you know, so I Yeah. Yeah. And usually, trucking long haul trucking in particular has larger limit policies, and plaintiff attorneys know that. So there's more of a target on their back, so to speak. So there is a little bit more rearing its head on long haul trucking as opposed to other commercial auto. Paul Newsome: Well, I know in the past, you've been it was, you know, last question. Don't know if you asked it. I know in the past, you guys have been very disciplined about hitting loss trend rate. And I would've assumed that that's the plan prospectively as well. Are there other things that you're considering in terms of reacting to the loss trend change in terms of condition or, you know, areas to your right or anything else sort of non-rate actions? Is this gonna be just a matter of hit it with rate at whatever you think is happening from the loss trend perspective? Craig Richard Smiddy: Yeah. So, you know, we are out of all of our 20 companies, our most sophisticated data and analytics area is within our long haul trucking company. And we slice and dice the data and analytics in a very robust and sophisticated fashion, which helps us with targeting rate to those customers that elevate higher propensity for loss. And so part of that is risk selection as well. It helps us with risk selection. And being able to not broad brush rate, but target rate to the insureds that require more rate. And then also, continually refine our risk selection so that we're selecting what we think are the best risks and making it very punitive or not providing quotes at all to those risks that we deem too high. With respect to terms and conditions, you know, there's not there's, while in other of our businesses, terms and conditions are key, really key to the business, the specialty business they're in, long haul trucking, there's not a lot you can do with terms and condition on commercial auto. So I wouldn't say that there's a lot we're doing with terms and conditions. But you know, we react with rate. We make sure our overall portfolio rate increase is reflective of the trends that we're observing. And, you know, when I answered Greg's question, you know, I explained that understanding what the trend is is not instantaneous. But we use a conservative approach. We assume trend is going to if it's going up, we assume it's going to continue to either be where it's at or continue to go up and until we have clear evidence it's going down, we're not adjusting rates downward. You know, we adjust the rates upward and, just in one quarter, you know, two or 300 basis points and we'll have to keep our foot on the pedal on that. Assuming that we, our goal is to stay ahead of trend which, we will continue to do. I would also I would also just point out that you know, as far as what this means for 2026 are, because we do that, our expectations for 2026 are not different from where we're at now with respect to loss ratio. We assume we're going to keep up with trend. You may recall from a couple of years ago, we had similar kinds of observations back at the 2023. And we, for the 2023, we bumped up that accident year loss pick. And if you look at how that year has played out, can look at the financial supplement. You know, things after 2023 were remained pretty steady. And the '24 and '25, with 72% loss ratios following a 71.5% loss ratio in '23. So we would expect the same to happen here again. We're not changing our view on how 2026 looks. Paul Newsome: We always appreciate the proper insight. Thank you very much. Craig Richard Smiddy: Thank you, Paul. Regina: Our next question is a follow-up from the line of Gregory Peters with Raymond James. Please go ahead. Gregory Peters: Hey. One of the things I just wanted to touch upon just as to close out, the capital position of the company. I mean, you've been, you know, your record of special dividends alongside your regular dividends is pretty interesting. And I'm just curious how you view in light of the $2.50 dividend that I guess is paid out in was paid out already in January here, how you view the capital of the company at this point in time and, you know, what are the metrics we should be watching for, you know, to determine whether there's still, you know, excess capital, etcetera? Craig Richard Smiddy: Sure, Greg. I'll be happy to do that. So part of our regular planning cycle is to head into our February board meetings and present our plan for 2026, which includes a complete analysis of our capital position and our projected capital position. We still think we have plenty of capital. So we think that'll put us in a position to, again, recommend to the board a regular dividend increase somewhere in line with what we've been doing over the last couple of years. And, in the meantime, we also have $850 million still remaining on our share repurchase program. And, we'll put that to work. Especially, you know, when there's opportunity. We set all along that we like having both tools in our tool chest, the share repurchase tool as well as the special dividend and regular dividend tool. And, you know, to the extent that we think there's a buying opportunity, we've said we'll be opportunistic, and to the extent that markets react or overreact, it gives us a buying opportunity to repurchase more shares. So have that $850 million. We believe that, you know, if the opportunity presented itself, we could put most of that to good use throughout the year. And we would do that. And then, you know, as we get further along in the year, again, take a look at where we're at with that capital position, what we've been able to do with share repurchases, and if we as we did at the end of last year in December, if we think we are ending the year with more capital again, we'll reset it with a special dividend. Gregory Peters: Alright. Got it. Thanks for letting me ask the follow-up question. Craig Richard Smiddy: Thank you. Regina: And this concludes our question and answer. I'll hand the call back to management for any closing comments. Craig Richard Smiddy: Okay. Well, thank you. We appreciate the Q&A. We appreciate the opportunity to share our prepared remarks in addition to the earnings release and wrap up 2025 for the year with another very good solid year, and we think we're set up for a very good '26. We realize market conditions are in question, but we'll focus on bottom line and profitability and continue with our underwriting excellence initiatives and our pricing discipline and continue to produce growth, particularly as our new specialty operating companies are producing more and more premium. And we feel very good about where we're heading in '26. So thank you all for your interest and participation, and we will talk to you all again next quarter. Francis Joseph Sodaro: Thank you. Regina: This concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to the Preferred Bank Q4 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch-tone telephone. To withdraw your questions, you may press star and 2. Please also note today's event is being recorded. I would now like to turn the conference call over to Jeffrey Haas with Financial Profiles. Sir, please go ahead. Jeffrey Haas: Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank financial results for the fourth quarter ended 12/31/2025. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; Chief Risk Officer, Nick Pi; and Deputy Chief Operating Officer, Johnny Tzu. Management will provide a brief summary of the results, and then we will open up the call to your questions. During the course of this conference call, statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks, uncertainties, and other factors relating to Preferred Bank's operations and business environment, all of which are difficult to predict and many of which are beyond the control of Preferred Bank. For a detailed description of these risks and uncertainties, please refer to the SEC-required documents the bank files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materialize, or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in statements. Preferred Bank assumes no obligation to update such forward-looking statements. At this time, I'd like to turn the call over to Mr. Li Yu. Please go ahead. Li Yu: Thank you, ladies and gentlemen. Thank you for joining the earnings conference. I'm very pleased to report that for 2025, the bank's net income was $34.8 million or $2.79 a share. For the full year, the bank earned $134 million or $10.41 a share. Our profitability for the year is believed to be among the top tier of the banking industry. Amid interest margin for the fourth quarter declined from the third quarter. The principal reason for the decline was federal rate cuts. With a 70% floating rate loan portfolio, the rate cut did reduce our loan interest income. However, the cost of deposits remains stubbornly high. In fact, many analysts have reported that between quarters, the banking industry, the entire banking industry, cost of deposits may have increased slightly. Looking forward, we are seeing that our loan demand is getting stronger. For the quarter, our total loan growth is $182 million or over 12%. Deposit growth was $115 million or 7.4%. To round out the year, loan and deposit growth was 7.3% and 7.2%, respectively. During the quarter, we sold two large pieces of OREO, resulting in a net gain of $1.8 million between the two. The income was reported in the section of noninterest income. The loss, the result of the loss, was reported in the noninterest expense section. This is based on the current principle of generally accepted accounting principles. For the quarter, nonperforming assets declined slightly. However, criticized assets did increase by $97 million. Principally, this is due to placing a large loan relationship into the classified status. Our loan loss provision was $4.3 million. Most economists are forecasting 2026 to be a year of relatively stable growth. Our customers' feelings also indicate they have an improved outlook for 2026. Barring any sudden changes in the current policy or directions, which we just had one, we are hoping 2026 to be more of a growth year for Preferred Bank. Thank you very much. I will answer your questions. Operator: To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Matthew Clark from Piper Sandler. Go ahead with your question. Matthew Clark: Hey. Good morning, everyone. Just want to start on the margin and get some visibility there at least in the near term. Do you have the spot rate on deposits? Spot rate on deposit costs at the end of the year or even the month of December, and then also the average margin in the month of December? Edward Czajka: Hi, Matthew. This is Ed. The margin for December was 3.66%, slightly below that of the quarter. That was with the full effect of the December rate cut. Total cost of deposits was 3.17% for the month of December. So that's coming down about six, seven basis points a month. Matthew Clark: Okay. Yeah. And that's where I was headed. Deposit beta this quarter looks to be about 40% on interest-bearing. Sounds like things are still pretty competitive. What are your thoughts on the beta? The deposit beta? Going forward? Assuming we get maybe one or two rate cuts this year? Edward Czajka: Well, it's going to depend on a number of things. Obviously, the rate cuts will play a big key role, but the other thing that Mr. Yu alluded to is the competition for deposits still remains very, very strong. So I would foresee a similar pattern in terms of about five or six basis points a month as we have CDs rolling off and then coming on at lower rates. They're just not coming on at rates that we thought we would see at this point given what's happened with the Federal Reserve. Matthew Clark: Got it. And it sounds like loan growth you expect to maybe step up a little bit this year from the 7.3% pace last year. I would assume you're going to try to grow deposits at a similar pace. Is that fair, just given your loan-to-deposit ratio? Li Yu: That's a fair statement. Matthew Clark: Yeah. Okay. And then just last one for me on expenses, the run rate, a little noise this quarter, but stripping that out. A little better than expected on comp. How should we think about the run rate here in the first quarter? With some seasonality? Edward Czajka: I'm going to forecast probably somewhere in the neighborhood of 22. Maybe slightly below that. But, you know, 21.5 to 22 should be about right. You know? Matthew Clark: Okay. Thank you. I'm getting it now. Yeah. Operator: Our next question comes from Gary Tenner from D. A. Davidson. Please go ahead with your question. Gary Tenner: Thanks. Good morning. Just a quick follow-up on the deposit side of things. If you could kind of update us on the CD maturities in the first quarter and kind of the out and in rate that you expect? Edward Czajka: Sure. So we have about $1.3 billion maturing in Q1 at a weighted average rate of 3.96%. They're currently coming on right now at about around 3.70% to 3.80% on average. Gary Tenner: Appreciate that. And just out of curiosity, last quarter, when you talked about the CDs maturing in the fourth quarter, they were maturing at 4.1% and you sort of posited kind of new CDs in the mid to high threes. So it sounds like that number was towards the upper end of that repricing range in the fourth quarter? Is that kind of what played out? Edward Czajka: Yes. Yes. Yes. As we said, we would have expected CD rates, market rates to come down a little more than they did given the Federal Reserve's actions. Gary Tenner: Okay. And that 70% floating rate portfolio now, does that have you with the fourth quarter cuts, did you clear through any significant floors? Edward Czajka: It probably only affected about $150 to $200 million of the loan book. Right now, we have about 45% of the floors are in the zero to 100 basis point bucket in terms of their protection effectiveness. Operator: Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question. Andrew Terrell: Good morning. I was hoping to just follow-up on the time deposit commentary. I was hoping you could just maybe expand upon that a bit more and just, you know, sounds like high threes for you guys right now. Is that generally in line with your competition? Are you trying to, you know, price ahead, price below to pick up more deposits? Just curious, you know, where you're at versus the market, kind of your strategy, your expectations there. Edward Czajka: I think the challenge is kind of walking the tightrope. Right? We want to bring deposit costs in. That's really a big goal of ours, but at the same time, we want to grow the deposits. So that's been kind of a challenge. What we've seen in the marketplace is not only local competition still being fairly stiff, but we're seeing some large money center banks still out there promoting CDs right in our marketplace. And when you have those guys doing that type of it makes it more challenging for us because of their size. Andrew Terrell: No. It makes a lot of sense. On the downgraded loan this quarter, the $123 million relationship, I appreciate all the color you guys put in the release around the LTVs and debt service there that both look pretty good. I was hoping you could talk a little bit more about the pathway to curing this. You know, what the timeline and outcome looks like as you see the big picture today. And then also just, you know, as a pretty large relationship, 2% of the loan book. Is this the largest relationship with the bank, or are there other, you know, similarly large that you guys have? Li Yu: I believe this is one of the large relationships. Correct. For the bank, that is small. In terms of the workout, it's a little bit early to be able to tell what the future is going to hold for this particular relationship. There are several options, you know, that we've utilized in the past. We've sold notes, we've foreclosed and taken back property, etcetera. But our first choice, obviously, we know these customers, they are late in payments, and they are having problems with other banks. But their principle is that because these properties still have value, very positive value in their eyes. And the information we have is that they are working very hard, trying to finance it out from other alternatives. So the bank is going to be waiting for them to get these procedures done. So in case they are not able to continue the loan, and we have to go through the foreclosure procedure, we are not going to shy away from that. We'll do it immediately. And the current marketplace is pretty reasonable as regard to pay for these properties at this point in time. So in other words, when I see in the market situation 2011-2012 that you have to bottom four off, it's not happening. The market has been very stable. So it's a matter of time to resolve the thing as these loans are basically fundamentally well, reasonably underwritten. Andrew Terrell: Okay. I appreciate all the color there, and thanks for the questions. Operator: Our next question comes from Tim Coffey from Janney. Please go ahead with your question. Tim Coffey: Great. Thank you. Good morning, everybody. Mr. Yu, as we start looking at loan growth this next year, what do you think are the best opportunities for growth? Or, like, what loan product? Li Yu: Basically, we are still a sort of like a commercial market that we basically focus on commercial real estate and C&I loans. We see both sides' demand is reviving a bit right now. In fact, internally, we're budgeting a higher number than the previous year right now. So it's still very early to tell. As you know, not only do we have the normal economy, but we do have a very active government that changes practices from time to time. So it will be, you know, if we mentioned some for the babies, it was lose no change, or go this way, I think that's overly optimistic. But I like to say that we're budgeting a higher number than last year for our upcoming year. Tim Coffey: Okay. Great. Thanks. And then, Ed, looking at noninterest expenses for the full year in terms of the growth rate, is kind of a mid to high single digits number reasonable? Edward Czajka: Yes. That's about what we're looking at, right in that neighborhood, Tim. You're spot on. Tim Coffey: Okay. And then the kind of just general thoughts on share repurchases for this year? Li Yu: Well, we just have to see what the total picture is. You know, first of all, obviously, we have to see what our loan growth is during the year. And all possibility, all funds will have to be reserved for loan growth. And secondly, the deposit situation will also be very important. So when we have the balance sheet fixed, then we probably would turn around to see whether there is additional availability for repurchases. But I would say that the situation is not quite as conducive to repurchase as last year. Tim Coffey: Right. Well, sure. Absolutely. And then I guess this is what I want to kind of make sure I dot the I and cross the T's on the classified loans. I mean, given the uniqueness of this situation, what does the timeline for disposition look like? Or how does this play out? Li Yu: Well, first of all, that amount of relationship there. There are several different loans. Some of them have earlier maturity dates than the other ones. So first of all, obviously, we will be giving our customary opportunity to that particular relationship, the opportunity of resolving matters to our satisfaction. And then the legal procedure will start if they fail to do that. Now I would say that internally, we will say that probably we will have the majority of a good portion of all resolved sometime within two quarters. Nick, do you think I'm too optimistic? Or what's your take? Nick Pi: That is the goal where we're heading, Mr. Yu. Yes. Of course, we'll try to solve the issues. I think we'll give ourselves that much time to get a lot of the work done. Tim Coffey: Okay. Great. That's very helpful. Those are my questions. Thank you. Operator: Our next question comes from Liam Coohill from Raymond James. Please go ahead with your question. Liam Coohill: Hi. Good morning, everyone. This is Liam on for David Feaster. So there's been a good amount of discussion surrounding the classified downgrade, but I did just want to touch on the well-secured multifamily loan that was downgraded to nonaccrual. Did you have the credit metrics for that loan, or is there anything in particular we should take into account? Li Yu: You mean the $19.4 million? Yes. Based on the most updated appraisal we conducted after we classified this loan, the value came out even higher than the previous one. So with everything in mind, the value is $49 million, and our loan is $19.5 million. Liam Coohill: That's very helpful. Thank you. And then just one more from me. For fee income in 2026, would the Q4 number excluding the one-time OREO impact be a good baseline? Edward Czajka: I think it would be, yes. I think that's probably a good baseline, maybe slightly below that. The LC fee income was very, very strong this year. Not sure we can exactly reproduce that number, but I'm sure we'll get close to that. So I would take that noninterest income without the gain on sale of other real estate. Liam Coohill: Thank you very much. I'll step back. Operator: Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. Our next question is a follow-up from Matthew Clark from Piper Sandler. Please go ahead with your question. Matthew Clark: Hey. Thanks. Just want to clarify your expense guidance for this year. Does that exclude OREO costs? Because the midpoint of your guide for the first quarter of $22 million, you know, annualizes obviously to $88 million, would be below this past year and would imply some significant growth after the first quarter. Just want to make sure we're on the same page. Edward Czajka: Yes. It will grow through the year. There's no question about it. And we will have, you know, we still have a couple of small OREO properties, so there will be some expense related to those as well. Matthew Clark: Okay. And then did you repurchase any shares this quarter? Li Yu: No. Not this quarter. We did in October, but it was a nominal amount, Matthew. Matthew Clark: Okay. Then just last one for me on M&A. Just wanted to get an update on your appetite for M&A to the extent you see some opportunities with M&A expected to accelerate this year? Li Yu: Yeah. There are a few deals that have been brought to us that we end up taking a look at. As you know, that has been nothing main effort in M&A. But there are a couple of deals we take a look at, and probably the pricing structure required of us is not to our satisfaction. So we'll continue to look at it. We know that there may be another one or two coming up, we'll take a look at it. Matthew Clark: Okay. Great. Thanks again. Operator: And our next question comes from Arif Angad from Cygnus Capital. Please go ahead with your question. Arif Angad: Yes. Hello. Thanks for taking my questions. First question is really more just to clarify the diluted EPS of $2.79. If I'm reading it correctly, it looks like your gain on sale of the OREO property is included in that EPS, which after tax was about 20¢. Just want to confirm, am I reading that correctly? The effect of that gain on the EPS was $2.59? Edward Czajka: That sounds about right. Yes. Li Yu: $1.8 million after equal to $3.6 million. Yeah. So that's about right. Arif Angad: Okay. Thank you. And then my next question is on those OREO properties you sold in the fourth quarter, did you provide any financing to the buyers, or have you completely absolved yourself of any exposure to those properties going forward? Li Yu: One of them we provided financing. The other one was an outright cash sale. Arif Angad: Got it. So you still have a loan through one of those properties going forward? Li Yu: Yes. Much smaller loan. Arif Angad: Got it. Okay. And then the last question I had was with respect to the increase in the classified loans. Can you please confirm the $121 million of loans that are with the relationship where there's litigation going on with other banks, assuming you're referring to Western Alliance and Zions. Are those loans paying current? Are they performing or no? Li Yu: As far as I know, we don't know exactly the status of the other two banks' loans, and we don't have any idea about their structures. All I know is that we are in a first position, you know, trust lender to the world. Fully secured by a problem. Arif Angad: But are those loans being paid, you know, are you receiving current interest in debt service on those loans? Currently? Li Yu: Yes. We have been receiving the payments, but it's being slowed down. That's correct. Arif Angad: Sorry. So when you I did so they're behind in interest service or they're currently in interest service? I'm not following. Li Yu: Generally, they're behind in interest services. That's one of the primary reasons that's the weakness of the loan that we classified. Arif Angad: For clarifying. I'm just really more trying to understand the context of a 1.14 times debt coverage ratio if the loan's not paying. Li Yu: Because of the guarantors getting involved with litigation with other banks. So a property that is not 100% using all the cash flow from those properties to make the payment to our bank and to spend that. Arif Angad: Got it. Okay. That's helpful. And then, you know, just to finalize the question on this topic, you know, given where the allowance for credit losses stood at the end of the quarter or end of the year and your increase in the provision for credit loss, what gives you comfort that you're adequately reserved and we don't get surprised as we did this quarter with a significant increase in nonperforming and criticized loans? How recent of a scrub have you done of your portfolio to kind of give you that comfort that you're adequately reserved? Li Yu: All these loans under this or go with because it's substandard in care, we go with the principal one for case analysis. And as the release mentioned about the rookie virus, around 5%. So there's no specific reserve on this one. However, the $4.3 million provision for this quarter was mainly the result of a combination of many, many factors, including the loan growth, including other specific reserve for some of the loans. Just to give you an example, we fully reserve this relationship to under unsecured credit. And also based on Q factors. So due to the movement of all this relationship, and increase of the criticized loans, we have adjusted our Q factor side, especially on the credit trend area. We increased five basis points of the risk entire risk segment. So these are the components of our reserve at this moment. Our Q factors are actually kind of around 42.5% reserve. So we do believe the reserve should be more resolved to cover our credit situation. Arif Angad: Got it. Okay. Thank you very much. Operator: And ladies and gentlemen, with that, we've reached the end of today's question and answer session. I'd like to turn the floor back over to management for any closing remarks. Li Yu: Well, thank you very much for being with us. For now, Preferred Bank, we have a little challenge and they try to within the next six months period of time, try to resolve these issues on the credit side. But overall, everything remains the same. We are the same company with a well-structured balance sheet, normal operations, normal metrics, and so on, and we still look forward to 2026. Thank you very much. Operator: And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to the RLI Corp. Fourth Quarter Earnings Teleconference. After management's prepared remarks, we will open the conference up for questions and answers. Before we get started, let me remind everyone that through the course of the teleconference, our alliance management may make comments that reflect their intentions, beliefs and expectations for the future. As always, these forward-looking statements are subject to certain factors and uncertainties, which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the annual report on Form 10-K as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing fourth quarter results. During the call, RLI management may refer to operating earnings and earnings per share from operations, which are non-GAAP measures of financial results. RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities. Additionally, equity and earnings of unconsolidated investees and related taxes were removed from operating earnings and operating EPS to present a consistent approach and excluding all unrealized changes in value from equity investments. RLI's management believes these measures are useful in gauging core operating performance across reporting periods but may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings. The Form 8-K and press release are available at the company's website at www.rlicorp.com. I will now turn the conference over to RLI's President and Chief Executive Officer, Mr. Craig Kliethermes. Please go ahead. Craig Kliethermes: Good morning, everyone. We appreciate you being with us today, and I'd like to introduce Aaron Diefenthaler, our Chief Financial Officer; and Jen Klobnak, our Chief Operating Officer, who are joining me. I'll start by saying we feel very good about where RLI Corp is today and just as importantly, where we're headed. 2025 was another strong year for our company. We delivered underwriting income of $264 million on an 84 combined ratio, grew book value per share by 33%, inclusive of dividends and achieved our 30th consecutive year of underwriting profitability. That kind of consistency is extremely rare in our industry, and it certainly doesn't happen by accident. It's too long to be considered a hot streak, it reflects disciplined execution over time and the principles we worked to uphold every day. The environment remains competitive, and premium growth was modest, but that's exactly when our model tends to show its strength. We don't measure success by how fast we grow, we measure it by how well we grow and whether today's decisions stand the test of time. Jerry Stevens, our founder, used to remind us that you don't win the long game by swinging at every pitch, you win it by knowing which ones to let go by. That mindset is deeply ingrained at RLI. We're comfortable pulling back when the risk-reward equation doesn't work, and we're confident leaning in where we have the expertise and when the market supports it. Our diversified specialty portfolio, strong balance sheet and ownership culture give us a lot of flexibility and a lot of confidence as we look ahead. We're well positioned and optimistic about the opportunities in front of us. And with that, I'll turn it over to Aaron to walk through the financials in more detail. Aaron Diefenthaler: Thanks, Craig, and good morning, everyone. Yesterday, we reported fourth quarter operating earnings of $0.94 per share, up from $0.52 in the year ago period. Better underwriting performance, minimal storm activity and increases in investment income drove most of the improvement compared to last year. For the quarter, we generated $71 million of underwriting income on an 82.6 combined ratio versus $22 million on a 94.4 combined ratio in Q4 last year. For the full year, we delivered $264 million of underwriting income on, as Craig mentioned, an 83.6 combined ratio, marking our 30th consecutive year of underwriting profit. I wanted to call your attention to a change we made to our definition of operating earnings. As referenced in a footnote on Page 1 of our release and in the non-GAAP disclosures on Page 2, operating earnings now excludes equity and earnings of unconsolidated investees and related taxes. Prior periods were recast to conform to that definition for comparability. Currently, unconsolidated investees only includes our minority investment in Prime Holdings. We believe excluding these investments from operating earnings, better reflects RLI's core operations, where we maintain full operational control and aligns the treatment of investee results with other equity investments. On a GAAP basis, net earnings were $0.99 in the quarter and $4.37 for the year, an increase of 17% over full year 2024. In addition to operating earnings, net earnings include net realized gains and losses, net unrealized gains and losses from equity securities and now earnings of unconsolidated investees from Prime. Our Q4 net earnings reflect Prime's core operating results based on our minority ownership and a reduction to Prime's value on our balance sheet to $53 million. Turning to premium. Top line growth was down 2% for Q4 and up 1% for the full year as competitive dynamics necessitated heightened discipline in several businesses while other products continue to find opportunities. Property premium was down 11% during the quarter, consistent with the rate environment for catastrophe-exposed commercial property although other parts of the segment, Marine and Hawaii homeowners continue to grow. Properties underwriting profitability was supported by $17 million of favorable loss emergence on prior year's catastrophes, modestly offset by $4 million of storm activity in the quarter. Inclusive of these net benefits properties combined ratio was 49.2 in Q4 and 57.2 on the year. Casualty premium was up 2% in the quarter and 7% on the year with strong contributions from personal umbrella. The bottom line for casualty benefited from $4 million of favorable prior years' loss development just under $2 million of this release was related to prior year catastrophe activity. Surety premium remains flat in the current period and up slightly on a year-to-date basis. The segment's quarterly underlying -- underwriting results included $2.7 million of favorable loss emergence from prior years, which improved surety loss ratio by 7 points in the quarter. On the expense ratio Q4 came in at 39.3%, up from 37.6% a year ago. Bonus and profit-sharing expenses were higher on strong results and business level expenses were up as we've continued to invest in people and technology. On the investment side, net investment income increased 9% in the quarter and a portfolio generated 1.5% total return in Q4 and 9% for the year. The yield environment has been relatively stable for intermediate maturities and we continue to find accretive fixed income opportunities. Purchase yields averaged 4.9% in the quarter, which was 70 basis points above our book yield. Putting it all together, we produced $5.29 of comprehensive earnings for the year, driving 33% growth in book value per share, inclusive of dividends. This level of generated capital again allowed for a special dividend to shareholders of $2 per share in addition to our ordinary fourth quarter dividend. Overall, a solidly profitable championship caliber closed in 2025. With that, I'll turn it over to Jen for more color on market conditions. Jennifer Klobnak: Thank you, Aaron. I will dive right into our segments, starting with Property. While premiums declined 11% in the fourth quarter, our property team delivered an excellent 49 combined ratio, underscoring the quality of our portfolio and ability to execute. E&S property premiums decreased by 18% on an intense competition from other carriers and MGAs along with increased risk retention in some areas by insurance. Hurricane rates were down 15%, while submissions continue to grow as insurance shop for the best terms. We are seeing pressure on terms and conditions, and our underwriters are flexing selectively to retain high-quality accounts. This competitive dynamic extends to other property lines as well. Earthquake rates declined 12% as insurers saw rate relief or decided to retain the risk. We see carrier competitors in the E&S property market slowly giving back terms and conditions, while MGAs are being more aggressive. Despite the rate moderation on catastrophe coverages, we continue to achieve returns on retained business that exceed our long-term targets. Our experienced E&S property team delivered a meaningful underwriting profits despite challenging market conditions. We have navigated many hard and soft market cycles with discipline and remain focused on securing terms and conditions at an appropriate rate while reducing uncertainty when a loss occurs. Hawaii homeowners premium grew 5% in the quarter, supported by a 16% rate increase. For the year, premium was up 26%, due in part to a couple of book rollovers we assumed following the Maui wildfires. We will continue to see growth in this profitable book through our outstanding local customer service, investments in customer experiences and additional rate increases from recent filing approval. Marine premium was up 2% in the quarter. Our diverse portfolio is evolving based on market opportunities. Inland Marine continues to grow through strategic talent additions and new product adjacencies. Ocean Marine remains competitive, particularly in cargo where we had pulled back. Our underwriting teams continue to apply patience and discipline, which resulted in underwriting profit across both Inland and Ocean in 2025. Surety premium was flat but produced a strong 80 combined ratio in the fourth quarter. Transactional surety grew 4% through continuous marketing efforts and investments in our distribution capabilities. These are very small premium bonds, so it takes significant volume to move the needle. Commercial surety also grew 4% as our talented team secured new accounts by closely engaging with our distribution partners. Increased customs bond requests offset the slowdown in renewable energy with both trends driven by government policy. On the contract surety side, premium declined 5% as we navigated the ending to a year that included multiple fits and starts in construction spending. We know that infrastructure investments are needed at the federal state and local level, and we remain well positioned to support that business as public funding increases. Our surety underwriting teams remain committed to underwriting discipline and prudent risk selection in this evolving environment. The casual segment premiums grew 2% on a 99.6 combined ratio for the fourth quarter. Personal umbrella led the way with premium growth of 24%. This included a 12% rate increase, and we secured additional approvals that will further add rate to the book in 2026. This controlled growth reflects reduced new business in several challenging seats where we have taken larger rate increases, required higher underwriting -- I'm sorry, underlying limits and works with our distribution partners to improve the quality of our book. The personal umbrella market continues to present opportunities as our competitors responded to deteriorate results by adjusting their appetite and terms and conditions. Our continuous product collaboration supported by intensive data mining, actuarial analysis and claim trend identification produced an underwriting profit for the year. Transportation premium declined 10% in the quarter despite a 13% increase in rates as we continue to prioritize profitability over volume in a highly competitive environment. Severity trends and economic pressures have reshaped the market with heightened volatility and increased expenses forcing some transportation companies to consolidate or close reducing the demand for insurance. At the same time, despite some insurance providers leaving this space due to poor financial performance, there always seems to be new markets entering and pushing for growth. Acute pressure on the largest size accounts has led to a decrease in our average account size over the last 2 years. Our in-house loss control team provides an advantage as they assess and try to improve the safety of our insurers, which helps all drivers. Our underwriters are empowered to make bottom line driven decisions. We remain disciplined, pushing for more rate and walking away from underpriced accounts. Our Executive Products group achieved an underwriting profit again this year. Premium in the fourth quarter was down 2% with rates down 1%. The market is stabilizing amid broader industry loss development. Our focus remains on marketing to increase access to business and disciplined risk selection to maintain our quality book. The E&S casualty team also produced an underwriting profit for the year. We saw increased competition in the fourth quarter, particularly on larger 6-figure premium accounts due to competitors chasing top line growth, presumably to meet year-end goals. Our primary excess liability premiums declined 8% in the quarter, but full year premiums finished up 10%. Competition varied by region with some markets exiting while others leaned in. Submissions increased by double digits, and we are constantly engaging producers to see the best new business opportunities. Much of our business is construction related and projects are taking longer to bind. We have many quotes outstanding waiting for permitting or funding. The group knows that words matter and have not relaxed terms and conditions despite competitive pressure. We continue to provide a stable solution for our business partners in the construction space. Before I provide perspective on the full year, I'll update you on our reinsurance renewals. On January 1, we renewed about 2/3 of our annual reinsurance spend. It was a buyer's market for property. We secured 15% to 20% rate decreases on our catastrophe programs and more modest relief on our property working layers. With our reduced exposure and continuing soft market conditions, we purchased $150 million less catastrophe limit for 2026, but we remain ready to approach the market midterm should an opportunity present itself as we have done in previous years. On the casualty side, rates were down around 5%. We achieved similar terms and conditions with some broadening of coverage in the property attributes. For the full year, we achieved modest growth while producing an 84 combined ratio. While E&S property prudently contracted in response to softening market conditions, other teams capitalized on opportunities, most notably personal umbrella, E&S casualty and Hawaii Homeowners. We pushed for rate change where we needed it, achieving an overall 16% rate increase in auto liability coverages across our portfolio. In 2025, we also spent time with our distribution partners, broadening and deepening those relationships, and we invested in operational efficiencies. This included simplifying and automating processes, developing new capabilities to improve ease of doing business and investing in our data infrastructure to support granular real-time decision-making. Internally, we brought our teams together regularly to talk about how we are doing and where we can improve. These actions position us well for another successful year in 2026. In a more challenging environment, capital discipline and alignment of interests differentiate successful insurers. Underwriting, which we define as underwriters, claims and analytics collaborating to evolve our products is the disciplined pursuit of opportunity. We are an underwriting company as evidenced by our unmatched track record of 30 consecutive years of underwriting profit. I'm incredibly proud of our entire team for producing these results and for how they do it by taking care of our customers and striving to improve every day because they are owners. With that, I will turn the call over to the moderator to open it up for questions. Operator: [Operator Instructions] Your first question comes from Michael Phillips with Oppenheimer. Michael Phillips: The accident year loss ratio in Casualty improved a bit from last year is once you back out the reserve addition you did. Can you talk about how much of that was because of the mix shift from pulling away from transportation book versus anything else that might have caused that improvement? Jennifer Klobnak: So as you look at the casualty loss ratio, you did see improvement. And we did pull back in both transportation and other areas of auto where we provide coverage like in our package businesses. Last year, in the fourth quarter, we did recognize additional reserving related to those auto-related coverages, both in our transportation and our personal umbrella product. This year, as we looked at losses coming in, we did not see the need to take such action. And so you did see that improvement. I can't quantify specifically the difference. Aaron? Aaron Diefenthaler: Yes. I think the bulk there on a comparative basis to Q4 of last year that you're seeing is the action we took for the full accident year in 2024 around auto-related exposures, also true of the 2023 accident year as well. So we feel we're on more stable footing around those exposures because we didn't take the same level of action in the current accident year. Still cautious around auto-related exposures. And our incentive structure is set up for those business leaders to pull back from those markets when they see underpriced competition coming to bear on Submission activity. So everything is set up for there to be a natural pullback from markets that are underpriced. But the underlying results themselves that we're seeing, we feel better about because of the stability relative to the action we took the last couple of years. Michael Phillips: Okay. I guess on that last year's reserve addition, I mean I think it was from higher severity in umbrella and transportation. And this year, you've seen a bit of -- in Casualty, a bit of a slowdown in favorable PYD. I assume that means you're still seeing that same level of severity that you -- that caused you to take those reserve additions last year. I guess the question would be, I'm not sure how much of that reserve addition was because of the accounts that you've now subsequently lost from midterm cancellations that you talked about last quarter. But to the extent some of that was and those accounts are no longer here, I guess, what does that mean for any potential favorable development if those accounts are no longer here, I guess, going forward? Aaron Diefenthaler: Yes. Well, it's hard to get down to the account level when you're -- when you're examining these things. But I'll just say, overall, you're right to identify lower levels of favorable development for Casualty here in the fourth quarter. I think you do have to rightsize that for a small proportion of the prior year catastrophe activity as well to get closer to that $4 million number that I referenced. However, just overall, we're seeing lower levels of favorable development out of casualty. We're still seeing drivers out of GL and commercial excess and still some challenges around auto-related exposures, all of that being maybe to a lesser extent than what we saw in the year ago period. Jennifer Klobnak: Yes. To supplement that, I would just add that there are many metrics that you can track to see what direction you're headed. And I'll tell you that new claim counts in 2025 were down significantly in those auto spots. So for example, our Transportation division, new claim counts were down 24% for the year, which is a positive indicator that the actions we're taking are going to translate into a more stable going forward. Michael Phillips: Yes. Okay. Perfect. That's helpful, Jen. I guess just switching gears, last question on the Property side. I mean last time, you talked a lot about how you've kind of leaned in and made some investments there as you were growing in that hard market. What does that mean today, given just the opposite? Is there any -- I guess, lack of a better term, fat there on the Property side that may need to be trimmed as there's pressure on the expense ratio in Property over the next year or so? Jennifer Klobnak: Well, that's an interesting question. I would say the one thing we did do to ramp up in addition to trying to be more efficient to handle more submissions is that we added additional talent. We've had some very experienced underwriters that have really enjoyed this hard market. And I think as they come towards the end of their career, not that I'm encouraging anyone listening to retire, but I think we will see a handful of retirements in that space, and now we'll be ready as we've already started training the next generation in that group. In addition to that, though, I would tell you our submission count is still up. We continue to see growth in submissions throughout that property book, and we do want to look at that business. So it's harder to work now. There's just as much work, if not more, despite the fact that terms and conditions are more challenging. So you can't necessarily shortcut that. You do want to support the producers that are sending you business. So there's a little bit of -- we still need to keep investing in supporting that. Operator: Our next question comes from Hristian Getsov with Wells Fargo. Hristian Getsov: On the property competition, I guess, what needs to happen in the market for us to see an inflection in the rate decreases, at least like moderate from here? Is it -- it's like thinking about it, is it simple as a large outsized cat event, call it, north of $50 billion? And then I guess on the competitive dynamics you're seeing in the space, like how much of that competition would you classify as being irrational in pricing versus a more rational normalization of the cycle given the strong rate increases and profitability we've seen in the line? Jennifer Klobnak: Well, this is Jen. I think what we need is a little bit less capacity. And whatever can cause that to happen would be beneficial to the market. So whether that's an incredible cat event, whether that's a change in the investment opportunities to shift to a better opportunity in the greater space, anything of that nature that would reduce capacity would be beneficial. Having said that, all we need is a stable market. I will tell you that the current catastrophe market is well priced with reasonable terms and conditions in a lot of places. So we can navigate this market easily if it would stay where it's at. Now with reinsurance renewals being a little more friendly on 1/1, it could soften further. And so again, looking for either a large cat or some other event that would take capacity out of the market would be beneficial. I can't quantify how many are reasonable or unreasonable as we are navigating that market every day, responding to our producers, we see business being stolen between producers. There's a lot of movement going on just because people have changed which wholesalers they work for. So that's one factor, but we also see carriers that have aligned interest being responsible. And so we don't mind competing against those people. That's a fair playground. It's where capital providers that don't have aligned interest. The MGAs, in some cases, have no downside. It's not aligned with the carriers who have to pay those claims at some point. That's where there's a disconnect and where the MGAs want to use up that capacity quickly because right now, the market could be better than it is a few months from now. So I don't know how much of that market there is. I can tell you there are examples where people have received capacity for this year that are multiples and multiples of what they were able to provide in terms of capacity last year. So we just know that we can't compete on some of that, so we don't spend a lot of time on those types of deals. We kind of moved in the spaces where we know we have a chance of the business. Hristian Getsov: Got it. And then switching to personal umbrella, are you seeing a shift in the competitive dynamics there, just given we're seeing more of a focus on growth from some of the bigger personal line carriers and mutual? I'm trying to get a sense of the ability to compete as a monoline provider becomes more challenging given a lot of these other players are focused on bundling, which would include personal umbrella. Jennifer Klobnak: Yes, I'm a fan of the [indiscernible] commercial. But other than that, I would say the personal umbrella market continues to evolve. Some of those personal lines carriers that bundle their business, I know, are increasing rates tremendously, changing their coverage. You see that in filings. You see them in the press. And we do partner with some of those same carriers to offer our personal umbrella when it doesn't match their appetite. We have a pretty wide moat around our business. We're pretty embedded with our business partners. They find value in our product and in how we support that product through servicing. So we update our information daily on what kind of business we're getting in the door. We're talking to our producer partners monthly to see what they need and how we can service that business. So I feel pretty good that we have a good base to go from a position of strength going into the next year. We're also still getting some rate increases in various states where we need some rate. And so I see opportunity for growth from both rate, but also from our continued great service that we provide to our producers, I think we'll have more opportunity there. So while there's some more competition coming in on the edges, I think people might be noticing that we do a pretty good job of this. There's some people talking about getting in. We're going to defend our space. We're going to continue to evolve this product and offer a quality product to insurers out there who need this coverage. Hristian Getsov: Got it. And if I could sneak one more. Have you seen any benefit on submission volumes from the elimination of the diligent search documentation requirement for surplus lines in Florida? I know that's a pretty good portion of your premium mix. And I just wanted to see if there's any updated thoughts there. And then also if you have any updated thoughts around the general tort reform we've seen, not only in Florida, but in states like Georgia on loss trends? Jennifer Klobnak: I'll tell you that in Florida, in the last year, we have actually tried to slow our new business a little bit given the severity that we were seeing previously. And we just talked about our actions from last fourth quarter, for example. And so with some of the actions we've taken between rate attachment points and curtailing some of the production we want from certain producers, we haven't really seen an impact from that specific regulations just because we're more controlling our growth at this point in that state. On the other side of it, I'll tell you total reform has been a positive. We don't necessarily have a number we can point to, but we do see on individual cases where we have a more reasonable resolution because we can present actual medical costs, what people pay, just -- the things that we can do to fight the plaintiff's attorneys and their playbook create a more fair playing field there to resolve claims fairly for that insurer who has an actual loss. We're willing to pay for that loss. We just don't want to pay the attorneys as much. And so that environment has changed and has improved. And we'll probably see that in other states. It's a little more early like for Georgia, for example, but some of the things they have passed have been favorable as well. And in addition to that, all of that third-party litigation, there's a lot of states now that have started passing legislation to get those kind of arrangements disclosed and that kind of thing, which will also help both in personal umbrella as well as broader auto coverages. Operator: Your next question comes from Andrew Andersen with Jefferies. Andrew Andersen: Recognizing really strong overall results and a very good long-term track record here. If we just kind of focus on Casualty over the last 2 years, 98% reported combined ratio, a little bit uncharacteristic to have that 2 years in a row. And I realize there were some headwinds on trucking, both on the reserving side and on the premium side. But do you feel that some of these headwinds within this Casualty segment are behind you or have really worked their way through and you're kind of entering '26 in a better position, both from a booking ratio and from any premium growth headwind into next year? Aaron Diefenthaler: Well, Andrew, I think as we've characterized the product level rate increases we've gotten within the Casualty segment, we think that's probably the strongest foundation we can offer in terms of data itself. We feel better about where the overall rate level is for a lot of these businesses that have had some challenges related to them. So it's hard to say the exact point in time where you turn the corner into something that may offer some additional potential for expanded margins, but having that rate profile and having some compounding of those rates over multiple years, we think, is a good foundation. Jennifer Klobnak: Yes. In addition to that, I would say we have clearly slowed a bit releasing reserves for some of those coverages. I mean we've talked about that in the past, too. Initial booking ratios tend to hold up a little longer. While we may be seeing positive signs like claim counts that I look at, we're not acting -- we tend to be pessimist. So we don't tend to act on the good news. We tend to wait and make sure that we are seeing enough good news for a while I think of a trend before we're going to recognize it for sure. Craig Kliethermes: Andrew, I grew up in the Show Me State of Missouri. So we got to wait and see. On good news, we're slower to usually recognize that. But if we see something go in the other direction, we obviously like to try to get that up as quickly as possible. So that's the way we look at things. Andrew Andersen: Understood. And on the property side, you've talked quite a bit about the MGA market being aggressive there. How would you characterize kind of more of the traditional or admitted carriers? Jennifer Klobnak: Well, I would say that everybody wants premium. So it's a fight out there, but I would say the other E&S carriers are fairly responsible. I'll give them credit. And so we don't -- again, we don't mind competing against them. I think if we could just reduce the little capacity in that market, it could -- it would at least stabilize, which would be great. Andrew Andersen: And then maybe last one. I think I heard 5% for Hawaii home. Is that just reflective of we've lapped kind of the book rolls here because it's quite a decel quarter-over-quarter? Jennifer Klobnak: Yes, that's correct. So we had a couple of book rolls that ended right at the end of the third quarter. And so now we're back to our outstanding local service and just competing on a regular basis at this point. In addition to getting green, we have gotten rate increases that will drive a little bit of growth as well. Operator: Your next question comes with Mark Hughes with Truist. Mark Hughes: Any granularity you can provide on that property dynamic just in terms of the competitive pressure as you think about Q4 relative to Q3 or even through the quarter, kind of the monthly pressure? Is there -- I know it's certainly more challenging year-over-year, but has it stabilized at all? Or is it still under incremental pressure? Jennifer Klobnak: That's a tough question. You're getting pretty granular, I would say. Every month, we -- obviously, we look at it on a very regular basis. And each month, we -- if it's good news, we hope it begins a trend. If it's down, we are like what's going on. So I don't know that I should provide color on a monthly basis. I'll tell you that in the fourth quarter, that's our smallest quarter for renewals. I mean there's just not as many renewal dates out there. So it's a tough quarter to really conclude about anything. If 1/1 is a big date and then in the spring 4/1, 5/1, 61, 7/1, all those are bigger dates, and that's really where you make your book of business. So all of that is coming up. And I think providing any 1/1 color on renewals probably provide a little too much information. So the market is still competitive. It continues to be, and we will see how that plays out this year. Mark Hughes: Yes. And then the -- thinking about the lower reinsurance costs, would you say pricing was already incorporating that? There seems to be a pretty wide expectation for 10% to 20% decline. Just thinking about whether -- when that actually happens, does that mean much for the market in the near term? Jennifer Klobnak: Well, as we prepare for our 1/1 renewals, we did contemplate a bit of a decrease in our cost. And so we built that into our benchmark pricing, which indicates how we need to price the business. I don't know what other companies do. I will tell you that last year in 2025, January, we didn't really see an impact from the reinsurance renewals. But in February, we noticed that that's when all of that information trickled down to the underwriter desk and people got more aggressive because they did get relief last year on 1/1. So January, we're just going to put it in the books, and we'll see if the behavior changes later this spring to incorporate that. We also see changes on 4/1 because that's when some MGA relationships renew their capacity. And so we may see further change in behavior at that point in time, but that's yet to be determined. Mark Hughes: And then one quick one, if I might. You've mentioned that you were seeking additional rate increases in personal umbrella, and that would help 2026. Can you size that? Jennifer Klobnak: Well, this is a 50-state product where we have to file in each state and each state has a different process. So I can tell you that effective December 1, we did get a California rate increase of about 20%. And so that will bleed into part of the book. California is one of our bigger states. I can tell you our process is that every quarter and now that we have year-end, it will be nice to, again, look at results to see which states require rate, where we're not getting adequate rate and where are we? Those analyses are underway already. And so we'll conclude in the next couple of weeks if we need to start taking additional action. But just based on these filings that were approved in the second half of last year, we know that there will be a pretty good amount of rate going into the book this year as well. Operator: Our next question comes from Meyer Shields with Keefe, Bruyette, & Woods. Meyer Shields: Jen, when you talk about lower auto claim emergence, is that across accident years? Or was that an accident year 2025 comment? Jennifer Klobnak: These are just new claims that are received in 2025. They could be related to 2025 accident year or previous accident years. Craig Kliethermes: I was just going to say, I think we did see a reduction last year as well, so 2 years in a row. Meyer Shields: Okay, that makes sense. I just want to make sure that I was understanding that correctly. The $150 million catastrophe reinsurance limit reduction, was that at the top end of the tower? Did your attachment point change at all because of the smaller book? Jennifer Klobnak: No. So we maintained our $50 million attachment on the cat tower and just brought that tower down. Meyer Shields: Okay. And then final question. Just -- you mentioned, I guess, concerns about competitors seeking to meet their budgets. How significant is maybe fourth quarter competition compared to other quarters? I've heard the comment a lot. I'm just trying to get a sense of how material you think it is in the market? Jennifer Klobnak: I mean, overall, the fourth quarter is always challenging, and our underwriters always say, oh, other people -- and it's legitimate, other people are compensated on top line directly, sometimes not even compensated on bottom line. It's just strictly top line. So you do see a rush to meet people's bonuses. But I argue with them that, that happens every year. So the real test is, is it worse this year in the fourth quarter versus last year fourth quarter, that's sprint to the finish. And in some of our segments, I would say people have this feeling it's worse, but it is a lot of feeling as opposed to something you can measure to some extent. That's offset by -- in some cases, like in property where we have just less business that renews. So you can't really measure what's going on as well as other quarters where there's just more business available. Meyer Shields: Okay. No, that makes sense. I guess the question for me is always is in the first quarter so far less competitive than the fourth quarter that just ended? Jennifer Klobnak: Sorry, I didn't follow that. Meyer Shields: I'm just asking whether some of that competitive pressure has abated in the first quarter because right now, people aren't as worried about 2026 premium budgets. I know it's early in the first quarter to even ask. Jennifer Klobnak: Well, it's too early to ask. Yes, we haven't closed January yet. So it's hard to see -- I see a partial -- a partial month is all I have right now. Operator: Your next question comes from the line of Carol Bruzzese with Philo Smith & Co. James Inglis: Sorry, it's James Inglis. Great quarter and year. But I've got a question about the reserve development. If you look at the '24 and prior cat events, there was a big swing in both the quarter and the year. And I'm wondering, is that just sort of a normal thing -- time to figure out what the cats actually ended up as? Or is there something specific or unusual in there? Aaron Diefenthaler: Not unusual, Jamie. This is Aaron. You think back to last year, we had a couple of sizable storms in Helene and Beryl. I think we outlined our expectations for there in our third quarter results and also at that time, offered a range of potential loss activity around Hurricane Milton, which was early days in the fourth quarter of last year. We tightened up our expectations as of the fourth quarter release last year, but that was close to $50 million of an estimate just on Milton alone. And so you get -- a year on from those events and then some -- and you have some more comfort around what actual losses are going to transpire, and we felt it's prudent to take down some of the IBNR. Those were not the only events that were incorporated in that analysis. We have cat activity going back over several years that we examined and each storm stands unto itself. And it's a hand-to-hand combat in terms of examining claim activity, what's outstanding, what may be in litigation, all fitting into our thinking on what to take down there. Operator: Your next question comes from the line of Gregory Peters with Raymond James. Mitchell Rubin: This is Mitchell Rubin. You referenced the 13% rate increase in transportation this quarter. Is there any quantification you could provide on the magnitude of the underlying loss trend you're seeing in the portfolio? And what level of rate increases you believe might be required in 2026 to sustain rate adequacy in the book? Craig Kliethermes: Yes. Mitch, this is Craig. So I'll speak to that. So -- I mean, we anticipate to continue to try to get increases going forward, probably double-digit increases. We have seen elevated severity trends in pretty much all auto businesses since COVID, since the courts have opened back up. At some point, we think that has to subside. I mean people are going to want to continue to pay 10%, 15% increases in their insurance or they can't afford to pay 10% to 15% increases in their insurance. So at some point, there's going to be a breaking point where we're going to get more tort reform in some of these states so that we can moderate this loss severity trend. In the meantime, you can expect us -- I can't speak for other companies, but you can expect us to try to at least get the increase to cover trend. And if we can't, we'll get smaller. That's just the way we operate. So we're going to try to continue to get 10%, 15% increases on auto business going forward until we see that loss cost trend subside. Mitchell Rubin: Great. That's very helpful. Can you provide any additional detail on how your technology investments over the past several years have impacted your underwriting performance, particularly touching on changes in submission to bind ratios within the transactional surety business? Jennifer Klobnak: Well, I would say our investments in technology have done a couple of things. I focus on a couple of things. One is really improving our customer experience, and that starts actually before the technology. So considering, for example, what questions we ask, we've tried to simplify it in a few places, the application questions that we're asking, making them more straightforward. I don't know about you, but whenever I get an application, I struggle with how do you answer this question. So trying to simplify it based on feedback and input from our producer partners and insurers has been really critical, then providing that through automation and modern systems, which we've been upgrading over the last few years. For example, in surety, we're rolling out an upgrade to our current offering. We've been in that business since 1992. As you can imagine, that technology has changed tremendously over the decades. And so our recent investment is rolling out to provide end-to-end ability to look at what's going on with surety bonds by those producers so that they can service that business better without feeling like they're bothering us to ask questions and whatnot. So that will be very helpful to them. So really kind of that customer experience and getting business in the door has been a big investment. Our second large bucket would be efficiencies. So there are a number of things we've done with efficiencies through various types of artificial intelligence and various types of other automation to try to just have people spend more time using their brains instead of doing administrative tasks. So that can include things like summarizing submission information, summarizing claims, lengthy claim information, they can mean inputting various e-mails that come in regarding claims go straight into claim files. So that we have to look at them and decide where they go, updating loss runs that come right in and go straight into our systems. So things of that nature on efficiencies have been a big category. And then lastly, I would say is just that improving that feedback loop that we have between underwriting claim and analytics, really getting our data in places where we can really look at it, slice and dice it very granularly, having the ability to update that daily where it makes sense. Some business units that doesn't make sense, we don't need to invest in that. But in others, there's data available to drive decisions that we like it updated more often. So we've invested in that. We've rolled out a number of dashboards to provide people insight into submission counts, binding percentages as well as marrying that up with loss information, so which producers, which states, which types of business, which attributes of an insurance drive loss activity. All of that information has been ramped up to help us make better decisions as we're underwriting and handling claims. So those are kind of the 3 big buckets that we have focused on. And I would say, given our diverse portfolio, you're never done, but we have spent a lot of time and effort, and I think we're reaping the rewards in that we continue to make an underwriting profit, which is in a more challenging environment as the market softens, we've got everything in place so that we can keep making great decisions for that bottom line. Operator: There are no further questions at this time. So I will turn the conference over to Mr. Kliethermes, RLI's President and CEO, for some closing remarks. Craig Kliethermes: Thank you. Before we wrap up, I want to take a minute to reflect on what this year, our 30th consecutive year of underwriting profitability truly represents. 30 years ago, RLI was a very different company. We wrote about $270 million of gross written premium. Roughly 1/3 of our business was earthquake insurance. We were still in the contact lens business. Our market cap was under $200 million, and we were proud to make Ward's top 50 performing insurance companies for the fifth straight year. For the record 2025 representing our 35th consecutive year on that list. The world was a different place, too. Public access to the Internet was just getting started with AOL and Prodigy. The Sony PlayStation that just hit the market. Cell phones were used for one thing, to make phone calls. A lot has changed over those 30 years, but the things that matter most to us haven't. There are still no shortcuts in this business. Sustained success is built the same way it has always been with discipline, accountability and a lot of hard work. What gives me the most confidence as we look forward is not just our results, but how we produce them. We have a strong balance sheet, a diversified portfolio and a team of engaged employee owners who care deeply about the decisions they make and the outcomes they produce. Every day, they show up committed to making RLI a better company for its customers, their coworkers and our shareholders. Our founder like to say that great companies are built one good decision at a time and that those decisions never seem easy in a moment. That philosophy has served RLI well for 3 decades, and it continues to guide us today. We're proud of what we've accomplished, but we're not done. We're optimistic about the future, confident in our approach and committed to doing what we've always done, staying disciplined, staying different and playing the long game. I would be remiss to end without thanking Todd Bryant, our CFO, who just retired at year-end after 31 years of dedicated service to RLI. I also want to thank our employee owners for their hard work, and we appreciate you all for your continued interest in RLI. We look forward to speaking with you again next quarter. Operator: That concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the fourth quarter of 2025. [Operator Instructions]. Now I will turn the call over to Mark Secor, Executive Vice President, Chief Administration Officer, for the opening introduction. Mark Secor: Good morning, and welcome to our conference call to review the fourth quarter results. Please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they may be accessed at the company's website, horizonbank.com. Representing Horizon today are Executive Vice President and Senior Operations Officer, Kathie DeRuiter, Executive Vice President, Chief Administration Officer, Mark Secor, Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, Executive Vice President and Chief Financial Officer, John Stewart; and Chief Executive Officer and President, Thomas Prame. At this time, I will turn the call over to Thomas Prame. Thomas? Thomas Prame: Thank you, Mark. Good morning. We appreciate you joining us. Horizon's fourth quarter results demonstrate the core strength of our community banking model and the excellent execution of the balance sheet repositioning. We have delivered on our shareholder commitment to create a top-performing community bank with durable peer-leading performance metrics and shareholder returns. The fourth quarter exceeded our prior performance estimates with annualized return on average assets above 1.6%, return on average equity approaching 16% and a net interest margin of 4.29%. Within the quarter, loan growth and credit quality continued to be excellent, and the team performed well, strategically reducing our portfolio of higher cost transactional deposits. Fee income continued to make progress, and our expense management efforts reflect our commitment to continually improve our operating leverage. We are very pleased with the fourth quarter results for our shareholders and the transparency the quarter provided to highlight the strength of Horizon's core community banking model that truly remains the cornerstone of our value proposition. Additionally, the company is kicking off the new year from a position of strength with the franchise well positioned to deliver durable earnings and continued top-tier performance metrics. As we look ahead, our thesis remains consistent with management focused on creating sustainable long-term value for our shareholders through our disciplined operating model, consistent profitable growth and peer-leading capital generation. I'll pass the presentation over to Horizon's Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share highlights for the quarter on our loan growth and our continued excellent credit performance. Lynn? Lynn Kerber: Good morning. Total loans were $4.9 billion at December 31, an increase of $60.7 million from September 30. Commercial relationship lending continues to be our lead strategy with modest declines in consumer loans and residential mortgage loans predominantly being sold into the secondary market. Commercial loans increased $76 million in the fourth quarter, representing 9% growth on an annualized basis. Growth in the portfolio mirrored our overall portfolio mix with 28% in commercial and industrial and 72% in commercial real estate. Our growth for the quarter was well balanced across our attractive footprint of Michigan and Indiana. This quarter, we experienced growth primarily driven by the markets of Troy and Kalamazoo, Michigan, Lake County, Indiana, Metro Indianapolis and Johnson County in Central Indiana. As noted on Slide 5, our commercial portfolio is well diversified by geography and remains consistent with the overall mix. As referenced in Slide 15 of the appendix, our portfolio remains very granular with our largest segment representing 6.3% of total loans. Overall, our pipeline remains steady and quarterly volumes are consistent with our averages, for new origination activity, payoffs and net line of credit activity. As we look forward to 2026, our focus remains on steady diversified growth, disciplined pricing and credit and growing well-rounded customer relationships to drive cross-sell activity with deposit gathering and treasury management services. Residential mortgage lending continues to be a foundation product for the bank and volume has been predominantly sold in the secondary market to align with our strategy to create capacity for commercial lending activities and the generation of gain on sale fee income. Balances for the fourth quarter were essentially flat in alignment with the strategy. Turning to credit quality and the allowance. Our credit quality metrics remain within expected ranges and are summarized on Slide 7 of the presentation deck. Substandard loans of $59.4 million represent 1.22% of loans for the fourth quarter, a decrease from 1.31% for the third quarter and 1.33% for the fourth quarter of 2024. Non-performing loans of $34.9 million represent 72 basis points of loans for the fourth quarter, an increase from 64 basis points in the third quarter and 56 basis points for the fourth quarter of 2024. The increase of $3.9 million in the fourth quarter is an increase of $2.2 million in commercial nonaccrual loans, $831,000 in residential nonaccrual loans and approximately $800,000 increase in consumer loans over 90 days past due. While there is a modest increase in this metric, our overall substandard loans have decreased by $5.2 million or 8% from the year ago period, and our net charge-offs remain within historical loan ranges and continue to compare favorably to the industry. Net charge-offs were $1 million in the quarter, representing 8 basis points on an annualized basis. Net charge-off results for the full year were very positive, totaling approximately $2.9 million, representing an annualized charge-off rate of 6 basis points. This is reflective of our conservative and consistent approach of Horizon's credit culture. Finally, our allowance for credit losses increased from $50.2 million to $51.3 million, representing 1.05% of loans held for investment. The net increase of $1.127 million was predominantly related to economic forecast assumptions. The related provision for credit losses of $1.6 million consists of the $1.1 million increase in the allowance, replenishment of our fourth quarter charge-offs, offset by a reduction in reserve for unfunded commitments with the completion of several large construction loans. We continue to monitor economic conditions and future provision expense will be driven by anticipated loan growth and mix, economic factors and credit quality trends. Now I'd like to turn things back to Thomas, who will provide an overview of our deposit trends. Thomas Prame: Thank you, Lynn. Moving on to our deposit portfolio displayed on Slide 8. Horizon's core relationship balances continue to show the strength of the franchise's community banking model. As noted in our Q3 earnings call, a deliberate strategy for the fourth quarter was to further reduce the organization's exposure to high-cost transactional deposits. As we review the quarter's results, we feel very confident in the strength of the deposit portfolio in terms of mix, relationship tenure and granularity entering 2026. Comparing the current portfolio to the fourth quarter of 2024 provides good insight in the stability of the noninterest-bearing balances, which are up year-over-year and the improved cost structure of the core relationships within the interest-bearing segments. The performance of the team transitioning and improving the profile of our balance sheet while capturing the benefits of previous rate cuts has created significant benefits for the organization heading into 2026. Additionally, we believe our deposit portfolio continues to have opportunity to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets. The team is well positioned to fund our go-forward loans grow with a treasury management team that has renewed capacity, commercial relationship bankers with aligned deposit objectives and an excellent branch distribution in some of the most attractive markets in Michigan and Indiana. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional fourth quarter financial highlights and provide an outlook to what we believe will be a very successful 2026. John Stewart: Thank you, Thomas. Turning to Slide 9. Q4 marks the ninth consecutive quarter of net interest margin expansion, totaling 188 basis points from the low in Q3 of 2023. What you see now reflects the true economic profitability of our organic community banking operations without the distractions of the non-core assets and liabilities that were impeding our returns previously. Through these efforts, we believe we have built a balance sheet that is relatively neutral to changes in interest rates with a cash flow profile that should create reliable returns for our shareholders. As of the year-end, the restructuring activities are now complete and balance sheet activity from here is expected to be marginal and tactical, where growth will be driven primarily through commercial lending relationships funded with organic core deposit generation. Specific to Q4, the net interest margin increased by 77 basis points to 4.29% and above the upper end of our guidance range. Certainly, the remainder of the balance sheet repositioning played a big role in the linked quarter expansion, which can be seen in the transition of the earning asset base to more than 80% in loans and deposits are now 93% of total non-equity funding. The margin did see some modest upside relative to expectations from the decision to increase the planned deposit runoff to nearly $200 million in the quarter, which carried a weighted average cost exceeding 4% versus the planned $125 million. However, on an organic basis, we continue to see notable stability in our loan yields, as origination spreads held up well and reductions in our core deposit costs that exceeded prior expectations as realized deposit betas approached 40% for the rate cuts during the quarter. Looking ahead, to account for some of the favorable outcomes just mentioned, you will note that we have increased our net interest margin outlook for the full year 2026, which we now expect to be in the range of 4.25% to 4.35%. Importantly, as has been the objective all along, we are not anticipating there to be much volatility in that result over the year. New loan production coupons above 6.5% continue to exceed cash flows rolling off the book. At the same time, we are anticipating somewhere in the range of $75 million to $100 million of principal cash flows from the securities portfolio over the year, which is coming off at a weighted average FTE rate of approximately 4.75%. Replacement yields in January thus far have modestly exceeded that rate. As you can see on Slide 10, reported noninterest income results were broadly in line with expectations at $11.5 million for the quarter. Excluding securities losses in the comparable period, total fee income was up 7% year-over-year, led by strong results in wealth management and total mortgage fees, which grew 19% and 14%, respectively. Results in Q4 did include a BOLI death benefit of just under $600,000, which is included in other income. On Slide 11, at $40.6 million, expenses were generally in line with expectations and as planned, included $0.7 million related to the write-off of the remaining unamortized issuance expense for the subordinated notes we called on October 1. Absent this item, expenses were up modestly from the linked quarter related to seasonal occupancy-related expenses and higher marketing costs. Results also include episodic legal fees related to certain legacy items that have now largely concluded. Turning to capital on Slide 12. Capital ratios have improved quite strongly in the quarter on the heels of a much more profitable balance sheet. Additionally, you'll recall in our prepared remarks last quarter that we anticipated the leverage ratio and the total risk-based ratio to revert closer to Q2 '25 levels as average assets caught up with the mid-Q3 balance sheet activities and the prior subordinated debt issuance was repaid in early Q4. You can see that these results were consistent with those expectations. As we have previously communicated, we are comfortable with the company's current capital position, particularly against what is a significantly derisked balance sheet. Additionally, as our 2026 outlook suggests, our peer-leading levels of profitability will accrete capital very quickly, which you will see over the course of the coming year. Turning to our 2026 guidance on Slide 13. Our overall outlook has generally improved from the preliminary commentary provided last quarter, which I will make a few comments about. Period-end loans and deposit balances are expected to grow mid-single digits. This outlook would suggest deposit balances will grow modestly more than loan balances. We anticipate balance sheet growth to be driven by organic deposit funding going forward, leveraging our relationship banking model and well-positioned 70-plus branches located throughout Indiana and Michigan. Non-FTE net interest income is now expected to grow in the low teens year-over-year. This will be driven by the FTE net interest margin in the range of 4.25% to 4.35%. Average earning asset balances are likely to modestly exceed $6 billion for the full year. The first quarter average earning assets are likely to be down from the fourth quarter averages, but should represent the low point for 2026. This outlook includes the assumption for two, 25 basis point rate cuts, one in April and October, but neither moves the needle much on the outlook as intended. Fee income in the mid-$40 million range generally expresses the continuation of trends we have seen over the back half of 2025. Expenses in the mid-$160 million range represents standard inflationary expense growth, modestly higher expenses in medical benefits compared with 2025 and the continuation of ongoing growth and marketing efforts. Finally, the effective tax rate is still anticipated to land in the range of 18% to 20%. Overall, 2026 should be a strong year for Horizon, steady growth with durable peer-leading returns on assets, returns on tangible common equity and top quartile internal capital generation. With that, I'll turn the call back over to Thomas. Thomas Prame: Thank you, John, and I appreciate the summary of the quarter and the updated outlook for the year. As you can see from our financial results, we're very well positioned entering 2026 to create significant shareholder value through durable top-tier financial metrics, excellent capital generation and a premier community banking franchise located in some of the best markets in the Midwest. As the leadership team, we'll continue to be front-footed in our execution and disciplined in our operating model, focusing on profitable growth and continued smart stewardship of capital decisions for our shareholders. We look forward to what we believe will be a very positive outlook for our shareholders, clients and the communities that we call home. At this time, I would like to turn the presentation back over to our moderator to open up the lines for questions for the management team. Operator: [Operator Instructions] The first question comes from Brendan Nosal with Hovde Group. Brendan Nosal: Maybe just to kind of start here at a top level, if you guys look at your outlook for 2026, pretty similar to what you guys offered last quarter. As you look at kind of the opportunities and risks, like what in that outlook could end up going better for you guys? And conversely, what are some downside risks as you look at the year ahead? John Stewart: Brendan, this is John. I think first and foremost, I commented on this in my prepared remarks. We actually view the outlook to be slightly more favorable than it was when we initially gave it. The NII, in particular, is where the leverage is higher base and more growth in the low teens. I think as you kind of generally push that through the numbers, you'll get a non-FTE number that's closer to $260 million. I think that guidance was maybe closer to mid-250s last quarter. FTE would be then about $4 million above that. So we do view there to be a more optimistic outlook. Maybe the very modest offset to some of that NII upside would be on the expenses, but really nothing materially there, just maybe $1 million delta or something from what we had initially put out there. I think some of the levers as you kind of work your way through the year, it's really going to come down to the ability to grow organic core deposits to fund organic core commercial loan growth. And I think a favorable outcome on that front is probably the biggest leverage point to upside to the outlook. And conversely, the opposite would be true. The loan growth pipeline, Lynn can talk a lot more about this. We feel really good about it. Spreads have held up really well. The team has done a fantastic job on the asset side, and it's going to come down on the liability side, I think, most notably. Brendan Nosal: Okay. All right. That's helpful, John. Maybe pivoting here to that topic of loan growth. Is there a point at which like the modest decline in the consumer category of the loans eases, which would allow the high single-digit commercial loan growth to shine through more visibly in that net growth number? Thomas Prame: Thomas, thanks for the question again. As we look at the portfolio of our loans, our business model is truly a commercial banking model. That has been our lead strategy and Lynn and her team has just done a fantastic job on that. our consumer loan portfolio right now is primarily made up of HELOCs and consumer closed-end mortgages that deal with real estate. We feel as though we are well positioned there. We have a great credit profile in that area. Again, that's something we feel like we're going to stretch and try to create demand and/or try to create excess growth in that with taking on extra risk. So for us, it's a good product, but we're not seeing the consumer side to be something that we're going to probably push to accelerate. We really found great value not only on the lending side in commercial, but truly getting the full relationships with the deposits. Brendan Nosal: Let me sneak one more in here. Just on asset quality, can you unpack the rise in NPAs over the past couple of quarters? Like each quarter's increase is relatively small, but I think they've been up in 5 in the past 6. Like is this normalization from a low base? Or is there perhaps pockets of stress that you're seeing at this point? Lynn Kerber: Thanks for the question. I appreciate your observation. We had a very low base that we're starting from, and our overall metrics continue to be very strong and within the expected ranges for our portfolio and credit risk appetite. So recognizing that we're starting from a very low point, any increase, while modest, may appear to be a larger percent. As I noted in my comments, substandard loans did increase this quarter, roughly $2.2 million of it was commercial, $800,000 mortgage, nonaccrual and over 90 days, $800,000 consumer. These are all relatively modest numbers. I don't see it as reflective of any one sector, any particular product. When I look at our commercial nonperforming, it's really more episodic with the customer. As I shared in some previous calls, we had one customer that started up a new business, they had road construction. It just caused some delays. Sometimes we use nonaccrual as a tool to help them weather some of those challenges that they have. And the goal always is to hopefully get them back on the right path and upgrade them. Sometimes, however, we recognize that it might be a liquidation and try to work hand-in-hand with the customer. I think ultimately, though, if you look at the bigger picture, substandard loans have decreased for the last 3 quarters and roughly 8% for 2025. And if you look at commercial specifically, our criticized loans have actually decreased 17% since December '23 and 7% since December '24. So I think our overall metrics are good. I look at this just really as the migration through the buckets. Operator: The next question comes from Nathan Race with Piper Sandler. Nathan Race: John, I was hoping you can just unpack some of the margin drivers over the course of this year? It seems like you guys are pretty well matched in terms of short-term rate-sensitive liabilities and assets. So I wonder if you could just hit on kind of what the asset repricing tailwinds look like and kind of where you're originating new loans these days relative to the portfolio yield? John Stewart: Yes, sure. Thanks for the question. Yes, as I said in my prepared remarks, new originations spreads continue to be really good. We see that continuing here in January. New origination yields continue to sit on a coupon basis above 6.5%. We've got cash flows coming off the portfolio on the loan side that are still below 6%. So you do have some front book, back-book repricing that will help as we just kind of grow through the year. On the other side, it's going to come down to just deposit -- core deposit generation. I think those are going to be the big drivers for the margin, as I mentioned earlier. The only other margin leverage that will flow through over the course of the year is just whatever the cash balance ends up looking like. So as the guidance suggested, based on where cash ended the year, the averages might be down in Q1 on a cash basis, the expectation deposit growth versus loan growth, the assumption there is that the excess is just flowing back into cash for the time being for liquidity purposes and nothing else. And of course, that's not -- that's NII accretive, but maybe at the margin on a NIM percentage, modestly dilutive. So those are -- where the cash kind of lands is going to be whether or not it's up a bit flat, whatever the outcome ends up being, but I think those are the big drivers. Nathan Race: Okay. That's really helpful. And changing gears a bit, as you guys alluded to in your comments, capital levels just with the profitability profile are going to build a pretty strong clips. I could see most capital ratios increasing by 100 basis points year-over-year by the end of this year. So just curious, maybe, Thomas, if you can update us on some of your capital deployment priorities. I imagine supporting growth is still #1, but would be curious to get your thoughts on the opportunity to deploy excess capital via acquisitions and kind of what you're seeing across that landscape these days? Thomas Prame: Thanks for the question. And also, thanks for the recognition of the strong capital generation of the new profile of the organization. We're very pleased with the performance of the company and also the positive capital generation from the results coming from the fourth quarter. As we have discussed previously, there's ample opportunity internally to grow and expand our organic business model. We are located in some of the best markets in Michigan and Indiana, and we still see significant upside potential just through organic growth in our community banking model. This is going to continue to be our primary focus. As we look at our capital going forward, as we mentioned in the third quarter, this isn't going to burn a hole in our pockets. In the near term, we believe we have ample runway to build capital to align with some of our industry peers. And again, as we review capital decisions in the future, we're going to continue to be disciplined about this and make sure that we focus on logical deployment that's accretive to our shareholder value proposition. Nathan Race: Got it. That's helpful. If I could just sneak one last one in. I appreciate the expense guide. Curious if that contemplates any additional commercial hires? Obviously, you guys have been active taking advantage of M&A disruption across your footprint in the past. And there's obviously been some notable M&A announcements with some larger competitors that are maybe more focused on some southern geographies these days. So just curious what you see in terms of the opportunity to either add talent or just benefit from the existing team to grow share on the commercial side? Lynn Kerber: Yes. Thank you for that. First of all, I'd say we have a stellar team. At this point, I don't see that we're going to be adding, although there may be some opportunities presented that we consider with some of the changes in the market. But our team has been performing really well, as you can see with our growth numbers, just doing a fantastic job, not only in volumes, rate management and credit quality. So really pleased with them. We do have a few retirements that are occurring. Really pleased with the candidates that we've hired and the talent there. So I would say that we're probably benefiting from some of that disruption in talent there. We have expanded our treasury management team over the last year. We may look at some opportunistic additional adds throughout the year there, too. Operator: The next question comes from Damon DelMonte with KBW. Damon Del Monte: First question, just on the outlook for fee income. I was hoping you could just talk a little bit about some of the drivers that you see leading to the kind of that mid-$40s million of revenues for 2026? I don't know if it's going to be driven more by fiduciary duties or do you have other treasury management services? Kind of I guess, what are your key assumptions behind that growth? John Stewart: Thanks for the question. This is John. As we kind of roll the year forward and look at our budgeted assumptions, there's not one piece of that fee business that is towing the line, so to speak, modest kind of low- to mid uptick in service charges and interchange would be the assumption. We've got some specific initiatives in the market around interchange, but nothing -- we're not assuming anything in that outlook that would significantly change that view for 2026 anyway. Fiduciary activities expect them to continue to be strong. Mortgage should continue to grow and hopefully benefit rates. We'll kind of see what the rate environment does. But as we get back into the seasonally strong years, we'll get a better -- strong quarters, excuse me, we'll get a better outlook there. But there's nothing in particular, Damon, that is really pushing the growth number for 2026. It's pretty well balanced. Damon Del Monte: Okay. That's helpful. And then just quickly on the margin. Do you happen to have what the spot margin was for December, kind of where you exited the year? John Stewart: Yes. It was slightly a couple of basis points above where the full quarter average was, Damon. Damon Del Monte: Okay. And I mean, based on your commentary, John, it seems like your guidance is including 225 basis point rate cuts. So it kind of seems like, again, based on what you've been saying, you guys seem to be pretty neutral. So we shouldn't see much movement either way if we do have a couple of cuts here in '26. Is that a fair characterization? John Stewart: Yes. We continue to believe that's the case. I mean, if you -- we've walked through some of these numbers before. If on a static balance sheet, what happens inside 30 days, it's -- we'll probably need about a 30% beta on our non-time deposit balances, interest-bearing deposit balances to be neutral. We exceeded that in the fourth quarter. The assumption is that we would be able to kind of just achieve that in 2026. And so with that outcome, with that set of assumptions, I think, yes, your statement is correct that the rate cuts would not significantly change the trajectory of NII or the margin for the year. Similarly, it's not a headwind if there is not a rate cut. Operator: The next question comes from Terry McEvoy with Stepehns. Terence McEvoy: Looking at the loan growth in 2025 on the commercial side, do you expect it to be weighted more towards CRE like we saw in the fourth quarter? Or do you expect more of a mix between C&I and CRE? And then I'm just curious, is leasing still, call it, a priority for Horizon? Lynn Kerber: Terry, in regards to your question, we've been really consistent with our commercial portfolio. Our mix hasn't changed much over the last 3 years that I've been in the seat. If you look at our quarterly origination mix, it's generally pretty consistent with the overall book mix. We have been intentionally looking to add some additional C&I. Our equipment finance division has been a very nice complementary piece to that. When I say it's a priority, I would say it's one of our core products. And so is it going to be outsized? No. It's going to be complementary to what we're doing. Nathan Race: And then as a follow-up, you opened up a pretty cool office in Kalamazoo last summer in terms of just history there. Lynn, I think you mentioned loan growth in that market. So my question is, are you planning to open up more offices, which, to John's point about funding loan growth, a new office would definitely help on the deposit generation side? Thomas Prame: Thanks for the question. And I appreciate the commentary on the Kalamazoo office. Very excited about that and glad to be part of the renovation that's happening in what we feel is just an outstanding community. We do have another office that will be opening up this summer in Indianapolis that we started about 1 year ago, and that should be coming to fruition. We will look at some different opportunities throughout Michigan and some of the core markets that we've talked about that we feel like there's an opportunity for additional distribution where our teams have just have done extremely well, in both loans and deposits and get benefit from perhaps a second or third location. Those will primarily be in the Grand Rapids, Lansing, the Holland area that we feel as though we've got the right people, the right teams, the right penetration, just again, need a little bit more market reach through distribution. But I wouldn't say it's going to be a wholesale branch strategy versus very optimistic as we see opportunities come to fruition in the marketplace. Operator: [Operator Instructions] The next question comes from Brian Martin with Janney Montgomery. Brian Martin: Just wondering, can you -- how has the pricing been both on the loan and deposit side in the markets? Have you seen any irrational pricing? Has it been -- it sounds as though it's not been irrational, but just hearing mixed commentary from other banks. So just thinking about that. Lynn Kerber: Yes, I'll speak to commercial. I would say that it really just depends on the segment of the customer and their profile. I mean we are seeing some rates that -- for commercial real estate credit tenant, very attractive deal profile, it's pretty aggressive. And we've been seeing some 180, 190 spreads, which is pretty low. And so is it irrational? I guess every organization has to make a decision on what works in the balance sheet. But it just -- it depends on the sector. I think for us, we're priced appropriately for the types of deals that we're doing. We're in market generally, and there's going to be some that are higher and a little bit lower. So I wouldn't say it's irrational. There's just some competitiveness in certain segments. Thomas Prame: This is Thomas, I completely agree with Lynn's answer there. Horizon has positioned itself for decades of being a relationship bank, not a price lead bank. And so for us in our markets where we are, there's always been great competition. And for us, I think whether rates are up or down, we've seen recovery in our marketplace, there's always rational pricing out there, both on loans and deposits. And I think it gets to your go-to-market strategy. Our go-to-market strategy is really about being embedded in our communities, doing more than just price and really about being a consultant to our clients, both on the loans and deposit side. So again, I think for us, how we approach our clients, how we approach our communities probably gives us a little bit of insulation from the edges on pricing and for us also from not just the pricing, but also a discipline around credit, I think it's been a forefront of the success we've seen over the years. Brian Martin: Got you. And last couple. Just in terms of the commercial pipeline, Lynn, did you talk about kind of the commercial loan pipeline here? I know you talked about what areas did well here in the fourth quarter and geographically, we did better. But just the pipeline today, where that stands heading into first quarter? Lynn Kerber: There's always a little bit of seasonality. And so you look at the first couple of months of the year, it's usually a little bit quieter. It tends to pick up in the second quarter or third quarter. So you'll hear me talk about fluctuations from quarter-to-quarter. That being said, our pipeline is pretty strong and steady. You're just going to see some fluctuations from quarter-to-quarter. We might have a couple of larger loans one quarter. We might have a larger commercial real estate project that goes to the secondary market or is sold that could impact results. But usually, it's pretty even. So at this point, I feel like it's steady as she goes. You just might see some fluctuation quarter-to-quarter based on seasonality. Brian Martin: Okay. So pipeline is likely down from what it was last quarter and just given seasonality. And I guess your expectation will be as you kind of build the loan growth, it's more second quarter and beyond, maybe less in the first quarter. Does that seem fair based on your comments? Lynn Kerber: I don't know that I would infer that. It's just first quarter is traditionally a little bit softer as far as originations, but the pipeline itself is solid, and we look out more than 90 days, we're tracking 30, 60, 90, 120 up to 190 days. So I don't see the pipeline softening at all. It's just -- my point was is you're just going to have some timing differences month-to-month. Brian Martin: Got you. Okay. That's helpful. And I don't know if it's maybe for John, but I think someone talked about the loan repricing or kind of the back book repricing being one opportunity. What -- can you just remind us what that that loan repricing looks like throughout the year? John Stewart: Sure. Yes, what I said before was new origination coupon yields have held up very well. Spreads have held up well. New production continues to be in excess of 6.5%. The roll-off amortizing, non-amortizing maturities, the cash flow coming off the book is still sitting below 6% in that 5.5% to 5.75% range. And it's pretty evenly distributed by quarter throughout the year in 2026. Brian Martin: Right. And how much is repricing, John, I guess, in terms of throughout the year? It's pretty even by quarter, but just in aggregate, what's repricing this year at kind of that range? John Stewart: Plus or minus $150 million a quarter. Brian Martin: Okay. So $150 million coming across the quarter. Okay. And last one for me, just more housekeeping. I think, John, you said the average earning asset level. I missed what you said there, but I thought it was down linked quarter, but up thereafter. Is that kind of what you suggested? John Stewart: Yes, that's right. Just based on where cash balances kind of ended the year, you might see that pull through the averages, slightly lower cash balances in Q1. We would anticipate that from -- that's the low point for the year, and it would grow and that the full year average would slightly exceed -- modestly exceed $6 billion. That's -- we had scripted that in the guidance slide as well. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Mark Secor: Again, we want to thank everyone for participating in today's earnings call. We appreciate your time and also your interest in Horizon, and we look forward to sharing our first quarter results in April. Have a wonderful day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Jacob Lund: Good morning, and welcome to Investor's Q4 and year-end results for 2025. I'm joined here in the studio in Stockholm by our CFO, Jenny Ashman Haquinius; and our CEO, Christian Cederholm and both will soon be giving their presentations. After that, as usual, we'll be opening up for questions, both on the call via our operator and online. And with that, over to you, Christian. Christian Cederholm: Thank you, Jacob, and hello, everyone. As we look back on the past year, it's clear that 2025 was anything but straightforward. The world remains impacted by significant geopolitical uncertainty. Now despite these headwinds, the global economy delivered decent growth. And in this environment, our companies are doing a good job balancing profitable growth here and now, including focus on efficiency and cost out whilst continuously investing to future-proof their businesses. Let's take a closer look at how we performed over the last year. So 2025 turned out a strong year for Investor. Adjusted net asset value grew by 14%, and our TSR, total shareholder return, was 15%. Listed companies total return amounted to 22%, and we strengthened our ownership in Ericsson and Atlas Copco for a total investment of about SEK 2.3 billion. Patricia Industries total return was minus 9% with considerable headwind from the weaker U.S. dollar. Operationally, it was a good year in total for the major subsidiaries. And in addition to organic growth of 4%, the companies made add-on acquisitions for a total of SEK 24 billion, of which Patricia funded about SEK 16 billion with the rest funded by the portfolio companies themselves. The biggest one by far, of course, being the acquisition of Nova Biomedical. Investments in EQT generated a total return of 15%. And here, we also made our first co-investment, Fortnox, alongside EQT X, exploring another way to create value together with EQT. Lastly, supported by a strong balance sheet and cash flow generation, Investor's Board of Directors proposes a dividend of SEK 5.60 per share for fiscal year 2025. This represents an increase of SEK 0.40 or 8% over last year. At the end of the year, adjusted net asset value stood at SEK 1,087 billion. Now let me briefly go through the 3 business areas. Starting with Listed that represents about 70% of our assets. Listed Companies generated a total return of 6% in the fourth quarter. Investor received proceeds of close to SEK 900 million or SEB shares divested in Q3, so the last quarter to maintain our ownership level as the bank continued to buy back shares. Portfolio companies continued activities focused on future-proofing their businesses. So as an example, Sobi announced its acquisition of Arthrosi, expanding its portfolio within gout with a promising Phase III drug. Wärtsilä announced the divestment of its gas solution business, further focusing the Wärtsilä portfolio. Now over to Patricia Industries, which represents about 20% of our portfolio. Total return in the fourth quarter was 1%, driven by earnings growth and multiple expansion, offset by significant negative currency impact. While reported sales declined by 5%, our major subsidiaries grew sales 5% organically. Adjusted EBITDA declined by 6%, heavily impacted by the same negative currency effects I mentioned and with some costs relating to restructuring initiatives in a couple of the companies. We saw continued high activity in Patricia. For example, Laborie announced the acquisition of the JADA system, expanding its offering within obstetrics for a potential maximum value of USD 465 million. Sarnova completed 2 add-on acquisitions for a total of $165 million, strengthening Sarnova's software offering for revenue cycle management. Also, we contributed SEK 200 million to Atlas Antibodies to strengthen the balance sheet after a period of weak demand and performance. Mölnlycke and BraunAbility distributed a total of SEK 4.1 billion to Patricia Industries in the fourth quarter. All the major subsidiaries and our 40% in 3 Scandinavia in aggregate, including the combined Nova Biomedical from Q3 and onwards, reported last 12-month sales stood at SEK 68.4 billion, and EBITDA was SEK 17.2 billion. We should note here that this is in Swedish krona, so of course, rather sensitive to FX. And finally then, investments in EQT, our third business area, which represents about 10% of the portfolio. In Q4, total return for investments in EQT was 8%, driven by strong share price development in EQT AB. Net cash flow to Investor was SEK 1.2 billion with approximately SEK 0.9 billion net inflow from EQT funds, driven by continued healthy exit activity in the funds. During the quarter, we also completed the very last part of our SEK 4.5 billion investment in Fortnox. So it was a strong quarter and a strong year. But as always, our focus is on the future. I'm confident in our strong platform. Investor has a clear purpose and a focused strategy, a portfolio of high-quality companies, an ownership and governance model that is well proven and great people, both at Investor and in our network and in the companies. And we have financial flexibility with low leverage and strong underlying cash flow. Our strategy towards 2030 is clearly defined and well aligned with our purpose with the ultimate target, of course, of generating an attractive shareholder return. Our objectives are to grow net asset value, to pay a steadily rising dividend and to operate efficiently and sustainably. We will remain focused on our 3 strategic pillars: Performance, portfolio and people. And let me say a few words about each of these. Performance first. While it varies between industry segments and geographies, overall demand remains lukewarm. In addition, the U.S. dollar is down significantly and tariffs need to be managed and the geopolitical situation remain profoundly unpredictable. Against this backdrop, companies need to focus on efficiency here and now to drive profitable growth. At the same time, focus on future-proofing initiatives is critical to ensure long-term competitiveness. This includes, for example, R&D, other investments for innovation, expansion of sales, including to new geographies and investments to leverage the potential of AI and other new technologies. So moving to portfolio then. Based on our financial strength and strong cash flow generation, we continue to seek attractive investment opportunities across all 3 business areas. This includes additional investments in our listed companies, add-on investments and potential new platform companies within Patricia Industries and continued investments, of course, in and together with EQT. Ultimately, the allocation will depend on where we find the best opportunities. And finally, people. Given the rapid transition pace in all industries, we have to ensure that the right people are driving our companies. With 24 portfolio companies and around 200 board seats across the portfolio, talent sourcing and succession planning is a top priority for us. So near-term priorities are clear, and we have a lot of work cut out for ourselves. With that, I'd like to leave the word to Jenny to talk more about our financials. Please, Jenny. Jenny Haquinius: Thank you, Christian. Yes, so let me take you through the financials for the quarter. So in Q4 2025, adjusted net asset value was SEK 1,087 billion, and this implies an increase of 6% compared to Q3. For the quarter, all business areas contributed positively. Investments in EQT increased with 8%, Listed Companies with 6% and Patricia Industries with 1%. So this implies a total return of 6% for the quarter and 14% for the full year. And now double-clicking on each of the business areas, and I will start with Listed Companies. So within Listed Companies, share price performance was mixed, but with positive share price development in almost all companies, particularly strong quarter for the Electrolux share, followed by AstraZeneca, Wärtsilä, Ericsson and Sobi. Saab and Husqvarna, however, had a tougher quarter looking at total return. Total return for the Listed Companies portfolio was 6% and largely in line with SIXRX. And as for absolute contribution, it paints a similar picture, but with AstraZeneca and Atlas Copco in the top due to the weight in our portfolio. All in all, a solid quarter for the Listed Companies portfolio. And then moving on to Patricia Industries. For the quarter, the Patricia Industries portfolio, so the major subsidiaries, grew 5% organically, while the adjusted EBITA declined by 6%. For the full year, organic growth was 4% and the adjusted EBITA declined by 1%. And as a reminder, we are restrictive when it comes to EBITA adjustments. So in the 6% drop in EBITA for the quarter, we have only adjusted for transaction costs related to M&A and one-off costs related to CEO transitions. Other than that, and of course, then not adjusted for and hence, still weighing on the adjusted EBITA margin, we have negative impact from FX, so the stronger SEK and also tariffs as well as restructuring costs to unlock efficiencies in several of the companies, and we deem this as part of ongoing operations. And now double-clicking on performance across the companies in Patricia Industries. And first to highlight a few positives. We saw a second strong quarter for BraunAbility, in part explained by a relatively weak comparison quarter, but also due to strong demand. Profitability improved, but coming from a depressed level in Q4 2024. Nova Biomedical had a solid quarter in terms of growth and profitability. Growth was partly helped by recovery following the cyber incident in Q3. Integration is progressing according to plan, and this includes initiatives such as merging the organizations and implementing a common ERP system. And this, as we mentioned last quarter, may have an impact on sales and earnings near term. We also do know that Q1 last year was a particularly strong quarter for the acquired part of the business. Laborie continued to see solid growth, driven by a large extent the Optilume urethral strictures product. Reported profitability for Laborie was down as it includes USD 11 million in cost for the JADA acquisition and the CEO transition. If we were to adjust for this, profitability was still down, but only slightly on the back of commercial investments. Permobil and Piab had a more challenging quarter. Permobil is experiencing muted growth, and that's primarily explained by negative impact from the voluntary product recall of the Power Assist device announced in Q3. But positive to see good cost containment and a slight increase in EBITA margin, and this is despite SEK 32 million in restructuring costs. Piab had a quarter with negative organic growth, and that's on the back of weaker customer demand, particularly in the semiconductor market. Generally, Piab's end markets have been more choppy following the introduction of tariffs and increased geopolitical disruption. Lower sales impacts margins together with negative FX and tariffs as well as SEK 37 million in restructuring costs to drive efficiencies. And finally, on to Atlas Antibodies, we contributed SEK 200 million to strengthen the balance sheet. And this is to give room to the relatively new management to execute on the plan. And we do see that roughly 70% of the business is recovering, but we still see challenges in terms of soft market and competition for the evitria part of the business. And over to Mölnlycke. So Mölnlycke had a solid quarter with 3% organic growth, and this was primarily driven by Wound Care. So Wound Care grew 5% organically and Gloves 3% organically, and this was somewhat offset by a contracting ORS. On a general basis, we see continued good momentum in U.S. and China, while softer markets in Europe and the Middle East. In Europe, as mentioned before, there are pressures on health care budgets and that's specifically in Germany and France. And in the Middle East, we see customers with relatively high inventory levels. Profitability for Mölnlycke improved, and this is despite negative impact from FX and tariffs, and this is driven by positive product mix, but also lower cost on the back of continuous work with efficiency improvements. And Mölnlycke distributed EUR 200 million to Patricia Industries in Q4. We saw a 1% increase in estimated market values compared to Q3, so from SEK 223 billion to SEK 225 million. And this increase was explained by earnings growth in the portfolio companies as well as cash flow generation and, to a lesser extent, also expansion in valuation multiples. However, the increase was essentially offset by a negative impact from currency. And looking at value development across the companies, we can say that the main contributors for Q4 were Nova Biomedical and Laborie, while Sarnova and Piab was a drag on total value. For Sarnova, mainly due to multiples and for Piab, mainly lower earnings. Also worth highlighting is the distribution, so roughly SEK 2 billion from Mölnlycke and BraunAbility, respectively as well as the already mentioned equity contribution to Atlas Antibodies of SEK 200 million to strengthen the balance sheet. And now moving on to investments in EQT. So total value change was 8% in the quarter, and that's primarily driven by EQT AB, which was up 14%. Fund investments were essentially flat. And as a reminder, we report EQT fund investments with 1 quarter lag. So the 0% is based on EQT's Q3 report. On the right-hand side, we illustrate the net cash flow from EQT to Investor, which was roughly SEK 1 billion in the quarter, and this is driven by exit proceeds as well as dividend from EQT AB. And here, we have an illustration of the net cash flow from investments in EQT over time. While it's quite lumpy on a quarterly basis, over the past 10 years, we've received a net cash inflow of SEK 1.6 billion on average per year. And the LTM net cash flow is a negative SEK 2.4 billion. However, this includes SEK 800 million in acquisition for EQT AB shares and also SEK 4.5 billion in investment in Fortnox. If we were to adjust for this, net cash flow on an LTM basis is a positive SEK 3 billion. Our balance sheet remains strong. Our leverage as of Q4 is 2.1%. So it remains in the lower end of our policy range despite significant investments. And we closed the year with SEK 27 billion in cash at hand. All of our 3 business areas generate cash flow to support investments and a steadily rising dividend to shareholders. And as you know, from Listed Companies, we receive ordinary dividends as well as extraordinary dividend. In Patricia Industries, the portfolio companies generate cash flow, which can be reinvested in the companies or paid in distribution. And for investments in EQT, we have an ownership in EQT AB, which yields an annual dividend as well as fund investments where cash flow is, by definition, lumpy because it's dependent on drawdowns and exits, but it remains a strong contributor to cash flow over time. Since 2015, we have received total funds from all of these 3 business areas of SEK 216 billion, and note here that EQT is net cash flow in the pie chart to the left. The use of proceeds is illustrated on the right of more than 50% has been distributed to shareholders, roughly 30% has been reinvested in Patricia Industries and north of 10% in Listed Companies. So this platform with 3 strong business areas provides a broad-based cash flow that supports continued growth and distributions. The incoming funds provide strong investment capacity and have been deployed across all of our 3 business areas. 2025 was a record year in terms of investments, and this has been executed on while maintaining a strong balance sheet going into 2026. While sustaining this high level of investment activity, as mentioned, more than 50% of incoming funds have been distributed to our shareholders. We have continuously delivered on our commitment to pay a steadily rising dividend, and we continue to do so also in 2025. So the dividend proposal for 2025, as Christian has already mentioned, is SEK 5.6 per share, which is an increase of SEK 0.4 per share compared to 2024. And this applies an average annual growth of 8% over the last 10 years. And then on to my final slide. So looking at the longer-term perspective, the performance of the Investor ABB share truly illustrates the strength and the resilience of our portfolio and strategy. So with that, I will leave the word back to Jacob. Jacob Lund: Thank you, Jenny. Thank you, Christian as well. We are now ready to take your questions, and we will start with the questions through our operator, Sharon. Sharon, please. Operator: [Operator Instructions] And your first phone question comes from the line of Linus Sigurdson from DNB Carnegie. Linus Sigurdson: Starting off with a question on Mölnlycke and Mölnlycke growth. Is there any visibility on these France and Germany headwinds subsiding? Or should we expect this effect to persist in the foreseeable future? Jenny Haquinius: I can start. Thank you for the question, Linus. It's quite hard to say. We are seeing muted growth across many sectors at the moment, given what we're seeing globally. And specifically for Mölnlycke in Europe, there's weakness in France and Germany, and that is because there's a lot of pressure on health care budgets. But it's really hard to say if that would look any different in the next quarter, but really good to see continued momentum in the U.S. and China. Christian Cederholm: And maybe just to add, I think it's fair to say that this started somewhere during the first half of last year. But to Jenny's point, we don't really have visibility on the future development. Linus Sigurdson: That's fair. And then on the margin in Mölnlycke, is it fair to assume that the sort of tariff and currency impacts on profitability there are in line with previous quarters? And I mean, with 30-plus EBITDA margin, have we sort of already reached the potential for the efficiency program? Jenny Haquinius: Well, I can start. I would say that for the companies impacted by the tariffs, on a general basis, they're doing a really good job to mitigate, but it's roughly 1 percentage point or so still impacting margins. In terms of FX for Mölnlycke for this quarter, it's roughly 3 to 4 percentage points in negative FX. And Mölnlycke is doing a really good job working with efficiencies and really demonstrated that in this quarter. Then, of course, that's ongoing work because it's a mix of travel restrictions, using less consultants and also finding more sustainable efficiencies. So I think that work will continue also through 2026. Linus Sigurdson: Okay. And then my final question is a more general one. When you talk about solid cash flow in the coming years and this ambition to accelerate investments, could we view this as a comment on, say, EQT exit markets and the potential for, for example, Nova Biomedical start generating dividends to investors after the integration? Christian Cederholm: Sorry, can you repeat the question? You were asking about our comment on accelerated investments and the cash flow, and then I didn't quite follow. Linus Sigurdson: Yes. I mean, implicit in that statement is accelerating cash flows to fund those investments. So just -- is there anything you can comment on in terms of where those cash flows will come from? Christian Cederholm: Okay. I can take a first crack. So thanks, and it's a good question. And really, the way we think about it is we look at the cash generation from the 3 business areas. And when it comes to Patricia and you were asking about Nova, the way we think about it there is that really the cash flow generated and the debt capacity generated in the subsidiaries is all a potential funding source for acquisition and/or distribution. And really, cash is sort of a corporate asset. So whether it's distributed or not is maybe not the key point, but rather that the underlying cash generation in these businesses is solid. Does that answer your question? Linus Sigurdson: Yes. Operator: And your next question comes from the line of Derek Laliberte from ABG Sundal Collier. Derek Laliberte: I wanted to ask on Mölnlycke. You say the prevention and post-op were strong product segments in the U.S. I was wondering if you could give some more insight on why these areas are performing so strongly now and which product areas perhaps aren't doing as well. Also, I'm wondering if the product mix is similar in Europe in terms of performance right now. Christian Cederholm: I can start on that. I think the main difference we see is relating to the different geographies, as Jenny mentioned. And when it comes to product mix and channel mix, maybe the one thing to say there is that in the U.S., we're more heavily leaning on acute and hospital, while in Europe, including in France, for example, we have more towards post-acute and even some home care. Jenny Haquinius: And I could also add to that maybe that the Prevention segment is larger in the U.S. because of the reimbursement structure. So there's a clear market for that in the U.S., which is very different compared to Europe as well. Derek Laliberte: Okay. Great. That's very helpful. And on Laborie, what's the status on this BPH product, is it reasonable to expect any meaningful contributions from that during '26? Jenny Haquinius: Well, we don't really provide guidance, but what we can do say is that for this quarter, as we mentioned, the growth is a lot driven by the urethral strictures product. But as of now, we do have an active reimbursement in the U.S. for the BPH product. So we continue investing behind that launch. And of course, it will also depend on the reception in the market, et cetera. But the launch is very much ongoing, and we are very optimistic about the long-term runway with both of these products. Derek Laliberte: All right. And regarding Nova Biomedical, looking at the combined company now, I was wondering how the geographical split looks like, how high is the share of U.S. sales, for example? Christian Cederholm: We provided that in the last quarter. Let us come back to that. Derek Laliberte: Yes, absolutely. That's fair. And on Three Scandinavia, I was wondering generally here, the background, I think the growth looked pretty strong here in Q4 and actually over the year. What's driving this growth? Is it mainly continued market share gains or also some price increases involved here as a contributing factor? Christian Cederholm: Well, yes, we agree. Three has been continuing to gain market share, as you can also tell from the subscriber growth numbers. And then with regards to price, I mean, it remains a fiercely competitive market, of course, but at least they have been good at holding prices. That's what I would say on that. Derek Laliberte: Okay. Great. And finally, if I recall correctly, on Sarnova, you have this high inventory situation with distributors affecting market demand and so on. Is it fair to say that this has subsided now? Christian Cederholm: Thank you. Yes, this is primarily relating to the AED or cardiac response business. And really, what we see there is it is continuing to be a tough market. However, on a sequential basis, it has been more stable recently. And then, of course, inventory could be one part in that. Operator: We will now take the next question. And the question comes from the line of Jakob Hesslevik from SEB. Jacob Hesslevik: First, on demand navigation. So several businesses face weak demand and cautious demand in their segment. How do you differentiate between cyclical weakness that require patience versus structural challenges requiring strategic pivots? Christian Cederholm: I can start there. Well, so really, what we try to track, if I start there is, one, of course, total market development, but also we're benchmarking with a certain cadence so as to make sure that we understand whether we're gaining, holding or potentially losing market share. And there, I think it's fair to say that for the majority of the portfolio, we're confident that we're holding or increasing market share. And then the other part of your question was whether -- to what extent we see structural weaknesses in markets. And that's, of course, something we continuously evaluate. And generally, when it comes to investments, we're quite keen and that's one of our top criteria to make sure that we are in industries where we see, call it, GDP plus rather than GDP or GDP minus growth. And of course, sometimes that changes over time. And then we make sure we keep track of that. Jacob Hesslevik: Great. And then double-clicking on the currency exposure management. So FX headwinds significantly impacted Patricia Industries performance during this year. It should have affected your Listed portfolio as well given its large exposure towards exports. But beyond the operational efficiency improvements mentioned, what strategic actions are you considering in order to manage your FX exposure across the portfolio more efficiently, especially to hedge the Patricia portfolio that seems to be more sensitive to USD weakening while not having a professional treasury department helping out, which you can maybe found in most of your listed portfolio. Is this something you're looking into how you can help out Patricia more in managing their exposure? Christian Cederholm: Thank you for the question. Well, as you allude to, our main way of, let's say, balancing FX exposure is by way of operational hedging, i.e., to try to have the costs where we have the revenues and the income. Now despite that, we do have a significant earnings stream in U.S. dollar, thanks to our presence and strong market positions in the U.S. When it comes to sort of further hedging within the companies, we typically don't engage much in that. But rather, we want the FX effect to be seen immediately and then addressed and dealt with. So with a long-term perspective, the changes and the FX environment will be a reality and will hit. So we'd rather just see it upfront and then try to deal with it. The only additional hedging we do is we try to match our debt currency with what our underlying cash flow is per currency. So for example, if you have a company with a lot of earnings in U.S. dollars, it's appropriate to have some level of U.S. debt there as well. Jacob Hesslevik: Okay. And then just finally on Atlas Antibodies. Following the goodwill impairment and now equity contribution, what strategic options are you evaluating for Atlas Antibodies? I mean it's a holding from back in the days when it was called investor growth capital. It is still a very small investment and contribute limited to NAV. Why are you not looking into divesting this holding? Jenny Haquinius: Yes. Well, thank you for the question. First and foremost, so we are contributing the SEK 200 million, and that is to give management some room to execute on the plan. And we have a clear plan. I think we also mentioned in the presentation that roughly 70% of the business is doing well, while we have the 30% evitria business, which is struggling, and that's on the base of weaker market demand. But we have belief in management and also the plan to continue to build on Atlas Antibodies. So that's what we are focusing on here and now. I don't know if you want to add something. Christian Cederholm: No. As alluded to previously, I mean, you have 2 out of 3 business areas that are performing well. And the struggle we see is within evitria. Jacob Hesslevik: Yes. Fair enough. I'm just thinking about the time it takes versus the size of the company relative to the rest of your portfolio, maybe we can come back to Atlas in the future? Christian Cederholm: No, but I think the one thing to say there is maybe that, of course, with Atlas Antibodies as with the other companies, our ambition is to grow it bigger over time, for sure. Jacob Hesslevik: No, I agree. It should -- it's just it hasn't really grown over the past 15 years. It's not that much larger than it was when it came out of Investor Growth Capital. But it's clear. Thank you for the elaboration at least on the business performance in the name. That makes a lot of sense. Christian Cederholm: May I just, before we take the next question, come back to the question on the geographic split on the combined Nova Biomedical business. And then the numbers are roughly 60% North America and then the other 40% is roughly equally divided between Europe and rest of the world. Operator: [Operator Instructions] And your next question comes from the line of Johan Sjöberg from Kepler Cheuvreux. Johan Sjöberg: I hope you can hear me. My question is, if you start off with the Wound Care business and looking at the growth rates over the last year, it seems like you continue to be in the high single-digit growth area. And my question here, going forward here, I heard your comments on especially what's going on in Europe here. But do you see any change to that or any -- I mean, over the next, say, like 3 years, whatever, is that the sort of -- do you see any change to the market that would sort of change that picture, if you take some sort of a helicopter view on that one, please? Jenny Haquinius: Yes, I can start. And I think the short answer is, not really. So no clear change. I think looking at the full year, Wound Care specifically grew 7% organically and was 5% in the last quarter. And that is, as we've talked about before, in a market that's growing low to mid-single digit. So Mölnlycke has continued to take market share within Wound Care on the back of a strong product offering, very much focused on the customer. And we, of course, have the absolute aim to continue to do so by continuing to investing in innovation and also go-to-market. And then in addition to that, we also have new geographies. So we are investing in China, where we now have local production. And there we, of course, are seeing potential for higher growth. And then also the investments and the building presence in the post-acute channel, which is also an addition because Mölnlycke has historically had the strong position in acute, and that will also add potential avenues for higher growth. So we're not seeing anything differently now. But of course, in the more short-term perspective, we will always have markets that can be under pressure like we're seeing now in Europe. Johan Sjöberg: That's great. And also, Jenny, can I ask you on EQT funds, EQT reported today also and sort of you -- given a quarter lag on your -- the reported value of EQT funds. Should we expect any shift -- or put it like this, is there any material change if you were to use the Q4 numbers compared with the Q3 numbers? Jenny Haquinius: No, the short answer is that there will not be a material change, at least not for this quarter. Johan Sjöberg: No, good. Then also FX is all over the place right now or rather going in the wrong way, you can say, to some extent. How -- what -- could you sort of give some sort of indication? We know about the domicile of all the companies, but just to get a feeling for what is sort of the -- what is the most important currency to look at? Is it Euro-Dollar, is it the Euro-SEK or the U.S. dollar-SEK, just to see sort of the flows within the company, so to speak here, because it is a little bit big movements, to put it mildly. Christian Cederholm: I assume you're referring to the Patricia portfolio? Johan Sjöberg: Yes. Christian Cederholm: So this is what I would say. First of all, the #1 exposure is, of course, to the U.S. dollar, just given our big presence there with some U.S. domiciled companies, but also for a company like Mölnlycke and Permobil, I mean, the U.S., clearly the single biggest market for many companies. And then in Swedish krona, for most of the Swedish domiciled companies or the global, I should say, Swedish domicile companies, you would typically look at SEK exposure that is or krona exposure, where we sort of short the krona because we have headquarters here, R&D, et cetera. But of course, sales in Swedish krona is typically quite limited. And then thirdly, just to comment on the euro, I think from Mölnlycke, in particular, it's worth to highlight that we do have manufacturing for Wound Care, for example, in the U.S., in Maine. That said, we are still net exporting from Mikkeli in Finland and so from euro into U.S. dollar. So that's another one to keep track of. Johan Sjöberg: Okay. Cool. My last question, it's really about -- I mean, some of your portfolio companies are talking about also the hesitance among customers to place orders due to tariff uncertainty, geopolitical stuff and everything like that. I would like to hear your thoughts upon, especially when you're looking at -- or you are looking for a platform acquisition or if your companies are doing an add-on acquisition, do you see that being impacting, well, sellers and buyers also here in terms of hesitance. I know one thing is the sort of valuation, but that's always a thing you can say. But this geopolitical stuff here, is that something which is also sort of hindering your M&A ambitions in both platform and add-on? Christian Cederholm: Thanks for the question. I would not say that it's sort of the major obstacle. But of course, all the factors that you point to just add to the general sort of uncertainty in terms of deciding what's the underlying earnings, et cetera. That said, on a lot of things that we're looking at, for example, in the health care and life science market, tariffs, for example, is sort of not the biggest factor driving that. So it certainly adds to the unpredictability and uncertainty, but it's not a -- I would not call it out as a major obstacle for doing transactions as proven also in the recent year where we've done lots of add-on acquisitions, for example. Operator: Thank you. There are currently no further phone questions. I will now hand the call back to Jacob for webcast questions. Jacob Lund: Thank you very much, Sharon, and let's take the questions from the web. We can start with one from [ Tommy Falk ] around the dividend for 2025. Maybe add some flavor to that, Jenny. Jenny Haquinius: Yes. Well, thank you for the question. Well, I think, first of all, the dividend proposal is the Board's proposal to the AGM and for the AGM to decide. But maybe some flavor commenting on the SEK 0.40 increase. It seems balanced looking at our robust balance sheet and also view on cash flow generation and investments. And I think the SEK 0.40 is also really a testament to the fact that we have 3 business areas generating cash flow that really supports continued growth, also investments and delivering on our dividend policy to pay a steadily rising dividend. Jacob Lund: Next question, [indiscernible]. Please, how Investor AB is engaged in rearm Europe programs or other defense investments globally? Would you like to pick that up, Christian? Christian Cederholm: Yes, I'll take a crack at it. So Investor AB as such is not particularly involved in this. But of course, the build-out of the defense of Europe means business opportunities for Saab quite obviously, but also for other companies. And as an example, Ericsson do see a potential from the rebuilding of the European defense. Jacob Lund: Next question comes from Oskar Lindstrom, Danske. On Mölnlycke, are there opportunities to growth, more through acquisitions in the Wound Care or adjacent segments given weak main markets? That's the first one. And then on Patricia acquisitions, for some time now, you've been talking on and off about adding a new major leg in Patricia, mentioning industrial automation as a segment of interest. Is that still the case? What does the pipeline look like? And what is your thinking on valuations? Jenny Haquinius: Yes, I can start with Mölnlycke. Yes, well, add-ons is a priority for all of our subsidiaries and Mölnlycke included. So there is a lot of time spent to, of course, understand the different segments within Wound Care, but also adjacencies. And I think so far, there has not been any major available targets that have made sense because Mölnlycke has been able to grow so strongly organically. What Mölnlycke has done and is, of course, also continuing doing is add-ons that are smaller and more focused on innovation. So early-stage research, for example. And I think a recent example of that is a product for potential debridement of wounds, which would be a good addition to the Mölnlycke portfolio. But as for the other subsidiaries, it's also an important focus for Mölnlycke, of course. Christian Cederholm: And then the question on new platforms. And just to recap, our capital allocation priorities are quite clear in that we always put development and growth of our existing companies first. So that's our top priority. And as we've said, we are also open for and actively looking to add new platform companies, not the least in Patricia. And yes, industrial automation or industrial technology has been pointed to as one area that we're looking in, but we are also looking more broadly than that. And as for the pipeline, I think all I can say there is the work with identifying, scouting and potentially executing on acquisitions is a continuous process. And then when it comes to sort of closings and actual execution, that is inherently volatile and will remain so. Jacob Lund: Then the next one is from [indiscernible]. Will you organize another Capital Markets Day in 2026 for us, long-term shareholders? This is helpful to gauge the development of nonlisted companies. I think I can answer that briefly. It's been a while since we had the last Capital Markets update, and we'll be getting back with more information on that in due course. Next question and the final question I can see is from Jens [indiscernible]. From a strategic perspective on China, how do you assess the competitive risks and opportunities, the latter in terms of growth, investment and cooperation? Christian Cederholm: So as we comment on in the CEO statement in this report, we do see China as a very important region and for several reasons. I mean, one is that for many of our companies, both on the listed side and in Patricia, China is a large and growing market. So that's one thing, the market potential. But also, it's increasingly clear that competition in China or from China is evolving and evolving quite fast. So as we comment on, it's important for many of our companies to be in China, not just for the market opportunity, but also to be where and to compete where some of our toughest competitors are. And it's quite clear to me that comparing China today to a number of years ago, they're not just leading on low cost, but also on implementation of new technology, on fast innovation cycles, et cetera. So even more reasons to be there. Jacob Lund: Thank you very much. There are no further questions on the web. That means it's time to wrap up. Thanks to both of you. Our next scheduled call is the Q1 results for 2026 scheduled for April 21. And until then, thank you, and goodbye.
Operator: Good morning, ladies and gentlemen, and welcome to the Fourth Quarter of 2025 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Sherry, and I'm your operator for today. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed. E. Nicholson: Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter of 2025. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2024, and in particular, the information set forth in Item 1A, Risk Factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager. Dave? David Brager: Thank you, Allen. Good morning, everyone. For the fourth quarter of 2025, we reported net earnings of $55 million or $0.40 per share, representing our 195th consecutive quarter of profitability, which equates to more than 48 years. We previously declared a $0.20 per share dividend for the fourth quarter of 2025, representing our 145th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.4% and a return on average assets of 1.40% for the fourth quarter of 2025. Our net earnings of $55 million or $0.40 per share compares with $52.6 million for the third quarter of 2025 or $0.38 per share and $50.9 million or $0.36 per share for the prior year quarter. Pretax income grew by $5.4 million quarter-over-quarter and $6.3 million over the prior year quarter. Both the quarter-over-quarter increase in pretax income as well as the increase from the fourth quarter of 2024 were primarily the result of growth in net interest income. Net interest income grew by $7 million or 6% over the third quarter of 2025 and by $12.2 million or 11% over the fourth quarter of 2024. During the fourth quarter, we collected $3.2 million of interest on a nonperforming loan that was paid off during the quarter and incurred a $2.8 million loss on sale of investment securities. We also incurred $1.6 million of acquisition expense related to the pending merger with Heritage Bank of Commerce. Changes during the first quarter to our allowance for credit losses and reserve for unfunded loan commitments had the net impact of increasing pretax income by $3 million compared to the prior quarter and pretax income decreasing by $1.5 million compared to the fourth quarter of 2024. Noninterest income was $11.2 million in the fourth quarter, which was $1.8 million lower than the third quarter and $1.9 million lower than the fourth quarter of 2024. Trust and investment services income grew by $156,000 or 4% from the third quarter of 2025 and grew by $519,000 or 15% over the fourth quarter of 2024. Bank-owned life insurance income decreased by $1.1 million from the third to fourth quarters due to the annual amortization of revenue enhancements. In addition, other income declined by $800,000 from the prior quarter. This decrease in other income was the result of a smaller loss on sale of investments during the fourth quarter as we incurred a $2.8 million loss during the fourth quarter compared to the $8 million loss on sale incurred in the third quarter and the $6 million of income earned in the third quarter from a legal settlement. Now let's discuss loans. Total loans at December 31, 2025, were $8.7 billion, a $228 million or 2.7% increase from the end of the third quarter of 2025 and a $163 million or 2% increase from the end of 2024. The quarter-over-quarter increase in total loans was due to growth in nearly all loan categories. As typically happens at year-end, we experienced seasonal increases in dairy and livestock borrowings. Dairy and livestock loans grew by $139 million compared to the end of the third quarter, driven by higher line utilization. from 64% at the end of the third quarter to 78% at the end of the fourth quarter. Loan growth was also positively impacted by increases in line utilization for C&I lines of credit, increasing from 28% at the end of the third quarter to 32% at the end of the year. Compared to the end of the third quarter, C&I loans grew by $34 million, CRE loans grew by more than $39 million and SBA 504 loans grew by $17 million. The $163 million year-over-year increase in loans includes growth of CRE loans of $67 million, $49 million of growth in C&I loans, $25 million of growth in SBA 504 loans and $22 million of growth in construction loans. Loan originations were approximately 70% higher in 2025 than 2024, and the fourth quarter production was approximately 15% higher than the third quarter of 2025. Our loan pipelines remain strong going into 2026, although rate competition for the quality of loans we compete for continues to be intense. Loan originations in the fourth quarter had average yields of approximately 6.25%, which was consistent with the prior quarter. We experienced $325,000 of net recoveries during the fourth quarter compared to $333,000 of net recoveries for the third quarter of 2025. Net recoveries for the full year of 2025 were $539,000. Total nonperforming and delinquent loans decreased by $20 million to $8 million at December 31, 2025. A $20 million nonperforming loan was paid in full at the beginning of the fourth quarter. The sale of the building collateralizing this loan resulted in the bank receiving all principal and $3.2 million of interest income. Classified loans were $52.7 million at December 31, 2025, compared to $78.2 million at September 30, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans were 0.6% at December 31, 2025. Now on to deposits. Our average total deposits and customer repurchase agreements were $12.6 billion during the fourth quarter, which compares to $12.5 billion for the third quarter. Our noninterest-bearing deposits declined on average by $122 million compared to the third quarter of 2025, while interest-bearing nonmaturity deposits and customer repos grew by $234 million. On average, noninterest-bearing deposits were 58% of total deposits for the fourth quarter of 2025 compared to 59% for both the third quarter of 2025 and the fourth quarter of 2024. At December 31, 2025, our total deposits and customer repurchase agreements totaled $12.6 billion. Noninterest-bearing deposits declined from the end of the third quarter to the end of the year by approximately $440 million as we typically experience seasonal deposit declines at year-end. However, interest-bearing deposits and customer repurchase agreements increased by $430 million between the third and fourth quarter. Our cost of deposits and repos was 86 basis points for the fourth quarter compared to 90 basis points in the third quarter of 2025 and 97 basis points for the year ago quarter. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income. Allen? E. Nicholson: Thanks, Dave. Net interest income was $122.7 million in the fourth quarter of 2025. This compares to $115.6 million in the third quarter of 2025 and $110.4 million in the fourth quarter of 2024. Interest income was $156 million in the fourth quarter of 2025 compared to $150.1 million in the third quarter and $147.6 million in the fourth quarter of last year. Average earning assets increased by $153 million in the fourth quarter when compared to the third quarter, and the earning asset yield increased by 11 basis points from 4.32% to 4.43%. The fourth quarter loan yield was 5.47% compared to 5.25% in the prior quarter. Excluding the $3.2 million of interest income on the nonperforming loan we previously discussed, the yield on loans would have increased quarter-over-quarter by 7 basis points. Interest expense was $33.3 million in the fourth quarter and $34.5 million in the third quarter of 2025. Our cost of funds decreased from 1.05% for the third quarter of 2025 to 1.01% in the fourth quarter of 2025. The average balances of interest-bearing deposits and repos increased by $232 million over the prior quarter. However, interest expense decreased as interest-bearing deposit costs declined by 17 basis points and the cost of customer repurchase agreements decreased by 24 basis points. Our allowance for credit loss was $77 million at December 31, 2025, or 0.89% of gross loans. In comparison, our allowance for credit losses as of September 30, 2025, was $79 million or 0.94% of gross loans. The decrease in the ACL resulted from a $2.5 million recapture of credit loss and net recoveries of $325,000. Our $77 million ACL is 133% of our combined nonperforming assets and classified loans. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at December 31, 2025, was modestly different from our forecast at the end of the third quarter, with loss rate assumptions for C&I loans experiencing a negative impact from the economic forecast. Real GDP is forecasted to stay below 1.5% through 2027 and not reach 2% until 2029. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue their decline through the third quarter of 2026 before experiencing growth through 2029. So now switching to our investment portfolio. Available for sale or AFS investment securities were $2.68 billion at December 31, 2025. During the fourth quarter, we sold $30 million of securities with an average book yield of 1.5%, realizing a $2.8 million loss and then purchased $239 million of new securities at an average book value yield of approximately 4.75%. The unrealized loss on AFS securities decreased by $26 million from $334 million at September 30, 2025, to $308 million on December 31, 2025. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $20 million increase in other comprehensive income for the fourth quarter. Our held-to-maturity investments totaled $2.27 billion at December 31, 2025, which is $109 million lower than the balance at December 31, 2024. Now turning to the capital position. At December 31, 2025, our shareholders' equity was $2.3 billion, a $109 million increase from the end of 2024, including the $84 million increase in other comprehensive income. There were 1.96 million shares of common stock repurchased during the fourth quarter of 2025 at an average purchase price of $18.80. For all of 2025, we repurchased 4.3 million shares at an average share price of $18.60. The company's tangible common equity ratio was 10.3% at December 31, 2025, while our common equity Tier 1 capital ratio was 15.9%, and our total risk-based capital ratio was 16.7%. I'll now turn the call back to Dave for further discussion of our expenses. David Brager: Thank you, Allen. Noninterest expense for the fourth quarter of 2025 was $62 million compared to $58.6 million in the third quarter of 2025 and $58.5 million in the fourth quarter of 2024. During the fourth quarter, we incurred $1.6 million of onetime merger-related expenses associated with the pending merger with Heritage Bank of Commerce. The fourth quarter of 2025 also included a $1 million provision for off-balance sheet reserves compared to a $500,000 provision in the third quarter. Excluding acquisition expense and the provision for off-balance sheet reserves, operating expenses grew by 2.3% or $1.4 million over the third quarter of 2025 and by 1.6% or $1 million over the fourth quarter of 2024. Excluding the impact of acquisition expense and the provision for off-balance sheet reserves, we achieved positive operating leverage from both the prior quarter and the year ago quarter of 2% and 6%, respectively. Noninterest expense, excluding acquisition expense, totaled 1.53% as a percentage of average assets in the fourth quarter of 2025 compared to 1.50% for the third quarter of 2025 and 1.49% for the fourth quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions that you may have. Operator: [Operator Instructions] And our first question will come from the line of Matthew Clark with Piper Sandler. Matthew Clark: Good morning, Matthew. I just want to start on the interest-bearing deposits. You mentioned some seasonality. It looked also like some mix change towards savings money market. Can you just speak to what you saw there and maybe whether or not there was some behavioral change among customers seeking rate. David Brager: Yes. No, I don't think there was any behavioral change. It's pretty standard for us. People pay bonuses, accrue for taxes, do different things. So I don't really think there was any major change. There wasn't any movement of any large relationships or deposits from noninterest-bearing to interest bearing. I think for the most part, it just was normal seasonality. The part that was different was that we actually grew the noninterest-bearing deposits, and that is something that is a little different, but it wasn't necessarily coming from the noninterest-bearing and moving to the interest-bearing . E. Nicholson: I mean, Matthew, I would just consistently say look at quarterly averages. Our deposit customers move fairly large amounts of money at any point in time. So point in time balances don't necessarily reflect exactly what's going on. So average balances, I think, are just more important. Matthew Clark: Yes. Yes. Okay. And then just on the nondairy and livestock loan growth. If you exclude it, it's up over 4% annualized this quarter. I know some of it was higher line utilization. But maybe speak to the higher line utilization, whether or not you think that might be more sustainable? And your thoughts overall on kind of nondairy and livestock loan growth this year. David Brager: Yes. It's kind of interesting. I think we ended the year year-over-year up about 2% in total loans. And it's kind of in line with what I thought at the beginning of the year. It just took us a little while to get their point-to-point. But loan pipelines remain strong. I think the utilization is normalizing I think people are a little more positive, I mean, as evidenced by just some of the GDP growth that we're seeing. So I think that that's probably going to remain a little more stable than it has been over the last 1.5 years or so. And candidly, that's anecdotal, but everybody we talk to is basically saying that they're ready to go and they think things are going to be okay. So that's a good sign. That's also evidenced, obviously, by the classified loans and the nonperforming loans that we reported at the end of the quarter. So I think all in all, the pipelines are strong. at least for the foreseeable future. And I believe that we'll be able to do more with our existing customers, and we're still attracting some pretty good relationships going forward. So all in all, I'm cautiously optimistic, maybe even positive and optimistic about 2026 so far. Matthew Clark: Great. And then last one for me. Just on the Heritage deal. Any update on how it's progressing? David Brager: Yes. So everything is going well. We've toured their offices and their headquarters, almost all of their offices. We are in -- we're getting ready from an application perspective and the proxy perspective. But everything is going according to plan right now. We still anticipate second quarter close and a second quarter systems conversion. And I think that's where we are. Obviously, there's still game to be played there, but everything is looking good so far. Operator: One moment for our next question, and that will come from the line of David Feaster with Raymond James. David Feaster: I wanted to circle back to the core deposit side. Obviously, we talked about the seasonal dynamics within NIB. But Wanted to get your thoughts on the competitive landscape for deposits from your standpoint. Where are you winning deposit business? And your thoughts on the -- obviously, you saw good interest-bearing deposit growth. And then just your thoughts on the ability to push through the Fed cuts and expectations for betas near term. David Brager: SPYes. So I think just from your first part of your question, I think the type of clients that we go after generally is an operating company. And so the majority of the new deposit relationships that we're bringing to the bank are 75% plus noninterest bearing. If you look back over the last 10 years of the bank, we always seem to have this sort of dip. And as Allen said, on any one given day, that money can move out and move back and there's a number of things that happen. And that's why I think the average number is better as well. But we are winning relationships. As you know, we are not a bank that goes out and offers the highest rate on our deposit accounts. And we're not really trying to attract that type of customer. So I think for the most part, it's pretty standard on the type of relationship. As far as the Fed rates are concerned, we basically -- during the last cut, we basically lowered everything by 25% that was earning over 1%. And so we're trying to capture as much of that as possible. I think the combination of -- on the interest-bearing deposit side with be trying to offset to the extent we can on the asset side of those rate cuts. I mean I think it was a good sign for us that our asset -- our loan yield still went up despite a Fed rate cut. And we added a slide in our investor deck in the appendix that really gives a very good overview of sort of the repricing reset time frames both on the truly variable stuff as well as the fixed rate stuff that's maturing or resetting over the next -- I think it's we go all the way up to 10 years and over. It's a very small number in that category. But there's a lot more granularity there than we had in the previous deck as well. But on the deposit side, David, it's pretty much the same type of thing. And -- and I think from a competition standpoint, we are seeing more competition utilizing earnings credit and that ability to pay. I mean we just had a relationship that came to us and said, that there was a bank, and I won't mention the name, but there was a bank that was offering them a 3% guaranteed ETR rate for 5 years with paying their accounting system, which is $120,000 a year as part of that 5-year deal. I don't know the outcome of that 1 yet, but we -- that's not something we would do. So -- that's what I'm seeing out there. And I don't know if that's just for the other banks to drive their noninterest-bearing or just deposits in general. But there is loan growth. So there's going to be funding pressure. So I think that's something that we need to stay on top of. But for the most part, it's pretty much status quo and business as usual for us. David Feaster: Okay. That's helpful. And to that point on the growth side, I was hoping you could touch on the competitive landscape state there. It sounds like you're seeing primarily just on the pricing side. But wanted to see if you're getting any more aggressiveness from competitors on the underwriting side? And then just -- how do you think about payoffs and paydowns. Obviously, there's pretty significant back book repricing in your story. But I'm just curious, with competition and potential Fed cuts still on the horizon. How do you think about payoffs and paydowns next year? Is that something that you would expect could be headwind? David Brager: Yes. Well, it's always a little bit of a headwind. The payoff and prepayment penalty activity in the fourth quarter was lower than the third quarter. But it's always something we have to deal with, and we anticipate that happening when we model and forecast internally, we look at those numbers and just sort of from a historical perspective. The one thing to your comment about the back book repricing -- the one thing that is becoming or not in a major way, but is an issue is that when there is a reset, we still have prepayment penalties in our loan. But when there is a reset there are people that are getting quotes theoretically from competitors that are lower than ours. I don't always see the actual quotes. So I always question whether that's true or not. But they're theoretically getting quotes from competitors out there saying they'll do the loan that lower rate than what our repricing rate would be or reset rate would be. And so we have a little protection with the prepayment penalty. But on the maturing book, we don't have any protection there. So we have to be a little more aggressive I was candidly very happy that our fourth quarter average yield was 6.25% because I would say some of the stuff we're doing now is closer to the 6% range just to be competitive on that. And look, treasuries are going up, at least in the last week or so, they're going up pretty good. So hopefully, people will remain disciplined. But it's really more pricing than credit. We're not we're not going to do something that we wouldn't do from a credit underwriting perspective, but we especially to protect relationships, we'll be a little more aggressive on the pricing aspect of it. David Feaster: Are you seeing more... E. Nicholson: We're seeing more short-term loans as well. So people are doing 5, 3-year instead of going out 7 or 10 years. So I think that's also part of the yield we're seeing. David Feaster: Okay. Have you started to see... David Brager: I'm sorry, David, I was just going to add one thing, and that's a very good point that Allen brought up. I don't know that, that's a good bet. Like trying to keep things 2 or 3 years. We'll see -- but if you just look at forward rates are especially on the longer end, could be higher just based on a lot of different factors. David Feaster: Yes. And so it doesn't sound like other than the duration that you've really seen much pressure on the underwriting structures or standards. . David Brager: No, not really. I mean, we wouldn't really consider it anyway. So it might not come all the way up to me... Operator: And that will come from the line of Andrew Terrell with Stephens. Andrew Terrell: If I could just start maybe asking on expenses, I think, post the adjustments you guys call out, it's around $59 million or so. But compensation up this quarter. Was any of that incentive accrual adjustments kind of at year-end? And then maybe just looking for a little bit of help around thoughts on organic expense growth into 2026 or kind of run rate expectations you guys have? E. Nicholson: Yes, Andrew, you're correct. There were some adjustments to our private bonus share accruals that elevated the expense quarter-over-quarter. We also -- every fourth quarter with the holiday season, there is extra benefit expense. So Q4 to Q4 might be a better indication of where dense growth is, and I think that was less than 2%. I think once again, particularly if you look at the full year numbers, the only expense line that's really growing more than very low single digits is the technology side, the software expense. And we'll continue to invest in that. And the percentages may not be quite as high as 24% to 25%, but an area we'll continue to invest in. Andrew Terrell: Yes. Okay. And then just on the margin overall, I appreciate the slide you guys gave on the loan repricing in the presentation. But if we look at margins for the industry right now, a lot of the banks out there approaching kind of that peak level or fairly close from back in 2019, you guys are still 50 or 75 basis points light versus the 4.25 level from 2019. So I guess the kind of question is, has anything structurally changed preventing you from getting back there? And then just keeping that loan repricing in mind, I know some of it looks decently far out there up to 10 years. How long does it take you guys to get margin back to what you would view as a normalized level? E. Nicholson: Well, of course, the yield environment plays a lot into that, Andrew. But yes, I mean, obviously, if you go back pre-pandemic, our securities book still has a much lower yield than it would have had back then. And so that's obviously going to play into it. And the loan book still as well. So it will take a little time for both cash flows and the security book to reprice as well as the loan book reprice. And that's why we added that slide. So I mean it's hard to tell. I don't know if I would comment on it knowing that there's so many variables, but I wouldn't be surprised if we get there over the next couple of years, but there's a lot of things that could change that. David Brager: Yes. And the only thing I would add to that, Andrew, is to the point that we have not done any large restructuring loss trade type transactions. And so in the fourth quarter, with the gain that we had or with the recapture of the interest income that we had, use that to take advantage of. So sort of all these onetime things that happen, we will still look at that and make determinations. And that's really part of the reason that we looked at the loss trade to utilize that $3.2 million where we recaptured an interest. So we'll just continue to do that. It's more singles. We're not planning on doing anything like we've said all along, anything larger than that. Matthew Clark: Yes. Okay. Yes, my follow-up to that was going to be on the securities, so I appreciate it. Operator: And that will come from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I had just a follow-up on the loan yields in the quarter. Even excluding the interest recovery, as you pointed out, Allen, the loan yield was up 7 basis points. Was that pretty exclusively driven by the increased C&I outstandings between general C&I and the ag portfolio? I just wanted to make sure there weren't any other dynamics during the quarter that impacted. E. Nicholson: I mean I wouldn't point to anything -- one thing. I mean, dairy goes up, but really, I think the dairy borrowing to a higher percentage of our overall loans probably drove about a basis point improvement in loan yields. So a little bit on the mix. But once again, I think the bulk of our loans are commercial real estate, and it really goes back to the back book conversation. They're slowly repricing -- and as we have the payoffs, we're replacing them with higher yields. So that concept is probably still the biggest driver... David Brager: And new production. E. Nicholson: New production versus what's rolling off out there. Gary Tenner: Okay. Great. And then just looking forward to the HCP transaction, any expectations at this point of kind of any day 1 restructuring of their balance sheet or otherwise? E. Nicholson: The only thing we've announced, Gary, is that we do plan on selling approximately $400 million of single-family loans that Heritage has -- these are not really customers they were purchased. And the duration is very long on them. So even though we'll get to mark them to market, and there's a lot of accretion there that if we kept them at significant accretion, but still they're very low coupon, 30-year mortgages. We don't really care for the duration, and they're not associated with customers. So we'll sell those and reinvest into investments with shorter durations. Gary Tenner: Okay. And I was in the merger announcement, but beyond that, no other -- nothing at this point. Operator: And that will come from the line of Kelly Motta with KBW. Kelly Motta: Good morning. Thanks for the question. apologize. I joined a little bit late. I may have missed this. But just circling back to the noninterest-bearing flows. With those balances down a bit, can you just elaborate? I know you guys sold an NPL if there was any attrition of customers related to exits or anything that? Or if it was just normal seasonal movements post COVID getting back to more normal trends. David Brager: Yes. I think maybe you're just back checking me, Kelly, but no, there was no loss of relationships that, that represented and the comment that we made was really just around the point in time on December 31. There's a lot of movement around the deposits going back and forth or going out and this is actually pretty standard. The part that was a little surprising. I mean, I watch it every day, but not surprising, but a part that was different is we did grow noninterest-bearing deposits. The new relationships that we're attracting to the bank are probably in the 75% noninterest-bearing range. interest-bearing. So this is really just kind of normal stuff. If you go back 10 years, we always have this seasonality in the fourth and first quarter. I think, Allen, a while back, we had done an analysis of that. I think in the fourth quarter, we normally lose about 4% of our deposits going back like 10 years. This, on averages, that didn't occur this year. We sort of had the normal noninterest-bearing stuff that went out for taxes or bonuses or whatever the case may be. But no, there was nothing abnormal about it and no loss of relationship that -- and I'd say no loss, any material or significant relationship, nothing changed. E. Nicholson: And Kelly, I just mentioned that I think it's better to look at average balances. They are more indicative. Our customers move a lot of money. There's patterns day of the week and things like that, that depending on how a quarter end happens to land you're not really getting the -- probably the 2 picture. Kelly Motta: Got it. That's helpful. Maybe switching to the buyback. You were really this quarter. And then obviously, you had announced Heritage Commerce site in the quarter. Wondering, is it fair to say that you're out of the market at least until the deal closes, just wondering... E. Nicholson: Yes. I mean, obviously we're -- we'll be issuing an S-4 prospectus. So we've been out of the market since the beginning of December. And the Board reevaluate that once we close the merger. Operator: And our next question will come from the line of Tim Coffey with Janney Montgomery Scott. Timothy Coffey: Question on the loan modifications. Is there anything special causing the balances in that bucket to [indiscernible]. David Brager: Go ahead, Allen. I would have small on to say [indiscernible]. E. Nicholson: I wouldn't say there's anything abnormal about it. Timothy Coffey: Okay. What causes somebody to fall into that bucket? E. Nicholson: I'm sorry... David Brager: You're talking about the loan modifications. Timothy Coffey: Yes. David Brager: Yes. Well, it depends. I mean when we -- there's a lot of different reasons they can fall into that if they come to us and ask for help and they need to do something to make the payment. That's one way that they would get in there. Another way would be just through our normal evaluation when we're doing our annual term loan reviews, if we see something that's not accurate or not -- that isn't meeting our minimum debt service coverage or some other covenant that could cause us to go in there. That number in and of itself is still a material number relative to the total loan portfolio. But there's a lot -- there's a few different reasons that it could fall into that category. Timothy Coffey: Okay. And then post the closed deal with Heritage Commerce Bank, we look out back half of this year and the next year. Dave, do you anticipate the addition of Heritage Commerce to materially change your outlook for loan growth? David Brager: Yes. Well, look, I think it just depends on a couple of different factors. We are, as you know, sort of slow and steady wins the race. Heritage has been growing a little faster than we have. I'm sure there'll be some combination of that. We're going into new markets. We're going to be able to help their clients grow even -- they'll be able to do more for their clients than they can do for them today. So I think there's some definite tailwinds with respect to that. But we got to make sure we get to close, we get it integrated. We we go through the culture things to make sure they understand how we do things. So I think for the most part, there could be some benefit to that for our overall loan growth, but we're going to maintain the same credit quality that we've maintained and the same credit quality that they've maintained. So we'll have to evaluate that as we combine everything and see where we are. But I do think there's a lot of opportunity in those markets for what we have to offer, not just from the loan perspective, but also from just the overall product array that we have relative to the product array they have. Timothy Coffey: Sure. Yes. And a bigger balance sheet will help them a lot. David Brager: Exactly. Timothy Coffey: And then [Audio Gap] No check -- final no check for me, Allen. What was the core loan yield in the quarter? E. Nicholson: I would point you to the slide we added on Page 43. And that is what I would call a basic coupon, no loan fees, nothing else. And you can see where it ended the year. And then you can obviously see the relative repricing for the different buckets. David Brager: And Tim, that number was 5.12%. Operator: Thank you. I'm showing no further questions in the queue this time. I owuld now like to turn the call back over to Mr. Brager for any closing remarks. David Brager: Great. Thank you. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 195 consecutive quarters or more than 48 years of profitability and 145 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small- to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and associates for their commitment and loyalty, and we look forward to a successful 2026 and the pending merger with Heritage Bank Commerce. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking to you in April for our first quarter 2026 earnings call. You can always let Allen and I know if you have any questions. Have a great day. Thank you. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Ashia, and I'll be your coordinator for today. [Operator Instructions] Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Georgia Lo: Thank you, Ashia, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer; and Mr. Heng Chen, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that the speakers on this call may make forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 concerning future results and events, and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31, 2024, at Item 1A in particular, and in other reports and filings with the Securities and Exchange Commission from time to time. As such, we caution you not to place undue reliance on such forward-looking statements. Any forward-looking statements speak only as of the date on which it is made, and except as required by law, we undertake no obligation to update or review any forward-looking statements to reflect future circumstances, developments or events or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and full year 2025 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at cathaygeneralbancorp.com. After comments by management today, we will open up this call for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu. Chang Liu: Thank you, Georgia, and good afternoon. This afternoon, we reported a net income of $90.5 million for the fourth quarter of 2025, a 16.5% increase from $77.7 million in Q3. Diluted earnings per share increased by 18.3% to $1.33 in Q4, up from $1.13 in Q3. For the full year 2025, our net income was $315.1 million, a 10.1% increase from net income of $286 million in 2024. In Q4, we repurchased 1.1 million shares of common stock for $51.9 million at an average cost of $47.15 per share under our June 2025, $150 million stock buyback program. There is $12 million remaining under our June 2025, $150 million buyback program, which we expect to complete in early February. We plan to announce a new buyback program after approvals are received. Total gross loans grew by $42 million, driven primarily by increases of $18 million in CRE loans and $17 million in residential loans. We expect loan growth in 2026 to be between 3.5% and 4.5%. Slide 7 of our earnings presentation shows the percentage of loans in each major loan portfolio are either at a fixed rate or hybrid rate. Aggregate fixed rate and hybrid loans account for 60% of the portfolio, excluding fixed to float interest rate swaps, which represent 3.1% of total loans. Fixed rate loans make up 30% of total loans and hybrid in fixed rate period account for 30% of total loans. We expect these fixed rate loans to support our loan yields as market rates are expected to decline. We continue to monitor our CRE portfolio. Turning to Slide 9. The average loan-to-value of our CRE loans remained steady at 49%. Our retail property loan portfolio represents 24% of our total CRE loan portfolio or 12% of total loans. As shown on Slide 10 of the $2.5 billion in retail property loans, 90% are secured by retail store, neighborhood, mixed use or strip centers, only 9% are secured by shopping centers. Turning to Slide 11. Office private loans represent 13% of our total CRE loan portfolio or 7% of our total loans. Of the $1.4 billion in office loans, 30% secured by a pure office, only 3% are in central business districts. Another 42% are collateralized by office retail stores, office mixed use and medical office properties, with the remainder 28% secured by office condos. For Q4, we reported net charge-offs of $5.4 million as compared to $15.6 million in the prior quarter. Nonaccrual loans were 0.6% of total loans as of December 31, 2025, down $53.3 million to $112.4 million compared to the prior quarter. The decrease in nonaccrual loans during the fourth quarter of 2025 included the sale of a $15.8 million CRE loan at par and a $10.8 million CRE loan brought current and restored to accrual status. Turning to Slide 13. Classified loans decreased from $420 million to $391 million for Q4. Special mention loans increased from $455 million to $535 million in Q4. The bank downgraded 5 loan relationships totaling $92 million to a special mention that have not met certain debt covenants and have exhibited short-term financial issues for closer tracking. The bank believes that these credits will resolve within the next 12 months by either credit upgrades or partial or full payoff. We recorded $17.2 million in provisions for credit losses in Q4 compared to $28.7 million in Q3. The ALLL to gross loan ratio increased to 0.97% from 0.93%. And excluding our residential loan portfolio, the total reserve to loan ratio would be 1.22%. Total deposits increased by $373 million or 7.6% on a annualized basis during Q4, driven primarily by $366 million increases in core deposits and $7 million in time deposits. The growth in core deposits reflected seasonal factors in targeted marketing activities. For 2026, we expect deposit growth to range between 4% and 5%. As of December 31, 2025, total uninsured deposits were $9.3 billion, net of $0.9 billion in collateralized deposits, representing 44.6% of total deposits. The bank has $7.5 billion of unused borrowing capacity from Federal Home Loan Bank, $1.3 billion from Federal Reserve Bank and $1.6 billion in unpledged securities. Altogether, these available liquidity sources provide more than 100% of the uninsured and uncollateralized deposits as of December 31, 2025. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the quarterly financial results in more detail. Heng Chen: Thank you, Chang, and good afternoon, everyone. For Q4 2025, net income increased $12.8 million or 16.5% to $90.5 million from $77.7 million for Q3, primarily due to $11.5 million lower in provision for credit losses, $5.4 million higher in net interest income and $6.8 million higher in noninterest income, partially offset by a $4 million increase in noninterest expenses and $6.8 million higher in provision for income taxes. The net interest margin increased to 3.36% in Q4 from 3.31% in the prior quarter. The increase in net interest income was driven by a lower cost of funds. We anticipate further benefits to the NIM from declining deposit costs supported by the fixed rate proportion of our loan portfolio. Based on the Fed fund futures, we project 2 rate cuts in 2026, one in June and a second cut in September and anticipate that the net interest margin for 2026 to range between 3.4% and 3.5%. In Q4, interest recoveries and prepayment penalties added 5 basis points to the net interest margin compared to adding 4 basis points to the net interest margin in Q3. Q4 noninterest income increased $6.8 million to $27.8 million compared to $21 million in Q3, mainly reflecting a $6.4 million change in mark-to-market unrealized gain on equity securities in Q4. Noninterest expense increased by $4.1 million from $88.1 million in Q3 to $92.2 million in Q4, primarily due to a $4.3 million higher bonus accrual in Q4 as a result of the above budget financial performance for 2025. We expect core noninterest expense, excluding tax credit and a core deposit intangible amortization to increase between 3.5% and 4.5% in 2026. The effective tax rate for Q4 2025 was 20.33% as compared to 17.18% for Q3. We expect effective tax rate between 20.5% and 21.5% for 2026. As of December 31, 2025, our Tier 1 leverage capital ratio increased slightly to 10.91% as compared to 10.88% in Q3. Our Tier 1 risk-based capital ratios increased to 13.27% from 13.15% in Q3 and our total risk-based capital ratio increased to 14.93% from 14.76% in Q3. Chang Liu: Thank you, Heng. We will now proceed to the question-and-answer portion of the call. Operator: [Operator Instructions] The first question comes from Kelly Motta with KBW. Kelly Motta: Maybe kicking it off on deposits. I appreciate the updated margin guidance -- or the new margin guidance for 2026. It looks like you did a pretty nice job lowering interest-bearing deposit costs here. Can you speak more in terms of what you're assuming for deposit betas embedded in that NIM outlook here? And just any market commentary as to the level of competitiveness now at this stage. Heng Chen: Yes. I think we're assuming deposit betas in the 60% range or so. And in terms of market competition, I think it's about the same. Yes, we haven't -- it's pretty rational in Q4. Chang Liu: So Kelly, kind of for me looking forward for 2026, I think the local L.A. and New York landscape is still pretty competitive. I mean we have about nearly $4 billion of maturing CDs in the first quarter with an average yield of about 3.8%. We'll run our -- the Lunar New Year campaign and likely if we can price somewhat below that, that's kind of the goal, but we're going to be sensitive about defending that base that we have, while we try to transition some of that into noninterest-bearing. Kelly Motta: Got it. That's helpful. And just a point of clarification on that beta hang that 60%, is that for interest-bearing or total deposits? Heng Chen: Interest bearing. Kelly Motta: Got it. And then maybe on -- it was nice to see the NPA improvement, and it seems like you had both a payoff and a resolution there. As we kind of look ahead, what are you seeing in terms of credit and any migration into criticized and overall trends? Chang Liu: So maybe some of that I can help with this is some of the migrations into special mention, we don't see any particular trends in particular, 3 of the 5 that we were talking about the top 3, they're different in their own nature. One, for example, is a project in New York. It's a mixed-use project. It's completed. It's fully occupied. The ownership is just waiting for a lower property tax status approval to get through. And once that status approval gets through, then they'll be back up to compliance with sort of the debt coverage with that one. Another one is a multifamily mixed use, primarily in the Pacific Northwest. They have a new commercial tenant coming in, not quite there yet. And so that's contributing to the -- not being able to meet the covenant requirement and as well as some of the more competition in the area. So it's -- they're finding some more challenges, but they're going to return that back to stabilization and it's got a great guarantor support and they're paying us as agreed. And then lastly, it's a bit of a C&I story, and it's a distributor of exercise equipment and their own warehouse and they got some quarterly -- not being able to meet the quarterly financial requirements. But overall, for the year, they're expecting a full year on a positive note. So once we get the CPA financials, we hope to be able to upgrade that if they can show a full year profit. Operator: [Operator Instructions] The next question comes from Andrew Terrell with Stephens. Andrew Terrell: Maybe just on the margin quickly. The loan yield performance this quarter was also a decent amount better than I kind of was expecting. Was there any level of interest recovery in the loan yields this quarter, just looking at some of the NPL reduction? Heng Chen: Yes. It was 5 basis points to the NIM versus 4 basis points in Q3. Andrew Terrell: Got it. Okay. So relatively close to the baseline amount? Heng Chen: Right, yes. Andrew Terrell: Okay. And I appreciate all the color on the deposit and kind of cost dynamics in the market right now. What about on the lending side? Have you seen an elevated level of competition for incremental loan growth? And just what's the kind of status of the market on the lending side? Chang Liu: Yes. So surprisingly, I looked at those numbers for 3 segments. On the residential mortgage, believe it or not, we had a pretty strong growth last year in '25 and the rates of the entire portfolio actually held up pretty nicely. As a matter of fact, I think improved by a couple of bps there. On the CRE side, I think there's still pretty strong competition for the right type of assets and loans. So that declined by, don't quote me on this, about 15, 20 bps on the entire portfolio there. I think the most amount of competition we saw probably was on the C&I side. I think the C&I side, we're still trying to push for growth and find some new lenders, new relationship kind of teams and those kind of things. But our existing portfolio on the C&I side, that we saw probably the most amount of competition there, and that rate declined steeper than the other 2 segments. Andrew Terrell: Got it. Okay. If I could just sneak one more in. Do you have the amount of the expected amortization in 2026? Heng Chen: For low income housing, it's probably $11 million a quarter, Andrew. Operator: Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks. Please go ahead. Chang Liu: I want to thank everyone for joining us on our call, and we look forward to speaking with you at our next quarterly earnings release call. Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.